BiggerPockets Real Estate Podcast - 987: BiggerNews: Rate Cut Chances Increase as New "Affordable" Markets Emerge

Episode Date: July 12, 2024

Will the new jobs report finally prompt the Fed to cut rates, leading to you scoring a lower mortgage rate? With multifamily rents still falling, should we fear a nosediving rent trend in the near future? And why are all these traditionally overlooked investing markets becoming the new rental property hot spots? You asked, and on this episode of BiggerNews, we’re answering. We’ve taken top questions from the BiggerPockets forums and are answering them on today’s show! It wouldn’t be a BiggerNews episode without talking about the Federal Reserve. With the latest job numbers pointing in the right direction, is this the final signal the Fed needs before they start cutting rates? Or is there a specific unemployment rate we must hit for the Fed to give us some interest rate relief? Next, we’re talking about the continuously “softening” rents around the country. One sector is actually seeing rents grow, but if you’re not seeing that with your rentals, how do you ensure your tenants stay put and keep paying you rent? We’re giving our expert tips on mitigating falling (or stagnating) rents. Next, we’re highlighting the “affordable” investing hotspots popping up throughout the country as the cost of living increases. Are these markets actually worth investing in, or are the big cities going to have better returns once they bounce back? Finally, should you wait to save up emergency reserves and risk home prices rising OR buy your first property now? We share exactly what we did in the same position when we first started investing.  In This Episode We Cover Fed rate cut updates and how close we could be to mortgage rates finally falling The “softening” rent trend and what you can do NOW to ensure your rent prices stay put  Why the oversupply of multifamily rentals could actually reverse soon  The new “affordable” investing areas that are emerging across the US (and whether we’d buy there) Emergency reserves 101 and whether you should buy now or keep saving  And So Much More! Links from the Show Join BiggerPockets for FREE Property Manager Finder Find Investor-Friendly Lenders See Dave & Kathy at BPCON2024 in Cancun! Ask Your Question in the BiggerPockets Forums Ready to Invest? Grab Dave’s Newest Book, “Start with Strategy” The Fed Stalls as High Rates Cause More Pain—What Is Powell Doing? (00:00) Intro (01:54) Rate Cuts Coming? (11:24) Rents Are “Softening”  (19:09) How to Mitigate Falling Rents  (21:36) New Affordable Markets Emerge  (28:20) Emergency Reserves 101  (33:05) Ask Your Question! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-987 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

We spend a lot of time on this show keeping up with the big forces that shape the housing market and ultimately your investing returns. And as always, we try to break that information down into a way that everyday investors and listeners like you can put into action. But sometimes it's hard to know what to do with all of the crazy and sometimes conflicting information out there. So today, we're starting with the practical and answering your housing market questions. Hey, investors, this is Dave Meyer, and this show, this format you're listening to, is Bigger News.

And today, I'm joined by Kathy Fecky. If you don't know her, Kathy is a co-hosts of our sister podcast on the market. She's also a data-driven investor who extensively studies and understands the economy and housing market, as well as anyone I know. And we have Kathy here today because we're bringing in some community questions and I could use her help. And we're going to get into some really good topics, like what's happening with rents and will soft rents continue? What does the latest jobs report mean for expected Fed rate cuts?

We'll talk about affordable housing and a whole lot more in today's episode. Before we jump in, I just want to mention that we do pull these questions from the BiggerPockets forums at biggerpockets.com slash forums. And if you want one of your questions answers, go check it out. You might get your question featured on the show, but in a more immediate way, you will get advice from thousands of real estate investors who are participating in the forums every single day and can give you advice on whatever challenge you're having in your investing journey and it's completely free. So make sure to check that out. All right, let's bring on Kathy and get into our user questions. Okay, Kathy, our first question is of course about the Fed because people are always wondering.

