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8 Reasons Suburban Housing Should Be Your Go-To Investment

by Carl Medford | Oct 11, 2024 | Investing, News Feed

Suburban migration didn’t end with the pandemic. If anything, we’ve seen a long-term shift in American priorities concerning housing, which has led to an increasing number of households moving out of the city and into the suburbs.

When people head out to the ‘burbs, real estate investors would do well to follow. We have a saying in real estate that we look for the path of progress. Sometimes, this is revitalizing or rezoning areas to include new housing or businesses. Sometimes, it is simply the trend of where people are moving.

8 Reasons Investors Benefit from Suburban Rental Properties

Recent trends and long-term market dynamics demonstrate that this trend is here to stay. Here’s why:

1. Shifting priorities

Since the COVID-19 pandemic, living preferences have shifted noticeably. Many have moved from dense urban areas to the suburbs, seeking more space, larger yards, and a quieter environment. This shift, driven by the desire for square footage and flexibility, has boosted demand for suburban rental properties.

Suburban demand didn’t end with the pandemic, though. There’s always been a flux between urban and suburban appeal, but there’s no doubt where the preference lies today. Because demand lies in single-family suburban homes, investors can expect higher rental rates, less turnover, and increased portfolio stability.

2. Affordability

Houses are more expensive than ever. Naturally, people are on the hunt for a deal! Urban housing markets often have higher living costs, making city apartments unaffordable for many. Suburbs, however, offer a better balance of affordability and quality of life.

At the very least, renter households get more bang for their buck in the suburbs. So do investors!

Suburbs benefit from increased land availability and housing inventory. That naturally helps keep prices in check.

3. Better price-to-rent ratios

Because they’re more affordable, suburban properties often have a better price-to-rent ratio. Make no mistake: A better property price doesn’t mean the home will rent for significantly less. If the property is high quality and in a desirable neighborhood, rates can be competitive. Suburban homes often benefit from increased square footage; that extra room means extra income.

Better price-to-rent ratios mean investors can achieve more substantial revenue. This makes scaling your portfolio and acquiring further properties easier.

4. Potential for long-term appreciation

Suburban areas, especially near growing cities or within desirable school districts, tend to appreciate over time as more families move to these areas. Urban decay isn’t likely to happen, as these properties are usually in up-and-coming or established neighborhoods rather than declining urban centers.

For real estate investors, this potential for long-term property appreciation is just another means of generating wealth. Buy-and-hold investors have a multipronged plan of attack involving more than just cash flow or appreciation.

5. Increased inventory

We all know that tight inventory can be a pain. While balance is always good, housing units have been in short supply for a long time—and we feel it. New inventory is much more likely to crop up in suburban areas with land to build. Urban areas are usually already developed to near what the land reasonably allows. That means land is more expensive, too!

In the suburbs, though, builders have a much easier time acquiring land and increasing housing inventory. That gives investors more options and keeps the balance of supply and demand in check.

6. Lower property taxes and maintenance costs

Suburban areas tend to have lower property taxes and maintenance costs than urban properties, where land value and regulations can inflate costs.

Lower ongoing expenses mean higher net cash flow. Consistently high—or at least steady—cash flow is a significant factor in long-term success. Fewer regulations and lower fees in the suburbs also reduce the complexity of property management.

7. Family-oriented residents

Suburbs primarily target families. These households typically rent for longer and are more likely to take care of the property compared to younger, transient urban renters.

Lease renewals reduce turnover costs, including marketing the property, vacancy periods, and wear and tear from frequent moves. Stable, long-term residents also improve cash flow predictability. Families tend to “put down roots” with stable jobs and consistent housing.

8. Less competition from institutional investors

Urban markets often attract large institutional investors, driving up prices and reducing potential profit margins for smaller, more independent investors. This can make it hard for a solo investor to elbow their way into these primary markets.

Individual investors find better deals in the ‘burbs and can capitalize on opportunities without facing bidding wars or runaway prices.

Final Thoughts

As mentioned, there is no universal U.S. housing market. There are individual markets throughout the country, each with multiple submarkets, and often, suburban areas fall under this category. So, when talking about suburban markets and the opportunities they offer investors, it goes without saying that some will be better than others.

Overall, some suburban rental properties can offer a balanced combination of lower costs, strong rental demand, and long-term growth potential, making them a sound choice for real estate investors looking for steady cash flow and appreciation over time.

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

Cash Flow or Equity: Which One Should Beginners Invest for? (Rookie Reply)

by Makenzie Green | Oct 11, 2024 | Investing, News Feed

Investing for cash flow or equity is an age-old debate, but what’s the best approach for a new investor? Should you focus on making a monthly profit right off the bat or play the long game with equity growth and appreciation? You might be surprised to hear where Ashley and guest co-host Noah Bacon land on this topic!

Welcome back to another Rookie Reply! How much money do you actually need to buy your first rental property? Should you put down as little as possible and use debt to get your foot in the door, or is it best to save enough cash for a large down payment, closing costs, and reserves? We’ll break down your best options. Finally, house hacking can help you get started in real estate, but eventually, you may want to move out and put your unit up for rent. We’ll discuss whether you should get a property manager or self-manage from afar when that time comes!

Looking to invest? Need answers? Ask your question on the BiggerPockets Forums!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
Let’s get your questions answered. Welcome to the Rookie Podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to kickstart your investing journey. I am Ashley Kehr and usually Tony Robinson is here, but we are joined by Noah Bacon. You might recognize him from being on the Rookie podcast before and from his YouTube series, how I started aired on the BiggerPockets Real Estate rookie YouTube channel. Today we are diving into the BiggerPockets forums to get your questions answered. The forums are honestly the best place for you to quickly get all your real estate investing questions answered by many experts. So today we are going to discuss whether you should chase cashflow or equity for rookie investors, how to determine how much capital you need to get started and ways to transition out of your first house hack. So Noah, welcome to the Rookie podcast as my co-host today.

Noah:
Thank you, Ashley. It’s always an honor to be here. Really excited to pick your brain a little bit, pick some rookie questions off the forums and learn from the best with you.

Ashley:
I’m actually excited about a little debate here because this first question out here, I think we might have different answers on it and we can get into a little heated discussion here. Noah,

Noah:
I’m looking forward to it. I love the age old debate here of equity versus cashflow, and I’d love to hear where your stance is because I’m sure mine’s going to be a little bit different.

Ashley:
Okay. Well, Noah, do you want to read off the question that was brought to us from the BiggerPockets forms?

Noah:
Yeah, absolutely, Ashley. So let me read the first question here directly from the forums that I found. Cashflow investing is for rookie investors. Sorry, I know this one’s going to be painful for many rookie investors just getting started who want to live on the beach with their mail order cash, but this is not the way investing works. The real wealth is in equity. Equity and debt pay down are king. I’ve been investing for 15 years, I own over 60 units, manage 700 and have data and analytics on everything. The data is clear, stable B class investing of quality assets professionally managed, makes investors rich through equity, play the long game, buy good properties with low cash returns and stable tenancy. Do you agree or do you disagree with this? And Ashley, I’ll start with you. Do you disagree or do you agree that equity is king instead of cashflow?

Ashley:
I think this is a great long-term play. I want to kind of set the stakes here on this as to are we going to assume that this is for a new person getting started? Because I think it’s hard to actually debate and say cashflow is king or equity is king based off of is this going to be something you start today and do forever or is this something you’re just starting now? And then it gives you the option to pivot. So if you’re open to it, I would like to debate it as to starting out what should happen, but what are your thoughts?

Noah:
I love that stance too, and that’s exactly how I would love to set the scene. So let’s say somebody is a rookie investor looking to get their first property and their intention is to have this property for 10 plus years, not just have it for one to two years, look for a flip and start to move their pieces around. So let’s have that long-term aspect for somebody that’s just getting started out for their first property.

Ashley:
Okay, so my choice for rookie investors starting out is to go for cashflow. Then as you build your foundation and get stabilized, then that will provide you the opportunity to go for equity. So that would be kind of my basis is I am team cashflow. You guys can make the shirts. I will wear one that says Ashley’s team cashflow

Noah:
And I’m going to be on the other side of it. So I guess you can make me a pair of shorts that says team equity or have on the back of my shirt team equity. But I take the stance on the other side where I do think having cashflow is extremely important. I’m not discounting that by any means. I look at it a little bit differently as if you have the rental income coming in and you’re break even, maybe even a little bit negative and you have enough to keep the lights on and you’ve done your due diligence upfront, the equity to me is going to give you so much more of a return down the road, like we said, a 10 year investment than you’re ever going to have with, let’s say you’re going for 200, $300 a cashflow per month and it’s not going to appreciate the way that you’re anticipating.

Ashley:
The first thing that made me be on team Cashflow was the fact that a rookie investor is not experienced, that there’s going to be mistakes made when analyzing a deal, when underwriting a deal, when doing the due diligence. I want that cashflow there to cover any of those unexpected costs that didn’t come up. So maybe you are buying the property cashflowing, but then you underwrote it wrong and now you are breaking even. So that’s my number one thing that I want cashflow for a rookie investor because you’re not experienced. You may not know everything there is to know about analyzing a deal and you may make a mistake and that cashflow will give you the room and the opportunity to actually eat that and it not be a devastating decision because you already bought the property at breaking even.

Noah:
Yeah, that’s a really good point and I think you hit the nail on the head for a lot of people’s fears initially out the gate is that I’m not going to be able to keep the lights on monthly if my expenses do overtake my income. I’m maybe going with the assumption here that they have a bit of a reserve already in place to say if my tenant doesn’t pay this month, I’m not going to go underwater immediately. And I do think with let’s say a property that appreciates at a 5% rate compared to a property that appreciates at a 3% rate. I think the situation here, investing in a B class asset compared to a D class asset where you get more of that cashflow, yeah, you are getting a better return on the monthly, but are you having more risk with that cashflow? And that’s what I really like to look at in this situation.
I myself invest in B to a class properties that are relatively breakeven and I haven’t had many tenant concerns when I look at a C or a D class, sure it could bring me in an extra three, 400, maybe even $500 extra a month. That’s a great amount year over year if my tenants are paying on time, if there’s no maintenance concerns, there’s no property upkeep and I just assume in these higher cashflow areas that it’s going to come with a premium on that side where you’re going to never have more problems than in a B class with a potentially safer bet to mitigate your risk a little bit. So I think that the asset class has to really be in consideration here when we’re talking about cashflow versus equity as well.

Ashley:
Yeah, I 100% agree with that as to there’s that spectrum and you need to find that happy medium where it’s not going to be a D or low C class property, but a B class property where you’re getting some cashflow and we talk about cashflow, that doesn’t mean that I’m buying this one property and I’m quitting a W2 job because it’s so much cashflow, it’s minimal cashflow. And I kind of mirror this model after my own story as I started out with just buying properties that had a hundred to $200 cashflow. It was zero money into the deal. I had reserves set aside with my business partner. And so with that, we had that little bit of security of cashflow where we didn’t need to ever put money into the deal because something came up and it was just that cushion. But then five years down the road, we sold that property, we had mortgage pay down that was from the tenants.
We didn’t pay that down, and then we had built up some equity. Not a ton amount had changed because of actually the market conditions were great. So that really helped us. But even if it wouldn’t have changed that much, there still was some equity, there’s still going to be a little bit of appreciation every year as long as you’re taking care of the property. So then that’s where you can use the stack method is you’re buying these little cash flowing properties. Now you go ahead and you can 10 31 exchange into something different, and then that’s maybe when you go into a property that has, that’s more equity based than actual cashflow based.

Noah:
Absolutely, and I think what we talked about setting the scene here with this being a first time investor, I think your approach definitely changes as you have skin in the game. When I was looking at my first property, I probably got stuck closer to this analysis paralysis that we like to talk about where it took me six to eight months to really find that deal where it hit my cashflow numbers. Second time around, rates are rising, let’s get in and get the equity because like I’ve heard very commonly in the past is you make your money when you buy and if you have a rate at a lower percentage, you’re getting the equity right off the bat. My approach definitely changed from property one to two. As you can see, you need to get in there to get skin in the game and actually start to pay down your loan and actually gain the equity. I didn’t want to wait anymore. Did your approach change as you’ve gotten from rookie to more experienced investor, Ashley, where I have this analysis paralysis, I need a property that cash flows is $500 a month, are you still looking at that the same or are you looking at it differently where my equity position is what really matters now down the road?

Ashley:
Well, I actually do have something that could go towards your side of the argument as well as if you were in that predicament, maybe you owned a business and something happened with that business where you’ve lost all your income or lost your W2 job. If you have that rental property and you’ve been banking on equity and you’ve held it for a year, two years, and it does have that equity, you have the option to sell. So you could sell it, you could get rid of that debt, and then you have equity and if you are going to buy a cash flowing property, you most likely are going to have less equity in the property because you have more debt on it because you want as little of your own capital into the property. And so you’re not going to be able to pull out as much of it because you’re most likely have too much leverage in the property because you really wanted to maximize what your cash on cash return is, but also cash flowing on the property. So I would say it’s kind of like a double-edged sword. You do have options either way, and that’s why no matter what you should invest in real estate,

Noah:
You can have your cake and eat it too, is what you’re saying down the line. We eventually turn that equity into cash flowing properties. So I think we’re speaking the same language right here anyway.

Ashley:
Yeah, and I think that’s a great strategy to pivot. I think as rookie investors analyzing deals, look for that little bit of cash cashflow instead of saying, you know what? I don’t mind putting a hundred dollars, $200 into the property or breaking even because you just don’t know. And it just gives you that extra little sense of security and there are deals out there where you can find that extra little bit of cashflow for sure out there, even with putting no money into the deal. And if you don’t care that much about cash on cash return and you want to put a lot of capital in upfront, but your mortgage payment is a lot lower and you have less risk that way than you are going to get more cash flow because you’re getting more of your money back that you actually put into the property too. So that’s kind of a way to stay a little adverse, not to over-leverage yourself and still have that cashflow coming in, but just make sure you’re also calculating the cash on cash return and it’s not like you’re just getting 1% cash at cash return back after just dumped a hundred thousand dollars into a property.

Noah:
Absolutely, and this goes without saying to rookie investors, but don’t anticipate that your first couple of properties are going to replace your W2 income, have the mindset that this is going to take 30 years until your loan is paid off. That cashflow can be great to help you out in immediate concerns. Like Ashley said, if something goes wonky in your career and now you’re stuck without a job, it’s great to have that cashflow to supplement your life for the short term. Do not have that be your long-term outlook until you’ve reached a position where I can comfortably walk away and have this portfolio supplement my life. So I’m sure that goes without saying, but just a rookie warning sign of somebody who thought they were going to be a millionaire after owning properties for 24 months.

Ashley:
And I mean there are definitely people who do it, but we don’t hear down the road how it’s going. But I think that’s a great disclaimer as to you should look at this as whatever cashflow you make on this as bonus money and investment. So for example, if you have a 401k at work and you make returns on that money, you’re not saying, Hey, I’m pulling that money out, woo, I’m going to spend it. That’s just reinvested, reinvested, reinvested back into your 401k and that really is the best way. And then before you know it really starts to build up. But I completely agree, if you go in with wanting to completely quit your job, it is going to get frustrating and there’s nothing better than having multiple income streams coming in. So if you have your rental property income, maybe property manage those, you have partners and you charge a property management fee, maybe you make YouTube videos and you YouTube income coming in, all these different, you have your W2 income, maybe you got a landscaping company, there is nothing that’s going to build wealth faster than having multiple income streams because when one business is hurting or one income stream is hurting, you have the other ones to support that and that is going to be such a better tool for building wealth than just relying on one income stream of rental properties.
But another disclaimer makes you build that foundation first, then you go and you kind of pivot off. Don’t try and build out all these things at once. It’ll be overwhelming and you just won’t do a good job at each of them because you’re trying to do too many at once. Start with one

Noah:
Spoken like a true queen of finances where asset allocation and diversifying your assets is only going to benefit you down the road. I think, like you said, Ashley, this is a really amazing conversation to have for a rookie investor because you want to think from the exit position, where do I want to get to and how do I get there working back from let’s say 10 years to year 9, 8, 7, 6 to today, what am I going to do to take action and what strategy am I going to take to get there?

Ashley:
Noah, we have to take a quick break here, but I just want to say I’m really impressed with ourselves. We debated more like the vice president debate than the actual president that debated it here, comparing the two. So we’re going to take a quick break and when we come back we’re going to go into some more rookie reply questions such as how much capital did we each have to invest in our first property?

Noah:
Welcome back. Well, Ashley, I think we have another cool question here that we found from the forums about how much capital you need to get your first investment.

Ashley:
Yeah, so this one we pulled, it says, what would you say is the starting capital needed to sustainably invest in real estate? I feel like that’s the first thing I need to know in my planning. What was your experience with this? Is it wise to use loans to start? Please let this newbie know as much as you think is important. Okay, so let’s start off with I think the first thing. Let’s answer how much capital we each had to start investing in real estate and then tell why that was a good idea or a bad idea.

Noah:
So for my first property I put 10% down. This was a property that I closed at 260,000, so I want to say cash to close, including the down payment of 26,000. I want to say it was all in around $35,000. That’s how much I put just to the table to closing with my reserves and everything else saved up. I had about $50,000 before I really started to consider investing into real estate. So I know 10% is higher than what some people look at for a three and a half, 5% or if you’re VA 0% down to really leverage, but I went a little bit more conservatively. I still pay private mortgage insurance, which takes a little bit of your return away, but 10% at a $260,000 property. I think for me to feel safe was that $50,000 amount to have reserves upfront. But Ashley, what about you? How much did you have saved for your first property?

Ashley:
Probably like $5,000, which is not a good idea. I had very little money. I had just gotten married, I was expecting a baby and basically all her money had gone to personal expenses in life and there wasn’t a lot of savings left, and so I partnered with somebody who had about $80,000 in his savings account, and that’s what we actually used to make the cash purchase of the property. And then the money that I had saved was used for some of the repairs. We put a split unit in and replaced the electrical panel and then a couple other things like that, but it was definitely not the best to do that, I would say is starting out that small, but that was something I knew going in was that I needed a partner for that security because I did not have the financial security to go in and purchase a property and know that I could cover the expenses for it every month or if there was a big expense that came up or a tenant stopped paying rent and I had to cover the mortgage.

