Afford Anything - [R] Remember When Inflation Was High and Rates Were Rising? [GREATEST HITS]

Episode Date: December 25, 2025

#674: Welcome to Greatest Hits Week – five days, five episodes from our vault, spelling out F-I-I-R-E. Today's letter R stands for Real Estate. This episode originally aired in May 2022, but the insights on long-distance investing remain just as relevant for anyone feeling priced out of their local market. We tackle the five biggest challenges of investing far from home – from fear of the unknown to managing contractors remotely – and reveal four compelling benefits that make it worth the effort, especially when you're competing in markets where million-dollar properties are the norm. ________ Remember when inflation was high and rates were rising? What were people saying about real estate back then? And with the benefit of hindsight, how much of what we thought at the time proved to be correct? If you feel unsettled, join the club. At this present moment – December 2025 – interest rates are falling, but not enough. Inflation is mostly under control, but not enough. The noise makes everything feel new. When you only see the present moment, everything looks obvious. When you remember the past, patterns start to show. That's why we’re rewinding the clock back to May 2022 – when interest rates were rising and inflation was near its peak. So what was on our mind three years ago? We start with the basics. Why the Federal Reserve raises rates. What higher borrowing costs do to spending. Why falling stock prices often reflect fear – not proof that housing prices must fall next. We explain the difference between recession and deflation, and why the two are often confused. We walk through what made the housing market in 2022 different from 2008. Inventory was tight. Builders had not overbuilt. Many homeowners held fixed-rate mortgages and record levels of equity. Those conditions mattered then. They still matter now. That equity becomes the next focus. We talk about cash-out refinances, HELOCs, and reverse mortgages – and what happens when homeowners borrow against rising values. You hear how higher rates can slow borrowing, why that matters for inflation, and what risks appear if some borrowers struggle to repay. From there, we outline four ways investors might encounter properties if foreclosures rise: bank-owned homes, short sales, “subject to” deals, and wraparound mortgages. The episode then shifts to long-distance real estate investing. You hear the real challenges. Fear of the unknown. Managing people you cannot see. Contractors who disappear. Agents who stop returning calls. You also hear what makes distance workable: education, relationships, local investor networks. We walk through how investors think when conditions feel unstable — and why looking backward sharpens how you see what comes next. Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (0:00) Trade-offs and priorities (07:41) Fed hikes rates (09:16) Inflation drivers explained (11:26) Recession vs housing (13:21) Home equity surge (15:21) Borrowing against equity (17:11) Foreclosures and options (18:26) Subject-to and wraps (21:11) Shift to distance investing (25:31) Education and networks (31:36) Choosing markets (36:11) Accountability challenges Learn more about your ad choices. Visit podcastchoices.com/adchoices

Merry Christmas and welcome to the Afford Anything podcast. Today is Thursday, December 25th. It is Christmas Day. This week, all week, Monday through Friday, we are sharing episodes from the greatest hits Vault as part of a special five-day F-D-I-R-E series. Every day this week, we're focusing on a pillar of wealth building. Monday was financial psychology, the letter F, Tuesday was increasing your income, letter I.

Wednesday was the second letter I investing. and today is the letter R for real estate. Before we share today's episode, I want to set the stage because this is a time machine. The episode that you're about to hear originally aired in May of 2022. So let's climb into the time machine and remember what was happening. What's the context of May 2022? That was when inflation was peaking. In fact, one month later, in June of 2022, inflation hit its record peak at 9.1%.

That's the highest inflation rate. in 40 years. So at the time that we recorded this, May 22, we were right around a 9% inflation rate. We were at peak inflation. Interest rates were rising fast as the Fed was struggling to keep inflation in check. And because interest rates were rising so fast, people were worried that home prices were going to collapse. Today, of course, we have the benefit of hindsight. We know how the story played out over the last three years. But do we remember what we thought in the moment, right? How do we get the full benefit of hindsight? We get the full benefit of hindsight by remembering what we thought at the time that things were unfolding. And so that's why

I want to share this episode with you because it captures what we were thinking. It's a real-time record, right? What we were thinking before we knew how the story would end, before we knew the outcome. It's what I love about podcasting. We have a real-time record of what we thought in the moment? Because later, after we know how things turned out, we often can mentally revise our memories. And we convince ourselves that, like, whoa, we always knew, you know, we always knew what was going to happen, even when we didn't. And that, I think, is one of the most powerful things of podcasting as a medium, like podcasts create that real-time record of what we actually thought in the moment, the uncertainty, the assumptions, the fears, the expectations. There's a record

preserved exactly as it was. And when we understand that past uncertainty, we can recognize patterns when new uncertainty shows up, right? And we start to see how narratives form. We see how fear repeats itself. We see how often the most costly mistakes come from waiting for clarity or from like wallowing in recency bias. Like I remember back in 2015, 2016, 2017, people were saying, oh, real estate is way too expensive. Like in 2017, people were saying like, oh, I should have bought five years ago, but I didn't. I'm just going to, I'm going to wait for the next crash. I'm going to wait for prices to come down.

And so the people in 2017 who decided that they were going to wait because they had the recency bias of remembering 2008, nine years prior. Well, now here we are, like nine years hence. And the people who in 2017 decided to wait are now regretting it. So the question that I want you to hold is, Nine years from now, or heck, even three years from now, this episode is from May 22, three years from now, what will your future self want you to have understood about today? When we go back and we revisit how we thought in the moment, during moments of crisis in particular,

as peak inflation May 2022 was, when we remember how we thought during moments of crisis, we get the full benefit of hindsight. So think of this as a way to borrow that hindsight. With that said, let's rewind the clock back to May of 2022. We have not edited this episode at all. You're going to hear it exactly as it aired back in May 2022. So we'll revisit what we thought at the time that inflation was peaking. And I'll meet you on the other side.

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly means turning away other opportunities. And that opens up two questions. one, what's most important? And number two, how do you align your decision making around

that which matters most? How do you take charge of your limited resources? Answering those two questions is a lifetime practice. And that's what this podcast is here to explore and facilitate. My name is Paula Pant. I'm the host of the Afford Anything podcast. Typically, we are a weekly show. Lately, we've been airing episodes every Wednesday. But Once a month, on the first Friday of the month, we air a special first Friday bonus episode and these episodes are now thematic, where once a month on the first Friday of the month, we air a special presentation called Invest Anywhere, dedicated to long-distance real estate investing. And these are co-hosted with my esteemed co-host, Sonny Rao.