I'm sure they are asking you about the Fed all the time as they do to me. The question is, quote, do we expect the latest job report to accelerate the eventual rate cuts we're expecting from the Fed? And before I get your opinion, Kathy, let me just explain to everyone what we're talking about here. We have a jobs report that came out on July 5th that has data from June of 2024. And what it showed was that the U.S. added a pretty solid 206,000. jobs last month, which is a little bit better than what most economists and people who spend their time predicting this stuff were expecting. But unemployment did tick up to 4.1%, which is a sign that the labor market is slowing down a little bit. But obviously, with 200,000 jobs added,

it's not at a standstill or anything like that, but it is showing a downward trend. So that's the context for this conversation. Kathy, what do you make of it? Well, I think it's, It is really a sign that we're coming back to normal. And normal is going to feel slow and, like, confusing because we're coming from abnormal. We're coming from a time when, of course, there was COVID and millions of people weren't working. And then as we recovered from COVID, people started to go back to work. So it looked like huge numbers, right? You know, because you've got the normal job growth on top of people coming back to their jobs.

and that all counts in the numbers. So now we're at where we would have been had there been no COVID at about 159 million people working. And so we've caught up. So the numbers from here on out are going to look like we're slowing down, but it's really just coming back to normal and there shouldn't be panic. But will the Fed see it that way? I think so eventually.

They keep saying they want more data. They want to make sure that inflation is under control. So eventually the Fed will cut rates, but the question is when? Will it be September? Will it be November? It'll be this fall. There'll be at least one rate cut, I think. So we're moving in the right direction.

I agree. I think we're starting to see what the Fed has been very obvious and candid about what they're trying to do, which is to create slack in the labor market. And I guess I should probably just explain why that is, because some people might be thinking like why would they be waiting for a higher unemployment rate? Why would they be rooting for a higher unemployment rate? Well, it goes back to this sort of confusing and contradictory dual mandate that the Fed has. Basically, Congress has assigned the Federal Reserve two different jobs.

One is to, quote, unquote, maximize employment. So that is basically stimulate the economy as much as you can. The other thing, though, is they are responsible for, quote, unquote, price stability, which is just another word for controlling inflation. And these two things are sort of opposite each other, because inflation comes when you have an overheated economy. And so the Fed is always playing this balancing game. And during the pandemic, after the fallout of a lot of the economic challenges that came

from the pandemic, the Fed basically was really focused on maximizing employment. That's why they kept interest rates so low. we had stimulus from the government, not from the Fed, but from other parts of the government. And so what we saw was it overheated. They, you know, clearly in retrospect, we could say they made a mistake and they overheated the economy and then we've had inflation. And so the way that they are trying to get inflation under control is to try and create some slack in the labor market to cool down the economy. And that's why Kathy, I think correctly and I agree with her, is saying that, you know, with this slugly, lower labor market that we're going to start to see Fed rate cuts. Now, I'm of the opinion,

Kathy, that the Fed is going to raise lower rates pretty slowly. Do you agree with that? Or what are you expecting in the next, let's say, six months? They're just going to keep their eye on the labor market. And that's why these numbers matter so much. If it really slows down, if there's, you know, a month where it's below normal, then they might cut rates quicker. Because like you said, that's their mandate. It's the inflation and full employment. But I don't know if they've explained to us or if they even know what full employment means. It's not zero percent.

It does not everybody working. Because the problem is if everybody's working, then you've got new jobs that come online and there's nobody for them. So then employers have to increase wages to try to attract employees. reason that creates inflation. So I think maximum employment or what they want is in that 4% range. And we've been in 3% territory in terms of the labor market and unemployment. And they don't like that because that's kind of down to the people who maybe don't want to work or don't have the skills for the jobs that are available. So they want to see a larger pool of people, of employers to

pick from. So I wouldn't want to be a Fed official and have to make that decision of what, you know, how many people should be working or not working, but they have been trying to move into this 4% unemployment rate from 3% for years and we're finally closer to where they want to be. So this is good. This is not recession that everybody was talking about. This is back to normal. So hopefully, hopefully this means the Fed is landing the plane, which, has been the terminology for, can they increase unemployment, have more people lose jobs without creating a recession, which would be lots of people losing jobs? And it's looking like maybe they can, but next year we'll know for sure. It's definitely looking more possible than I thought it was

