Real Estate Is Changing& So Is BP

Kathy:
We spend a lot of time on this show talking to experts and analyzing markets in order to provide more context that we think is valuable for you as an investor today. Today’s episode steps back and provides even broader context for the market we’re in, and the question that hovers underneath what drives a lot of our investing on today’s show. How has the real estate market changed over the last 10 years? And is financial freedom still even possible through real estate today? Welcome to the BiggerPockets on the Market podcast. I’m Kathy Feki, and I’m here with some of my favorite people, some of my on the market friends, James Dard and Henry Washington. Welcome.

Henry:
What’s up Kathy? What’s going

James:
On guys?

Kathy:
Well, I don’t know about you, but I am personally excited for today’s episode because it’s a crossover from the Real Estate Podcast, and it’s a major milestone for BiggerPockets and for our co-host, the brilliant Dave Meyer.

Henry:
That is right. It is the 1000th episode of the Real Estate Podcast, and it’s Dave Meyer’s first episode as the official full-time host of the Real Estate Podcast. So congrats, Dave.

Kathy:
Yeah. Woo-hoo. So well deserved.

Henry:
Well, that is right. That sounds great. But all the people want to know, is Dave abandoning us? And the answer is no. Do not worry. Dave Meyer will still be the host of on the Market as well.

Kathy:
He’s just gonna be a busy guy and probably write a few more books while he is at it . Well,

James:
No better, a better way to launch the thousandth episode than having Dave get in the driver’s seat. So I’m excited for Dave. I think it’s gonna be a great episode and a great thing. I mean, who doesn’t wanna hear more? Dave?

Kathy:
Yeah, who doesn’t want more? Dave? And we’re gonna be airing this episode here too, because this episode is when we know that you’ll appreciate as on the market listeners in it. Dave talks to Scott Trench, who is a real estate investor, personal finance expert, and happens to be the CEO of BiggerPockets. Scott and Dave get into the nitty gritty and they get super conceptual, and they take on some thought experiments, all in the pursuit of answering, number one, how has the real estate market changed over the past 10 years? And is financial freedom even possible through real estate today? That’s a huge question that so many people have.

Henry:
Well, you have my attention because you’re right. A lot of people want to know, is the possibility of financial freedom still a thing in this current real estate environment? And I’m excited to hear the thoughts of Dave and Scott on this.

Kathy:
All right, well, let’s get to it. Enjoy.