Hi, Sonny. Hey, Paula. How are you? I'm great. How are you? I am excellent. Excited for episode two and all the things that we're going to talk about today. Exactly. Episode two of Invest Anywhere. We want to make real estate investing approachable for everyone,

not just the hedge funds on Wall Street. We want to make sure that no matter where you live, you have the opportunity to invest so that we can move wealth back into the hands of the ordinary people. We're here to level the playing field by teaching you how to invest in real estate at a distance. So Sonny, what's cool about the series is that we're sharing information that builds on what we shared in the last first Friday Invest Anywhere episode. We're sharing information sequentially. Yeah, it's almost like a course format so that someone can come in at the very beginning if they're interested in real estate and don't know exactly how to think about it.

They can learn about the basic principles and then take that journey with us through all the pieces that they need to think about in order to be able to assess a good fit when it comes to investing in real estate at a distance. And a lot of what we are going to be talking about in this first Friday Invest Anywhere series is strategic thinking around investing, how to make important decisions, especially if you live in California or New York or some high cost of living, area. You're thinking about investing in the Midwest. That's a huge jump. Exactly. Yeah, that's a really huge jump. And I know a lot of what I hear from other investors, and I think what you hear, too, is there's a lot of fear because you don't know what you don't know. You don't know about the big, there might be some big thing that you're missing. And we really want to take the audience through the big things to help set them up for success. So here's what we'll do in today's episode. First, we're going to talk about what's happening right now because there's some big things, big current events. You know, we're

recording this on Cinco de Mayo of 2022. And today, the Fed announced another half-point rate hike and today was also the worst day for stocks this year so far. So there's some big things happening in the markets. We're going to talk about that first. And then we're going to go into the topic of today's episode, the pros and cons of being a long-distance real estate investor. But let's start, and we normally don't start by talking about current events. Typically, most of our episodes are fairly evergreen. But I've heard a lot of people in this community worry about whether or not they should sit on the sidelines. Essentially, the fear is if mortgage rates are going up, which they are, doesn't that mean

that home prices will go down? And so that is a question that I want to address. Now, first of all, the reason the Fed is raising interest rates is because inflation is at its highest point in 40 years, and they want to pump the brakes on inflation by limiting the amount of money that flows into the economy. So when they raise rates, they make money more expensive to borrow. And when money is more expensive to borrow, fewer people borrow it. It's simple supply and demand.

When something's more expensive, people buy less of it. So if money is more expensive to access, people access less of it, meaning there's less money flowing around in the economy, which in theory means that the rate of inflation would slow. However, there are still some underlying factors triggering inflation that haven't been solved yet. One is lack of materials, upstream supply chain disruptions.

The other is a labor shortage. And when there's a labor shortage, employers have to raise wages and salaries because there's a labor shortage, and that triggers a wage price spiral. Already, wages are about 5% higher than they were last year. And inflation, March to March, is 6%.

So given that those two underlying issues have not been solved, there is a likelihood, or at least there are the underlying conditions present, that inflation might continue to rise. And if that happens, which it may or may not, if that happens, then it's possible that the Fed will continue to aggressively raise interest rates even further in order to combat that inflation. But this is something that the Fed needs to be careful about because as money becomes more expensive to borrow, there's always the risk that businesses will borrow less, thus triggering a recession. Anytime the Fed is trying to combat inflation, the risk of recession is there.

And given that the price of both food and fuel are invariably going to rise due to the war in Ukraine, which is also, in addition to labor shortages and supply shortages, the war in Ukraine is also exerting pressure on the price of food and fuel, making those prices even more volatile, the need to combat inflation and the subsequent risk of recession that goes hand in hand with it, those are present. And that's why the market is declining. The drop in the market is a reflection of investors being worried about the possibility of an impending recession. But a recession is not synonymous, despite what we've all, what we all remember from 2008, a recession is not synonymous with a decline in home values. A decline in

home values represents deflationary pressure. When something is worth less tomorrow than it's worth today, that's deflation. If something costs $100,000 today and it only costs $90,000 tomorrow, that's deflationary pressure. And so during the last recession, we saw deflationary pressure in home prices as a result of the specific factors, the over borrowing, the easy credit that led to that recession. We don't see right now evidence of deflation happening, either in the housing sector or in any other sector. In fact, all of the underlying fundamentals point to the opposite. With material shortages and labor shortages, the underlying fundamentals point to continued inflation rather than deflation. And remember for home prices to drop below where they are right now,

we would need deflation in the housing market. And we would need a change in supply and demand. So 2008 recession, supply and demand looked very different from how it looked today. There was an excess of inventory hitting the market that wasn't able to be purchased right away, Whereas the opposite is happening today between the shortages that you mentioned and lack of building over the course of several years, there's such a shortage of inventory that it is going to take quite a while for supply and demand to catch up to what would be considered air quotation's normal inventory levels. Here's something that I am watching closely. So because home prices have risen so much in the past year, homeowners now have record levels of equity. According to a CNBC article published on February 28, 2022, the average mortgage holder has $185,000 in equity. Whereas last time, a lot of people, a lot of homeowners were upside down on their mortgages.

They had negative equity. Exactly. One thing that has happened as a result of homeowners having so much equity. equity is that a record number of people right now are borrowing against that equity, taking out helox, cash out refis, and reverse mortgages. And particularly seniors, those age 62 and over, have been taking out a record number of loans. So the number of loans to seniors in 2020 hit $759,000, which was up from $647,000 back in 2018. So there's been a number of loans to seniors in 2020, So there's been a significant increase in the amount of homeowners, particularly seniors, who are borrowing against their equity.

And what this says to me is two things. Number one, it shows how, by virtue of the Fed raising interest rates, fewer people will want to borrow against equity because of the fact that the cost of borrowing is higher. And that slows down new money in the economy. So it shows some underlying evidence that rate hikes may work in incentivizing people to borrow less from their home equity and therefore curtailing the flow of new money into the market. On the other hand, the other thing that this says to me is that there's a risk that some people who have borrowed against their equity may face foreclosure. And if that happens, which I hope it does not,

But if that happens, that opens up four possibilities for investors. One is that investors can then purchase foreclosed homes, either through HUD or through a bank's REO. That's one possibility. The second possibility, which would be more of a win-win for both parties, is that an investor could spare a struggling homeowner from the stress of a foreclosure by virtue of buying a short-sale property. So that's the second option. And then there are two other options. Sunny, would you like to talk about these subject to and wraps? These are a little bit more sophisticated. Absolutely.