Noah:
That’s amazing to hear that from day one that you were able to basically say not I can’t do this. How can I do this with what I have right now? And I think that’s what a lot of rookie investors are asking with today’s prices, with today’s interest rates is how can I actually do it? Another part of this question that was interesting to me was is it smart to use loans? And I think this is just hearing from your story and my story, we’re going to have a little bit difference here. It sounds like, and correct me if I’m wrong, but you guys purchased your property as partners with no loan. Is that correct?

Ashley:
Yes. And I will tell you that that was because we didn’t know any better. We did not know you could go to the bank and get a loan. We thought you had to buy in cash since we weren’t living there and it wasn’t a primary, so we just didn’t know any better,

Noah:
Then we may have the same opinion. We may not have any debate here, but I am all in favor of leveraging your money as far as it goes with loans. And I say as far as it goes, meaning you have that safety reserve, your numbers make sense that you’re either going to break even maybe cashflow a little bit negatively. Like we talked about how if you have a great equity position, it could make sense or you’re going to cashflow and have your cake and eat it too. I think with this unique scenario that you have to put a three and a half 5% on multifamilies now, it can really benefit you massively, but it can also really put you in a negative spot right out the gate. So I don’t want people to get confused when I’m saying leverage as far as you can leverage as far as you can in a very smart and very risk adverse way, and that’s what I did at 10%. It sounds like Ashley, you would agree that’s something you would’ve done probably for your first property, try to leverage as far as possible, and that’s what I would give advice to a rookie here, but you need to really make sure you’re not putting yourself underwater and basically paying a mortgage just to have a rental property.

Ashley:
And we actually did make a mortgage note payable to my partner, so our LLC for that property did pay him every month. So it was like we had a mortgage anyways, but yes, we would’ve rather have used his capital that he had for several down payments on properties. And when we went to go buy our third, we actually did go and refinance the first two to go and buy our third property. And that’s where we really were starting to get some more momentum is like, okay, great, we don’t have to actually save all this cash that we can go ahead and use debt to purchase the properties. But no, I wanted to ask you something about your PMI. So for anyone that doesn’t know if most often if you put down less than 20% down, you are going to get charged private mortgage insurance by the bank, and this just gives the bank some security that you’re not going to default and just in case there’s not really any equity for them to go and sell the property on your behalf, they have this insurance in place. Noah, what was the dollar amount of that per month and how long do you think until you’ll be able to get rid of it from the day you purchased it, how long until you can get rid of it?

Noah:
Great questions, and this is something I’m sure a lot of rookies probably have in the back of their mind when they are talking to their lender or just even considering putting less than 20% down the PMI, typically what I hear is going to be half a percent of the loan value is what you’re going to pay on a monthly. For my situation, I put 10% down. Like I said, I’m only paying $98 a month in PMI, so I actually am paying about a hundred dollars a month. So to me, $1,200 a year isn’t the biggest deal. It is a tax deductible payment as well. So I always do kind of look at that with a grain of salt that this is, as much as mortgage insurance is not the most fun thing to pay, it is something you potentially get money back for at the end of the year.
So it’s not the end of the world. Another question that you asked Ashley was when do I expect to have this PMI drop off? I think you’ve said earlier in our conversation that if you put 20% down, you don’t have to worry about PMI. That’s exactly the target that I’m looking to hit. I actually think it’s a little bit higher in my mortgage. You have to get to 22 or 24%. So they actually made it a little bit more strict to incentivize the, well incentivize me the borrower to be paying my mortgage on time and paying a little addition on top of it. But if I currently right now got an appraisal today, if I got A-B-P-O-A broker’s price opinion, send somebody out there today, I guarantee you that I would meet that threshold of 22% loan to value ratio right now, or excuse me, 78% loan to value ratio.
And I’m sure today I could drop the PMI if I want to. Now I’ve kind of dragged my feet on it. There’s a bit of a cost analysis to doing an appraisal that’s about a thousand dollars. So I would get that money back, I’m sure immediately it’s just I need to take action and actually get this thing off of my loan. But it’s not a huge scary number. At least in the market that I was in for starting out could vary on your lender of course, but I wouldn’t let that number completely deter you away from investing until you’ve actually heard what that number is.

Ashley:
Yeah. And that right there just shows that down the road there is that potential for that added income along with increasing rents too over time that your mortgage payment will actually decrease by a hundred dollars a month, but you could have increased rental prices by then too. So there are added expenses and closing costs, all this stuff that comes with obtaining debt and leverage, but it’s not always a negative thing because you could either make $0 not doing anything or you could make some money and it’s not the perfect most perfect deal, but at least you are getting something. You’re getting started, you’re taking action, you have that investment. So I don’t want leverage to scare anyone or debt because it definitely is a way, and even though the interest rate looks awful, you don’t want to pay it. If that means you can make the deal work, even if it’s not the golden goose deal, you could have got in 2021 with a 1.99% interest rate that it’s still a deal.
It’s still a deal. Don’t get caught up in spending your time spending your money on the most perfect deal. It may come, but it may not come. So make sure that you’re not wasting your time trying to maximize your value. We see all the times the questions like I have $50,000 in capital, should I use it as a down payment? Should I purchase a house and a property with a partner? What is my best use of this 50,000? You can write out the numbers for each one, but you might get stuck in analysis paralysis and you just need to take action on one. Having options is so much better than somebody who only has one path to take. So once again, don’t get too caught up.

Noah:
And I think just think about it from the lender’s shoes as well. If Ashley or Noah comes to the bank and says, I want to borrow 95% loan to value ratio, that sounds extremely risky to them, I’m sure they’re going to put up 95% of a loan to say, Hey Noah, hey Ashley, I trust what you’re about to do. You’re only bringing 5% in. So it’s almost like, yeah, you are handcuffed for 30 years, but somebody’s willing to give you, let’s say $400,000 to go buy a property that you don’t have $400,000 laying around. So to me, what’s the PMI? Like you said, you get cashflow down the road, it improves your position and during that time you’re actually increasing your equity position. So it is that conversation again, can I have my cake and can I eat it too with cashflow and equity?

Ashley:
So the last kind of piece of this question is how much do you suggest that she would actually need to get started? She wants to start planning what is the starting capital she should have before she even starts to make offers on property.

Noah:
So it’s going to be really dependent on what your closing price is. Of course, I think with my example, it still could be really risky in people’s eyes that 10% down still having, well, let’s say you look at your reserves as basically your rental income. The property I was closing on was $2,000 a month of rent. I had $15,000 of reserves, still very, very conservative to have over a year of reserves, but in my two and a half years of investing, I’ve had $6,000 expense on a furnace. I’ve had a $9,000 bill on an eviction this year. That money’s already gone just off two really massive, massive expenses right out the gate. So I would say probably three years ago, I would never be saying this and say three months of reserves is going to be appropriate for you. In my opinion, save up a whole year, save up six months of reserves to really give yourself that safety net because as a rookie, you’re going to make mistakes. You’re going to have these problems come up that you’re inevitably going to pay a bigger premium than what you’re going to pay 10 years down the line because you didn’t have the right resource or the right contractor or the right idea of how to go about a project. So I think that the number is going to be really dependent on your purchase price, but have at least six months of reserves on top of your mortgage payments that’s going to cover you for at least six months.

Ashley:
Yeah, I think looking at your market is a great starting point. And what’s the range of costs? So if you’re looking at duplexes in Buffalo, New York, maybe you’re looking in between 250,000 to $300,000 and you want to put 10% down, what’s 10% of that? You’re going to at least need that. Then you’re going to have closing costs. So what’s common for closing costs? And you can actually go to a loan officer and you can tell them, I want to buy a $300,000 property and they will give you a loan disclosure, an estimate that will tell you here’s what we estimate the fees to be and what the cash will be to close on a property for that amount in this market. And that will kind of give you, okay, I know I need at least this amount. Then you’re going to go into the reserves.
I highly agree with Noah doing six to 12 months, at least six months, and I look at as to if you are getting a little bit of cashflow, leaving that cashflow and just building up your account so that maybe you don’t even have to tap into your reserves, that if there’s an expense that comes up, you can tap into your cashflow and just leave your reserves sitting in a four and a half percent savings account and making you some money that way. And I say that with a grain of salt because I just got the notice that my account was decreasing from 5% to four and a half percent now with the recent fed decrease. So one time everybody’s all happy that their decreasing interest rates, but now my savings account rate has gone down. We’re going to take a quick break. Okay. Welcome back.

Noah:
We love talking about real estate. We love answering questions like this with all of you, and we’d love if you could hit the follow button on the podcast or wherever you are listening. So in our next question, we’re going to discuss how to transition from your first house hack into your next property.

Ashley:
So for this question right here, it says, I have been a huge fan of the BiggerPockets podcast for years now, but I am just now creating an account on this site. Well, welcome to being a member of the BiggerPockets community. I am currently house hacking my town home in Silver Springs and have been doing this so far for just short of several years. I’m looking to move as early as November of this year to get a second property closer to dc. I live in a town home with five bedrooms and am currently renting out four of the rooms. So he’s house hacking and I live in the master suite. It is worth noting that two of those bedrooms are in the basement, which have their own entrance and an independent unit. Today I have been self-managing my property and has been pretty straightforward since I was living there.
However, with me moving out, I will not be there all the time. And this is make me wonder how I can manage this property with five tenants. I would like to continue to self-manage this property, but I am open to a management company as of now. I’m looking for any advice on what I should be doing to prepare for this transition and how people have successfully managed room sharing properties. Any advice would be appreciated. Honestly. I think it would be easier not living in the apartment. You really have to try to keep the visa. You’re living with these people. So Noah, what do you think about this? Have you done this with your strategy is rent by the room?

Noah:
Yeah, so when I lived in my properties, they were rent by room. They were in HOA communities and when I moved out, they had to be full-time leases. So I was in a kind of unique situation here where I have this strategy now I need to kind of transition out of this strategy, keep it into my next property, but while I move out of property, one kind of switch around what I was doing with the leasing. So it sounds like for this property, there’s two ways that I would go about this and you can do full-time property manager. I don’t know how far he’s moving away from the property, but I do like to have just starting with the easiest first and to me that would be converting the property he’s moving out of into a duplex and using a full-time property manager. He says here that he has a separate entrance to the basement, so you can split it into two units, basically have a full-time property manager manage those as traditional long-term leases and separate units.
So not everybody that’s in the property is on their own lease can have all these crazy occupancy and turnover during the year. And you have that stability when you move out because moving from one property to the next, what you’re looking for is stability. You don’t want to go into property number two, completely over leveraged and mismanaging property number A. So for me, look for property manager and split it into a duplex or if you want to do the rent by the room situation. Have you made a relationship with any of the tenants that’s more substantial than the others? This is something I can speak on from my experience where I was moving out, one of the tenants that I was living with in my house hack, we had a really, really great relationship. I actually decreased his rent, put all three tenants on one lease.
He was responsible for a little bit less as he was basically referring new tenants coming into the property. As I was moving out, I like to call him my tenant property manager because he saved me a crap load of money. He saved me a lot of headache during my time as I was moving into the next property and I was focusing on leasing the next property I was moving into to have him basically have no days of vacancy for me and just decrease the rental rate just ever so slightly to keep him satisfied. It was a home run, really a home run right off the bat. So like I said, didn’t have any days of vacancy. I didn’t have to really worry about anything really going wrong for the next couple months as I had two really solidified leases in my properties. So that’s a really unique example, I’m sure. But if he had any great relationships with the tenants there, can you keep them satisfied with a very slight rental decrease while moving in more people to increase your bottom line basically?

Ashley:
That’s a great point. I did that with a resident to mow the lawn. We decreased his rental rate a little bit and it would’ve cost probably four times to have somebody actually come and mow the property. It was a triplex then if we had him do it. And sometimes those resources are great. You do want to be very careful though and make sure that there’s an addendum to the lease or something that states what their specific duties are and that the rent will be increased back to the normal rate if those duties aren’t fulfilled or something like that to protect yourself and to protect them. So when you did this with that property manager or that tenant in place to act as your tenant manager, what were some of the things you didn’t have them do? Were they collecting rent or anything like that?

Noah:
No, they weren’t collecting rent. I was self-managing the property from afar. What I really relied on them heavy was for referrals for the application process. So basically I did everything as the property manager when it came to tenant screening, when it came to any tenant disputes, maintenance concerns, things like that. But to give you a little bit more of the situation, he was a manager at Amazon, actually referred me to two more managers at Amazon that were just looking for another place to live, get them all on one lease, decrease his rent because of basically a finder’s fee. And he was extremely responsive due to our relationship. Whenever dishwasher concern, fridge concern, anything with a neighbor that would potentially come up, Hey, they missed trash this week. I’m very happy to get that text from somebody that I can call a friend instead of a tenant that I don’t know. And I do get mixing business with. Friendship can be a little bit froggy here and there, but the relationship we had was very transactional and was, I’m going to scratch your back a little bit if you can scratch mine and help me find some tenants to move in. So it was a really cohesive relationship that we had throughout our house hacking tenancy. And then as I was turning into his full-time property manager,

Ashley:
Noah, what I’m getting from this is that somebody who’s in this situation needs to look and figure out, okay, here’s the reasons or here’s the things I need somebody to do in order for me not to hire a third party property management company. Here’s why I’m having reservations of self-managing. And for you it was finding the tenants and maybe showing the apartments, things like that. You couldn’t be there because you’re trying to get into your other place and you found somebody that could do that. And even though it seems like such a small role of all of the property management duties, you had systems set up the amazing software that’s out there to manage rentals, that you could handle it all. It was just those two little things that you needed someone like the boots on the ground. So I think that would be my suggestion is think about what are the hesitations or the reservations you have when renting out room by the room when you’re leaving the property, why do you think it would be difficult for you to manage from a far?
And then that’s maybe where you’re finding, okay, I need to hire this person to do this specific role. And it doesn’t even have to be a tenant. Maybe you just need a handyman that go over there and run over there. If there is some kind of issue that needs to be taken care of, then maybe it’s not a service call for a full on plumber to come. Different things like that. So yeah, I think that’s a great idea, Noah. Okay. Well thank you guys so much for joining us on this week’s Ricky reply. And Noah, thanks for being such an awesome co-host and providing new and insightful information to our rookie listeners.

Noah:
Thank you for having me, Ashley. It’s always an honor to be here with you.

Ashley:
If you have a question and you want to find out some more information about being a rookie real estate investor hat on over to biggerpockets.com/forums. And if you haven’t already, make sure you join BP and sign up as a member. Okay, well thank you so much for listening and we’ll see you guys next time. I’m Ashley and he’s Noah. We’ll see you on the next Rookie podcast.

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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:

Cash flow versus equity (and which one new investors should focus on!)
Which property types deliver the highest cash flow (or appreciation)
Leveraging the power of partnerships to help fund your first deal
How much money you need to save before buying your first property
How to transition out of a house hack (and whether you need a property manager)
And So Much More!

Links from the Show

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

4 Ways to Make Passive Income from Real Estate (Don’t Quit Your 9-5!)

by Bernice Ross | Oct 11, 2024 | Investing, News Feed

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

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

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

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Mindy:
One of the ways to speed up your financial independence timeline is to earn more money. This is where side hustles enter the chat, finding the right side hustle for you could supercharge your investments. Today we’re bringing on Devon Kennard to talk about four passive real estate investing strategies you could be using today to replace your W2. Hello, hello, hello, and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my non NFL Player co-host Scott.

Scott:
Geez, Mindy, that was a real kicker of an intro BiggerPockets as a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial health in order because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting or how bad your field position is. We’re so excited to talk to Devon Kennard today. Devon Kennard, for those who don’t know, is a veteran. NFL linebacker played nine, 10 years in the NFL Absolute superstar, played for the Giants, played for the Lions, played for I believe the Cardinals at one point as well, just awesome career, made a large amount of money, but signed a relatively normal rookie contract and started his career without certainty around that, made a large number of great decisions and became a really strong real estate investor with a lot of deep expertise that he’s developed. We’re super proud to be publishing our latest book in partnership with Devon Kennard. It’s called Real Estate Side Hustle for Passive Investing Strategies to Build Wealth Beyond Your Day Job. And we’re going to talk about those four strategies and how he became a successful real estate investor today on BiggerPockets Money. Super excited to get into it.

Mindy:
Before we get into the show, we want to thank our sponsor. This episode is brought to you by Connect Invest real estate investing simplified and within your reach. Now back to the show, Devon Kennard, welcome to the BiggerPockets Money podcast. I am so excited to talk to you today.

Devon:
Thanks for having me. I wanted to hop on this with you guys for a while, so I’m glad to be here.

Mindy:
So let’s jump right in. Let’s address the elephant in the room. You were an NFL player, correct?

Devon:
Yep. I retired at the end of the beginning of 2023, so a little over a year ago. Last season was my first year out and this is my second season out of the league, so it’s kind of surreal. My backstory is I was a fifth round draft pick and for those who don’t know, that’s pretty low in the NFL draft. So there was no guarantee of how long I was going to play or how that was going to look for me. So for me it was like, okay, I want to start to figure out what I’m going to do outside of football while I’m still in it. And I had that mindset from day one. I

Scott:
Think the term is not for long. The average NFL career is three years or less things, and for many athletes that’s peak earnings of their lifetime or for many years at least in there. Is that kind of the mindset had at the time entering your career? Obviously it did not turn out that way and you became very successful as a star linebacker, but how close am I with understanding how the mentality of rookie athletes at that point in their career?

Devon:
Yeah, it’s a very unique situation in that we’re put in a position where you can make a good amount of money for your age. You know what I mean? You’re 22 million or 22 years old and the annual salary is over a million dollars now, so that sounds great, but there’s a couple of things you have to think about. We’re taxes W2 employees, so you literally have to cut that in half. I was drafted by the New York Giants, so literally in half we pay agent fees, which is 3% of your gross contracts. So when push comes to shove and you get to actually see what you take home, it literally adds up to about half of that. So putting that in perspective and understanding the average career is only three and a half to four years. It’s like, okay, even if I play for a few years, that money has to sustain me for a long time or it has to propel me into whatever I’m going to do next. And having that mindset and understanding is really important.