Dave:
Welcome to the BiggerPockets podcast, 1000th episode. This episode is a huge milestone for our show and the community that has helped thousands achieve financial freedom. This is a big achievement, and I wanted to thank you all for your listenership and support over the many years. But this milestone is not just a time to look. It’s actually a better opportunity to start looking forward and to consider and reimagine what the show is going to look like for the next 1000 episodes. So today we’re gonna have a full normal episode where I’m gonna talk to investor, author, and BiggerPockets, CEO Scott Trench about the realities of investing in 2024. But first, I wanna take just like five minutes to talk to you about the future of the show and what we’re internally thinking of as BiggerPockets 2.0. I know we’re not actually rebranding or renaming the show, but we have some announcements and tweaks we’re making to the show that I’m super excited to tell you about.
So first and foremost, I am gonna be the host of the BiggerPockets Real Estate podcast going forward, and I am super excited about this opportunity. But first, I wanna thank David Grave for doing an incredible job for the past few years and helping millions of investors. We are very excited to see what he does next. So David, thank you. And if you’ve been listening to the podcast, I do guest host a lot, so you may already know me, but if you don’t, I’m Dave Meyer. I’ve been an investor for 15 years and a BiggerPockets employee for more than eight years now. I’m a regular contributor to all the BP media channels. I’ve written a few books, and I host our sister podcast as well. It’s called On the Market, and I’m sure you’re gonna get to know me better as the host. You’ll learn my story, my investing philosophies going forward.
So for now, I’m gonna spare you my background and instead just wanna share with you some of the other exciting changes that are coming with BP 2.0. We are gonna make some slight changes to what we talk about on the show and who we have on the show, because I wanna make sure that the show goes back to its roots of hype free real estate investing. That means we’re gonna focus on the fundamentals of investing and building wealth over the long term. We’re gonna leave the get rich quick schemes to other people and other platforms. We’re also gonna talk about tactics exclusively that work today here in 2024, because let’s face it, back when this podcast started, it was a totally different set of strategies and tactics that you needed to use to succeed than what you need right now. So we need to update that as well.
We’re gonna bring on a lot of investors to share their stories as we always have, but we’re gonna focus on investors who have authentic, relatable stories and who are willing to go deep on exactly how they attain their accomplishments. And we’re gonna focus on bringing on investors who are coming on the show not to sell something primarily, but because they wanna provide genuine advice and guidance to our community. And the last thing I really want to make sure we do on the show is focus on tactics that create mutual benefits across the entire investing ecosystem. That of course, means for investors, but it also means for real estate service providers like agents and lenders and property managers. It also means making sure that we create mutual benefits for tenants and communities. Super important to me, and we’re gonna talk about that more on the show.
And although these are some tweaks, they’re not gonna be huge changes. There’s not gonna be some big shift in the show. I just want you to know that we as a team are gonna be focusing on the fundamentals of investing and how ordinary people can build wealth through real estate. And yes, can still do it even in today’s economic climate. The show’s not gonna have height, no unrealistic expectations, just candid conversations about how to use real estate investing to achieve your financial goals. So those are the tweaks to the focus. We’re also just gonna update a couple logistics to the show that I want to tell you about. First, we’ve heard you all on ads, and we’re actually gonna reduce the number of ads that you hear on the show. There will still be ads. This is a business after all, but we’re gonna take ’em down a notch.
Second, we’re actually gonna scale down the number of shows we release per week to just three. And that’s gonna allow us really to focus on the quality of each and every episode. On Mondays, we’re gonna continue doing our investor stories. This is our bread and butter, sharing the success stories of other real estate investors. On Wednesdays, we have a new format called the Deep Dish. This is where we’re gonna go into tactics that you can apply to your own portfolio here and now. And on Fridays, we’re gonna continue the bigger news segment, which helps you understand what’s going on in today’s economic environments. You can make informed investing decisions on top of these three episodes. We’re gonna occasionally have bonus episodes, we’ll work on a couple of miniseries, but I just want you to know that these three formats are what you can expect each and every week.
So that’s it for my little speech and update. I am so honored, so excited to take on this leadership position in the BP community. I am going to do my very best to make the next 1000 episodes of the show the best that we’ve ever made. And in that effort, I would love to enlist your help. I’ve actually created a url biggerpockets.com/pod feedback just for you, anyone in the community to submit their feedback directly to me. I’ll actually read all the feedback that you submit at that uur l. Please don’t go on there and ask me for investing advice. That’s not what it’s for. It is for podcast feedback. So go to biggerpockets.com/pod feedback and let me know what you think of the show, what we could do better. I would love to hear from you. All right, with that said, let’s get going. BiggerPockets 2.0 starts right now with the conversation between me and the personal finance expert, real estate investor, and BiggerPockets, CEO Scott Trench. We’re gonna talk about how real estate investing has changed over the last decade, and if financial independence is still possible using real estate. Let’s welcome on Scott.
Okay, Scott. So you’re an investor yourself. You are the CEO of BiggerPockets. And to be honest, it’s pretty rough out there right now for real estate investors. It feels, at least to me, more difficult than it has in the last couple of years. So I’m just gonna ask you straight up point blank, is real estate still a good idea?

Scott:
Yes, real estate’s still a great idea. If you meet certain criteria, if you have a very long term outlook, if you’re gonna be active, if you’re gonna find ways to make things work, if you’re gonna find opportunities in your local market, if you’re gonna use different parts of the capital stack in the real estate, uh, business to, to drive returns. So look, real estate’s always been, um, a scary prospect, right? The first or next investment is often an all in bet. And I remember when I was getting started in 2013, I bought my first place in 2014, um, but in 2013 was when I was doing a lot of the learning how we were about to see a bubble pop, right? Mm-Hmm, . The Denver Post has a headline from 2013 called Buyers Caught in a Price Squeeze. The Housing Market already shows signs of a new bubble was a headline from CNBC . We saw similar headlines from the New York Times and Fortune in 2014, and

Dave:
We’ve seen them every year since, every

Scott:
Year since I actually went back and chronicled all these in an article called, yes, I’m Afraid of a Real Estate Bubble, but I continue to invest. Anyways, here’s why on the BiggerPockets blog,

Dave:
Oh, maybe that should have been the title of this episode, . Yeah. But that’s a really good point. Like you were, you started investing in 2014. Did it feel different to you when you were getting started than the market feels right now?