When we talk about subject to financing, that basically means the investor is taking the ownership of a property, but their ownership is subject to the financing that already exists for the current homeowners. So you take on their rate in terms. And it's often subject to that homeowners and that homes existing liens and debts. That's where there is some risk with that option. However, you get a deed and you have to make the borrower's payment. So that requires a specific kind of structuring of the agreement to make sure that A, you legally can do that based upon the homeowner's existing finance agreement with their loan servicer, and that B, the payments you make actually go to the loan servicer, i.e. making sure you're not making payments maybe to the homeowner

who then might skip out on paying the loan servicer. So that is another risk with that. Right. You would want some sort of third-party escrow to handle those payments. But that is one way, that's another way to create a win-win situation between you as the investor. and the homeowner, right? If the homeowner doesn't want a foreclosure on their credit report or doesn't want a short sale on their credit report, then they can create a subject to agreement where an investor can then take over that loan and get the deed to the house and spare the existing homeowner from the credit destroying ramifications of getting foreclosed on. Which would be a win-win for both the investor and the homeowner because once a home is

foreclosed upon the homeowner's credit is impacted and their future decisions are heavily, future financial decisions are heavily impacted. Right. Exactly. So both subject to and short sales can spare a homeowner from that. Those are three options, buy a foreclosure, buy a short sale, buy a property subject to. And then the fourth one is a rat mortgage. Yeah. So that's at a very basic level. That is when you put an additional mortgage on a property. This one can be a little bit more complicated because sometimes banks don't want another lien position. Sometimes you might not want another lien position, but basically you write a note and a mortgage in favor of the seller for the amount you agree upon that basically wraps around the current mortgage. So your note would outline the terms that would include the payments for what is the current mortgage plus potentially whatever additional.

loan that you pay the homeowner. So if I was to give this some numbers to make it less abstract and theoretical, let's say you talk to someone who has 120K in a mortgage on their house. It's a great deal. The terms are great. The mortgage is great. And they're willing to sell it for 150, but they don't need that 30K right now. You can write them a note for 150,000.

and make the monthly payments on the 30K and make monthly payments on the 120K for the note that is in place. Right. But for all of this, make sure you take the time and spend the money to get ironclad legal documents that follow state laws

and really respect the mortgage that is in place because you never want the bank to call on the mortgage, which means then you would have to, probably pay it off all at once, losing the deal on having much larger future ramifications. Right. So those are four options that would be available to investors in the event that we start seeing foreclosures. And the reason that I bring that up, and that's purely speculative, but the reason that I bring that up is because we're seeing a record number of homeowners borrowing against the equity in their homes, given the fact that home equity has risen so

significantly, especially in the past couple of years. But we don't know if we're going to start seeing more foreclosures or not. You know, one big difference between now versus 2006-2007, two big differences. One is that borrowers today have to be much more qualified. So the debt-to-income ratios that banks will lend on are much stricter. The income verification process is much stricter. You know, banks today, as compared with 2006-2007, banks have much tougher, tighter lending criteria. So the people who have taken out loans are better qualified than they were. That's one thing. The other thing is back in 2006, 2007, a lot of people took out adjustable rate mortgages and fell into arrears when rates went up and they couldn't pay the new higher rate. But given

that mortgage interest rates have been so low for so long, a lot of today's current borrowers have locked in fixed rates. So we don't know if we're going to start seeing future foreclosures. The fact that so many people have borrowed against their home equity does not necessarily mean foreclosures are to follow. So this conversation is theoretical. Yeah, exactly. It's speculative. One thing you shared earlier, wages have increased 5% over the last year, right? So if you take that wage growth into account, as well as the fact that so many people locked in lower rate fixed 30-year mortgages in previous years and previous times when the rates were lower, that would mean they'd be more able, better able

to pay the mortgages that they've locked in. Right. Exactly. That's the beauty of having a fixed rate loan during a period of high inflation. You're paying back that loan in cheaper and cheaper dollars over time. And I think that's an excellent segue to the subject that we were going to talk about today is, well, part of it is investing in real estate, making that jump to buy property, even if it's not in your backyard. Yes, the pros and cons of long-distance real estate investing. So let's do this. So since we've just finished talking about current events, let's take a break to hear a word from our sponsors. When we come back, we're going to go into the planned topic of today's episode, the Evergreen topic, which is the pros and cons

of investing in real estate long distance, meaning investing in real estate, out of state, far away from where you live. We're going to talk about that right after this break. Stick around. Reality says the odds are stacked against us. To think our U.S. men's national team can ever raise the world's biggest trophy. Be the first soccer team to beat them at football. Never.

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Be part of the journey. Welcome back. To talk about the pros and cons of real estate investing, let's start with the negative. Let's start with some of the challenges. I've been thinking about buying an income property in another state, but it seems like there's a lot that could go wrong. What should I be aware of and how do I prepare properly? All right. So how many challenges are we going to cover? What are the challenges? We are going to cover five challenges. These challenges are one, the fear of the unknown. Two, the ability to hold people accountable. Three, traction. Four, my favorite stress. And five, the piece that can make the biggest difference in your investing journey, relationships.

Let's talk about why investing in real estate in a far off land can make you feel just so crazy. Point number one. Fear. Which can also be thought of as. I'm terrified of dumping a lot of my hard-earned income into something so far, far away. I don't even know where to start. And what if there's an emergency and who's going to take care of it? And I don't know what I'm looking at here. And how do I make sure that I don't lose everything? And if that was boiled down to one sentence, that one sentence would sound like this.

I am afraid of what I don't know. Which totally makes sense. You've saved all this money, you've worked really hard to learn, and all of a sudden you're going to put it all in a place where you don't get to set eyes and ears on it every single day. But fear works to keep you safe. There's a reason like fear has evolved with us biologically. The problem is that fear can also keep us from living a life that is smaller than what we desire. And we don't want that to happen either. So let's focus on the two antidotes that we can use to combat that fear.

Antidote number one is education, is knowledge, right? If fear is fear of the unknown, then the antidote is the known. And how to make the known known is by learning as much as you can. And you're starting that process right now by virtue of listening to this. And there's so many resources out there. There are podcasts. There are books. There are news reports.