Scott:
Yeah, I think maybe a decade or two ago there was kind of this notion that athletes make all this money and blow it, and from my experience interacting with a limited number of athletes, that seems to be changing pretty dramatically and that finances are a major topic in terms of planning for the post-professional sports career. Is that right? Is that what you saw in the league when you were playing?

Devon:
Yeah, I would say when I first got into the NFL, it was definitely the case. You heard a lot of players going broke a lot, but things have shifted a lot by the end of my career and I still have a lot of friends in the league now. Investing is very much a part of conversations in the locker room. You see a lot of guys doing different things and I think it’s for the better because I think we have a unique position being professional athletes to where if we can educate ourselves on investment vehicles, we have capital, if we can gain the knowledge, we can have access to the right kind of resources and opportunities to where you could put the right formula together to become a very powerful investor in whatever, whether it’s real estate, venture capital, private equity, just the stock market, whichever route you want to go, I think we have a distinct advantage in if you take advantage of it.

Scott:
Awesome. So can you walk us through your mindset as a rookie and how that evolved as your career began to take off in the next couple of years there?

Devon:
Yeah, so when I first got in, I feel like I was the anomaly in the sense that I was not trying to spend a lot of money at first. There’s even an article in CNBC where I drove my high school car for the first year and a half. I was in the NFL, so it was a 2005 Kia Sorento and I took it out to New Jersey and I drove that and then even the rest of my rookie contracts, I ended up having issues with that car, but I worked with the Kia dealership, they saw the article and they gave me a car to drive a KIA cadenza at the time for the rest of my time. So I was in a Kia for the first four years in the NFL and I was having success. I ended up having early success in the NFL starting as a rookie and all that.
So I would get the jokes in the locker room like, oh man, DK pulling up in his Kia or his high school car and stuff. But for me it was the delayed gratification. It’s not like some people are like, oh, I’ll drive a Toyota Camry for the rest of my life. I don’t, can’t say I’m like that. I always wanted a nice car, but I was willing to do the right things and take the steps to invest first, and then I always wanted to invest and then let that extra income provide some of those extra things that I wanted, like a car.

Mindy:
Was it hard to be surrounded by people driving way nicer cars than your high school car and still driving your car or were you able to focus on the end result?

Devon:
I mean, it was hard at times. You’re pulling up to different events or you’re going to places and I’m seeing Roy Rolls Royces, Mercedes, all these different cars and like I said, my rookie year’s, literally a 2005 silver Kia Sorento with cotton seats, it was beat down, but I understood the bigger picture and it’s not that I’m not going to get it, I’m just delaying it. And I would tell myself that consistently and I’m thinking myself now because full transparency, I’m driving the car that I want to drive now and a car that I always wanted to, but I bought it with passive income and that’s a lot more rewarding to me than if I were to do it earlier in my career.

Scott:
So would you mind sharing the details of the high level details of your rookie contract? We have the mentality of saving that and then what you did from an investing perspective during those four years with the Giants?

Devon:
Yeah, so the specifics, I think my rookie deal, fifth rounder, I think my salary was like 800 and something thousand dollars. So you could kind of run the math and see what I netted, what I netted from there. But one, my claim of fame, which a lot of my teammates couldn’t believe, is after I finished my third year in the NFLI accumulated a million dollars net worth, which at the time was hard because of what the salaries were. Like if I’m making $800 in three, 800 k three years, but putting on top of your living expenses and all of that, it’s like a lot of guys had a lot less than that. They bought their mom a house, they bought a car. So the fact that I could say I actually had a million dollars in the bank after my first three years in the NFL was a huge accomplishment for me.
And it was just a testament to where in the off season I went back home but I stayed with my parents or I would rent an Airbnb if I wanted to live on my own for a little bit, but I didn’t try to go and I’m from Phoenix, I didn’t try to go and buy a really nice or rent a really nice place in Scottsdale. I got kind of a basic standard apartment when I did need to stay away from my parents’ house, I need some alone time, I would do that. Otherwise I would just sleep in the basement at my parents’ house. And that’s how I was able to grow that within the three years. But those decisions really propelled me because it’s like, alright, I have more money to invest and it put me in position. And then with the success I was having on the field, I remember that I hit a marker to where because I was drafted so late, I had bonuses if I was going to play a certain amount. So my fourth year the salary bumped up because of my playtime from the last three. So that’s when I was like, oh, I’m going to double down. I’m having success. I’m going to make even more money than I made the last three years. So that’s where I started really listening to a ton of BiggerPockets, looking at investment opportunities and was like, I did some stuff in the first three years, but it was time to scale up at that point.

Mindy:
Your 1 million net worth at year three, is that just saving your salary or is that investments too?

Devon:
That was cash that I had in my bank account, so I had a million dollars saved essentially, but I was investing, so that’s not including some investments. So I had my first property, I had 401k already stacking up because the NFL has that and I had some stock investments, so that was kind of added on top.

Scott:
So I want to go through two concepts here. One is the mindset and how you were already thinking about investment on this rookie deal. And then I think in year four, probably two things trying to get inside your head seemed to have happened. You tell me if this is right. One is you’re making more money, but two is you’re like, I’m going to get another contract and it’s going to be a lot bigger than my rookie contract and that’s going to change the way I play the game. And I would love to hear how close I am there and that evolution from how you’re thinking about investing from the early party rookie contract to the next deal.

Devon:
Well that was kind of the point where it’s like, alright, I’m confident in my ability anything could happen injury wise, but I’m going into year four, I know I’m about to make more money so I could essentially double what I made in the last three years just in this fourth year. So I saw that trajectory and then I also was looking at if things go well and I have a good fourth year, I’m going to be able to get another contract, hopefully staying in New York. But either way. So it was a weird kind of place to where I couldn’t count my eggs before they hatched on like, oh, I’m going to get a big deal. You can’t really do that in football. An injury could happen or you could have a bad year. But I did know that I was going to be making pretty much double what I made in the last three years in one year.
So I’m like, okay, this is a great opportunity. And my mindset with my rookie contract was like, if I save up enough, even if nothing else works out, I stopped playing from here. I’m in a good position to have some momentum behind me. I, I was drafted at 23 so I would’ve been 27 years old with hopefully 2 million after my fourth year and some runway to, okay, let me, I have some things to invest, I have some knowledge, I have some resources. So I’m like, okay, I’m in a pretty solid position. And that was kind of my mindset and gracefully I ended up having a good fourth year and by the end of it I’m like, I knew I didn’t know where, but I knew I was going to get a really nice contract and that’s where I was able to really kind of take off.

Mindy:
While we’re away for a quick ad break, we want to hear from you like Devon, have you started investing in real estate while working a W2 job? Submit your answer in the Spotify or YouTube app. We’ll be back after a quick few ads.

Scott:
Alright, let’s jump back in. You already broke the news here so I think I can share that you upgraded from your Kia to a Toyota Camry around that same time as well.

Devon:
So once I got my second contracts, full transparency, I always wanted a Range Rover, but when I went to the Range Rover dealership, the full body big ones were way more expensive than the sports. And I’m like, they’re just a little bit bigger. Why are they so much more expensive? So as soon as my fourth year was done and I knew I was about I’m, I’m healthy, I’m going to sign a contract, I just don’t know where I ended up buying my first Range Rover, but I got the sport I just couldn’t rationalize spending literally $60,000 more for what they call the autobiography in comparison to getting the sport. So I bought the sport and it was one of those things again, people were like, why’d you get the sport and not the full one? And I’m like, bro, there’s so much more expensive. I couldn’t rationalize doing it.
So I’m like, I’m still driving a range. I feel good about it. But I think the underlying to a lot of listeners, I think the underlying thing that I would want to make sure to share that many people forget is put yourself in a position to earn as much as you can in your working years. And for me during those years I was spending a lot of time, my focus was ball. I don’t get me wrong, I had some fun with my friends here and there. I went on a couple of vacations, but I wasn’t taking three week vacations to Europe while I was in my dog days. Really trying to make it and put together a career. For me it’s like they’re trying to replace me with somebody younger, cheaper, faster, better. And I’m not about to be in Europe for three weeks drinking Arnold Spritz or Afro Spritz and all of that.
I’m going to be locked in. And I think some people in real estate specifically, it becomes a thing of like, oh, retire early and all that. And it’s like, don’t forget you got to work hard and put yourself in a position to have enough money and that’s going to propel you into a lot of more opportunities. So that was my mindset in those years and it really kind of positioned me well, how can I earn as much as I can in these years by being as good at what I do as possible and kind of putting my boss’s feet to the fire of you have to pay me.

Scott:
In the earlier as your contract and your rookie deal, it seems like the mentality was there’s a little bit of investing and a lot of cash accumulation going on. One of the things we’re excited to talk about today is your book, real Estate Side Hustle here, which we’re super excited about. When did that begin to come into become a bigger and bigger factor in terms of what you were doing on the side with the dollars that you’re accumulating from these big deals?

Devon:
I was investing as soon as my rookie season ended, I was investing, but the amounts were just smaller. It was like I was still figuring it out. My first property ever in real estate was a $86,000 property. I went in with a partner and we each put 12% down and Beach Grove Indiana. For me it was like I wanted to start slow and then I got into a syndication, but the first syndication I ever got into was a debt fund and I put $50,000 into it. So I was making bets, but small and kind of learning the game, understanding how it goes in syndication world, reviewing ppms for the first time and understanding what a subscription agreement was and then in real estate going through the process of cash on cash and cap rate and the loan process and in my stock exposure, what the cycles look like and what are ETFs versus mutual funds.
So I was making investments but comparable to what I felt I was comfortable with and what my income was. And then as I was doing that, I was a accumulating a lot of knowledge from experience, but also a lot of time reading books, listening to podcasts. So I felt like I was getting real life experience and a lot of knowledge exposure and it propelled me at the right time for when I got my second contract and it’s like, man, I have some investments, I have some runway, I have capital saved. It’s go time and I can really start to do some things now.

Mindy:
I love that you didn’t jump in with both feet and just take that whole million dollars net worth and just throw it at something. I am shocked that you said you bought an $86,000 house with a partner. I love that because there’s so many people that I see in the BiggerPockets forums, they’re like, I’m going to buy this all by myself and I can barely afford the mortgage, but it’s totally going to be fine. It’s like, maybe not. I love that you’re learning. I think that’s so important that you get a foundation of knowledge before you jump in, but also you’re going to learn so much more by doing it and making mistakes and learning from those mistakes. The school of hard knocks is not just for the NFL.

Devon:
Absolutely. And I think making calculated risk with an amount that you’re comfortable with is really important. So my mindset with that first property was like, I’m going to be pissed if I lose $12,000, but at the end of the day with where I’m at, it’s not going to end me. I’m just going to be mad. I lost 12 grand. So I’m comfortable with this. And a lot of people aren’t okay with base hits. And I always have the mindset of I’m okay with hitting singles because I feel like those are going to accumulate over time and help me make better and better decisions to where I’m going to be able to identify the second base, the third base hits, and even the home runs. But especially starting out, it’s okay to mitigate risk with getting a base hit deal working with partners. And I feel like that deal, it turned out over the life of I own that property, I invested $12,000 when we sold it, my partner and I both got 25 grand plus the cashflow over four years. So it ended up an incredible investment for us, but the dollar amount didn’t necessarily change my life at that time, but the knowledge and the fact that it got the ball rolling for me in the investment world in real estate specifically, I’ll never forget that. I think that was my most important purchase.

Mindy:
Yeah, absolutely love that. Because so many people are like, oh, if it’s not a home run, it’s not worth doing. No, absolutely. Learn on the base, hit, get a single, like you said, learn on the single even though we’re mixing our sports metaphors.

Scott:
Yeah, I was going to say he’s really good at blocking and tackling.

Mindy:
Okay, you can’t get 10 yards until you get one yard. So get one yard, don’t go for the touchdown right away because you need to learn. And if you’re going for the touchdown and you’re only looking for the touchdown, you’re missing the two yard passes, you are missing the next down. I mean the two yard passes add up and then you get four more chances to get 10 more yards and you keep going, you keep going, I like baseball metaphors better for this, but whatever.

Devon:
Well, I think there’s something to really be said about that. And for me, I really wanted to make sure that I didn’t get over what I was comfortable with at the time. And how you do that is just making sure you’re making conservative choices while you’re learning and you’re going to be able to earn the right to take risk by getting in the game and taking shots and having the knowledge. And now I can take more calculated risk, I can invest in bigger deals because I understand that I have that foundation, but I think people are trying to hit for the fences or are the Hail Mary in football terms. And I think that’s the wrong perspective to have when you’re getting started

Scott:
Over this period of time really it sounds like became an expert and a master at investing in passive opportunities in particular. And you’ve developed a couple of frameworks that I’d really love to dive into here. One I think is the four passive income streams in real estate. Can you tell us what those are and how you came up with this?

Devon:
Yeah, so I started looking at ways to invest passively. A lot of people out there who say that passive investing isn’t realistic, you have to be active when we’re talking real estate at least, and I understand where they’re coming from with that, but my perspective was like I’m trying to sack Tom Brady on Sunday. I don’t have time to be an active investor, so my choices were figure out how to invest passively or don’t invest at all. And I felt like not investing at all was more risk than figuring out how to invest passively. So I’m like, I got to figure this out. And within real estate specifically, I found four vehicles that work passively and that’s investing in single family and smaller multifamily properties that’s investing in syndications, that’s private lending. And then you could get into commercial at scale eventually with triple net leases and owning commercial buildings.
But with those four vehicles you can do, and my kind of marker was like I have five hours a week in the season to focus concentrated energy on my investment portfolio and every decision I made was am I going to be able to do it within five hours or less? Is it going to fit within the timeframe that I have to focus on real estate? And if it wasn’t, I wasn’t doing the deal because I’m like, I could do this Airbnb and it’s going to make a ton of money, but at the time Airbnb property managers wasn’t as popular, how would I manage it? That would be stressful. I’m trying to sack Tom Brady and I got to worry about if they’re checking in on time on Sunday night, I can’t do that. So that was kind of barrier of like, okay, does it fit within the time that I have and structuring my portfolio to make sure everything I invested in would fit was really important to me.

Mindy:
I love that. Does it fit within the time I have? The short-term rentals are so sexy, but they take up so much time. If you have five hours to do real estate in a whole week short-term rentals are not for you. And I don’t think that your specific situation is all that different from doctors, lawyers, other high net worth individuals, or not even high net worth individuals who have these very demanding jobs and they’re like, oh, but I could make more money in short-term rentals. Yeah, you can, but if you’re giving up most of that because you’re hiring somebody to run your property or you’re making yourself crazy and losing out on stacking your Tom Brady because you had to get a phone call from somebody who can’t figure out how the keypad works, which is frequent, it doesn’t make any sense. So you just listed four passive ways to invest. What stream did you find the most success in and what was your favorite

Devon:
For different reasons? So one thing I would add to that question is you really have to solve for fast and slow money. And I didn’t realize this till I retired to be honest, because fast money is the money that you’re going to get back in a year or less. So your job, you’re getting paid every two weeks or every month. That’s fast money. You’re trading time and our capital for a fast return that’s giving you capital back within a year or less. Your slow money is your investments, your stock market. Oh, if you invest in the stock market over 10 years, it’s going to give you an eight to 12% return. Or if you invest in this real estate, it’s worth $200,000 today it’s going to be worth $500,000 in 10 years and the rent’s going to go up a ton. So understanding the fast and slow money, and when I retired I was like, I need to replace my fast money bucket because my fast money was my day job.
NFL, I’m making a good salary, that’s fast money and I’m able to use that money to invest in real estate. But what I found is I retired and if I don’t replace my fast money bucket, I’m going to run out of capital to keep investing and living my life. So understanding that, I would say it depends where you’re at and your life goals. When I was playing in the NFL, slow money was more important and I really liked accumulating rental properties and investing in syndications. Those were two things that I did kind of hand in hand. Syndications was extremely passive because I got to just underwrite the general partner who was putting the deal together, review the deal, and then I invest and I’m getting monthly or quarterly reports done with investing in syndication or investing in single family. I started out investing in turnkey properties, which is when you’re identifying markets and finding someone who is fixing flipping properties and you buy it from them or maybe it’s a new build and there’s already property management in place, so you pretty much are buying the property and you start getting immediate cashflow. So those are the two ways that I kind of started early on and then it kept evolving and building from there. And now because I needed more fast money, I’ve really leaned more into my private lending business in that because that sustains the capital I need to live my life, but then the extra capital so I can keep buying assets and investing in the slow money. So I think understanding where you’re at and what you need is really important.

Scott:
Awesome. We’ve just heard about how Devon Kennard’s defense led to incredible offense in the form of income generation and now we’re going to hear about special teams and how he builds Tax Advantage Wealth after this.

Mindy:
Welcome back to the show.

Scott:
One of the problems with simple, so I love your approach here. One of the problems with simple interest though is that it’s simple interest. It’s fully taxable. So when you’re making millions of dollars a year playing for the Giants, for example, let’s pick on New York again, they’re going to take half your income in terms of taxes, and so that 12% yield is really 6% after taxes, which is not that great at the end of the day. Is that part of the reason why this has shifted for you is because that private lending can generate enough simple interest to cover your expenses, but we don’t have the huge tax consequences of being in that NFL tax bracket. Is that part of the deal?