Scott:
It’s hard to tell, right? Like that’s, that’s what’s so difficult being in this for 10 years, you know, trying to put myself in the shoes of someone new today. What does that look like? And the best maybe example to illustrate that is my first house hack, right? I bought a $240,000 duplex. I put 12% down or $12,000 down 5% down. And the mortgage payment, including principal interest, taxes, insurance, and PMI mortgage insurance that comes along with a FHA loan, um, with 5% down was 1550 and each side rented for 1100. And today, I don’t know if those numbers would work. I think that the pity payment would be closer to $3,600 and each side rents for $1,600 on that purchase if I were to sell it at market value today. So it is clearly different in some ways, but the feeling in your, the pity of your stomach that goes along with making this all in bet on real estate, which is almost always is for a first time investor, I think is the same, um, as just the math and the numbers are different today.

Dave:
Well, I gotta admit, I’ve been doing this for 15 years and I still get that pit in my stomach. Anytime I buy a property, I’m still like very nervous about how it’s going to turn out. So at least for me, the sentiment is the same. Scott, you mentioned back in 2014 this first deal that you got, you know, you’re a personal finance expert. You’ve talked a lot in your content about the concept of fire or financial independence. Like why back then, did real estate strike you as such an obvious solution or way to pursue financial independence?

Scott:
Yeah, so I was a big follower of Mr. Money mustache, right? And Mr. Money mustaches approach to financial independence is get your spending low when you spend less. Two things happen in terms of the fire equation, right? One is you obviously have more cash with which to invest, but you also permanently reduce the amount that your portfolio needs to generate in order to achieve financial independence, right? So if I’m spending $25,000 per year at the 4% roll with an index fund portfolio, for example, I need, uh, $625,000 in my portfolio. If I wanna spend 40,000, I need a million. If I wanna spend a hundred thousand dollars, I need 2.5 million. So every time you reduce your expenses, you both increase the rate of accumulation and you decrease the amount of assets you need to fund financial independence. So that was my all consuming thought. And a house hack, uh, did two very important things for me in that context.
One, it allowed me to reduce my housing expenses to close to zero, which puts a lot more money in my pocket and allows me to have a much lower basis needed in terms of assets to achieve financial independence. And two, it’s a good investment in its own right, um, multiplied by the fact that you can get 95% leverage on the thing. Mm-Hmm, . And if you assume regular inflation, um, regular amortization, nothing special, three and a 5%, you get something like a 250% return on return on investment in the first couple of years on it, that’s pretty good. So it’s an amazing investment in an average market condition. Yeah.

Dave:
That, that, you know, obviously, you know, looking back it’s 2020, but that seems like a no brainer, absolute no brainer to do a house hack in that type of environment. But my question to you is, has that relationship between real estate investing and financial independence sort of broken in today’s environment? Because prices are super high, mortgage payments are so high, and when you look at all the data, it shows that renting for a lot of people is actually cheaper and a better financial option than buying a house. So do you still think if you’re someone trying to pursue financial independence, that real estate is the best option?

Scott:
Look, I think that house hacking is always a super powerful tool in any environment, right? Because the, yes, it’s cheaper to rent than to buy in many markets around the country. In a few markets it may still be cheaper to rent than to house hack, depending on how you’re house hacking, right? House hacking is a spectrum of opportunities, but I think that house hacking is a really powerful tool for a lot of folks. I think the problem that people are facing from a real estate investing perspective right now is the fact that because interest rates are so high, someone needs to get really creative about the approach that they’re gonna take with real estate investing. They need to do a lot of work to add value. They need to find alternative ways to finance the asset, or they need to make major sacrifices on the lifestyle front to get to the same results that I was able to get with a simple duplex purchase 10 years ago. And I think that’s fundamentally the challenge that people are struggling with right now. And I think, yes, it is harder and it is less appealing to a lot of folks that are just getting started in their journey. We see that in the numbers right? There are 1.3 million investor transactions in 2021. There were 760,000 in 2023, and there are even fewer, I think it’s like four or 5% drop in investor, um, activity in 2024 versus 2023.