There are investment reports. There are courses, hint, hint. And there are those who have successfully navigated the, arena that you are attempting to navigate, those who have already done what you want to do and can give you feedback in real time about the things that you have questions about. In addition to knowledge, there's another way to also overcome fear, and that is networking, which is, I really hate the term networking. Yeah, I hate that term too. It's just, it's making friends, you know, like networking is really pompous, but at the end

the day, the people who are going to help you and the ones you're going to help are the ones that you have commonalities with, the ones that you build relationships with, the ones that you can connect with. That really bounces off the last point of, that's also a part of education is talking to other people in the community. Real estate is about people and not properties at all. And as Joe, of stacking Benjamin's, likes to say, it's who, not how. Ask who, not how. I've heard that so many times. It's really funny to hear you say it too. So, So like minded and abundance minded of friends really want to help each other. And the circle that you build can really help almost have kind of a safety net for you. So when you're about to make a decision and when your friends are going to make a decision and you are also well educate, you guys can turn to each other and be like, hey, is there anything else I'm missing here? Is this how much I should pay for this rehab? Is there something about this area that I'm missing where maybe I shouldn't invest? It can help both on kind of like the launch pad of the investing journey or for each invest. But also, like we said, investing can be tough.

People don't always talk about the tough points, you know, and all of a sudden when you have to deal with a flood or some sort of damage or a difficult tenant, you can feel a little crazy because nobody talks about these things. So when you have your friends to talk to about this, you have your circle to talk to, you realize that everybody's going through the same thing. And if everybody's going through the same thing and money's still made, it helps keep you saying. You haven't made a bad decision. you don't need to pull out of your investment. You're not on the wrong path. You can still make financial progress in the face of obstacles and difficulties by having this perspective. And the thing is, when it comes specifically to long-distance real estate investing, the friends that you make, the network that you build, in the local community is incredibly

valuable. So I'll use myself as an example. When I was looking for some alternate location to invest, you know, and I was looking at places where I've never lived, I don't have any firsthand experience there. I was looking at places that I had never set foot in prior to going there for the specific purpose of deciding whether or not I wanted to invest in real estate there. I zeroed it on a couple of places. I looked at Birmingham, Alabama, looked at Montgomery, Alabama, looked at Indianapolis, Indiana, none of which I have any personal connection to. The reason that I chose Indianapolis, a big part of it, was because of the people that I met there, specifically the real estate investor community that I found there,

the friends that I made there, that was incredibly valuable. And so many people from the afford anything audience have asked me, you know, they were like, what, what, they were looking for me to state some type of quantifiable thing that I had found, some metric that made Indianapolis a quote unquote better choice than Birmingham or Montgomery. There is no quantifiable metric. The reason I chose Indianapolis over Birmingham is purely because when I went there to check out properties, I made more friends there, specifically real estate investor friends. You know, I tapped into a better community there, a bigger and more welcoming community.

Now, that's not to say that community doesn't exist in Birmingham. I'm sure it does. I just didn't happen to find it. the fact that I chose where to invest based on where I found a network of other investors who could provide that local knowledge, that underscores the importance of building those relationships when you're investing long distance, because it's those local investors who are going to have local knowledge. I think it's helpful also to share kind of what that looks like, right?

So, okay, it's awesome. You have friends. Cool. Why would you make a decision based on friends? Because it is those friends when they find a deal and they are they don't have the time or the resources at that moment to invest in the deal. They'll send it to you. And then all of a sudden you have deals being sent to you. When you want to hit your required returns, but especially in this environment, you're having trouble finding a lender or tapping into equity and you've made a dozen calls and can't get through to someone or can't get the right rates. It's the people who are also investing in that community. who have other connections who might be like okay no try this lender here's the number i'll connect you so that they call you back and then their rates are better so that your returns are then better and the same thing goes for contracts etc it's like tapping into a group mind and having six people work towards the same goal and all of you guys just share and pool what you know and your resources which will help you improve your returns over the long term exactly the last thing i like to say a lot of people i think

this is overlooked you know i know a lot of people and myself included who started investing without having the network in place in quite as strong of a manner. And I really don't think that should be skipped. If I had known then what I know now, I would spend more time building up the local network, the local community before I did that. I know that would have helped make my initial steps much, much easier. Exactly. Having local people, local real estate investors who, you can text, or you can be in a group thread with, right? That makes all the difference. And that also is the antidote to fear, too. Like, if you're living in Seattle or L.A. or New York

or Chicago, and you're thinking about investing in Cincinnati or Indianapolis or Birmingham, that's terrifying if you don't know anybody there. But if you are on a group text thread or a WhatsApp thread with eight other investors who are all local to that area and they're all talking about the duplex that they just bought in such and such neighborhood or the experience that they had with some plumber. By being part of that group thread, all of a sudden everything feels doable and you know you have the support of the people around you if you ever have a question that's specific to the local area. Whether that's a recommendation you need or whether that's more information that you need about a given neighborhood or a given

street, right? You know that you've got boots on the ground who can share their local knowledge with you. But back to the challenges. What's challenge number two? Challenge number two is what I like to call holding people accountable, which is also known as trying to get people to do what you agreed upon and or maybe what you paid them to do. This can look like a contractor who goes a wall in the middle of a rehab after you've paid them like a 50% deposit, you know, or, you know, you decide you've been, you say you want to buy this house. You've been searching for months. It's hard to find a good deal in this market. And also you find the perfect deal, but then you can't reach your agent. You can't even step up to the plate to swing

because you can't put an offer on the property in the first place. Or if you have a short-term rental and your cleaners don't clean it properly. And then all of a sudden, the next guest comes in and it's freaking out because it's dirty. And they're going to give you like a one-star rating, which will get you delisted. And all of a sudden, you're looking at losing a piece of your business, you know? So no matter like what strategy you want to go into, by the way, if the concept of different strategy sounds a little foreign to you or like more information on that, our next episode in the Invest Anywhere series is going to go through. like high level overviews of different strategies so that you can kind of think through what might be your best fit when you want to not if when you want to start investing in real estate

at a distance so we're not sharing all of these scenarios to scare you we want to prepare you for some of the challenges that you face and one of the big ways to deal with these challenges the first is to maintain a perspective there are some things that you can do if you're local but not that many unless you're a licensed contractor and you're currently unemployed, right? Because that's the only way you're going to be able to get over to that house to swing that hammer yourself.