like two years ago when inflation was at 9% and they're like, yeah, we can get this inflation under control without creating recession. I admit, I was very skeptical of it. that, but it is looking more likely. We don't know yet. But I do want to just also provide some context here. Like Kathy was saying, even a 4.1% unemployment rate right now is like pretty low historically, for reference, when we had the huge recession in 2008, 2009, unemployment went up to 10% in October of 2009. And right before the pandemic, it was in the high three. So it was 3.6, 3.7, I think, was about where we were before the pandemic. So we're still pretty in range with what has been a relatively good economy. But obviously, I guess the thing that

sort of worries me is, like, is there a slippery slope where it's like, it's going up 4%, 4.1% which is happening now, which is good. But then does, you know, we create some condition where it gets critical mass and all of a sudden we're at 5%, 5%, 5.5%. Because that's where things might start to get messy. There's no indication that that's going to happen just yet, but that's obviously what the Fed is going to try and be doing. It's like push this up maybe to four and a half percent, but they probably don't, I would imagine, wanted to go much beyond that. That's what's confusing. Like, what's that number? What are they trying to hit? I have heard that, you know, it's in the 4% range. So we're there. And it seems like they just want to hold things steady and make sure that

inflation really is under control. The latest reports look good. Inflation has been getting closer to the 2% level. They're very clear about what they want with inflation. It's 2%. But they haven't been super clear about what they want with unemployment. But I believe it's around 4%. 4.2%. So maybe a couple more months of seeing those numbers come in line. And I think a lot of people, obviously, Wall Street, saying, come on, cut them already. Like, September's a good time to cut rates. But it will all depend on, on the next job, jobs reports and inflation reports. It'll be this year, though, most likely, unless we see runaway inflation, which I keep telling people, just here's a simple solution. You want rate cuts, stop shopping. It's like stop spending money.

Yes, it's definitely true. But it's not happening. We'll see. You know, people are stretched, but consumer spending has remained relatively strong. So you're definitely right about that. I do want to say before we move on to our next user question, that if the Fed does cut rates, it doesn't mean mortgage rates are going to come down, and it doesn't mean they're going to come down quickly. Even if there's a quarter point reduction,

that doesn't mean mortgage rates will come down that much. Mortgage rates might come down more than a quarter point. There are a lot of other variables that we're not going to get into today. We talk a lot about this on our sister podcast on the market about what goes into mortgage rates, but just know that it's not like a direct one-to-one correlation. Fed cuts rates, mortgage rates go down. There is more to it, but there is, you know, a relationship there.

And I do think if the Fed starts to cut rates, that will be a positive indicator for mortgage rates going into 2025. But we've got more great questions on big topics coming up like Will Rentz continue to soften. Is the affordability crisis creating new opportunities? and what's more important, timing the market or having sufficient cash reserves. We'll get into all of that after this. Running your real estate business doesn't have to feel like juggling five different tools, and the tools are blades or flaming torches. With ReSimply, you can pull motivated seller lists, skip trace them instantly, for free,

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So you know you're making smart offers. Plus, you'll have access to PropStream Academy to guide you step by step. Start your seven-day free trial and get 50 free leads at Propstream.com slash BP. That's P-R-O-P-S-T-R-E-A-M. dot com slash BP. Don't just dream about real estate. Make it happen with PropStream. Welcome back to bigger news. I'm here with Kathy Fecky and we're answering your economics questions. Let's move on to our second question, which reads, rents are starting to soften in some areas. Do you expect this trend to expand? Which investors will be most impacted? And how can owners mitigate risk?