Dave:
I do wanna talk about experienced investors in a minute, but let’s just stick with this new investor idea for just one more question, Scott. If that’s the case, then who should be investing and getting started in this type of climate? The

Scott:
Person who’s gonna be successful in real estate long term is gonna be somebody who spends less than they earn, who’s capable of accumulating liquidity into their life, who’s willing to defer gratification and move into a place that may be a sacrifice. Rent, someone who’s maybe willing to rent by the room, someone who’s maybe willing to do the work to short-term rental a property, someone who’s willing to maybe self-manage on that property. These are all gonna be key advantages for an investor going into a long-term journey with real estate. And that person has a great chance to get rewarded with the long-term appreciation, long-term rental growth, and maybe even some short-term cash flow if they’re able to find, uh, and utilize some of the creative strategies that the market is offering to investors right now. That’s

Dave:
A great point. And it’s not really that different. Like the profile of person who’s gonna succeed in real estate is probably not changed, even though the tactics have, I mean, I I personally lived in my friend’s grandma’s basement for three years after I bought my first property. ’cause that was cheaper and I could rent out the units in the house that I had just bought. The house I had just bought would’ve been a much nicer place to live than my friend’s grandma’s basement, but I did it anyway. And so I think that just underscores the idea that even though in retrospect it was easier back then, it’s never been easy to go from someone who has never bought a property or who’s relatively young to having a hugely successful real estate portfolio. It’s always taken work, a bit of sacrifice and some creativity.

Scott:
Absolutely. Yeah. But the long-term math of, again, three and a half, whatever you want to pl plug in for the long-term appreciation rate, long-term rental growth, those are the drivers. Those are the fundamental reasons why we invest in real estate as opposed to alternative asset classes. It is an inflation adjusted store of value and an inflation adjusted, um, income stream that you’re getting with most types of residential real estate investing. And that’s why I do it. And that gets multiplied again, by the leverage and then your creativity and the skills you bring to bear on the, on the property, the sacrifices you’re willing to make to ensure that return and that profile remains unchanged. What you can’t do is you can’t put 25% down on a random property across the United States and expect to blow out returns like we got over the last couple of years.
Right? Another big story in this whole journey is the, that of the average American home buyer. I just wrote an article on this on this the other day, and it was like the average thing that happened in 2019 was somebody bought a house for $258,000. That’s a median home price in 2019. Yikes. Then by 2021, that thing goes to 3 97 in value and interest rates fall from 4% to 2.85%. So the median American who bought in 2019 saw their property go up 12 if they bought it with an FHA loan, a 12 fold increase on their down payment in two years, and they refinanced at that point in time, pulled $52,000 out. Again, this is the median or average scenario here, right? Um, that’s going on and reduced their payment by a hundred bucks all in one stroke. Like that’s not gonna happen. That’s the

Dave:
Weirdest yes.

Scott:
Best return you’re ever gonna see. And really any, any type of asset class that is, that is of any type of scale, I mean, it’s just an absolutely absurd situation that’s not gonna happen. But I am willing to bet on a three and a half ish, 4% long-term inflation rate and long-term, uh, in, in rents and, and prices on there. And all of my strategy really revolves around accessing that in a long-term sense.

Dave:
And that’s okay. I think a lot of people are holding onto this like amazing year, amazing couple of years and expecting that to happen again. But real estate was a really good investment asset class before the pandemic, before the great recession for decades. Even when we saw what is the long-term average of appreciation, which Scott just said, I think it’s like 3.4%, 3.5%, something like that. It was still a really good way to pursue financial independence and a long-term wealth. And I think Scott and I agree that that has fundamentally not changed. We gotta take a quick break, but I will continue our conversation with Scott Trench after the break. Welcome back to the BiggerPockets podcast. Let’s jump back in. Now, Scott, we’ve been talking a lot about beginner investors and and how to get started. Is your thinking any different for experienced investors and how they should be considering today’s market?

Scott:
I’m seeing an interesting problem emerging on the BiggerPockets Money podcast, for example, right? So, we’ll, we just interviewed a couple, they’re worth $1.5 million on a recent episode and they had a handful of properties. They’re on paper, excellent, right? They’ve got 50% debt to equity ratios, but they’re not really yielding enough cash flow for them to feel confident retiring, right? Their lifestyle expenses say they should be retired at this point in time, uh, ’cause they spend like 50, $60,000 a year, but their portfolio is not actually generating that cash flow. And so I think that there’s three options that folks could face right now if they’re experienced investors. One is lock in, let your properties amortize, let them run off. Be thrilled with the fact that you’ve locked in a 30 year mortgage at two, three, 4% and just ride that thing for the next few decades. That’s great. That’s what most people are doing right now in the market. That’s what’s, and that’s evidenced by lower transaction volume. People aren’t selling right now. Is that

Dave:
Meaning that lock in with existing properties or continuing to buy new properties with fixed