Right. You know, it just feels so much more helpless because you're like a thousand miles away and you feel like you can't physically do anything but you wouldn't be able to anyway. Even if you were local. Exactly, exactly. So an important thing here, adjust your mentality

and know that this is going to happen. It happens to everyone at some point in time. Just have to deal with it when it happens, underwrite conservatively, and keep your head in the game. If it was easy, everyone was doing it. Right. And once that happens once, you know, with an agent who doesn't pick up the phone when you need them or a property manager who doesn't do their job, right? Once it happens once, then you know to fire that person. You know to fire fast.

Yeah. You have a better idea of what to look for on the second round. There's no investor who will tell you that they will, they are likely still working with the same team that they worked with when they started investing. Unfortunately, there is, there is that process you have to go through. And you have to do that character due diligence. Sometimes you have to do it while they're on the job. But also, character due diligence can be done prior to hiring them through the network that you built in your initial stages, right? When educating yourself, one building that.

community. Right. Exactly. This is primarily how I get my referrals and how people around me get the referrals because that way you can see what a person is really like through all stages of the job. And typically, if someone has a good relationship, if person A and B have a good relationship and person A recommends you to person B, person B is not going to want to do a poor job because they know that the person who recommended them, who they've done good work for, who they've spent the time to build a good relationship with is suddenly going to get bad feedback, which might jeopardize that client. Right. So the more tied in a given contractor or agent or lender or property manager is with an overall local investor network, you know, the more tied in they are

with that network, the more incentivized they are to maintain a good reputation throughout everyone in that network. Exactly. Exactly. Also, when we talk about character due diligence, there's two things that I like to look for as they're going through a project. I like to keep my eyes open so that I know how much I need to manage or whether I want to hire them again. And one of those things is not taking the easy way out in terms of being a yes man or yes, ma'am. You know what I mean? So what I've really appreciated from the people that I've worked with is one they tell me no. You know what, no, don't, don't buy that property, even if I get a commission off of it. No, you know what, you don't need to make that fix, even if you're paying me for it,

because then you know that they have your interests at heart as well. Right. When they demonstrate good judgment, even when it's not in their own best interest. Exactly. And then you know, you can start to build that trust in them because their moral compass is pointing. in the right direction. Exactly. Exactly. And I think the other thing that I really find very important is the ability to take responsibility because in every project things are going to go wrong. You know, sometimes there's a little something that is miscommunicated and you need someone who's going to take responsibility for that. Like if a contractor wants to fix things that he missed in a timely manner without making it difficult or pawning it off on someone else, then you know

you've got someone good or an agent who may be or a property manager who makes a mistake that costs you money. And it's like, okay, what do you need to make this right and comes to the table with you to help make the situation better for you because they know that they messed up? Right. And so challenge number two is getting people to do what they say they're going to do. And the solution to that, again, it goes back to tapping into that local network, a local network of investors, that's critical to long-distance real estate investing.

100%. What about challenge number three then? Challenge number three is what you referred to as traction. What's traction? Traction is defined as the support or interest that is needed for something to make progress or succeed. So staying motivated? I mean, staying motivated can be a part of it. but it's also making sure others stay motivated and keep going with whatever they're working on.

You know, that can be really challenging when you're at a distance because it feels like things can take that much longer. It feels like the people that you hired might not be making that much progress because you can't pop over to just look at it and be like, oh, I see, like the plumbing's done. Oh, I see. The paint's been done. You know, instead you're kind of just wondering like 72 or 89 times throughout the day. I wonder how this is going. I wonder how all the money I spent is being used. You know, it can feel tough.

This is another area where maintaining perspective is important. Like I said before, unless you are an unemployed license and bonded contractor, there's really nothing that you can do to speed up a rehab. Almost every rehab takes longer than you anticipate it. Well, no matter where you, the investor, are located. last year I had what I thought would be like a six to eight week rehab take four months and it was 20 minutes from my house I can paint I can do a couple things I could have done the work but there's no way I was completing that rehab and even another friend of mine who's very experienced and very

successful needed almost a year to finish rehabbing a triplex so no matter where you're investing from, there is the challenge of having to deal with lack of traction, lack of feeling like your projects are making progress when you have money on the line. And it's costing you more money because you're not making the income. Right. And that's something that local and long distance investors both deal with. You know, one thing that I do is I'll often have contractors face time with me and do a walkthrough where they give me an update on, hey, here, here, here's how the project is going. And then they'll just face time with me and show me the progress. And that's how I know what progress is being made. It's those daily check-ins, right? Or those

every other day check-ins. And it doesn't have to be long. Sometimes it's a five-minute face-time. Yeah, that definitely helps a lot. And so the combination of all the things that we talked about can cause a lot of stress when it comes to real estate investing, which is frankly enough to drive a lot of people out of the business like that is in your head but it is a massive challenge because if you're sitting there going I don't know what's going on I wish I could do it this is taking too long I don't know what I'm doing all you're doing is feeding yourself this total feedback loop that is 100% negative right it's really really important to be aware that it's not going to be easy they're going to be challenges and it's going to be stressful but you need to do that internal work

to make sure that you keep your eyes on the prize, long-term gratification, wealth in real estate and income in real estate isn't built in two months and six months, in 24 months, even sometimes in 36 months, right? It's like over the course of several years. So everyone, and everyone goes through these struggles, literally everyone on every project goes through the same thing. And it is up to you to manage that stress so that you can stay in the game and have a way to keep stepping up to the bat and swinging so that you can keep pie.

on those investments over time. Every investor has a horror story. I would encourage you to talk to your community and your network and ask them, what, like, what is the toughest thing that's happened to you? Personally, within, I think, like a five to six month period between last fall and this year, I lost tens of thousands of dollars between different KAPX disasters that happened across different properties that I never saw coming. And I thought I was all alone.