There are actually a couple questions embedded in this one. So let's just start with the first one. which is, do you expect softer rents to continue? And I'll just provide some context here that rents are down, I think, less than 1% on a national basis. It's like half a percent or something, depending on who you ask. That is obviously a big change from what we saw during the pandemic, where rents were going up double digits for many years. And so they are softer. And so, Kathy, let's start with the first question. Do you think they'll stay in this quote-unquote softer stage?

do you think they'll actually start going down in any meaningful way or what what are your expectations? Well, oftentimes when we see headlines about rents or, you know, people talking about rents, oftentimes it's about multifamily rents. And that's, that behaves differently than single family rents. So right off the bat, we need to define what what rents are we talking about. And also that comes down to supply and demand. So there are some cities where there was a lot of new supply of multifamily, you know, new apartments coming online and they are definitely seeing their rent soften because in some areas it's just too much supply and it's too much supply of higher end generally because it was hard to build affordable housing. The numbers just didn't pencil. So most of the new supply coming on is a little bit higher

end, which it normally would be because it's new. Right. So in any of those areas where a lot of new supply came in, we're seeing rent softening. But from everything I've read and seen with demographics and migration, that will be overcome in a few years. It's just this moment in time. We personally haven't seen rents go down in the areas where we're investing because these are areas where there's really strong migration. And we're personally not in those big ticket cities where the multifamily builders came in. I don't know if you know specifically the markets where there was oversupply in multifamily, but I'm going to throw out a few is probably Dallas, Denver, Atlanta, the cities everyone wants to invest in, right?

Yes. Yeah, I invested Denver, and it's so overbuilt there. I mean, you can just tell. There's so much multifamily supply. I feel like everyone says that about their city because they see like a lot of cranes. But when you look at the data, Denver, Dallas, Austin, Reno, a lot of places in Florida. You know, that's just the thing about multifamily is it gets concentrated in certain markets. and they're often in these large markets.

So when you look at averages of what's going on in the country, they disproportionately, you know, like if you have huge change in apartment rents in Houston, it's the fourth biggest city in the country. So, like, of course that's going to impact the national average. But if you're trying to say what number, like total absolute number of markets are seeing rents declined, it's actually pretty small. I would think it's a few dozen at most. Yeah.

And that's why my personal story. strategy is I stay out of those headline cities, those banner cities. Like if I went to Europe or to, I don't know, any other country and said, what American city have you heard of? Those are the cities I don't invest in because the whole world's investing in those areas. I like to be in the little sub markets and the, I guess, third tier, the tertiary markets where a multifamily builder is just not going to go there and there's not going to be those supply demand issues. If you invest in a larger city that's growing quickly and lots of investors coming in. You just have to be aware that this is always a risk of a potential overbuilding in those areas. But Cincinnati, not so much.

Probably not. Yeah. Well, I agree with you. I do think that this trend of softening rent is probably around for a little while longer in those cities. Because when you look at multifamily, you know, forecasting home prices, all these things is difficult. forecasting multifamily rents is actually a bit easier because you know how much supply is coming online years in advance. Like, we know how many units are going to be online and new apartments are going to be entered into Orlando this year. That stuff is public information. It's pretty easy to understand. And what the data shows is that we're still going to have a lot of new supply for the rest of this year and like maybe a little bit into 2025.

And then it's going to start to slow down. And so do I think the trend will continue? Yes, probably for the next couple of months in those specific markets again. But I do think this is generally a temporary thing, because as you've probably heard, there is a lack of housing in the United States. And in my mind, the reason that we're just seeing an oversupply is more of a timing thing, a short-term timing thing, than it is this big macro issue. Because demographics show. us that there is going to be demand for housing, and we do need these units. The problem is, like, everyone's not moving at the same time. And so if you have a market like Denver, I'm just

going to make up the numbers, but like, let's just say there's 4,000 people who need a new apartment every month in Denver. And we just so happen because the way building works, getting 10,000 units that particular month, those 10,000 units are going to have to fight and compete for the 4,000 renters, and they compete by lowering prices. And so we're sort of in this, prolonged, you know, that's just a small example, but we're in a period where we're having that happen over a prolonged period of time. But eventually, in my opinion, these units are going to be absorbed because we just need more housing in the United States. Yeah, and again, just depending on which side of the table you sit on, this is great news because also the issue is affordable