Devon:
Yeah, well that’s one of the negatives of private lending is it is taxes ordinary income, and that’s why I’ll always coincide it with buying assets and investing in real estate. So I can earn X amount of money from private lending and then go and offset that income with depreciation, cost segregation studies and those things from my investment portfolio. And a cool thing that I did for my last year in the NFL is I worked with my tax strategist and I was able to qualify even though I was still in the NFL for a real estate professional my last year in the NFL and I did cost sex studies. So I was able to go back and reopen my 2022 tax year and get a large chunk of money back by qualifying for real estate pro and the cost segregation studies. So some people shy away from income businesses like private lending because oh, it’s taxes, ordinary income.
But even while I was playing, yes, it’s raising my taxable income, but I wanted a soft landing for when I retired, so am I not going to start to develop another fast money vehicle for myself when I know that my career is coming to an end just because of the tax implications. For me, that wasn’t a smart decision. It’s like let me build my knowledge and the understanding and the infrastructure so when I’m done playing and my fast money from football is done, I have a soft landing and I already have another fast money vehicle. So I was willing to take the extra hit if you want to call it in taxes while I was playing in the earned income, have a plan for my fast money once I was done and I’m always trying to offset it with buying real estate.

Scott:
Let’s dive in one more question on this lending front and let’s talk about credit funds. You mentioned that you put money into a credit fund at the very beginning. It sounds like you’ve switched to being a direct lender with directly to clients. What was the catalyst for that evolution and why are you doing that Instead of investing in credit funds today,

Devon:
You can earn more money investing yourself. So I think investing in debt funds and credit funds is a great vehicle if you’re like, I like that business plan, but I’m not trying to do it myself. So here’s the real numbers. If you’re going to do it yourself, let’s just stick with my company. So we charge 12% in two points. The average deal is less than a year. So the two points I could really charge twice a year. So when you add fees on top of that, you can earn between 16 to 18% on your money if you’re investing your own money. So that’s a pretty good return if you were to do the same thing. Not pretty good. I mean I would say 16 to 18% is a great return annualized on your money. Now if you do the same thing and you’re doing it into a debt fund, you could earn 10%.
If an investor comes to me, I’ll give a 10% return to my investors, that’s still good money for pretty much just investing invest it. You get a monthly check. So when I first started out, I was doing it that way and I was like 10% return on my money. They showed me their underwriting on how they pick the deals, their business plan, I can do this, but the more I learned and grew, I’m like I could do it for myself and make 16 to 18. Okay, is this something I could do? How do I systemize it? How do I build the SOPs out and the software to where I don’t want to work 40, 60 hours a week, but I like the returns I can get on doing it direct. So for me it was like it’s worth the upfront work to build out the infrastructure to where I can lend on my own as opposed to getting the 10% return. But there’s going to be many who you have a hundred thousand dollars and you can invest and make 10% on that $10,000 a year and that starts to compound and you can double your money in seven years or less and be getting paid monthly. I think that’s an advantageous way to look at it as well.

Mindy:
So let’s look at what your investment portfolio actually is comprised of. How many units do you own either by yourself or with partners? How many syndications are you in? Do you have any loans outstanding right now?

Devon:
Yeah, so I own 29 units today and it’s all single family and smaller multifamily up to six units. I have invested in over 40 syndications, so I’m waiting for a lot of those to liquidate because I want to put ’em into my own deals and into my lending company. But a lot of those was stuff that I invested in throughout my career. And then I have my lending company and I have over two and a half million dollars of my own capital lent out currently. And I’m trying to grow that and starting to take some investor capital and growing that business. And my goal is to have a really good operating business where I have 10 to 20 million out every year and a very small team. It could be a very lean business, so have the right software, have one or two employees or people that’s helping me and let that business chug along and grow it that way.
So that’s what it’s comprised of now. And my plan is in my personal portfolio I have an LTV of about 50%, so a low LTV on my portfolio and that’s kind of my strategy with that. Now I do have HELOCs, so that’s my fix LTV, but I do have HELOCs on a lot of my properties and I could leverage some of that for lending. So my HELOC is 8%, but I’m lending at 12 and two, I’m making the spread on that money without taking out a higher interest loan right now. So I’m taking advantage of that and that’s how I’m blending my lending business with my personal portfolio. So everything continues to elevate.

Scott:
Let me ask you about the syndications piece of this because we just launched a new product called Passive Pockets here at BiggerPockets, which we’re super excited about. And part of the deal there is people are getting crushed in syndications. We talk about multifamily, we’ve seen a drop of 30% in terms of prices from peak on average in the United States with geographic devastation that can weigh outpace that. So for example, in Austin, Texas or Atlanta, Georgia, we might see even bigger dropoffs in valuations. We’re seeing rent growth very slow in the face of huge supply headwinds and I’ll sit here and say it, I’m in two syndication deals and I’m going to get wiped on those. You have a lot more experience, 40 syndications. You’ve been doing this a lot longer starting from your NFL career. Walk us through how you’re thinking about this pain and how you’re thinking about the next wave of incremental investments and syndication in light of market conditions. Have you been able to avoid most of those problems or any lessons learned?

Devon:
So one advantage I had is I got connected with a financial advisor that all he does is evaluate syndications and funds. He doesn’t get his clients into anything but syndications and funds. So he’s vetting underwriting deals all over the country. So oftentimes people don’t believe me when they say I’ve gotten into 40 syndications, but that’s why I work with an advisor who only does that. So he would evaluate hundreds of deals a year and bring to his clients the four or five best ones and kind of would give a full report of his underwriting on it. And with that, I made him teach me how he was underwriting deals. What’s the typical fee structure you like? What are you looking for? What’s the debt structure? So I have a couple of deals that aren’t looking too good right now, but for the most part of my 40, they’re all on track on pace.
I’ve had some dividends suspended to accumulate cash, but across my portfolio of syndications, none of it’s not performing bad at all. And I think that’s due to having someone like that. But I will say the more that I know and the place that I’m in now when a lot of those syndications go full cycle, I’m going to be putting a lot more into my own stuff and less into other deals. And my main reasoning for that is not everybody has my wrist tolerance. I just showed that my LTV on my personal portfolio is 50%. I hope to keep it there or lower for the rest of my life. I just like having low controllable debt. I’d rather get to 50 doors with the LTV of 50% than have 150 doors with an LTV of 80%. And that’s kind of my business plan and structure moving forward.

Scott:
Yeah, I completely agree with that mentality. That’s what I do with my portfolio and I’ll go a little further. I’m scared of the market a little bit. I have that fear at all times of things could go bad places could drop all these things, and I’m not investing in real estate to get to $150. I’m investing to have a inflation adjusted at store of value and a reliable long-term income stream once the property is delivered or paid off over time. And so I completely appreciate that and I’m, I think that very few investors put a huge percentage of their net worth into passive investments. I’ve talked to maybe less than five people who put perhaps more than 20% of their wealth into syndications, but there is this desire to put a chunk of your wealth in that on a long-term basis. Do you think you’ll continue to put 10, 15% of your position into these deals going forward or are you going to generally phase it completely out? I

Devon:
Think there’s some syndicators and gps that have performed incredible for me over the last 10 years. So as deals close, I think I’ll double down on just a handful that have just crushed it. Their business plan has been incredible. They’ve done well for me, but I feel like I have my own strategy that really works. I feel like I can buy single family and smaller multifamily properties in a couple of markets that I’m in. I have good contracting teams. I like working with good systems in place and then I believe my underwriting and my lending company. So I feel like it’s very risk averse and I could get, like I said, 16 to 18% on my own money to where most of these deals they have an IRR of 15 to 20%. So if I can get similar returns on my own and have more control, I feel like why would I continue to invest in a ton of syndications? So I’ll do a little bit for diversification to your point. So maybe it will add up to maybe 10 to 15% overall. But as a lot of the syndication exposure I have goes full cycle, I’m 100% putting it into buying my own deals and into my own lending company.

Mindy:
I love that. What I’m hearing is you saying, I’ve looked into this and I’ve tried it out. There’s a few people that I really like and we’ll continue to invest with them based on my experiences with them, but I also want to do my own thing now that I have the time, now that I have the more knowledge because you’ve been doing this for six or eight years, I also am agreeing with Scott, the syndication market scares me right now. I’m still reviewing pitches that come through, but I’m not putting money into most of them. There’s a couple guys. I will give them money for almost any deal. They throw my way because I like how they operate. I love how they communicate and those are the people that I trust with my money. But yeah, I can do a better job on my own, a better job. I have more control over what I’m investing in on my own, and I like syndications for the diversification part. Well, syndications from a few years ago right now, I’m not seeing any great numbers.

Devon:
Well, I mean what’s really important for people to know with syndications is track record’s a huge thing, but you almost have to take track record from the last 10 years with a grain of salt. You have people who are not very good at what they do, but they were still making money the last decade to where it’s like, yes, you want a good track record, but there was legitimately a 10 year run where if you started a syndication, you’re probably doing pretty well and now the tide’s gone back and you’re starting to see who was naked. And specifically there was one deal that I did outside of my financial advisor. I thought I kind of had my chest out, thought I was pretty, knew what I was doing, and I had a gut feeling that he gave me a little arrogant feel. He was like, oh, I turned these properties into AAA class A stuff.
And his return metrics over the last 10 years was incredible. I knew some people who invested with him who made great money and I didn’t love his personality and it didn’t jive completely with me, but you couldn’t deny his track record over the last decade. So I got shiny object syndrome and full transparency, I put a hundred thousand dollars with him and that’s the one deal that’s for sure going bad, and I’ll be lucky to get my capital back when it’s all said and done. And I’m like, it taught me a valuable lesson to where numbers are numbers, but your gut feel really matters. Does the person fit with your perspective, your viewpoint on it? And if I have that feeling, again, I’ll never do a deal with somebody with that feeling.

Scott:
I want to chime in here and react to this because I missed the episode, Mindy that you did with Jim Pfeiffer from Left Field Investors Now passive pockets, and we got some comments. Hey Scott, you’re really cautious about this syndication space. Why are we doing passive pockets? Well, I’m the biggest skeptic of this industry. Some of these guys in the industry don’t know what they’re doing. Some of them are going to be fraudsters, some of them are going to be unlucky. People are going to lose money. People have already lost money. You just lost money. I’m in a deal. It’s the same way. I wouldn’t say the guy had too big of an ego necessarily, but the deal’s going to get flushed. This is a scary place to go invest, and it’s been hiding in the corner over here in the dark with nobody shining a light on it.
And this is a part of the BiggerPockets world. People get become successful real estate investors on BiggerPockets and they go out and raise money from other people and there’s a light shown on them as they’re going up. There’s no light shining on them when things are going bad or sideways, and we’re going to do that here at BiggerPockets with passive pockets. And so I want to just kind of set the record straight there that this is not a pump up the syndicators play. This is a hold them accountable play at BiggerPockets. It’s a great potential asset class that’s also super dangerous. On average, the fees are going to suck return out of your life, but you’ll also have that shot at different returns income or potentially major upside with particularly skilled operators or better risk adjusted returns with certain operators and people will try. I try with five to 10% of my wealth, not the 90% by any means, sounds like you’re in the same boat and you’re almost always going to get a better return on an average sense on the businesses that you run. Or if you’re scared of both of those, don’t want to put in the work, go into index funds. So sorry for my little rant here, Devon, taking away from what you’re saying here,

Mindy:
You have to agree he’s right. I want to agree with you, Devon. You said that you should have listened to your gut and when you are going through these deals, these presentations, you should be looking for reasons to say no. It’s really easy to find reasons to say no. It’s also really easy to find reasons to say yes, and that’s not what you should be looking for when you’re looking at this. I love that you are doing small amounts relative to your net worth because then if the deal goes sideways or when this particular deal goes sideways, you are only losing a hundred thousand dollars, which I fully recognize what a stupid sentence that is, but you’re not losing a million.

Scott:
Yeah, it’s like a Range Rover Sport Edition loss, not a full, the full price. The full size. Yeah,

Devon:
Exactly. And full transparency, if I really do lose it all, I’m going to be pissed because I’ve been lucky enough to never have lost a hundred thousand dollars yet. So that’s my first time losing that six figure chunk of money. So I’m going to be pissed, but it’s going to be that and not, I’m not the kind of person. That’s also why I’ve invested in so many. I’m not the kind of person that puts a half a million bucks in one deal. I like to spread it out. And then if I see some success and I like how stuff goes, maybe I’ll slowly put more with that person over time. But there is going to be a lot of shady stuff going on in the future in the syndication world because some of these syndicators are failing now and they’re not going to want to include their past failures in their reporting on the next deal. You think they’re just going to stop putting deals together, they’re going to pop back up. So doing due diligence and really kind of looking into the people you’re working with is going to be really important because if they’re conveniently showing the deals that went well and not the two that failed, then for me, that’s an automatic no. Like that alone. If you’re reporting and I’m only seeing the deals that did well,

Scott:
I’m out. You mentioned that you’re in single family. We have 29 units, we’ve got the private lending business, we’ve got the 40 syndications, and I believe you mentioned a fourth stream, which was going to be the commercial assets, which I assume means smaller commercial properties that you own and operate directly. Is that right? Can you tell us a little bit about that piece?

Devon:
That’s kind of what I want to grow into. So my kind of thought is with my 29 units, I’ll keep buying more and more of those and 10 31 into bigger and bigger properties and eventually get into probably some triple net commercial where that’s extremely passive. If you could buy the right kind of deals, if I can buy a standalone Starbucks and my tenant is Starbucks for the next 20 years, I would love to evolve into that. And I know some people who do that, and my goal is to kind of build my portfolio up big enough to where I can kind of buy off some of those triple net lease deals and have very stable returns from safe tenants like Starbucks, like Walgreens, maybe it’s an industrial building and it’s Amazon. So I think that is kind of a growth play for me in the future and what I feel like fits within my strategy.

Scott:
Well, let’s make sure a lot of this awesome stuff that you shared is covered in the book. Can you tell us about the book, the writing process, and what you hope to put into it and what you hope readers get out of it?

Devon:
Yeah, so pretty much everything we talked about today is within the book. The book starts out real estate side hustle, the four strategies for passive investing, and it’s the things that I really believe in and I’ve done, but it starts out talking about the spread between how much you make and how much you spend and how you need to increase that as much as you can. Because if you’re trying to invest passively, the elephant in the room is you need to have capital, you have to have an advantage to passively investing. If you’re an active investor, your advantage is the time and knowledge you have. If you’re a passive investor, it has to be capital, and it doesn’t necessarily mean your capital. Maybe you could raise capital. There’s different ways you can look at that. But an advantage you have to have if you’re trying to invest passively is some amount of capital.
And I really dive in at the beginning of the book of how to earn more at what you do and how I was able to do that within football and hopefully how it can translate to every listener here on how they can earn more, which then propels them into some passive strategies. And those are the four strategies with the single family syndications, private lending and commercial, and really building out the SOPs to do what passively, because that’s the key. I give out all the SOPs that I use for each, the softwares I use, the systems I put in place to streamline it. And to give you an example with single family, when I’m on buy mode, I’m reaching out to my wholesalers and all the deal finders who are helping bring me deals, but I’m being very specific with what I’m looking for. I do not want a hundred deals.
I don’t want an inbox full with a bunch of listings coming up. I want four listings that fit my buy box that I can dive deep in and put offers in, and if I see 30 deals instead of four, I’m not going to underwrite them all. So there’s systems you can put into place to where you can streamline it and really make it efficient in each category. So I think that’s kind of the secret sauce of the book is not only the four strategies, but how to do them passively and the structures you need to put in place.

Scott:
Love it. Systems and reps, both kinds of reps here. Thank you so much for writing this awesome book, BiggerPockets Money listeners. You can go to biggerpockets.com/side hustle pod to get your copy, and you’ll get 20% off any format or edition of the book if you go there. That’s biggerpockets.com/side hustle pod, and that’s limited to the first 200 people who purchased the book. So get your copy today. Super excited to have you on the show. Devon, it’s great to chat with you. Awesome to hear about your career. Thanks for being so open and transparent. Congratulations on the huge success and the wonderful three-pronged, soon to be four pronged business that you’ve built, an empire that you’ve built in real estate.

Devon:
Thank you so much for having me, and I’ll see you guys next time.

Scott:
Once again, we’re super excited to partner with Devon Kennard to publish real estate side hustle for passive strategies to build wealth beyond your day job. This book is released on October 15th, which is four days from now. If you’re listening to this, when we launch this episode, this episode will go live on October 11th. You can go to biggerpockets.com/side hustle pod to get your copy on October 15th, and you’ll get 20% off if you’re one of the first 200 people to take advantage of that discount biggerpockets.com/side hustle pod, really awesome book, really awesome story from Devon Kennard, really awesome expertise and really admire the career that he had both in the NFL and in real estate.

Mindy:
Yeah, this was a great show. I’m so excited to have Devon on with us. I love his thoughts on syndications. I love his thoughts on just the passive income lending side. He’s going to go on to be a trillionaire of course. Well on his way. Alright, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He of course is the Scott Trench. I am Mindy Jensen saying goodbye cherry pie.

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In This Episode We Cover

How Devon scaled his real estate portfolio while playing in the NFL
Four passive real estate investing strategies you can use today
Speeding up your financial independence timeline with real estate side hustles
Fast money versus slow money (and which bucket you should be filling)
The pros and cons of syndications and how to weed out “shady” operators
And So Much More!

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

BiggerNews: “Boomtowns” Are Declining…It’s Time to Take Advantage

by Cara Ameer | Oct 11, 2024 | Investing, News Feed

Real estate “boomtowns” present a massive opportunity to investors in 2024. A few years ago, buyers were fighting tooth and nail to purchase properties in Austin, Boise, Phoenix, and other red-hot markets. Demand was growing in these cities, and prices were shooting up with no end in sight. But then…it stopped. Prices started declining, vacancy rose, and investors were stuck holding onto properties now worth less than what they paid. The interesting part? These market declines might be only temporary, and those who don’t buy now could be kicking themselves a few years down the road.

To give us insight into which boomtowns are worth buying in and which are worth ignoring is Matt Faircloth, multifamily real estate investor. He saw many investors rush to these real estate boomtowns during the peak and are now struggling to fill their rental units as the boom became a bust. He’s identified a sneaky strategy that allows you to buy properties at a discount in these markets to make money while the FOMO investors search for an exit option.