Scott:
Debt? So that’s the problem that a lot of experienced investors have, right? Is they don’t have a lot of liquidity to buy the next property. Mm-Hmm. with that debt. So they’re like, what do I do? Well, the last couple of years folks have been buring or refinancing the properties or otherwise stockpiling assets and then using that to buy the next property. So this couple, for example, does not have several hundred thousand dollars to put down on the next property. And so they have, they have to make a choice here. So like what are those options, right? One is ride it out, right? I have a couple of properties, I’m not selling ’em, I got three 4% interest rate mortgages on ’em. I’m gonna, I’m gonna let that, let that ride. Okay? Now, if you do have liquidity, I think that a lot of investors are thinking about it in more simple terms and are simply putting more down.
They’re putting down bigger down payments and they’re cash flowing the properties as a result of that. Again, a symptom of that dynamic is lower transaction volume. Many of the purchases being done today are by people with more liquidity. And by the way, a lot of these creative strategies, like subject to or seller financing deals, for example, typically require that extra liquidity. Because if someone’s selling their house for $500,000 and has a $300,000 mortgage on it, well they’re gonna need $200,000 to make that situation work. Mm-hmm. , right? That’s, you know, only in a couple of cases is someone gonna be able to buy that with no, or very little money down. So that’s a really good approach that’s available to a lot of investors in today’s environment. And the third one is to make kind of a harder choice, one that the math doesn’t support, but maybe the feeling of financial freedom does support.
And so this would be paying off an existing low interest rate mortgage, right? Let me give you some fire math on this. Suppose we have someone who’s close to their fire number ready to retire, but doesn’t quite feel right about it because of their existing portfolio, right? They have a $500,000 mortgage. That mortgage, uh, is about $2,050 per month just in principle and interest. Well, if they pay that off, that’s $25,000 a year, right? Uh, in p and i payments, well, if they pay that off, their fire number gets reduced by $625,000, right? And they might feel better about actually quitting their job or leaving the environment. And so despite the fact that they have that low interest rate payment, some people are opting to pay off their properties. And I think there’s some really compelling fire math to that. There’s also compelling math to paying off a seven or 8% interest rate mortgage, right? If it can make sense at 3% in the example I just used, mm-Hmm, it can definitely make sense at seven or 8%. And if you’re not a professional investor really adding a lot of value or build it working a system that’s a guaranteed post tax return, which is pretty good in, in, uh, in the, in the context of historical averages.

Dave:
So that makes sense. So the three where one, paying off your mortgage, uh, can reduce your overall expenses and can actually move you closer to financial independence. The second was if you have the liquidity, then you can put more cash down. Uh, that’s something I I’ve been considering for sure. And then number three was to lock in fixed debt and just hold onto it long term. I agree with all of those, but maybe , I’m a little nervous now because you did mention one of the things that, or maybe two of the things that I’ve been doing, and so now questioning myself if those make sense. Yeah.

Scott:
Well look, I think that’s it, right? Is everybody’s kind of stuck here. The fact of the matter is one of the biggest assets you can have is that three 4% interest rate mortgage. So I think a lot of people took advantage of that. And again, now they’re locked in. You know, if a homeowner moves down the street, that median, uh, American I just talked about, right? Who refinanced their property at 2 97 and 2021 at 2.85%, if they move down the street and buy the same house over again with the same mortgage, their payment goes up by 800 bucks a month. And so I think that most people in today’s environment, that own property are choosing option three or the first option that I presented, which is lock in those properties and let it ride. And as liquidity slowly accumulates, making the next investment, whether that be in stocks, real estate, private businesses, bonds or whatever. But I think that that’s what’s, that’s what’s happening right now. And that may not be the worst choice for a lot of folks.

Dave:
Yeah, I feel locked in on my properties in Colorado. You know, Scott and I both started investing in Denver. I still have some properties there and a lot of them, I guess all of them have very low interest rates on them. And one or two of them are performing at a level that I think in, in terms of cashflow and revenue are performing at a level that if it were 2021 or 2022, I would’ve sold those properties. I would say, Hey, this one is not giving me a good enough return. I’m gonna trade out for something better. But right now there isn’t really anything better. But also I’m not trying to retire and so I can wait for two or three years or five years even if I have to, to, for that revenue to improve. ’cause they are still cashflow positive. It’s not like I’m bleeding money on them every single month, but they’re still doing decently.
They’re not my best deals. But I would not, I would rather hold onto them for three or four, you know, unoptimized years, so that in 15 years I still have that 3% mortgage rate. ’cause I’m gonna be pretty happy about it 15 years from now, which I think just sort of underscores this of time horizon and like what you want, where you are in your investing journey and time horizon really dictates tactics because for people like Scott and I, I don’t wanna speak for you Scott, but I hope you don’t retire anytime soon. Uh, you know, we are probably down to weather some of these storms, whereas if you’re trying to actually make that retirement, you might wanna pivot to Scott’s third option, which is like, take your liquidity, pay down your mortgages, because then you can have that cash flow much more immediately.