housing. And in a lot of these cities, it's just gotten so out of control because the rent growth was so massive over the past few years. It's really priced people out. And the way you solve that, and here is an example, is bringing on new supply. It always comes down to supply and demand. You can kind of try to control things through rent controls and so forth, but that is not natural. What's more natural is, you know, looking at supply and demand. You want to see affordable housing. There needs to be more supply. So in those cities where you're seeing rents decline, this is a wonderful thing for the people trying to rent. This is what's, needed in those cities where rents have gone up so dramatically. As landlords on the other side of that

table, you just have to know, like, it already happened. There was ridiculous amounts of rent growth in some cities over 20% in one year, you know, during the COVID years. So that's not sustainable. That's not healthy for families. So I see this as a positive thing. But when you're underwriting, you just need to be aware of that, that, you know, always pay attention to supply and demand. and you might be, you know, at one or two percent levels or like in San Francisco, negative a couple percent. It's still okay over the long run. But single family housing in general, at least the last reports I saw, it was pretty strong.

Like rent growth was around, what, 6 percent? Yeah. Yeah. It depends who you ask, but yeah, it's like mid single digits for sure. Yeah. So again, two different markets. Yeah, totally agree. Yeah, it really depends on what you're looking at.

multifamily tends to get impacted more in general. It's just a more volatile asset class than residential real estate in pretty much every way. But your point earlier about underwriting Kathy sort of brings us to the last part of this question, which is how can owners mitigate risk? And for me, for the last year and a half, I've been underwriting deals with zero rent growth for two or three years. I've been wrong. I didn't actually necessarily think that was going to happen, actually. I just did do that because it mitigates risk to this person's point. And then if you're wrong and rent goes up, that's great, but you should not plan on it. So I think that's, I mean, it's pretty straightforward advice, but like, that's what I would say

for mitigating risk is just assume very little rent growth for the next two or three years. And I wouldn't personally like be underwriting negative rent growth in the markets I invest in at least. but I think assuming some flat rent growth or rent growth that is close to the level of inflation is a good way to mitigate risk. Yeah, the business plans for multifamily tend to be very different for a single family. And a lot of times I would see these pro forma's multifamily where they're like, okay, we're going to buy this, we're going to fix it up and increase rents. It's like, yeah, except that now you, if you're in the.

wrong market. You're competing against new supply, brand new. You may have renovated your place, but if I were a renter, I'm going to take the brand new one. So just be, again, it's all about supply and demand. And if you're in a multifamily, if you're in the multifamily business, it's a different business. With single family, you're locked into a fixed rate. It's just a little bit easier to project, right? Because in multifamily, you're generally on adjustable rate mortgages. So you've got to be able to look out three, four, five years in the future because that's going to matter to you a lot when your rate adjusts. Whereas with single family, you're just fixed for 30 years. That's why I love it.

Well, actually, that made me think of one other tip for mitigating risk, which is just try and retain your tenants, especially for single family. Because, you know, if you have single family or small rent, just don't raise rent or just like make sure that your tenants are super happy. because the only way rent's going down is if you get a new tenant, because I've never heard of someone lowering rent for an existing tenant. So I think if you can keep great tenants, like that's another way to mitigate risk from falling rents in this type of market. 100%. All right. Let's move on to our third question from the Bigger Pockets forums, which asks, is the need for affordable housing creating new markets? Thank you to Corey J. Thornt for starting this conversation.

and I'll just read one other part of this forum post for some context. But Corey says over the last few years and even now, I'm seeing investors put their capital of work in areas that locals have previously ignored. In order to afford rent or an investment property or a primary home, will prices start pushing people to forget the first three rules of real estate, which are location, location, and location. What do you think, Kathy? I love this question because it's assuming,

that some of these new markets are not a location, right? But this has been my strategy forever. It's like finding out where people are migrating to. And affordability is one of the reasons people migrate. So it's incredibly important to pay attention where people are going and to find those affordable areas. One of the trends we're seeing is that these downtown areas have gotten so expensive. people are moving out into the suburbs. And that's super normal. That's nothing new. But because of that, it does create new markets where there's tons of opportunity if you find out, oh, this area 30 to 45 minutes out of this major metro has a new employer coming in. So it's not just a trend. Like I'll give an example in California. There's a town called Stockton where people always move to when prices get too