I literally drank a bottle of wine by myself on the couch one night and was texting my friends until they told me, hey, we've been through this too at some point in time. And they have been very, very successful. So that really helped me realize, okay, yeah, I'm on the right path. I just have to make sure I have reserves and I just ride this out and I learn from it and keep marching forward. So we've talked about four challenges so far. We've talked about, number one, fear, and how the antidote to fear is knowledge and network. We've talked number two, holding people accountable, and how the solution to that is hiring people who are referred to you by local investors. We've talked to number three, traction, staying motivated and keeping your team motivated. And we've talked to at number four stress. So let's talk about the fifth challenge of long-distance real

estate investing relationships. Yeah. So isn't it much easier for you to feel like you've bonded with someone and you've made a friend when you can have a drink at the bar or have brunch together and just talk in person? Right. When you're investing in real estate at distance, it is like it is so much harder to make those friendships. It's hard to know who to meet. It's not like, okay, well, we're going to lunch. I'll bring this other person, you know, because you're just kind of like this disembodied voice from another part of the country. And both sides don't have that humanizing element that help people bond when they meet in person. Right. The thing is, we've just been through two years, basically, of a pandemic. And you know what?

Like, business didn't stop. The world didn't stop turning. Wealth was still being created. People figured out how to manage this, you know, and we have the technology. So virtual happy hours, Zooms, masterminds, there are so many ways to still build those connections so that you can at least build kind of like the scaffolding so that when you are able to go out there and meet in person and really make those connections concrete, you can do so. There are still investors who are very successful building relationships at a distance and building business at a distance.

it just takes a lot more intentional effort to do so. Right. It's remote relationship building. And we've just had two years of a pandemic to learn how to build relationships over Zoom. And that's very much what it is. It's Zoom, it's email, it's text messaging, it's WhatsApp, it's Skype, it's FaceTime. It's using all of these tools that facilitate remote relationship building and remote communication. the very tools of the pandemic.

Yeah, exactly. And we know how to use them by now. Yeah, that's one silver lining is that Zoom conversations have become far more normalized. That basically wraps up the challenges that we see investors struggling with the most. And the things that actually drive investors out of the game or stop them from investing in the first place. So one more time, that's Fear the Unknown. that is being able to hold people accountable, traction, stress, and relationships.

Those are the five challenges of investing long distance. Let's take one final break for a word from our sponsors. And when we come back, let's talk about the benefits of long distance investing. Woo-hoo. And we're back. For this last section of today's episode, we're going to discuss the benefits of long-distance real estate investing.

My favorite part. I've been thinking about buying an income property in another state, but I'm not sold. Why should I think about investing away from where I live? So let's talk about four benefits that you enjoy when you invest in real estate long distance. I love that term in joy, by the way. Oh, thank you. That's very accurate. So these four benefits, and we're going to elaborate on all four of these, number one is the ability to compete, the ability to know that you have a decent chance at winning that bid.

That's benefit number one. We're going to talk more about that in a second. Benefit number two, diversification. You get to spread out your capital and your investments in a way that reduces the overall risk of your portfolio. You diversify into other asset classes, other locations. Benefit number three, your returns, the price to rent ratio in the area where you're choosing to invest and the return on your capital relative to what you've invested. And number four, repeatability, meaning the ability to take what you've learned and reapply

it over and over and over again, lather, rins, repeat. Those are four benefits, and we're going to elaborate on all four of those right now, starting with benefit number one, the ability to compete. There's a reason that we started off with the ability to compete as benefit number one because it is the ability to compete that sometimes keeps investors from ever starting investing in the first place. So when you live in a high cost of living area and you look around and all the homes are like minimum a million dollars. Every time I say a million dollars, I want to pretend to be

awesome powers, but that's neither here nor there. But yeah, everything is like a million dollars. And you're like, how on earth, A, am I going to save up that down payment in a decent amount of time? B, how can I make this cash flow and actually get where I want to be? And C, people are coming up with entirely cash offers. So I can't even get this financed. I'm having a hard time finding the down payment. I can't put the entire million dollars on the table as a cash purchase. So why do you even start? It doesn't make sense. Right. Right. Yeah. Investing in a high cost city is very difficult and probably not worth doing in a lot of cases. In a lot of cases, especially if you're focused on the cash flow. So when you move your investment focus to another

city that is maybe at a lower cost of living, but still has a strong economy, you can see the price points drop. When I was living in Boston, I couldn't compete in that market at all. And that's when I eventually found Indiana and Indianapolis to invest in. The price points were much lower. And that allowed me to just get my foot in the door and place more competitive bids so that I can actually start learning and start getting a little bit of practical experience under my belt. The thing is, the ability to compete almost has kind of like a snowball effect, because the more often that you can step up, the more you can build relationships needed to get

the better deals and get better returns, and then you can step up even more. So that's another thing that I really like about this aspect, right? Because even if you do have the ability to invest in a higher cost of location in that million-dollar duplex, you have two units. Let's hope two units don't require that much work. Whereas if you have 10 units, that does require more work. And then the local contractors will see you as someone who gives them repeat business and they will take you more seriously and treat you better as a highly valued client, which then increases your returns. You have more money in your pocket. You can more quickly save up for that next down payment or cash purchase, however you want

to go about it, rent and repeat, and it just kind of snowballs on itself. And the thing is, when you're competing for lower priced properties, you know, once you, let's say you take out an investor loan, you have a 25% down payment on a $100,000 property, right? So you save up $25,000. So you save save $30,000 just to have some extra cushioning, you buy $100,000 property, you hold it for two years and that $100,000 property, if it was the last two years where property values have gone up substantially, you know, if you did that two years ago, that $100,000 property would be worth $120, $130,000 right now. And not to say that property values are going to keep climbing in the future the way they did in the recent past, but

if a person two years ago had saved up $30,000, purchased a $100,000 property, held it for these past two years, that property might be worth between $120 to $130 today, which means that you've now earned in equity the value of that down payment and you now can borrow 80% of the equity that you hold in that property and pull that back out and use it to buy. the next property. And so that's how the flywheel starts spinning, right? The more properties you own, the easier it becomes to buy the next one. Going from zero to one property is much more difficult than going from four properties to five, right? And going from four to five is much more difficult than going from seven to eight or nine to ten. And when you're competing in these low, low cost markets where properties are inexpensive, then accumulating more properties in places where properties cost less is a huge benefit to deciding to invest in places where properties cost less, which if you don't happen to live in a low-cost city, that means

long-distance investing. So that's what we mean by the ability to compete, and that's the first to four benefits. The second benefit is diversification, which is, to recap, spreading out your capital and investments in a way that reduces the overall risk to your portfolio of investments. The cool thing about diversification is that there are many ways to diversify, and you can choose based upon what is the best fit for you. For the sake of today's discussion, we will limit it to four. you're welcome.