Scott:
Yeah. And, and I don’t know what it is about the market or whatever, but recently, you know, I like to get coffee with, with members, especially the BiggerPockets money community, um, on a pretty regular basis. And lately I’ve been talking to a lot of millionaires like two to three and a half million dollar net worth folks, and they don’t have a math problem. They have a leverage problem, right? If they just, like, it’s like if you just pay off a couple of properties, you’re done, you’re way past the number of cash flow that you need there. But I can almost guarantee you that if you pay off those mortgages, you’re gonna have a lower net worth number in 20 years. But you’ll be free now and feel really confident about your cash flow and lifestyle. And that’s, I think the choice that I’m trying to get at earlier is that’s not, that’s not a math problem.
I you, no matter how you build your spreadsheet, you are going to be richer if you assume reasonably close to long-term historical averages for stock market returns or, you know, appreciation, rent growth, all those kinds of things. But you may be free today if you make a couple of big moves that are suboptimal math. And I think that’s what I’ve been really grappling with in the context of this higher interest rate environment. Now, a a couple other things that gimme going on this one is lending. So a year or two ago I’m like, oh, interest rates are higher. I’m gonna lend simple as that. Boom. Here’s the problem, right? I went and, and got into hard money lending. I read the book Lend to Live, um, buy for years, and Beth Johnson and I got into it and it, it was great. It was, it was as advertised, right?
For me at least. I bought a hard money loan, I bought another one, right? So these are two small-ish hard money loans. I, one of them went perfectly as, uh, according to plan got paid off, I re put it into the next loan, another set of due diligence. I’ve done several of these to this point, all have gone according to plan. My last one should mature in the next two or three months, and I’ll get it back. Here’s the problem. I earned a blended 13% interest rate on these notes, but I’m in a high tax bracket, so really it’s closer to seven or 8% after tax yield. And if I just bought the property underlying the asset, I would’ve gotten a three and a 5% average long-term yield, plus a 5% cap rate on the property for an eight, eight or so. And that would’ve been essentially tax free or tax heavily tax advantage with really good tax options downstream.
So lending, even at those absurdly high interest rates, which do require constant recycling of the loans, constant new due diligence on those types of things, that’s, that’s a best case scenario for lending. I think that one can reasonably expect still wasn’t as good as just a paid off rental in my mind after tax for me. Now, where it could be really valuable is, let’s say I was to retire and my income from ordinary, you know, W2 sources was to drop to close to zero or to a much lower tax bracket. Well now all of a sudden that 13% yield is actually closer to a 10 or 11% after tax return. Mm-Hmm, . So that’s a really powerful option again for that person who’s thinking about de-leveraging, should I sell off one or two of my most painful properties, take that money and put it into something that does earn simple interest, but I’m gonna be in a much lower tax bracket after retirement. So those are the thing, the really kind of intricate games to play with, thinking about different parts of the capital stack. And I’m glad I did the experiment because I feel comfortable with the idea of lending and earning interest like that and using that part of the real estate capital stack to drive returns, but it doesn’t make any sense while I’m continuing to work and earning a W2 income and having a lot of these, these, these, uh, other sources of income going on.

Dave:
I also have gotten into lending a little bit both in passive ways with funds and recently have, uh, bought and participated into sort of hard money loans. And I’m treating it sort of as a learning experience because I agree with you, it, when you factor in the taxes, it’s always taxes. They just come back and bite you in the sometimes, you know, you look at these headline numbers and they look so great, but it’s true. It’s, it’s not necessarily the best, but I wanna learn how to do it because I think, you know, as I approach in a decade or two the time when I do wanna stop working full-time, I think lending is a fantastic way to, to do that using real estate. And so I kind of wanna learn slowly, um, and start building my, my skillset there. Um, but I, I agree with you. I don’t necessarily think it’s as good as it’s advertised and it is learning, at least in my experience, a pretty different business. It feels different to me than learning how to operate a small portfolio of rental properties.