expensive in San Francisco and San Jose, but there's not necessarily the job center that there is. So people have to commute an hour. And that, again, it goes crazy when things get too expensive, but then when if there's a pause in the market, everybody leaves and they go back into the city. I'm not talking about that. I'm not talking about just a temporary fix where people are going to do that hour commute because they can't live within a city. But if you're seeing employers also say, well, this city's too expensive, I'm going to move my operations out into this more affordable area. Now you have jobs created there. And now that's a new, new center. It's a new metro. There's reasons why people would stay there, regardless of what happens with markets in the

coming years. So that's what I look for is like, where are the employers trying to find more affordable places and go with them? Absolutely. I think you hit it spot on at the beginning with this question, which is a great question, Corey, I agree. But the idea that people are forgetting the first three rules of real estate by saying location, I think is a false premise, because it sort of implies that location and what is, quote, unquote, a good location is static. But it's not. It changes with people's preferences. And as Kathy just said, with businesses' preferences. So what was a great location, let's call it downtown San Francisco. I would say that by moving outside of downtown San Francisco right now, you're not ignoring location, location, you're adapting

and starting to change your opinion about how trends have changed because obviously businesses are moving out of downtown San Francisco. And while it may recover right now, it's not a strong market compared to a lot of other places in the United States. And so the key, I think, as Kathy he said is really trying to figure out what is coming next, not what is considered a good location now, because in a lot of these markets, they're what you would call efficient markets. And as soon as everyone knows that it's quote unquote a good location, then it's super expensive. And it's no longer a very good place to invest because words already out. And that's just how investing markets work. The places that are well known and low risk are going to be the most expensive. And so as an investor,

you really need to sort of figure out where you think the trend is going to be. But what I agree with with Corey is that affordability is going to drive those trends. And it sounds like, you know, Kathy, I know you've been talking about this for years, that affordability drives migration, it drives business behavior. And I think since the pandemic, that's only accelerated. Well, and another huge thing to look at, like you said, it's never static. Like the United States is never static. And one of the things we have to pay attention to, and I know you do, is demographics.

We have a massive population ages 60 to 80. Senior housing is going to be the theme for the next 10 to 20 years. Where are these people moving? They're going to be on fixed incomes because they're retiring. So affordability, again, becomes more and more important. Where are they going to retire? If you can get your finger on that pulse, you will benefit over the next 10 to 20 years. The next huge generation, actually the largest now, of course, the millennials are age 30 to, oh gosh, 50?

That can't be. No, God. I'm just saying no. I don't know if it's no. I'm just a millennial. And that made me, I did not like the sound of that. Okay. Yeah.

Well, you all are getting older. All right. Our producer just told us that the millennial generation is technically between. between 28 and 43. So, yeah. But we're getting up there, you know, at least in prime family formation, you know, prime need for like, you know, the traditional sort of American dream style house. Yeah, yeah.

It's just super important to pay attention to the millennials that are not the babies anymore. You know, the babies are the Gen Zs. Millennials are getting older, forming families. They are the biggest, biggest generation out there. and we've got to pay attention to them too. And if you're starting a family, you need affordability too. You want more space. You need a yard for your dogs and your kids. And, you know, so looking at the drivers here, where are you going to be? It's going to be the burbs, right? You're going to get out of those really groovy downtown apartments and you're going to need more space. So these are two

demographics we've got to pay attention to. And over the next 10 to 20 years, you will profit following where these people are going. Very well said. Well, just in summary, Corey, great question, good conversation starter. I think that your premise about affordability creating new markets is dead on, but I would just say that that is still in line with location, location, location. Just think about it a little bit differently. All right, we've got to take one more quick break, but stick around.