So these four, which I will dive into in a second, consist of economic diversification, strategy-based diversification, business cycle diversification, and asset-based diversification. All right, so four types of diversification, economic, strategy, business cycle, and asset-based. Let's talk about the first form of diversification, economic diversification. so that's basically being able to invest in different economic areas you want to choose more diverse areas that will be less impacted by events in a single market like an employer a large employer relocating or even something that sounds as mundane as property taxes being increased if you only knew how to invest locally or in one specific market that you had experience in

because it was easier to do and you didn't know how to analyze different markets versus finding a market that had more employers or a stronger economic track record, you wouldn't be faced with trying to save a portfolio of a few properties if the employer shuts down or your returns are suddenly a lot lower because of the fact that property taxes have increased and people can't quite afford to live in that area. And so demand drops. And then when demand drops, property prices and rents will follow suit.

So essentially, if all of your properties are concentrated in one geographic location, then you are subject to the risks of that specific geographic location. Whether it's, whether that's natural disaster risk or tax risk, employment risk, or population decline risk, subject to the risks that come from consolidating all of your properties into one geographic location. But if you spread your properties into multiple geographic locations, whether that means multiple neighborhoods in a city or multiple cities in multiple states, that gives you the ability to diversify your risk. I've got properties in Atlanta, Las Vegas, and Indianapolis. And so I know

that I've diversified some of my risks, because if something happens that impacts the economy of Indianapolis, unless the thing that happens is nationwide, it's unlikely that that thing will also impact the economy of Atlanta or Las Vegas in the same way. And real estate is hyper local. I only invest in Indianapolis and the surrounding suburbs, but the properties are in different counties. So if something happens in northern Indianapolis, where there is an employer that feeds that part of the city, but not southern Indianapolis,

I have properties in both northern and southern, right? So my southern Indianapolis properties are impacted very differently, and they're still okay. So you can invest in economically diverse areas on a macro scale by going to different states or even just spread out that risk by going to different parts of a city. Right, exactly. But it's the ability to analyze that is really important here,

and that is what we want to teach you, the ability to analyze different parts of the market so that you can make the decision that best suits what you need as you grow as an investor. So that is economic diversification. Let's talk about the second form of diversification, the second out of four, strategy-based diversification. Yeah, so that's it being able to,

invest in different markets so that you can invest in different asset classes, which can drive different strategies. If you want to be a flipper, if you want to buy a distressed home, fix it up, and sell it within six months or a year, and retain that income, or if you want to do something a little bit more residual, like buy a multifamily small apartment building, the markets can very different for that, you know? And so you would have to find the market that best suits what your passion about and where your skill sets lie. Right. And so one way to diversify in terms of those strategies is you could, you know, I know some people who do this, they will buy multiple properties, flip half of them, and use the proceeds of those flips to pay down

the other half, for example. But where they're buying their flips is going to be different oftentimes from where they're buying their buy and holds, right? They're going to be different neighborhoods, different age and condition of properties. There may even be different types of properties. It might be that they're flipping single family homes, but they're buy and holding fourplexes. Right. And some markets might not have that fourplex inventory for them. So they need to be able to analyze different markets to figure out where they can buy fourplexes. One strategy that's kind of very hot right now is medium-term rentals to those in medical professions, like traveling nurses. And let's say you have a passion for those in medicine, and you want to be able to also build a business off of that while helping them and providing good housing for those who work in hospitals.

You would have to find a market or an area where there are a lot of hospitals in that vicinity in order to be able to do that. So that's another way you can diversify into that and then maybe have another portfolio somewhere else that has those quadplexes for your more, I guess, generic long-term rentals. So that's strategy diversification. And that is also facilitated by opening up the map. Like when we talk about long-distance real estate investing, really what we're talking about is opening up the map so that you can pick whatever environment, whatever city and state is most conducive to the type of. investing that you want to do, you know, to the strategy, to the approach that you want to execute. And that map, I mean, it really opens up to you when you are no longer tethered to your own backyard. That's why we're having such a long conversation about all of the

different ways that you can diversify your investment holdings by virtue of opening up the map to yourself. We've talked about economic diversification. We've talked about strategy diversification. What is business cycle diversification? Business cycle diversification is knowing that real estate, again, is hyper local. And just because something is happening in one market, all markets won't necessarily follow suit. Just because everything's been in a boom cycle at this point for a while doesn't mean all markets are going to remain in boom cycles. So, and different cycles of the market mean that there are different returns that can be achieved. So let's use an expansion phase to start off with because that is, I think, what we're most familiar with and what we have the most recency biased towards at this moment.

Okay. Expansion phase, strong wage and job growth. There's dropping inventory because demand is outpacing supply. Property prices are increasing and deals are hard to find. That sounds pretty familiar to me. Right. So with those dynamics and especially the increasing prices, it can be really hard to find cash returns on properties when you're looking for that residual income from a buy and hold. Because property prices are increasing, the mortgage payment that you make every month is suddenly going higher, which then shrinks the gap between the mortgage and the rental income you'll be bringing in, which is the cash in your pocket that you are looking to build this real estate portfolio.

on. That is the backbone. However, if real estate prices are continuously increasing, like they have been for the last couple of years, what about thinking about a fix and flip scenario? So you underwrite your numbers. What has been happening is a lot of people underwrite their numbers for scenario A when they buy it in January. By the time it has hit the market in September, all of a sudden, the scenario is different and the selling prices are higher. And that likely will not continue to be the case indefinitely. But that is what's been happening, making, fixing, and flipping a very attractive option to many. On the flip side, maybe not quite the flip side.

Yeah, that was totally unintended. I'm more clever than I think. So on another aspect of business cycle diversification, what if. you have another market that is entering the recovery phase. So they've gone through some kind of struggle. Real estate prices have dropped. And now they're starting to plateau after that period of dropping. And maybe they're even just starting to increase a little bit.

Demand starting to increase a little bit, but people are still nervous about investing because everyone is geared, their mindsets are geared towards that recency bias of a negative and a difficult economic time, right? So property prices aren't increasing that mortgage rate after you buy will kind of allow probably for a little bit more of that gap between the mortgage and the rental income, which will allow for better cash flow. And this could also be an opportunity to optimize appreciation because if you're going up the recovery cycle, the demand is going to continue to increase as the property travels up and the market travel. up that recovery phase, which means that demand is increasing, which means that prices are increasing.