We’ll talk about the cities with the most hype, the ones worth investing in, the future boomtowns that most are ignoring, and the massive opportunity of “economic spillover” that could lead you to markets with the best future potential.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
When I say the word boom town, you probably think of some old wild west situation. Maybe someone goes, strikes gold or strikes oil and then sort of magically and overnight this entire town springs up around them. And that of course creates all sorts of opportunities because the whole economy is growing, but it also presents risks because when things grow that rapidly and there’s all this speculation going on, there’s no assurances or guarantees that it’s going to keep growing in the same way or at the same rate. In some ways. The same thing still happens today. Cheap costs of living, remote work, flexibility and corporate investments have rapidly increased populations in a lot of markets, probably in the Sunbelt while taking those benefits away from other places. And it’s tempting to want to invest in those markets. I think everyone looks at them and has some interest in them. But the thing is that these trends aren’t a secret and multifamily supply and a lot of investment and competition are sort of rushing towards these places, and that has created a boom, but it leaves all of us investors wondering, is it still a good time to invest in these markets or have we sort of missed the boat? Or if you’re already investing in these markets and they’re experiencing a little bit of a pullback or a correction, what do you do? Today we’re going to get into everything about Boomtowns.

Dave:
What’s up everyone? I’m Dave Byer back for another bigger news episode this Friday. Since we’re talking mostly about multifamily supply here, I wanted to bring on a guest who one understands multifamily but has also done single family investing and also has just been around for a long time and invested in a lot of different markets. So I’m bringing back one of the first people I befriended when I became a BiggerPockets employee. That’s Matt Faircloth from the DeRosa Group. Matt has been a full-time investor for almost 20 years, and you maybe have read his book, maybe you’ve seen him speak at BiggerPockets, but he is just a wealth of knowledge about all things real estate. But today I’m excited to hear from Matt about which fundamental metrics investors need to research to determine if a BoomTown market is still heating up, maybe it’s overheated or you’ve already missed the boat. We’ll also talk about what to do if you’ve already invested in an expanding market and you’re now seeing rent drops or maybe even price drops. And make sure to stick around to the end of the show because Matt and I are going to name a few markets that aren’t yet Boomtowns, but could be soon. Here’s me and Matt

Dave:
Faircloth. Welcome back to the BiggerPockets podcast. Good to see you, man.

Matt:
Great to see you too, Dave. Thank you so much for having me.

Dave:
This is fun. We’ve interacted at BiggerPockets in so many different ways, but I don’t know if we’ve ever had this one-on-one podcast vibe before.

Matt:
I’ve never been one-on-one with you if she brought gloves or not. But at the end of the day, you and I have been on many, many shows together with others, but we’ve never done just a Dave and Matt Fireside chat, so I’m really grateful and looking forward to this today.

Dave:
Yeah, I think this is going to be great. And we’re talking about a fun topic today with Boom Towns and some of the areas of the country that are just going absolutely crazy, and I wanted to just get your opinion on what’s going on here given your extensive experience in most real estate things, but also just in your commercial real estate multifamily portfolio. You’re operating in a lot of the, I don’t know if you’re operating in all of them, but you’re certainly aware of all the towns that we’re going to be.

Matt:
All of the booms we’re booming, all the booms. Wow.

Dave:
I hope not all of them. Some of them are no longer booming.

Matt:
Well, it’s an interesting conversation that I’m looking forward to get into you with today because there is a certain vibe you hear out there about these towns that are booming and it’s almost like, I feel like we’re back in high school sometimes, Dave, where it’s like, Hey, did you hear all the cool kids are investing in Austin? And so it’s like you and I are in high school and we’re hearing about the party that’s happening at Austin’s house, or did you hear what’s going on at Charlotte’s house this weekend? And we all should go to Charlotte, right?

Dave:
It’s so true.

Matt:
Or that new kid Phoenix that just showed up

Dave:
And you get

Matt:
Fomo, total fomo, man. I’m like, damn, I didn’t get invited to Charlotte’s house. That sucks. No, you didn’t get invited to Charlotte’s house, but did you hear that Chase Scott got invited to Charlotte’s house and I didn’t get invited to Charlotte’s house or whatever. So there’s a lot of fomo that happens around these boom towns in real estate and some of it’s warranted. Some of these kids are pretty cool actually, and some of it’s overhyped,

Dave:
But has it always been that way or is it new with social media and the prevalence of our industry now as it’s grown that these more individual or very specific markets get talked up more than other ones?

Matt:
I think so. Social media, just like anything in life is a big old bucket full of gasoline. And I think that you still need that spark of reality for social media to accentuate. And so I remember back in the condo boom to date myself, Dave, in the early two thousands, pre-run up and crash with 2008 and oh nine, that Miami was where the cool kids were and other places like Vegas was a cool kid, condo boom town, and there were people that were building out houses for sale was so much of a rental frenzy, but it was a development for sale frenzy because of how cheap money was and because pretty much if you could fog a mirror and had a heartbeat, you could go and borrow for a residential property to buy for a lovely four bedroom, two bath, you could get in seriously no money down. This is like pre Dodd Frank and all that kind of jazz. So there were people that were developing condo projects and development deals as fast as they could in those hot markets in Miami and Vegas and perhaps Phoenix too and whatnot, but it wasn’t as frenzied as it is now. I think thanks to social media.

Dave:
So you mentioned a few of the cool kids. What are the other cool kids when you think BoomTown or just a market that’s exploding right now, what do you think of?

Matt:
Well, okay, obviously what really is a foundational growth metric of a boom town is jobs. And we mentioned Austin, right? Austin, yes it is. Or maybe was boomed a little bit and the party’s starting to get the hangovers now and all that, but the Austin popped a lot the last couple of years. And it wasn’t just because all the cool kids were posting about projects they were on in Austin and social media, it was certainly backed up by what? By jobs. If Tesla goes and builds a gigafactory just outside of Austin, there is so many spillover factories that are needed to support that big gigafactory. So it’s not just them, it’s many, many other companies moved to that region for all the reasons, right? Because land’s cheap and because Texas had good rules around starting up businesses was incentivized all the stuff. So the local economy in Austin popped and that spills down and creates workforce housing jobs and it creates all kinds of things and it spurred an economic economy first, and then that created a housing boom behind it because people are moving into these markets and they need great places to live.

Matt:
And it’s not like the tech guy that wants to go work at the Gigafactory and Austin moves to town and ends up having to be homeless, no place to live, but there becomes competition for his dollar or her dollar for places for them to live when they go work at that factory or go work at whatever the tech boom is. And that pushes up rents, supply demand. If you look at a chart of Austin rents, it’s blown out the last couple of years now obviously hit a ceiling and that increase in rents is where that’s what drives people like you and me, right? Yet we see that things are increasing. We see that Austin used to rent for, I’m going to make a number up Dave, so don’t back me up. BiggerPockets listeners, put your pens down a thousand dollars a month for a one bedroom, right? I don’t invest in Austin, so I don’t know.

Dave:
That’s our baseline though. We’re using this as a straw man.

Matt:
You’re the data deli man. You should be telling me what the rents are in Austin, right? Well,

Dave:
As you know, I’ve memorized rent for every metro area back to 1915. So I could just recall that

Matt:
Encyclopedia brown of data across the United States, but let’s just say for example, that rents on a one bedroom worth a thousand dollars, they very quickly will become 1100, 1200, 1300 for a renovated or new built bedroom simply because there’s more people coming in. So there’s more demand in that. So not to one-on-one this thing, but for those that are newer to the market supply demand is what’s going to push rents up. Then the rocket fuel comes in, then the big bucket of gasoline comes in and people start doing deals and you start having fomo and you see that a cool kid is doing a deal in Austin, and so you want to get into Austin too because you think that cool kid’s smarter than you are. And so you want to go in, that’s what creates that real estate investment frenzy. And all of a sudden that kid in high school named Austin is having a party and we want to go to

Dave:
Thank you. That’s a very helpful description just for sort of the cycle of events that happens when one of these markets starts to get hot. And I want to talk about the other part of that life cycle, which is when they start to cool down in just a couple minutes. But when you think of these types of markets, or at least regions of the country that have experienced this change, Austin’s obviously one of ’em. You mentioned Raleigh. What are some other ones that come to mind?

Matt:
I have fomo too, Dave.

Dave:
Oh, totally. I think about this all the time

Matt:
And I see my cool kid friends investing in Atlanta. I do hear a little bit about Orlando, but I think that was a bit, you made a Covid reference. I think Orlando personally, Dave was a bit of a covid market as is a lot of these warm places like let’s say Jacksonville, Florida, not as much Miami, even the Tampa area.

Dave:
Yeah, Tampa for sure.

Matt:
Yeah, those are covid poppers I think. But Atlanta is a market that really, really increased for real fundamental job increases and things like that.

Dave:
Raleigh.

Matt:
Raleigh, yeah. Research triangle growth in Charlotte, Nashville, let’s say. That is a market that I’ve seen become a cool kid market. I read some data that this was a couple of years ago. There was a five year Dave waiting list for a crane in the city of Nashville because Nashville at the time, again, don’t be yelling at me, BiggerPockets listeners, if this is no longer the case. This is a couple of years ago. I feel like this’s a disclaimer, the views and opinions of Matt Faircloth, they’re not necessarily, anyway, at the time, there was a limit on how many permits you could pull for a crane in the city of Nashville. And so the waiting list for that permit to build anything to build a large multifamily housing project and office building anything was five years, Dave.

Dave:
Wow.

Matt:
So that’s a good sign and that’s actually a government imposed constraint that will cause the supply demand curve to artificially push in a direction. So let’s see, Nashville, Phoenix.

Dave:
Yeah, Phoenix was on the top of my list. I have one more that I’m thinking of that you haven’t mentioned. I’m

Matt:
See if I can guess it.

Dave:
Okay,

Matt:
I’m going to speed around. I’m going to throw three more out, see if I can get it. Okay. Either Salt Lake City or Boise.

Dave:
Oh, you got it. Boise. Boise was one. Yes. If people to the show, I always pick up Boise, this

Matt:
Is a game show. This is so great.

Dave:
I’ll send you a trophy or a prize.

Matt:
So yeah, those are some of the ones that you see a lot of energy and a lot of vibe going into. I’d say at least 50% of it is founded and the other 50% of it is a bucket of gasoline from social media and from cool kid fomo.

Dave:
Okay, so that’s really what I wanted to talk about. So in this episode is how do you split that out? What is a market that is for real and what is something that is perhaps either social media or the product of very unique and perhaps short term circumstances? Because Covid obviously created boom towns in places like Cheyenne, Wyoming, like places that you would’ve never

Matt:
Honolulu,

Dave:
Right? Yeah. Places. I don’t know nothing against these markets, but they’re not on any top of the list for job growth or population growth. So they sort of defy a little bit of the conventional logic about where makes a good place to invest. So how do you decide what party you want to go to? Matt, all these kids are having a party on a weekend and you, you’re popular guy, you get invited to all of them. Which parties do you choose?

Matt:
I love this party analogy dates. You can’t go to a party based on who’s going to the party. So I can’t look on social media and see, and I’m not going to name real names, but those syndicators that we all know of and we see on social that they’re either buying or building or investing in an apartment building in a cool kid town that like, oh, I should do that too. They must know something. I don’t know. The idea of you doing something that someone else is doing because you think that they’re smarter than you is absolutely the most flawed tactic for anything maybe day in life, right?

Speaker 3:
Yeah.

Matt:
You should never do something that other, I mean, I should tell this to my 10-year-old. You should never do something that someone else is doing just because you think it’s a good idea that they’re doing it. So they must know better than I do. The fact of the matter is that’s almost like a reason why you should not go to that party is because maybe when you get to the party, all the Doritos are eaten and all the soda’s gone, right?

Dave:
Yeah, exactly.

Matt:
Yeah.

Dave:
They already called the cops,

Matt:
Shut this party down. The reason why you should go, I mean obviously you could use it as an indicator. So maybe I see on social that somebody that I think is a cool kid is investing in Phoenix or whatever. Stop picking on Austin, right? They’re investing in Phoenix. Okay, why are they doing that? Maybe you should allow what you see on social to spark curiosity, perhaps not action, and that curiosity could lead you total shameless plug to somebody like Dave Meyer to the data deli to go and see some data that he might put out there or to go collect your own data. How about that? How about don’t let Dave do it for you. How about go get your own data and learn how Dave does it and go get your own data yourself on markets? And so find out why those cool kids went to the party to begin with. What are they serving at that party?

Matt:
Find out the economic factors that are driving the market. And as I said before, the primary factor that drives a market is jobs. We’re no longer in a covid economy. The majority of Americans are no longer working from home, or some companies at least require some sort of hybrid presence in an office. So economic drivers in a market are what’s going to keep a market sustained. So if you see good things happening in that market, continued, sustained, good things happening in that market and the propensity for those things to continue, then that makes it a good market to consider. But certainly not because of all the cool kids are going, Dave,

Dave:
That’s well said. And it calls your attention to places, but obviously don’t do it. Most of the people who talk up as individual market repeatedly have a vested interest in that market. I am not calling out anyone in specific, but

Dave:
If you follow a realtor in Atlanta, they’re going to talk about how great Atlanta is. These people are either just talking about the one market that they know about or they have a financial interest in it, but it doesn’t necessarily mean they’re wrong either. So there are probably tons of great things going on in Atlanta, and it’s very important to look at many of the variables that Matt just highlighted. It’s time for a break, but we’ll be back with more from Matt Faircloth on the other side. Welcome back to bigger news. Let’s jump back in with Matt. I actually think, Matt, the hardest thing to know in these types of scenarios is when is it too late? I went to Austin and then down to San Antonio in 2022. I’ve just been bombarded with information about those two markets.

Matt:
That is a peak of cool kid tomboy. That was midnight. That was midnight. And they turned the radio up a little bit louder, and the party was jamming about 2 20, 22 in those markets.

Dave:
Yeah, exactly. It was wild. And I chose not to because it just seemed like people went crazy. You talk to a realtor and they’re like, well, the average appreciation in this area is 8%. I was like, yeah, for the last two, three years, why? That’s not going to

Dave:
Happen.

Dave:
But people were talking about it, it was matter of fact. And I was like, this place has gone insane and I walked away. But not everyone has the ability to go to these places. And I’m in a fortunate position where I know a lot of people in most of these markets, I could talk to a lot of them. So how would someone who’s just maybe getting started or considering a new market know even if there’s great job growth, Austin has great job growth, but it had just gotten to this point where it was so overheated that it didn’t make sense. How do you measure that?

Matt:
New construction tends be the driver of rent growth in a market, right? New construction and major renovations. What’s going to push rents up 10, 15, 20%, and then if you own the building right next door to that new construction, they might be able to push rents up 20% and you’ll get the spillover side effect of 7% rent growth. And if there’s enough new construction happening, is that realtor you talk to, you’re going to see rent growth across the board in that. So new construction and new development tends to be what drives up growth. And so if you’re seeing in the market lots of permits pulled for new builds and things like that, then that’s going to be, oh wow, there’s a lot of economic frenzy, there’s a lot of development, there’s a lot being invested in this market. Maybe that’s a good thing. Maybe that’s an overheat,

Dave:
Right? Yeah.

Matt:
If you looked at Austin in 2022, you probably would’ve looked at that, and that’s maybe why you didn’t get in because you saw it. Man, this isn’t sustainable. This crane’s all over this town, man. And at some point when they’re done building all this stuff that they’re building, they’re going to have to lease all this stuff up and that’s going to cause pressure, economic pressure on the market, right?

Dave:
Yeah. I mean, there’s a reason rents are down 6% year for year in Austin. It’s leading the country and rent decline.

Matt:
It’s not because the jobs are going away. It’s not because employment’s faltering. It’s because there was a major, major spike in development. And listen guys, it’s going to be okay if you’re an Austin, let property owner right now, you’ll be just fine. Those jobs are not going to go anywhere. And eventually, eventually all that housing that got developed will be absorbed and rents will start to creep back up. Maybe not at 10, 15% per year, and maybe they shouldn’t. Maybe rents shouldn’t grow that much.

Dave:
I totally agree. Well, that’s a whole other question I’m going to ask you in a few minutes, but I want to continue on this theme looking at inventory numbers, because what Matt was talking about with construction permits, a hundred percent true. That’s total housing supply. How many physical housing units are in that area? Super important, but also when you start to see inventory tick up or when you start to see days on market tick up both for rents and for properties, when you see things sitting on the market that shows a shift that maybe the frenzy is starting to cool off a little

Dave:
Bit. Absolutely.

Dave:
And it’s starting to shift more to a buyer’s market. And frankly, that’s what we’ve seen over the last, let’s say two years, two and a half years in some of these boom markets like Austin has been one of the biggest markets in decline over the last couple of years. So has Florida. Most of the markets that are declining are in Florida.

Dave:
And so if you’re sort of a keen analyst of this data, those things were becoming obvious a year and a half or two ago. Because if you look at these inventory numbers, you can start to tell that something is shifting that creates a really interesting dynamic. Matt, I’m very curious your opinion on right now we’re seeing Phoenix. We see Boise, some of these markets that have really good fundamentals, seeing the biggest declines. So what do you do? How do you navigate a market where some of the long-term best looking places have some of the worst short-term potential?

Matt:
There is a bit of a gangster move that you can make. There is someone who thought that they were walking into the casino of real estate investing and that they were going to go put all their money on red or whatever it was, and they took a bet that the market was that Boise was going to keep rising at 10% per year, or that rates were going to stay down, or that cap rates were going to stay down or whatever it is. And the gangster move is to go and find that person that took bets that the market was going to zig and it zagged. Okay. That developer or investor will be very clear as someone who’s in distress, right? Like, okay, I’m halfway done this thing and I have some friends that are buying a halfway done, a halfway done 50 unit apartment building.

Dave:
Oh my God.

Matt:
In Seattle, our company just bought a 20 unit just outside of Raleigh. Okay, cool. Kid town,

Dave:
Right? Half done,

Matt:
Yeah, was they were planning on building it out and keeping it, and they couldn’t get their refi.

Dave:
Wow.