Scott:
And it brings us back to another question here, which is, for someone just getting started on the journey to financial independence, that is not a good tactic, right? No, it seems like a great return, but that’s a really terrible way to compound that growth towards long-term. You know, that that long-term goal of becoming a millionaire or multimillionaire and actually having the ability to retire early from a portfolio, like what does that person do? Well, I think we’re back to house hacking. We’re back to earning as much as possible, spending as little as possible, finding creative ways to use a variety of assets, including real estate to do that. But really I think that if you’re gonna use real estate at the end, whatever, that, whatever those creative tactics, whatever that value add, whatever the, the, the local market that you’re in gives you, it’s really the compounding effects of leverage that you have to trust or have to rely on to drive you toward financial independence. And you have to figure out how you can do that creatively and responsibly.

Dave:
Yeah, that, that is very well said. Agreed. It’s kind of like a diversification tactic. We gotta take one more final break, but stick with us. You’re not gonna wanna miss the rest of my conversation with BiggerPockets, CEO Scott Trench.
Welcome back to the show. Let’s get back into my conversation with Scott and Scott before we let you get outta here. I have one question about a tactic and strategy that I’m using and I know that we disagree on. And so we both started investing in Denver. I obviously, I live across an ocean now and so everywhere is long distance investing for me. And I decided about a year or so ago to start investing in what I would say are more affordable markets where you can find cash cashflow. It’s not amazing cashflow, but you can find MLS deals with cashflow. I like this tactic. It’s been working out great for me. I know you don’t do it and I’m curious why not?

Scott:
I don’t do it because I’m local and I believe I can get advantages by operating locally, knowing the people that I work with and having the option to take over management and those types of things. If I was in your shoes, Dave, I’d absolutely go to the best market that I could possibly find and invest there. I think it’s a, a interesting question about over the next 25 years, is there a spread? Like would I actually get better returns if I just went to the best market that you found with your ridiculous analytics brain and crazy data sets? Um, would I actually get a better return if I just went there instead of investing in Denver? Or does the five to 10% advantage in operational results and maybe, you know, um, subjective opinions of the market that I get by being boots on the ground here. Like, is that, is that there to offset that? And I think that that’s the, the million dollar or maybe $10 million question depending on how long your time horizon is and how much money you make, uh, around where to invest. But absolutely, if I wasn’t boots on the ground, I would be doing exactly what you’re doing and going to one of those markets.

Dave:
If I were you and you live in Denver, you’re rooted in Denver, you have a family in Denver, you have a operations in Denver. I, I agree, I probably wouldn’t do it differently For me, I’m in, I’m sort of on the other end of the spectrum where I’m nowhere in the United States and so I could invest sort of anywhere. But I’m curious again, let’s just go back one more second. So people who are kind of new, you know, if you were new and you didn’t have operations set up like you do where you have that benefit, do you think it ever makes sense for people in a high price city like Denver or Seattle or San Francisco, whatever, New York to like pursue out of state markets even when they’re new and haven’t done any investments before?

Scott:
A hundred percent. So I think there’s a couple options. One is, we heard a story recently about a, an individual who moved to like Cleveland or Columbus and started serial house hacking, made several hundred thousand dollars in the last two or three years and is off to the races. That’s one option. Not a lot of people are necessarily gonna be willing to do that, right? Let’s say that we have, we heard another, another story from an individual who works at a church choir, right? Does not make a lot of income, but was able to, uh, build an A DU and use that to drive wealth. Mm-hmm. in California, right? So that’s an advantage. Like that person’s probably not even a good candidate for investing in the Midwest ’cause you still need to generate 10, 20, $30,000 per property. Now there’s other folks that are gonna be executives or, you know, higher income earners in a place like California where it’s just really difficult for them to accumulate the $300,000 needed to make a duplex, a kind of bread and butter duplex cash flow.
Those folks are probably great candidates to invest outta state in the best markets in the country for cash flow or hybrid depreciation growth. Um, hybrid, a blend of appreciation and cash flow like the markets that you suggest. Mm-hmm, . So absolutely, I think it depends on the situation, um, and that the, the, the relative income, the relative levels of commitment and energy that one wants to put into it. But I think there’s a huge slice of America who should be thinking about investing outta state and doing it very carefully com you know, thinking about both the context of where the, what are the numbers for these markets say, and do I have a network that I can build there people I can trust on the ground?