So largely zooming out, as a person explores different locations, the business cycle in one given location, which is going to be highly influenced by the industry, the employers, the factors that impact that particular location, will be different, right? What's happening in Detroit is different than what's happening in Orlando. And so as an investor, you can choose to buy properties that are in a location that reflect a specific stage of a local business cycle by virtue of having the map open to you. All right. Let's talk about the fourth form of diversification, asset-based. Cool, cool.

So this refers to having, on one hand, more units for X dollars. versus the other hand of having fewer units for the same amount of dollars. So if I'm going to put that into a real-life example, that means that million-dollar duplex in a high cost of living location, what if you took that million dollars and took it to the Midwest, let's say, and we're able to buy 10 units with that. You're able to diversify your stream of income across more units. That way, if you have your 10 units in the Midwest and one person moves

out, you still have the other nine units to bring in income. Whereas if you have just the duplex in the high cost of living location and one person moves out, you've lost half your income. Right. Exactly. So the more units you own, the more diversified you are. And all else being equal, you can own more units for the same amount of money in a lower cost location. Zooming back out, so what we're talking about right now are four benefits of long-distance real estate investing. Benefit number one is the ability to compete. You can actually place competitive bids. Your money goes further when you're investing in a lower cost area. Benefit number two is diversification. And that diversification shows up as economic, as strategy-based, as business

cycle-based and as asset-based, the number of units that you hold. Benefit number three, which we can now talk about next, are returns, the potential to get higher cash returns, as well as to diversify the way in which you receive returns, whether you receive those returns in the form of equity, growth, or cash flow, or a combination of both. So greater returns and a more diversified composition of returns. There can be more arbitrage opportunities between the monthly mortgage that you pay and the rental income that you receive when you do a thorough market analysis and choose a lower cost of living location. So one rule that many investors like to use as a generic rule of thumb is the 1% rule. So that means for the price of the property that you're paying, you should be able on a monthly basis to be able to get 1% of that purchase price in gross rents.

What does that mean? If you have a million dollar home, you should be getting $10,000 in rent gross a month. That's very difficult to do. Whereas if you have $150,000 home, that means what you would need. would be $1,500 in rent per month. That is a much more feasible option to seek out and to bring into your portfolio. Right. Exactly. Particularly if that shows up in the form of, let's say, buying a 300,000 duplex where each unit rents for 1,500 on each side. And the 1% rule is a broad filtering tool that investors use to reduce a basket of properties. So if you're looking

at a basket of a thousand properties and you want to very quickly assess which properties have the highest likelihood of having a good cap rate, then you'll use the 1% rule to just be a blunt instrument that filters through this big basket of properties so that you can then do deeper due diligence on the properties that hit that metric. That doesn't necessarily mean that you buy every property that does hit that metric, nor does it mean that you pass on every property that doesn't hit that metric. It's just a way to filter through a big basket of properties so that you can find a property that has a higher likelihood of having a strong cap rate because at the end of the day, what matters is the cap rate. You know, the cap rate is the

measure of your unleveraged dividend that you're getting on the property. And at the end of the day, you want to get a strong dividend on the asset that you're holding. And to take this back to long distance investing, frankly, you're likely to find higher cap rates, i.e. higher dividends on properties that are in areas where the price to rent ratio is much more investor friendly. And with that, I think we can go on to our very last benefit. Absolutely. So what's our last benefit? Repeatability.

Throughout the series and afford anything in general, the overarching theme is discussing how to think about things. And this is kind of where that skill set really comes into play in the repeatability benefit of investing at a distance. And this just means you're developing a skill set to repeat. repeat the strategy in another area to increase the chance of success. When an area is popular, it gets saturated. You might have to move somewhere else if you want to continue your strategy and to keep getting the returns that you want to get.

And the hardest part is learning how to think about investing at a distance, knowing what you don't know, knowing what questions you need to ask, knowing what you need to look at. And once you've learned that skill set and you've done it once, talk about opening the map. You have so many different options at your disposal once you learn the skill set. Right. I often tell the students in my course in your first rental property, I tell them that the first property is the training wheels property. Anytime you're doing anything for the first time, whether it's your first time riding a bike, your first time driving a car, your first time trying to swim a lap in a pool, anything that you do for the first time, you're going to be a beginner. And

It's going to be a little awkward and not graceful. Like, no one jumps into a swimming pool and swims their very first lap with, like, a perfect graceful stroke. It's a little messy and it's choppy waters. But the more you do it, the more graceful it becomes, the smoother it becomes. And real estate investing is no different. So the first property, yeah, it's the training wheels property. But the more you do it, the better you get at it, just like anything. and when you're in an environment that allows you to buy five or six or seven or eight units

because units are cheaper, then you get to Latherins repeat. You get to repeat this skill set and diversify into a bunch of different units and get better. You know, you're going to know what you're doing at that eighth unit much more than you'll know what you're doing in that first or second one. And then you get confident and you get more efficient and you learn. how to squeeze better returns out of whatever you're looking at. And it just, yeah, the flywheel. The flywheel, exactly.

It really starts to spend then. Exactly. So those are the four benefits of investing long distance. And you'll notice thematically a lot of what we've talked about, we're sort of using investing long distance as synonymous with investing in a lower cost of living area where properties are cheaper and where the price to rent ratio, is more friendly to investors. And of course we're using those synonymously

because you wouldn't invest long distance into a worse market than where you live, right? A market where you can afford less. Yeah, exactly. Exactly. By definition, anybody who is interested in investing long distance is necessarily interested in investing in a market with better priced rent ratios,

lower cost properties, better returns. And so that wraps up our discussion of the benefits of investing in long-distance real estate. The challenges and the benefits, both. Well, thank you, Sonny, for this first Friday bonus episode, Afford Anything Presents, Invest Anywhere. Thank you for having me. Our new First Friday theme. Yeah, this has been super fun. We offer a course on real estate investing.

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We will catch you in the next episode. I hope you enjoyed that episode. Merry Christmas once again. You just finished listening to an episode that originally aired on May 6, 2022, on the topic of four benefits and five challenges of long-distance real estate investing. I hope that you enjoyed it. I hope you learned a lot from it. The website that we listed at the end of the episode is still active.

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