Matt:
And so they decided to just take their chips off the table because the refi wasn’t going to get ’em whole. And so they, it’s like, okay, what? Forget it, we’ll just sell. And so we got it for less than what they likely would’ve gotten appraised for when they had started the construction. So there are moves that we as real estate investors can make to find someone, and this sounds counterintuitive day, but it actually is working, and I’ve got some friends that are doing this and finding things that were just built and either approaching the owner direct or getting a realtor to find you something that was built recently because something that was built recently was built under economic assumptions from two years ago, and they might’ve thought the party was going to keep going. They didn’t realize that rates were going to spike and that rents were going to have an 8% decline, as you said, right?

Matt:
So if they didn’t bake all those things into their pie and they were not conservative enough, they are in distress and they might need to liquidate at a way more reasonable off the market number than we might be thinking. And that’s a gangster move is to go and find somebody like that and work out a deal to say, Hey, looks to me like you either can’t finish this thing or on the numbers that I can tell, it looks like maybe you projected rents to be X, and now they’re Y. Another thing that you could look for, Dave, that is an indicator of distress is major concessions on rents. So if you see an apartment complex that was recently built and call them guys, and it could be a four unit, it doesn’t have to be a 300 unit call up the listing. If you see a vacancy and say, are you offering any concessions right now, that means that I’m asking $2,000 a month in rent, but if you sign a lease right now, I’ll give you two months for free. That’s called a rent concession, and it’s a backdoor way of dropping your rents without really dropping your rents. Meaning I can still tell the market I’m asking $2,000 a month, but really I’m going to go and give away two, maybe even three months worth of rent for someone that signs a lease at my apartment complex,

Dave:
Which is basically a 25%

Matt:
Cut,

Dave:
Right?

Matt:
Backdoor, backdoor way to drop rent without having to tell the market, well, no, I’m still charging $2,000 a month, but we’re having a sale.

Dave:
Yeah, exactly. Does this work for a single family or a small multifamily as well as a large multifamily?

Matt:
I’m not a single family guy, but I would try it. Yeah. Another example, Dave, is builders realized that, geez, we didn’t expect that the interest rates to go to 7%, six and a half, and I know the fed just dropped rates. I get that, but they didn’t drop them to the degree that they rose, that they increased them. So rates are still pretty high. So you’re seeing developers selling houses to end buyers, and they’re buying rates down three and a half, 4%. You can get the fruit, the developer baking in rate buy down, Dave, I guarantee you, when they broke ground in the development in 2021 or whatever it is, they had not planned on doing that,

Dave:
Right? Of course,

Matt:
That was not in the equation. So I would start making offers and maybe that’s just being the shrewd buyer and the last, say five, six years, Dave, we’ve all been used to, well, the seller is asking $300,000 for this single family home or for this duplex, whatever it is. So that’s the starting conversation. People don’t realize the buyers are in way more control than the market’s letting on that they are. And so just because the seller is asking a number, that should be of no consequence to you make a offer that makes sense

Dave:
Because values have fundamentally changed. It’s just that sellers are always going to ask for the maximum price. But when you look at the fundamentals of the market, and I’m not talking about the other fundamentals of demographics of the market, the value of assets has declined in a lot, especially multifamily. But in some small multifamily residential markets, especially in some of these boom towns that we were talking about, they just have declined. And so going to a seller and saying, Hey, your number that you asked for is based off two years ago value, and they’ve changed, and here’s what I think the real value is. They’re probably going to say no. But if you do it 20 times, they might say yes. There’s no harm, no foul in trying it.

Matt:
Yeah. And the asset classes that I would be going after if I were perhaps listening to this podcast and want to go find a deal, right? The asset class that the cool kids were going after for the last five years, Dave, have been value add properties, and this is small assets too. Something built in the seventies, eighties, nineties, early two thousands or whatever, and I’m going to get in here and put a coat of paint. I’m going to drop in a new kitchen, I’m going to spruce it up and spit, shine it up real nice and increase the rents and push things up to market that works that equation. The value add equation works in a rising economy. It works when rents are going up 10% because the market rising will carry you a bit forward. We’re no longer in that space. I don’t recommend, nor in my company the DeRosa group, are we going after the older vintage stuff, the 1970s, eighties, we buy apartment buildings. But it’s still that this conversation still applies to people buying smaller assets too, because the value add play doesn’t work anymore. But what works is to find, I think something newer built that somebody might be looking to offer a real concession on. So you can probably get better assets at a way better price right now if you’re willing to sniff around, do some detective work and make some offers.

Dave:
I love this idea. It makes so much sense to me. Actually. I want to do the gangster move. So you should in a market, I invested in the Midwest, there’s this brand new fourplex, it’s super nice, it’s at a great condition and it’s just been sitting and this is not a market where things are sitting right now. It’s like, make an offer. I’ll do it today. Maybe I’ll go do it right after this thing. Let’s do it. That’s great. I’ve honestly just been waiting because as people might know, I live in Europe, but I’m in the United States right now for BP Con and I’m going to this market in a few weeks to go look at my properties. And so I was kind of like, if it’s still around, then I’ll make maybe make an offer, but you’re inspiring. Maybe I’ll just do it today because why not? It doesn’t cost me anything.

Matt:
Distress is hiding right now, guys.

Dave:
That’s a good way to put it.

Matt:
I don’t think it’s going to be in the open market. I don’t think that you’re going to see blood in the streets and maybe just because open and praying that we don’t, because I don’t think that real estate is going to see a drastic crash, but I do think that there is distress out there. It’s just not going to be as in your face as you think that it might. And there are people out there that had expectations of saying it again, the market zigging and it went and zagged on ’em, and maybe they want to take their chips off the table, take a modest profit, or maybe just get their money back, whatever it may be. And that’s something you guys, BiggerPockets listeners should maybe consider doing in a market.

Dave:
Alright, we have to take a break for some ads back with more in a minute. We’re back with that faircloth on the BiggerPockets Real Estate podcast. What about for people who already bought in these markets and who are maybe seeing what I would call a paper loss. They’re seeing the value of their asset go down, but as long as you sell, it hasn’t actually gone down, it’s just in theory. But how would you recommend people sort of manage that piece of their portfolio in this sort of strange time for these types of markets?

Matt:
It sure is strange, right? And if I were, unless you’re in major financial distress, I recommend holding what you got. I think that those that are able to hold out for the next year-ish or so, if we have a recession where sessions don’t last years and years and years, they tend to last. It probably should be asking you, but what, nine months to nine months to a year? That kind of thing. So I think that if you’re holding an asset that’s either not penciling out very well, not going well, if you can find a way to hold it and to weather the storm and to just air quote get by, I think that that’s the right play. Things are going to be better a year-ish for now. There was a mantra that a lot of folks in my world were using survive till 2025 kind of thing, which I’m sure you’ve heard that one,

Dave:
Right? I have, yes. But it’s true though, because I’ve talked about this a lot, and it’s not just true of multifamily real estate is very, very forgiving asset over the long run. And so what you really need to do is, hold on. I think the worst thing that you can do in real estate, and the only way you really lose money in real estate is what’s known as forced selling. So if you find yourself in a situation where you just can’t hold onto the asset anymore because it’s not cash flowing, you don’t have the money to front your rate cap expires. So whatever, it’s things happen. And that is sort of the defensive positioning. I think some people need to be in these markets that are experiencing corrections. It’s just like, how do I make sure to hold on? Not because for pride, but because normally these things come back around. Even if you bought, I did this analysis, even if you bought in the height of 2007, the worst possible time in nominal terms, not inflation adjusted terms, you would’ve been fine after seven years. Now you’re probably not earning the best return you ever did in your life, but if you had cashflow during that time, you’d still be getting cashflow, you’d still be getting tax benefits, you’d still be getting amortization. And then seven years from now, your property values recovered.

Matt:
I did that, Dave. I bought assets in 2007, right?

Dave:
Did you hold on.

Matt:
Yeah, I held them right. And they were like breakeven rentals. These were single family homes, man. These were not super enormous apartment complexes. These were very accessible to most investors. Three bedroom, two bath, single family homes. And we bought them as fix and flips. The market went Cali Wonka and squirrely and all that. So we said, okay, this is probably not the best time to go flipping, so let’s make ’em good ironclad rental. So we shifted our business plan and we leased them out and they made meager cashflow or breakeven cashflow for a period of time, amortized the debt over years, and we just kind of held them until it made sense to sell. And when we sold Dave, we did very well on them. So you end up averaging out over long-term, as you said, through patience. And I think that’s the mantra that those that already own real estate, if you can be as patient as you can if you’re looking to get in and expand your portfolio, the word’s probably not patience. The word is courage to get in there and just say, Hey, let’s just give it a shot and make that offer on an asset that’s a little bit of a stretch quality wise than what we’re used to going after. And you might be surprised,

Matt:
But I highly recommend just be a little patient right now as things continue to shake. The Fed actually indicated they indicate a lot of things and then don’t do them. They change their mind a lot. But they’ve said that they’re going to drop rates two more times potentially by the end of the year. They said a lot of things at the beginning of 2024 that they were going to do and didn’t do.

Dave:
Certainly not.

Matt:
But they’re certainly going to do something over the next 12 months, and I think that they will long-term benefit real estate. So if you can hold on.

Dave:
I agree, and I want to just make sure that everyone knows that what Matt and I are talking about are specifically for markets that have these good long-term fundamentals. If you’re in these good markets where things are going to turn around, I went to Austin, it was too crazy for me, but of course unless something crazy happens, but by all accounts, Austin’s going to keep growing over the long run. I’m not concerned about Austin as a city. The same thing with Raleigh, same thing with Charlotte, same thing with Tampa. I think the strategies that we’re talking about, just to be clear, where you’re holding on or for places that you have a strong indication they’re going to cover. If you’re in a market that’s just kind of the town is unfortunately dying economically, I wouldn’t, hold on. I’d probably cut bait and try and just move on and go somewhere else. So that’s a good point. It’s really mostly about what you think the long-term prospects are.

Matt:
Yeah, no, and it does depend on your analysis and predictions for the market if things are going to continue to grow, although long-term, things like interest rates and just long-term national increases of cost of living do eventually push markets up. But certainly not. That’s true with plenty of headwinds. Whereas if you’re a market that’s already showing economic growth, you’re going to recover much faster than other markets may. So you might have to wait a lot longer.

Dave:
Yes, that’s right. Alright, Matt, last question before we get out of here. What are some secret boom towns that you think might be coming in the future? The ones that aren’t booming yet, and we won’t hold them to you, but do you have any hunches or hypotheses about future boom markets?

Matt:
I sure do. Yeah. Columbus, Ohio is one. We’re not there. I’ll give you a few that were not in.

Dave:
Columbus is booming, man. I went there too and didn’t invest. It was too crazy for me.

Matt:
But it’s not a cool kid market yet, right? So there are real economic fundamentals there. They’re building a chip factory there.

Dave:
Real fundamentals there. Yeah.

Matt:
So yes, it is booming. Yes, there are real estate investment ventures happening there, but I still think there’s deals to be had. I like just down the road, Cincinnati, believe it or not. Yeah, I said it. That’s right. Cincinnati old steel town. That’s right. But I think Cincy is going to show some longer term growth in certain neighborhoods if you want to stick to Ohio. Now, I will say this is not a DeRosa commercial for my company. This is a market we are invested in, but this is a market that is growing that has real fundamentals. And that is Winston-Salem, North Carolina.

Dave:
Oh, I’ve heard a lot about Winston-Salem being a good market.

Matt:
Correct. But that triangle where it is, the Winston-Salem, Greensboro, and to give you a bit of OSA inside baseball and what our company invest, we tend to not go where the cool kids are. And if you look at the map, and that’s my advice to the BiggerPockets listeners here, is that if you look at a map, look at where Rally is, and we already talked rally’s having a big old house party at their house, and so is their little sister Charlotte down the road, but there’s Greensboro and Winston that are in between those two towns. And there is spillover that happens in these secondary and tertiary markets, maybe cities that don’t have major league teams that have minor league teams, right, Dave and so maybe not Austin, maybe San Antonio,

Dave:
Right? Yeah.

Matt:
Maybe markets that are going to get the economic spillover and job growth or whatever for where people either can’t afford or choose not to afford to live there. Or even companies open up in those secondary cities that want to get some of the job growth and economic support. They want to support companies like Tesla that are building out in Austin, but don’t want to pay the rent in Austin. They want to be in San Antonio. So I would look at even Tempe. Okay, another example. Tempe, Arizona, not Phoenix, Tempe, that’s what Boise was. Boise, Idaho and Salt Lake City or whatnot. They were kind of secondaries and they were spillovers from California, but they kind of became their own thing eventually. But find secondaries that are growing. You’re the data dude, man. What predictions do you have for markets that are beneath the sheath that haven’t popped yet?

Dave:
I like the first one. So people who listen to on the market probably know that I am generally long on the Midwest. I don’t think they’re going to be the hottest market in the next year or two years or three years, but I think 10, 15 years from now, people who invested the Midwest right now are going to be very happy about it. My whole hypothesis is about affordability. Housing is unaffordable and unfortunately for a lot of people, I don’t think it’s better anytime soon. We’re going to try and build more, but I don’t think prices are going down. There’s just too many demographic tailwinds. I think the Fed learns its lesson. We’re not getting 0% interest rates. Again, I generally think it will get a little bit better, but I think people are going to be attracted to markets where their dollar goes

Speaker 3:
Further.

Dave:
And I think the Midwest offers great value. I know people, let’s just say Chicago, people hate on Chicago a lot of crime there. First and foremost, look at murder stats. Chicago is not number one in the city. It’s actually, there’s a lot worse places in terms of crime than Chicago. Chicago’s a wonderful city. I spent a lot of time there. There’s great food, there’s great culture. It’s a huge city. There’s huge companies that work there. I think cities like that, maybe not in five years, but 10 or 20 years are going to growing again. And because they’re extremely affordable for the quality of life that they offer. And so I personally look for stuff like that. And I totally agree with your idea of the economic spillover idea.

Dave:
Living in Denver for 10 years while it was booming. You see this towns like Longmont or Fort Collins, the cities were never anything. They were nice places, but I mean, housing market wise, they were not booming. And then you just see it gradually when there’s an economic powerhouse like Denver is, you just see it spill over. And right now, I think the perfect example is that is the fastest appreciating market right now. You’re a northeast guy, Matt, I grew up in the Northeast is New Haven, Connecticut would have never guessed, but when you think about it, it’s right in the middle of New York and Boston. It’s between two of the biggest economies in the entire

Matt:
World. It’s affordable. You can commute to Manhattan from New Haven. Exactly. North Jersey, believe it or not, as much as Jersey gets hated on Dave, right? As much as Jersey gets hated on North Jersey is a way affordable alternative. And there’s plenty of trains that’ll take you right into downtown Manhattan fairly quickly. So I would not be afraid of those secondary areas that actually get hated on in the Northeast or whatever. Our company’s investing in Minneapolis, Minnesota to talk about a market that nobody’s talking about.

Dave:
Right? Yeah, exactly.

Matt:
I agree with you. The Midwest, I think is maybe in five years going to become the new Sunbelt and that because people are not going to have the luxury of only moving to a place because the weather’s nice, because we’re beyond that lifestyle. I think that people are going to, for all the other things, for jobs and for culture and for food and for everything else.

Dave:
Well, those are our guesses. We’ll have to have you back on in five years and we’ll see if we’re right. Well, you’ll be back before, but we’ll revisit this topic in five years.

Matt:
Yeah, hopefully sooner than

Dave:
That. Absolutely. Well, Matt, thank you so much for joining us. I really appreciate it. This was a fun conversation.

Matt:
I loved our one-on-one banter, man. We’ll have to do this again soon.

Dave:
Yeah, this is great. We will have to do it again soon. And of course, for anyone who wants to connect with Matt, hear more about what he’s doing, hear about what parties he’s going to this weekend, we’ll put his contact information in the show notes. Thank you all so much for listening. We’ll see you soon for another episode of the BiggerPockets podcast.

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In This Episode We Cover:

The future “boomtowns” that most investors have no clue about (get in early)
How boomtowns form and what to look at to tell if one is worth investing in
When is it too late to invest in a growing city (metrics to check before buying)
The secondary markets with “economic spillover” boasting huge opportunity
The sneaky move Matt is using to buy boomtown properties at a discount
What to do if you bought in a boomtown that is already declining
And So Much More!

Links from the Show

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

4 States With the Strongest Economies and Investing Potential

by Jason Waugh | Oct 10, 2024 | Investing, News Feed

We talk a lot about the overall housing market, but what about the best states to invest in real estate? A state on the East Coast might see solid rents, booming business growth, and low inventory, while somewhere on the West Coast could be experiencing the opposite. At a state level, factors like economic strength, job growth, income tax, and others can greatly impact where Americans live and rent. So, which states would WE happily invest in now?

Today, we’re sharing the four states we feel bullish about in 2024, specifically for economic growth. And when there’s economic growth, there’s usually excellent investing prospects. You may have thought about investing in a few of these states before, and one of them you may have forgotten was even a state (sorry to those residents), but all of them boast real estate investing potential that many other parts of the US lack.

And, during a time when home prices are still high, some of these markets are seeing what could be a temporary decline, opening up the potential for you to go in and scoop up deals before their real estate markets begin to rebound. Which states are we most confident about? Stick around to find out!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
With all this news coming from the Fed and the presidential election going on, we’re talking a lot recently about the national economy, but every seasoned investor knows that the national economy and the national housing market doesn’t really impact housing prices or investment performance as much as local economies. And although we do talk about specific cities and neighborhoods on this show, we’ve sort of skipped what I think is a really interesting level previously, which is talking about states and which states across the nation have the strongest economies right now. Today we’re going to answer that. Hey everyone, it’s Dave. Welcome to On the Market. We got the whole crew here today, Henry Washington. How’s it going?

Henry:
Fantastic man. Great to be here. As always,

Dave:
Kathy Fettke, thanks for joining us.

Kathy:
So happy to be here with you guys.

Dave:
And we also have James Dainard and although this show is supposed to be sort of a debate and we’re going to crown a winner, I think James has given away his bias a little bit. Most people are probably listening to this as a podcast, but if you are watching this on YouTube, you would see that James is wearing a Washington Dard political campaign style T-shirt for 2028. James, does this mean you and Henry already have an alliance?