Dave:
Totally. Yeah. I say that all the time where people, you know, it is my fault I publish these lists. So people are always asking me like, what’s the best market? What’s the perfect market? I really think for most people you just narrow it down to a couple and then where you have the best operations is going to actually win out over the long run. There’s a saying in real estate where people say you make money when you buy. And there’s definitely some truth to that, but so much of the money you make in real estate is about operations and no one wants to talk about operations ’cause it’s boring. It’s not as sexy and as cool as buying a property well under market value, but just running a business well is how you actually really make money over the long run.

Scott:
Let’s go back to that first duplex, right? I bought this thing for two 40, it’s probably worth five 50 to 600 now. So 70% of my return has been probably just from long-term appreciation. Mm-Hmm , the next 20% comes from how I operated the business. I’d probably be about 20 to $30,000 richer if I was reasonably competent in the early years at operating that rental. And then the last 10% at most comes from how I bought the property, right? If I’d overpaid by 20 grand to two 40, it would’ve been immaterial to the overall outcome. Yeah, if I’d underpaid by 20 grand, it would’ve been immaterial to the overall outcome. That’s not to say don’t worry about getting a good deal. That’s a huge thing. You make sure that you get a good deal. But far more important is letting the decades pass and then how you operate and Absolutely. So I, I think that that’s, I think that’s a good time to actually pitch some of the stuff that we’re working on here at BiggerPockets, right? We have a new market finder tool that, uh, has all of a, a lot of Dave’s input. You can filter by rent to price ratio. You can, uh, filter by appreciation, you can filter by affordability, you can filter by hybrid growth prospects. All of these really cool features that, um, and some of which are, are are Dave Meyer, um, originals.

Dave:
They’re, they’re hand picked, curated by

Scott:
Me. And we’re gonna add to those over time as we plug in more and more data sources. I’m excited, uh, in the coming months, the coming year to get good at supply, which is a huge factor, right? Like that’s a super interesting thing that’s going on in the market right now is, you know, Chicago, Chicago, real estate prices are holding very steady right now. And Austin, Texas prices are plummeting. People are moving to Austin, Texas, that’s not the problem. There’s not jo, lack of jobs, income, you know, uh, net inbound migration. There’s just so much darn supply coming online, 10% increase in supply that the market is essentially crashing in real time. And so that’s a really important component of this that I think will be really, um, exciting for us to add into the data set here.

Dave:
Well, we got it. We got it coming. Yeah.

Scott:
And once you have the data, it is the team, right? We have agents, lenders, property managers, and um, uh, t tax and financial planners all in there for each of these markets that you can interview and feel comfortable with. Um, all that’s available at biggerpockets.com/market finder.

Dave:
Yeah, I definitely, definitely check that out. Also, great ways for you to find property managers and all that. Scott, this has been really great and honestly, I, I really appreciate the sober conversation because the market has changed. It is difficult, different tactics are required, and I appreciate you giving us your true, honest opinion about who real estate is right for and how people can succeed in this market. Is there anything else you think, uh, the audience should know before we get outta here today?

Scott:
I think the last thing you should know is that most real estate investors in this country own 10 or fewer properties and are millionaire next door types, right? These are people who save their pennies, invest for the long term, often are doing, some are part of the work themselves and those types of things. And while there’s a lot of stories including on BiggerPockets about folks who build really flashy, huge businesses, that’s not the norm. Mm-hmm, , 90% of single family rentals are owned by people with 10 or fewer properties. And that is where many tens of trillions of dollars of American welfare and it’s totally okay to be in there. And in fact, that may be a sweet spot for driving returns. So, you know, yes we wanna celebrate the big, big success stories, but it’s totally okay to have a small and mighty portfolio as well. And there’s a lot. Real estate is an excellent option, um, for folks as part of that, uh, diversified portfolio.

Dave:
I love that. And we’re actually gonna be doing a show next week about that very topic, so definitely make sure to check that out. Scott, thank you so much for joining us today. We really appreciate it.

Scott:
Thank you Dave.

Dave:
Thank you for being part of the BiggerPockets community by listening to our podcast. I’m Dave Meyer, host and executive producer. Our senior producer is Kaylin Bennett and associate producers are Jennifer McCord and Hager El dos. Editing is by Exodus Media. Copywriting is by Calico content, and I want to extend a big thank you to the entire BiggerPockets team for making this show happen.
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