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Okay, so let's get into our fourth and last question here today, which is just a gut check question from a newer investor who asks, I'm getting ready to buy my first property, but I want to save up more reserves. I'm concerned home prices will rise so much by the time I've saved up enough in a year that'll have to downgrade the assets I'm considering. buying. Should I risk it and buy now? I know what I think, but Kathy, what do you say? This is such a good question. And I know that feeling of just like eagerness. I want to get in, you know, at all costs. And I understand because asset values will continue to rise. And both in the

stock market and in housing, of course, we don't have a crystal ball, but based on the fact that the U.S. is dependent on printing more money just to pay our debt. That tends to create inflation. The Fed wants to create inflation at least at 2%. So things will continue to inflate, and I get the fear. However, a bigger fear is not having enough reserves. Nothing is worse than that. And I have been there.

It's terrible when you don't know how to make your payments. You could have a tenant who also can't make their payments, and you're going to have to cover all the costs. I would say absolutely wait. Let's say prices go up 5, 10%. in the next year. It's not going to make a huge difference in your down payment, you know, that difference. But what will make a difference is if you can't make your payments. So got to have reserves. This is my number one rule. If you can't, if you don't, find a partner, you know,

get someone else into the deal. Doesn't mean you have to wait. I know plenty of people who have, again, I don't know if this is your first home or if it's your first home, you can house hack and rent out rooms and then you've got some stability there. You've got to have some place to live. There's still ways to get in now, but reserves are the most important thing. Yeah, I 100% agree with you. Cash reserves are, as a new investor, maybe the most important thing. Like, real estate, time is your friend. You need to be able to hold on to your properties and not having sufficient cash reserves is the single biggest risk you have in not being able to hold on, where you might be forced to sell. But I do think Kathy made a really good

good point that I want to reiterate here, which is just that even if prices go up, it shouldn't really impact things that much. Just consider the fact that the average price home in the U.S. right now is a little bit above $400,000, but I'm just going to use $400,000 as an example. If you put 10% down on $400,000, then your payment, your down payment would be $40,000. If prices go up 3% in the next year, which is actually higher than a lot of of people are expecting, but let's just say 3%. Then that home would be worth 412,000. And so your down payment would go up to 41.2%. So, or 41, sorry, your down payment would go up to $41,200. So yes, the price of the asset went up $12,000. But since you're putting 10% down,

your down payment would only change by $1,200. Now, whether or not you can afford that, I don't know. But because real estate is leveraged, even if prices are going up, the proportionate change to how much money you need to put down is not the same. And so I wouldn't worry too much about that. I would make sure that you're just investing from as strong a financial position as possible. I really believe that you need to have your house in order before you start buying real estate and not hope, you know, buy real estate, hoping that it's going to fix some. challenges that you have in your existing financial life and having cash reserves to me is like 101, you got to have it. Yeah. And again, if it's you, if it's your primary you're talking about,

listen, when we bought our primary, it was, we had no reserves. We just went for it. And it's my story. I've told many times. I wrote it in my book. We rented out every nook and cranny of that house. I turned the basement into a rental. You know, we, we totally house hacked it and we made it work and we got extra side jobs and all. And we still ran into times where it was really hard to make those payments. And that's why I tell you today, boy, reserves are the best thing in the world. But when you're starting out, you might not have them. That's why it might make sense to have a partner or, you know, your first property is a flip so that you've got a partner in there to help you and you make a chunk of money and are able to go do it again. But for buy and hold,

you know, that six to 12 months reserves is super important. You need it. Totally agree. Well, Kathy, thank you so much for helping us answer these questions today. This was a lot of fun. If you all have questions that you want me, Kathy, anyone else to answer, go on the Bigger Pockets forums. You'll get really good advice on the forums themselves, but we also might just pick them for a user question show like the one you're listening to today. If you do want to connect more with Kathy, we will, of course, put all of her contact information below in the show notes or the description. and you can also see her on the On the Market podcast that we are on together if you like more economics, news, data-driven types of topics. Thanks again for listening and we will see you next episode of the Bigger Pockets Real Estate podcast very soon.

Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe Content. And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter,

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