James:
Oh yes, we have more than an alliance. We are ready to change things in 2028. Get the word out.

Dave:
Why do we have to wait four years, man?

James:
Well, we don’t want to rush into it. We’re making a plan and we figure we might need it in 2028.

Dave:
Alright, well Kathy, I guess we’re going to be hearing about this for four years on the podcast. Seriously, they’ve got

Kathy:
My vote, they’ve got my vote.

Dave:
I was already feeling like presidential campaigns were too long, but I guess James is starting his campaign even earlier. Obviously we’re joking. I’m referring back to a previous episode of the show where we were coming up with our own economic policies. If you haven’t checked that out, it came out a couple weeks ago in the middle of September. But today’s episode we are talking about a showdown between states. You’ve probably seen this format where we’ve duked it out over cities before, but today each of us have chosen a state that we think has the strongest economy for investing. We’ll each go around and break down the strongest parts of the state we chose as economy, what cities in that state we’d investment and which investment strategies we’d use and why. Obviously this whole show will be immediately more fun if it’s a competition, so we’re going to make it a competition and we’ll be voting on a winner at the end. But the real hope for this episode is that you’ll learn how each of the four of us assess state level economic information to make micro level decisions about our investments and our portfolio. Let’s get into it. Henry, I guess since you are at the top of the Washington Dard ticket, we’ll allow you to go first. What state did you pick?

Henry:
Well, before I tell you the state, I want to tell you a little bit about how my brain works when I’m thinking about markets or states in this matter. I grew up in a town called Bakersfield, which is about an hour and a half north of Los Angeles. And what I learned living in that smaller town was that there are lots of people who live in more affordable areas who commute to more expensive areas. So I was kind of looking through that lens. Where is a place that also has strong market dynamics but maybe is more affordable in some of the states with some of the more noticeable larger cities within them? And so the state that I chose is Delaware, and the reason is there is proximity to a lot of other major cities. Delaware is not too far from Philadelphia. It’s Borders, New Jersey, so it takes a few hours to get to New York.
You can go south and hit Baltimore and dc. It’s a place where you can commute to other cities if you so choose that maybe aren’t as affordable, but it also has great real estate dynamics. If you look at the median home price, Delaware is approximately at 370,000, so it’s about 9% lower than the national average. To buy a home median rent is $1,500 a month. That’s below the national average. So from an affordability standpoint, it’s there, but if you look at the economy, Delaware in general is a business friendly state. That’s why there are so many LLCs that get formed in Delaware because of the business friendliness of the state. And as far as the economy goes, they’re very strong in the financial services and banking industry. Some of the largest employers in Delaware are the Christian care healthcare system. DuPont is the second largest employer there, which is a big manufacturing company.
The University of Delaware is there, which is a large university, and then JP Morgan Chase, bank of America, AstraZeneca. So you have people that are moving there because population has also been growing in Delaware over the last five years to work for these companies. And you have some amenities that keep people there. People forget that Delaware is a state where you can actually go to the beach and so there’s beach towns and there is tourist attractions as well as proximity to some of these other larger cities, Philadelphia, New York, New Jersey, Baltimore, dc. So you can really get out, see a lot of the country, live in an affordable area, have a high paying job, and be able to actually afford housing and or rent because of the types of industry that are there. And it’s a pretty landlord friendly state in comparison to some other states. So there’s a lot of different options for you in terms of what you could do from an investment standpoint. It’s pretty diverse for a small state.

Dave:
Alright, quiz time. James, can you name a single city in Delaware?

James:
I can’t but I can name Wayne’s World. That’s what I always think of.

Dave:
Am

James:
In Delaware.

Dave:
Kathy, can you name a single city in Delaware?

Kathy:
I just thought Delaware was a city.

Dave:
I love how these episodes are basically just lessons in how bad we all are at geography. It’s pretty bad. I think, and I swear I didn’t look this up. Is Dover in Delaware?

Henry:
Dover is in Delaware, that’s

Dave:
Correct. Okay, okay. That’s the only one I know. Henry, can you name another one?

Henry:
Of course I can name another one.

Dave:
Name me some interesting places to invest in Delaware.

Henry:
Dover is one of the cities and it is one of the cities that I would consider investing in. Dover is spending a large amount of money investing in revitalizing their downtown area, and so there’s a lot of expansion. Dover is also where Delaware State University is, and so there’s also a lot of money being spent by Delaware and Delaware State University to enhance the facilities because of the growth that they’re seeing. So Dover is one of the cities I would invest in. Wilmington, Delaware is another city. Think of the Riverwalk in San Antonio. So they’ve spent some money on developing their riverfront as that has continued to grow what we would consider. Smaller cities are major cities for Delaware and they’re investing in their growth because of the growth that Delaware has seen. The other city we would consider investing in is Newark. The University of Delaware is investing in other major research facilities and student housing around that area. And then in terms of tourism, you’ve got, oh gosh, I dunno how to pronounce this,

Dave:
Spell it for us.

Henry:
R-E-H-O-B-O-T-H.

Dave:
Oh my god. Okay. You guys all can’t hear this on the show, but our producer just popped in and took Henry to school and corrected that it’s not Newark, it’s new Delaware. So everyone who is about to write mean YouTube comments about this and how we don’t know how to pronounce things. First of all, you’re right, we clearly don’t know how to pronounce anything, but thankfully our producer corrected us and then Henry, you were about to tell us about a beach town.

Henry:
Rehoboth Beach is the, see, we can’t pronounce anything. I probably murdered that even after she told me. Yes, but in terms of tourism infrastructure, they’re making major upgrades to the boardwalks, to the beaches and adding public amenities because this is one of their beach towns and public attractions. And so that market would be great for short-term rentals. You’ve got student housing in New Ark and as far as Dover and Wilmington, those are the more city type areas where you could get your traditional long-term rentals and midterm rentals for people that are coming in because healthcare is the number one employer there. Got

James:
It. I do like Henry, and this is why he’s my running mate. Abby Delaware is one of the most tax friendly states. That’s why there’s so many corporations that get established there. I think that’s a massive benefit, especially as what we’re going into over the next three to five years. Things are more expensive. Quality of life’s going down, Delaware’s got runway. I think any of these tax friendly states have runway over the next three to five years, and so that’s why I think it’s a pretty good pick by Henry

Henry:
Delaware is home to over 1 million business entities because of that and 66% of Fortune 500 companies are there.

Kathy:
Yeah, I probably got five or 10 LLCs in Delaware. And then there’s the DST, the Delaware statutory trust. That’s a big thing where you can actually 10 31 into one of those.

Dave:
Oh yeah, I’ve done a DST.

Kathy:
Yeah,

Dave:
Yeah, absolutely. It’s a very beneficial thing. And I’ll just note, I looked up some of the stats here that Delaware’s got a pretty hot housing market right now. I think that means you’ll probably face a lot of competition, but prices are going up there. Days of market are low, and so if you’re looking to perhaps do a flip or some sort of value add project in Delaware, it seems like a good place to do it. Alright, well thank you Henry. Is there anything else we should know about Delaware before we move on?

Henry:
Yes. There’s one thing I would like everybody to know. Fun fact about Delaware. It is home of the pumpkin chunkin contest. This is where they have a contest to see who can chuck a pumpkin the furthest using homemade manufactured items.

Kathy:
Oh, I want to do that.

Henry:
I’m in on this

Dave:
Dude, we used to do this in college. Wow. Yeah, I went to an engineering school. They used to build trebuchet and catapults and just launch these things. Pumpkin chunking. Do you know the record? I don’t know the record. I’m going to look it up right now. How do you spell this pumpkin Chunkin? No. Okay. In 2013, the record was set by the American Chunker Air candidate. That’s such a good name. It lodged it. 4,698 feet is the record for chucking a pumpkin. It’s almost a mile.

Kathy:
This could be the first assignment for Washington to prove your skills.

Dave:
That’s right.

Henry:
That’s right.

Dave:
We’re probably not in time for Halloween this year, but next year we’re chucking some pumpkins. All right, well thank you Henry. This is very interesting. Honestly, didn’t know a lot about Delaware, but it sounds very compelling. Okay, so looks like we’re all learning some geography today and hopefully you’re learning some smart economic factors to look for in a state. We are about to take a short break, but when we come back, which market is James feeling bold about? And is barbecue actually an overlooked KPI for market performance? Stick with us. Hey investors, welcome back to On the Market. We’re talking about the strongest state economies. Let’s move on to Kathy. Now I got to separate you and your homey James over here. So Kathy, what state did you pick?

Kathy:
I dunno, you guys have a guess

Dave:
If you’re not watching Kathy, just put on a very, it looks like movie quality prop of Thank you. An American flag. What would you call that? Cowboy

Kathy:
Hat, I guess.

Henry:
Yeah, I would say it’s a cowboy hat.

Dave:
Okay,

Kathy:
That’s a cowboy hat. A lot of people don’t realize this is what defines America. When you think of France, you think of a beret, you think of sombrero. Mexico. This is it. This is America right here.

Dave:
Yes, an American flag cowboy hat. It actually looks very nice. That’s not an Amazon hat that looks like artisanal.

Kathy:
It could be just a CVS. Anyway,

Dave:
Okay,

Kathy:
So my state, I stole the gorilla here. I took taxes because of a few things. One, we are definitely heavily invested there. It was the first place I invested 20 ish years ago. Here’s just a few things. This is amazing to me. It’s the eighth largest economy among all the nations in the world.

Henry:
Wow.

Kathy:
So that’s impressive. The population growth has led the nation over the last 18 years and doesn’t seem to be slowing down and continues to be the top state for job creation.

Dave:
But is that job creation per capita? Just total jobs? There are a lot of people living in Texas.

Kathy:
Well, according to my data resources, I have no idea. It’s just a lot of jobs,

Dave:
Dan. Well, at least you’re being honest. You should have those stats.

Henry:
This is why you can’t vote Meyer fe gee, because they just blurt out random facts that they can’t.

Dave:
Well, I don’t know if I can go on a ticket with Kathy right now because Texas has got negative home price growth right now. I’m not sure I can pick it.

James:
Well you know what though? That just means there’s opportunity there. Negative growth is when you want to go towards the market.

Dave:
Are all three of you ganging up against me now? Are you recruiting Kathy, secretary of State?

Kathy:
You got to look at the micro level. Yes, there are some parts like Austin and downtown Dallas where we’ve seen prices come down. But you have to look in the special little corners where the jobs are moving, but it’s not slowing down in Texas. And I think now that rates are coming down, we’re going to see another boom just like we’ll see in a lot of areas. This is interesting. For the 12th year in a row, Texas won the governor’s cup and that is for the business climate there. There’s no personal corporate or personal income tax, so that’s a friendly business climate and lots of businesses are moving there for that reason. It is continually ranking as the best state for doing business by the nation’s top CEOs. Lots and lots of job growth in Texas and it’s very diversified. We know that the refining there is 31% of US capacity and as far as I know, we haven’t stopped using oil and gas. There’s high tech defense, biomed, these are all businesses that don’t just pick up and move easily. And then this was funny you guys. What do you think was the biggest job sector?

Dave:
I would hope barbecue.

Kathy:
That could be, but retail, because with all that money from their low expenses, they like to shop and there’s a shopping center is pretty much on every block.

Dave:
I mean Texas obviously has an incredibly strong economy. I think several of the fastest growing cities in the entire country are in Texas. Like Brownsville, Dallas, Austin, San Antonio are all growing a lot. So I think you got something going there, Kathy.

Kathy:
Yeah. And then just people talk Dallas and San Antonio, but it’s really the suburbs. You got to follow where the jobs are going, where people are going. So we’re investing in sort of northwest of San Antonio and Dallas. You guys have heard North Dallas as things get expensive within the cities and that’s fairly new for Texas. They didn’t have high home prices until just the last 10 years. They’ve been going up consistently. So as prices increase and as all these people move in, especially Californians with the high tech jobs, they are used to paying more. So as you move out into the suburbs, you can still find those opportunities in the path of progress.

Henry:
Well everything is bigger in Texas and that not only includes home value decreases, but it includes personal property taxes as well. So

Dave:
Yes it does. It does include

Henry:
Taxes. You don’t have income taxes, but then personal property taxes will murder a deal for you.

Kathy:
And in our fund, because we bought a lot of houses in north Texas, those properties have doubled in value. So just again, it depends. Maybe a lot of those stats are misleading and that’s fine. That is fine. Y’all stay out.

Henry:
Spoken like a true Texan.

Dave:
Well, just for reference, the average property tax in the United States is 1% of the home value. In Texas it’s 2%.

James:
So it’s

Dave:
Double.

James:
It’s brutal

Dave:
But it’s not actually the highest in the country but it is among the highest for sure.

James:
Yep. There’s a lot of job growth that offsets the tax.

Dave:
The government’s going to find a way to tax you.

Kathy:
Yeah,

Dave:
They might not have income tax but they make it up in property tax.

Kathy:
Yeah, the issue is the high property taxes and it is hot. It’s too hot for me there. It’s too hot. Sorry I’m a weenie. I can’t handle that.

Dave:
Alright, well Kathy, tell us a little bit about what strategies might work in Texas in different areas. I know you invest in Dallas but elsewhere in Texas. What would you recommend to people listening?

Kathy:
Pay attention to the suburbs. There’s still opportunity. It may look like a cornfield sometimes. Some of these areas that are just bordering areas that have gotten too expensive for 20 years I’ve been buying properties in cornfields, understanding where that growth is going and it’s a little bit scary because there’s nothing there yet. And then I go back and there’s a whole town. So just with the growth that’s happening there, if you buy within the city, it’s going to be more expensive. Although from what I hear, multifamily values have come down too. So if you’re a multifamily investor, you might start to see some opportunity. New homes can be a great opportunity but again, just you got to make sure the numbers work. That’s the bottom line. If you can negotiate the rate down, that’s helpful. If you have a team, there are still areas where you can buy older homes and fix them up and do the burn method, but that’s going to be for us, that’s like an hour out and prices have already gone up so much.

Dave:
Alright, well interesting stuff. I think Texas in my opinion, has sort of the extremes. There’s great opportunities. There’s also areas like Austin, which is probably the most overbuilt city in the United States right now in terms of excess supply as the highest rent declines. That’s obviously Texas giant state. So I think as long as you’re careful about which places within the state that you’re looking at, it can be a great place. And that’s not to say Austin’s not a good long-term market. There’s a lot of good fundamentals in Austin. It’s there’s some short-term disruption in a lot of Texas right now.

Kathy:
And if you are looking to move to Austin and there’s a lot of inventory that’s actually an opportunity for you. I think values are down and with all the growth there, it seems it would come back once the population growth can catch up with all the new supply. But I got my fun fact.

Dave:
Oh yeah, what is your fun fact?

Kathy:
Do you know that Dr. Pepper comes from Texas, from Waco?

Dave:
Was there an actual Dr. Pepper?

Kathy:
Yeah, he was a pharmacist. Charles Alderton in Waco, Texas started serving it around 1885. That’s when he created it. A year later, Coca-Cola was born and it became the number one drink in Texas because you guys back then there were nine milligrams of cocaine in Coca-Cola. So hard to compete with that. Hard to compete. Dr. Pepper tried it stayed alive, but

Dave:
Just a little less addictive.

Kathy:
Yeah, they decided that there was, I don’t even, I’m not even going to say,

Dave:
Yeah, we’ll just skip the rest of this conversation.

James:
All I know is I would’ve been hooked on Coca-Cola back then. I mean rockstar has got me enough.

Dave:
Alright, well we’ve heard Kathy’s pitch of Texas and her very strange, fun fact. So James, let’s move on to you. What state did you pick and why?

James:
You know what? I went with Florida, which I know seems like it’s tapped out. That’s so

Dave:
Boring.

James:
You know what? It is not boring.

Dave:
Well, it’s just everyone talks about Florida. I just thought you’d maybe be a little more creative,

James:
But this is why I picked it. It’s because everyone’s going to stop talking about Florida pretty soon because people are so seasonal. It’s the market’s hot, the market’s hot, and then all of a sudden, I mean what do people say now? They’re like, oh, Florida’s market’s starting to transition. It’s going down. There’s inventory. You’re starting to hear the buzz. And one thing I’ve learned is when the buzz goes away, there’s always an overcorrection and an over dip. And I think this is the year to buy in Florida because I think pricing’s going to be a lot better.

Henry:
I really thought you were going to go with when the buzz goes away, that’s when James Dard comes to play.

Dave:
That’s why Henry’s on the top of this ticket. He’s got all the campaign slogans.

James:
But that is what I liked about actually, and that’s kind of what I like about Texas too. When these markets transition out. Florida was never on my buy list, but now I’m like, okay, well it’s getting hard. Insurance costs are going up, inventory is starting to stack up a little bit. Builders are having to dump off some newer product or they’re cutting price. There’s opportunities to buy when the market slows down. And I feel like Florida’s going through its cooling moment and that’s the best time to buy. So I know it’s boring, but I’m actually doubling down on Florida when people are going to be on the way out. I think it is one of the best ways you can buy.

Kathy:
I am with you there. We have a lot of properties in Florida and at Real Wealth. We have so many investors who bought there and we have not heard of a single issue with this last storm because don’t buy in a flood zone in Florida, but if you could buy inland a little bit or just not in a flood zone and newer product, newer product, I know it’s not as great for flipping what was newer product. The insurance is way, way better and we have a property in St. Pete where it was right there, but it didn’t flood so it’s not in a flood zone

James:
And right now in 2024, 30.7% of Florida sellers cut price. So

Dave:
Yeah, you’re basically just counting on a big comeback, but I guess my concern would be Florida boomed, which is great if you invested in Florida four years ago, you’re doing great and now it’s having a correction. But are you expecting it to have outsized growth better than the national average going forward?

James:
Well, yes, because the big businesses are just starting to anchor there and move their money there. The tidal wave outside of the natural disasters is coming in the economic force too. You have companies like Amazon is currently shopping for 50,000 square feet and these companies aren’t moving their headquarters. I do want to say that, but they’re expanding their growth. The tech you have Twitter, Tesla, fun kite. There’s companies that are expanding their presence in this market and again, doesn’t mean they’re anchoring there, but when they expand the presence, things grow and jobs grow. And the one thing I have seen and I live in it, I have to go off personal experience. When you have tech growth and you have no income tax and affordability sections, good thing happens. And that’s what happens in Seattle and I think it has better overall investing potential than the Pacific Northwest because as a landlord you can control your assets a lot better.
It’s not as restrictive as Washington state as far as I know. I don’t have to wait nine to 12 months to remove a tenant from one of my properties because they haven’t paid me rent. And so the reason I think there’s upside is the businesses are just really starting to expand. Apple is starting to expand out through there and when that tech money comes with the no income tax, it hits that rocket fuel and it can have some major growth. Do I think it’s going to happen in the next 12 months? No, I don’t. 24, maybe not, but in three to five years it’s going to be ribbon and the best time to buy is on the overcorrection because when people get freaked out, they dump price and then you get a buy.

Dave:
All right, well every time I make one of these lists of best cities, best markets, Florida is at the top, but it’s also on the bottom.

Henry:
That’s the most Florida stat you could say.

Dave:
Exactly. There’s so much. You’re totally right about the economy in Florida. It’s extremely strong, but I just personally don’t get it and understand where I would invest in Florida, so it’s hard for me to wrap my head around

James:
And that’s the beautiful thing about Florida. You got all sorts of different types of landscape. If you want to flip, you go to Miami, there’s big margins there. You can rack big returns and if you want cashflow, you can get some amazing, and I know beach cities come with some problems, you get some weather issues, you got some insurance costs, but quality of living, some of these beach cities, there’s good metrics there for renting. There’s a ton of tourism there. There are coming because they want to go to the beach. You can do short-term rentals, you can do long-term rentals, the affordability factor all over the coast. You can go into any type of market into Florida and buy. So you can do the long-term, you can do the short-term, you can do whatever you want,

Dave:
Maybe like lose money. You can do

James:
That. I think we’re going to need to make a wager. I’m going to go buy a house in Florida in 2025 and we’ll see if we can make some money on it.

Dave:
I mean I agree Texas and Florida both have a lot of economic growth and population growth, but if it were me, I’d pick Texas over Florida. I just think there’s less insurance risk, less weather risk than I see in Florida for some reason that just worries me.

James:
Well, and Dave, if you’re worried about making income there, making money, there is one random fact about Florida that has some extra kicker. Andor benefit, Florida has over $2 trillion in lost treasure off the coast. Okay, so if you can’t find the cashflow, actually that works on me. I’m interested in that. You want to work a little harder, get a bow, go find some treasure. Double your cashflow. Wait a

Dave:
Minute, how do they know there’s lost treasure there? Who comes up with this stat?

Henry:
Wouldn’t that make it not lost treasure?

Dave:
Yeah, exactly. They’re like, we know it’s there. We know exactly what it’s worth. Then go get it. As

James:
Far as I’m concerned, it’s lost unless it’s in my bank account.

Dave:
You almost tricked me and convinced me there James, but I’ll go on vacation to Florida. That sounds great. I just got scuba certified. Kathy Scuba certified. Kathy, you want to go hunt for treasure with me? Absolutely. Excellent.

James:
You want to go to Ari’s Treasure on Honeymoon Island? Not only do you get a romantic spot, you get nice beaches, you can go get rich.

Dave:
Okay. Alright, time for one last short break, but stick around. Based on my research, there’s actually treasure to be made in real estate in one other state. And as always, if you’re considering investing in a new market, there’s a tool on BiggerPockets called the BiggerPockets Market Finder, and it’s here for you to help you find a market. You can check it out at biggerpockets.com/find a market. We’ll be right back. Welcome back to the show. Let’s jump back in. Well, I obviously do think there’s a lot to invest in Florida. I’m just talking shit because I want you to pick my market, which brings us to our last market. I selected another one in the southeast, but I didn’t want to pick the obvious ones like Florida and Texas. So I picked maybe the third most obvious one. It’s not really much of a secret, but it is North Carolina. I don’t know if you guys have invested there, but I know James actually you were thinking about moving there, right? For a little bit.

James:
I still kind of fantasize about moving there.

Dave:
Really?

James:
I like the Carolinas. It’s beautiful.

Kathy:
Oh, the heat in Arizona is getting to him.

Dave:
Yeah, he just moved to Arizona like two weeks ago.

James:
If I was at the point where, and I considered it just selling off the businesses, getting in cash and becoming a loan shark, hard money lender on the east coast, north Carolina’s off the top of my list.

Dave:
Okay, see I’m already getting a vote. I haven’t even said a single thing about North Carolina and I’m recruiting James to my team. Alright. North Carolina has great economy. It’s been voted for three years in a row. The second best state to do business, thanks to a really highly educated workforce. We’ll talk about that in just a minute, but there are a lot of really good universities in North Carolina. There’s generally just a booming economy and there’s very business friendly climate. I’ve actually never been to Charlotte, but I know Charlotte’s one of the biggest banking and insurance hubs in the entire country. So not only are there good jobs in North Carolina, but they’re very high paying jobs. If you haven’t heard, there’s this area of North Carolina called the research triangle where there’s a lot of universities, duke University, university of North Carolina, chapel Hill, North Carolina State Wake Forest, some of the finest universities in the entire country are there.
And because of that you have a lot of investment into more high paying jobs, a lot of life sciences, a lot of technical jobs are in the area. And so North Carolina has built an incredible economy. Businesses are taking notice. There have been 111 major corporate relocations into North Carolina in just the last year, including a major investment by Toyota and a 1 billion investment in Apple in the research triangle area to attract and retain a lot of that talent that’s coming out of their universities. And in addition to all of these awesome business stats, it is a very landlord friendly place. There is no rent control. There is no notice required for raising rent or entering property. Of course, there are laws that require landlords to maintain a safe and habitable place to live as there should be, but it does allow you to run your business as you see fit in North Carolina.
And it also has a very strong housing market today, unlike Texas and Florida, which are seeing these corrections right now. North Carolina continues to see steady growth. There’s nothing like, it’s not booming, it’s not a bubble. But North Carolina is continuing to grow at 3% a year, which is exactly what I want to see. That’s about the long-term average and to me, that creates a predictable investing climate for real estate investors. Now, a lot of the big cities are a little expensive for finding cashflow. You’re not going to find cashflow in Charlotte very easily, not in Raleigh. That’s a very expensive market. But if you go into some of the other areas, one of my favorite places that I read about is a town called Winston Salem. You might recognize them from the cigarette company, but there is a university there and it has great cashflow and great economy. There are also a couple other towns that I thought you can find good cashflow, which are Goldsboro and Rocky Mount. And I also put Wilmington on there just for James because I know James loves it, so I just included it anyway, but that’s my feeling and it has, I guess I would say the second best barbecue sauce in the country is North Carolina. My heart really goes to Kansas City barbecue sauce to be perfectly honest, but very good barbecue in North Carolina as well.

James:
Dave, I got to say I’m in on North Carolina too.

Dave:
Give it to me

James:
Honestly, if you didn’t take it, I was going to take it so you just got it first.

Dave:
Yes,

James:
But Riceville Beach is one of the coolest spots. That’s why I was thinking of move there. But if you ever want good tacos, there’s this little taco stand there that is the best tacos I’ve ever eaten in my life.

Dave:
Do you know how many people you’re going to piss off saying that the best tacos in the country are in North Carolina?

James:
Yeah, you know what? I don’t care. They were so good. It made me want to move. I was like, I will move here and I’m going to walk down, eat tacos every day for lunch and then go to the beach. It’s a great place. And also Charlotte is a really cool city. I mean North Carolina has so many fundamentals for growth. It’s got high quality living, it’s got some affordability in there. There’s business growth. It’s a great state. I do disagree that a steady growth, I think it’s a little bubbly still. It grew at 3%, but that’s down quite a bit from what it was growing. It’s slowed down and it could go a little bit the other way, but that doesn’t mean you can’t buy and there’s not opportunity there.

Kathy:
I have a little issue with the barbecue sauce because I think maybe Dave, you haven’t been to Terry Black’s in Austin.

Dave:
Oh, are you kidding me? I’ve been to Terry Black’s last time I was in Austin. I made the big mistake of going to Terry Blacks like three hours before a 12 hour flight back to Amsterdam. And I bought, I’m not even exaggerating, I bought one beef rib and it was $68 and it was like the best experience of my life. So I have definitely been to Terry Blacks and I’m not saying I actually like Texas barbecue in general better. It’s more brisket focused, but the barbecue sauce, I don’t love how thin Texas barbecue sauce is. I like the thicker sauce from either from Kansas City, but North Carolina’s a little thin too.

Kathy:
I’ll let Terry know.

Dave:
Yeah, please do.

James:
I think we need to do a next show on barbecue sauce and density.

Dave:
Don’t get me started. I could talk for another 45 minutes about barbecue and barbecue sauce.

Henry:
I grew up in a barbecue restaurant. My dad owned one for 10 years.

Dave:
What is your style of sauce, Henry?

Henry:
Yeah, I like a thicker sauce, molasses base sweet sauce. Ooh, no, sweet.

Dave:
You like the vinegar sauce?

Henry:
Yeah, it’s

James:
Going to have some kicking. I don’t like the sweet.

Dave:
Can we all just agree Alabama white barbecue sauce? There’s something wrong with that. I just like, no, I’m not saying,

Kathy:
Can we just have Henry do a barbecue for us?

Dave:
All right, next meet up.

Henry:
I’m sighing so much because man, I like North Carolina too. I do. I’ve always loved

Dave:
It winning everyone over.

Henry:
I’ve always loved it. It’s just I spent some time in Raleigh back when I was in school and it’s just such a cool place. Job infrastructure is amazing. Charlotte is growing and if Charlotte’s a bubble that’s going to pop, I don’t think it’s going to pop anytime soon. It’s now becoming not only everything else that you mentioned in terms of banking and finance, but it’s also becoming a transportation and infrastructure hub because of its proximity to all of these other cities around it. So lots of companies are establishing a presence within Charlotte just to get their products over to all of the other cities that are around it. So it’s becoming like a transportation hub as well.

Dave:
Home to NASCAR also. There’s all sorts of good stuff going on there.

Henry:
Home to the left turn.

Dave:
Yeah. Fun fact. The largest private house in the entire world is in North Carolina. It’s in Asheville. It’s 250 rooms. There is actually a house big enough for James to live in, thankfully. So he

Henry:
Can

Kathy:
Actually move there. It’s interesting because Florida gets the flack for having the most issues with climate change and I think North Carolina’s really experiencing that right now. It’s really tragic what happened this past week. And also it’s affecting a lot of homes and insurance prices will probably go up there as well and people might be rethinking where they’re living, but I do hope the recovery goes well. It looks like North Carolina got hit really bad.

Dave:
Yeah. Want to extend our thoughts to anyone impacted by Hurricane Helene in North Carolina and Florida, anywhere else in the United States? Thanks for bringing that up Kathy. Alright, well I think we’re all done. I think it’s time to vote. Henry, let’s just say you can’t vote for your own. Henry, what’s your vote? North Carolina. It’s not even close. James.

James:
You know I want to live in North Carolina. I’m signing up with you, Dave.

Dave:
Yes, Kathy, I’m going

Kathy:
With Florida.

Dave:
Yes. Okay. I am going to vote for Texas. I think there’s a lot of good growth there, honestly, I’m intrigued by Delaware. Henry, you’ve piqued my interest, but I just don’t know enough about it yet. But fair enough. There’s a lot going on in Texas that I’d like, but taking the victory right now, and I’m actually in the BiggerPockets office right now. I’m in our conference room and there’s all sorts of trophies right here next to me. So I’m just going to grab one and take this sandwich. Trophy. Alright, well thank you all so much for joining us, James. Kathy Henry. We’ll see you soon for another episode of On The Market. In just a couple Days 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.

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In This Episode We Cover

Four states with booming economies and serious real estate investing opportunity
The tiny state with below-average home prices and most of the Fortune 500 companies
A southern state boasting serious potential as its real estate values try to recover
A “treasure hunting” housing market that may be overcorrecting a little too much
Why more tech is moving into this East Coast state and pumping up its property market
And So Much More!

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

The Slippery Slope of BRRRR—Is It Still the Best Way to Run Your Landlording Business?

by Hans Wydler | Oct 9, 2024 | Investing, News Feed

With median home prices over $430,000 and interest rates hovering around 6%, the concept of BRRRRing your way to financial freedom seems like a real estate strategy from a bygone era.

The BRRRR strategy (buy, rehab, rent, refinance, repeat) is based on finding discounted properties, fixing them up, renting them out, refinancing, and socking away the cash flow with a long-term tenant, and repeating the process until you have amassed a sizable monthly cash flow. In 2024, I largely believe that it’s unrealistic to achieve.

Assuming you can find a discounted home, fix it up using hard money, and get market rent, the issue comes when you have to refinance it, strip the home of its equity, and take on more debt to repeat the process. Now, you are on the hook for the extra loan.

How much cash flow are you really making? Assuming you want to follow the 1% rule, you would have to charge your tenants over $4,000/month in rent if you purchased your rental below the median market value, adding debt to bring it to the median price when you rehabbed and refinanced. This is not feasible in most markets because the average national U.S. rent is $1,840.

Low-Cash-Flowing Properties Are Not Worth It

For argument’s sake, let’s assume you have found an investment that meets all the BRRRR criteria and cash flows $300/month after all expenses. It’s time to break the fallacy that you can BRRRR your way to financial freedom by amassing $300 cash-flowing rentals.

First, in the current market, to find a property that cash flows by $300 and does not cost a fortune, you would have to be in a C or C+ neighborhood—or worse. Having owned many such properties and clocked in more landlord/tenant court hours than some judges, I can attest that the numbers on paper never work out. Repairs and nonpayment of rent/evictions wipe out any perceived cash flow and leave most landlords deeply in the red. Even if you have scaled a few properties generating $300/month in cash flow, one costly repair or eviction could crash your real estate house of cards.

Buying in better neighborhoods costs more money. Are you really going to spend well over half a million dollars to break even, or cash flow $300-$500/month? You would need to be financially free to make such a move and look for a place to park cash or enjoy depreciation while gaining appreciation. Cash flow would not be your primary goal.

Alternative Strategies

Before you throw your hands up in the air in despair, wondering if owning rental real estate is even possible or worth it today, don’t fret. Making money from rentals is still possible, but the BRRRR method using a yearly lease is not the way. You need to be creative. Here are a few alternatives to consider.

Short-term/medium-term/vacation rentals

To cash flow, you need to increase rents. Assuming you cannot convert attics or basements to extra bedrooms, the easiest solution is not to rent your apartment/house on a standard yearly lease but instead convert it to a short-term/medium-term or vacation rental. Much of this depends on whether there is demand for this type of use in your area and whether you are prepared to undertake the additional management and costs this incurs or hire someone who is.

If you are in a seasonal location, when the rents for 12 months are collated, it might not be worth it. However, it could be a good move if you are in an in-demand college town or tourist area.

Buy a fixer-upper and do the renovation yourself

Sweat equity costs you nothing but time and materials. Assuming you have access to both, and you buy a property cheaply enough, you could circumvent a costly renovation and thus keep the equity in your investment. The end result is greater cash flow.

Rent by the room

The affordability crunch has made by-the-room rentals more popular in recent years. Whether you wish to call them workforce housing or co-living spaces, the concept of having roommates is not new. However, this type of rental can generate far more income than a standard whole-house rental, especially when each room is updated to feel luxurious like a hotel room.

Save money from your job and make large down payments

This might fly in the face of why many people want to invest in real estate, but the importance and benefits of a good-paying W2 job cannot be overstated. Your job is your first business partner and, as such, will help you scale much faster than risky leveraging, crossing your fingers, and hoping your tenants pay their rents on time.

If you are not in a position to borrow safely, don’t. Instead, focus on earning as much money as you can from your 9-to-5, limiting your expenses, and buying houses traditionally, never refinancing and stripping equity but ensuring your properties cash flow well by putting enough of a down payment each time.

Start by flipping houses to build up a sizable nest egg

Flipping houses is easier said than done. If you embark on this venture without a trusted team in place, it can amount to a full-time job. However, when done correctly, it can provide a big chunk of cash, which you can then deploy as a sizable down payment for rental property.

Invest in multifamily housing

If single-family real estate doesn’t cash flow, why should a multiunit be used? Economy of scale. A 20-unit rental, with each unit generating $300 in cash flow, will generate $6,000/month.

Of course, the multiunit will cost a lot more upfront than a single-family house. However, that can also be an advantage because, generally speaking, the competition is lower amongst buyers for multiunit properties. There is more opportunity to “buy right” (at a price that makes sense economically), especially if the building needs work. You can add value—thus increasing the rental income and asset value. There is also more scope to bring on partners, as there is more cash flow.

HUD offers programs that apply to small multifamily buildings in multifamily housing projects in urban renewal areas, code enforcement areas, and other areas where local governments have undertaken designated revitalization activities.

Other types of commercial buildings

Despite the drop in interest rates, commercial real estate will still face a tumultuous 2025, according to analysts. Particularly troubled is office space. Depending on your funding and investment ability, converting offices to housing is ripe for opportunity, with historic state and federal tax credits available for investors. Many states have also changed zoning laws to facilitate the process.

Final Thoughts

The BRRRR method using a yearly lease strategy had its time, but modern-day economics just don’t support it. It might become fashionable again should interest rates drop precipitously and housing prices and rents align. However, if investors attempt to BRRRR with less-expensive houses by marginal cash flow amounts in today’s market, they could be setting themselves up for financial ruin.

In the best of times, real estate investing is not for the fainthearted. There are many moving parts, each of which could derail you. This is exacerbated when adopting a highly leveraged investment strategy.

Be sensible. The risk and stress of investing a few hundred dollars in cash flow isn’t worth it. Just because banks might lend you money based on your credit score or the value of your asset doesn’t mean you should take it.

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

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