BiggerPockets Real Estate Podcast - Episode 1,000: Real Estate Is Changing, and So Is BiggerPockets

Starting point is 00:00:00 Welcome to the Bigger Pockets podcast, one thousandth episode. This episode is a huge milestone for our show and the community that has helped thousands achieve financial freedom. This is a big achievement, and I wanted to thank you all for your listenership and support over the many years. But this milestone is not just a time to look backward. It's actually a better opportunity to start looking forward and to consider and reimagine what the show is going to look like for the next 1,000 episodes.

Starting point is 00:00:34 So today, we're going to have a full normal episode where I'm going to talk to investor, author, and Bigger Pocket CEO, Scott Trench, about the realities of investing in 2024. But first, I want to take just like five minutes to talk to you about the future of the show and what we're internally thinking of as Bigger Pockets 2.0. And no, we're not actually rebranding or renaming the show, but we have some announcements and tweaks we're making to the show. that I'm super excited to tell you about. So first and foremost, I am going to be the host of the Bigger Pockets Real Estate

Starting point is 00:01:05 podcast going forward. And I am super excited about this opportunity. But first, I want to take a minute and just thank all the previous hosts of the show from David Green and Rob Abasolo to Brandon Turner and Josh Dorkin. All of them have made their mark and made such incredible contributions to the show over the years and help so many millions of investors. So I'm super grateful for all of them. And specifically to David and Rob, thank you.

Starting point is 00:01:35 We're super excited to see what you do next. And if you've been listening to the podcast, I do guest hosts a lot, so you may already know me. But if you don't, I'm Dave Meyer. I've been an investor for 15 years and a Bigger Pocket's employee for more than eight years now. I'm a regular contributor to all the BP media channels. I've written a few books. And I host our sister podcast as well. It's called On the Market.

Starting point is 00:01:57 And I'm sure you're going to get to know me better as the host. You'll learn my story, my investing philosophies going forward. So for now, I'm going to spare you my background. And instead, just want to share with you some of the other exciting changes that are coming with BP 2.0. We are going to make some slight changes to what we talk about on the show and who we have on the show. Because I want to make sure that the show goes back to its roots of hype-free real estate investing. That means we're going to focus on the show. the fundamentals of investing and building wealth over the long term. We're going to leave the

Starting point is 00:02:32 get rich quick schemes to other people and other platforms. We're also going to talk about tactics exclusively that work today here in 2024 because let's face it, back when this podcast started, it was a totally different set of strategies and tactics that you needed to use to succeed than what you need right now. So we need to update that as well. We're going to bring on a lot of investors to share their stories as we always have. But we're going to focus on investors who have authentic, relatable stories and who are willing to go deep on exactly how they attain their accomplishments. And we're going to focus on bring on investors who are coming on the show,

Starting point is 00:03:09 not to sell something primarily, but because they want to provide genuine advice and guidance to our community. And the last thing I really want to make sure we do on the show is focus on tactics that create mutual benefits across the entire investing ecosystem. That of course means for investors, but it also means for real estate service providers like agents and lenders and property managers. It also means making sure that we create mutual benefits for tenants and communities. It's super important to me, and we're going to talk about that more on the show.

Starting point is 00:03:41 And although these are some tweaks, they're not going to be huge changes. There's not going to be some big shift in the show. I just want you to know that we as a team are going to be focusing on the fundamentals of investing and how ordinary people can build wealth through real estate. state, and yes, can still do it even in today's economic climate. This show's not going to have hype, no unrealistic expectations, just candid conversations about how to use real estate investing to achieve your financial goals. So those are the tweaks to the focus.

Starting point is 00:04:10 We're also just going to update a couple logistics to the show that I want to tell you about. First, we've heard you all on ads, and we're actually going to reduce the number of ads that you hear on the show. There will still be ads. This is a business after all, but we're going to take them down the notch. Second, we're actually going to scale down the number of shows we release per week to just three, and that's going to allow us really to focus on the quality of each and every episode. On Mondays, we're going to continue doing our investor stories.

Starting point is 00:04:39 This is our bread and butter sharing the success stories of other real estate investors. On Wednesdays, we have a new format called The Deep Dish. This is where we're going to go into tactics that you can apply to your own portfolio here and now. And on Fridays, we're going to continue the bigger news segment, which helps you understand what's going on in today's economic environments. You can make informed investing decisions. On top of these three episodes, we're going to occasionally have bonus episodes. We'll work on a couple of miniseries. But I just want you to know that these three formats are what you can expect each and every week.

Starting point is 00:05:12 So that's it for my little speech and update. I am so honored, so excited to take on this leadership position in the BP community. I am going to do my very best to make the next 1,000 episodes of the show the best that we've ever made. And in that effort, I would love to enlist your help. I've actually created a URL, biggerpockets.com slash pod feedback, just for you, anyone in the community, to submit their feedback directly to me. I will actually read all the feedback that you submit at that URL. Please don't go on there and ask me for investing advice.

Starting point is 00:05:47 That's not what it's for. It is for podcast feedback. So go to biggerpockets.com slash pod feedback. And let me know what you think of the show, what we could do better. I would love to hear from you. All right. With that said, let's get going. Bigger Pockets 2.0 starts right now with a conversation between me and the personal finance

Starting point is 00:06:05 expert, real estate investor, and Bigger Pocket CEO, Scott Trench. We're going to talk about how real estate investing has changed over the last decade. And if financial independence is still possible using real estate. Let's welcome on Scott. Okay, Scott, so you're an investor yourself. You are the CEO of Bigger Pockets. And to be honest, it's pretty rough out there right now for real estate investors. It feels, at least to me, more difficult than it has in the last couple of years.

Starting point is 00:06:39 So I'm just going to ask you straight up point blank, is real estate still a good idea? Yes, real estate's still a great idea. If you meet certain criteria, if you have a very long-term outlook, if you're going to be active, If you're going to find ways to make things work, if you're going to find opportunities in your local market, if you're going to use different parts of the capital stack in the real estate business to drive returns. So, look, real estate's always been a scary prospect, right? The first or next investment is often an all in bet. And I remember when I was getting started in 2013, I bought my first place in 2014, but in 2013 was when I was doing a lot of the learning,

Starting point is 00:07:17 how we were about to see a bubble pop, right? The Denver Post has a headline from 2013 called Buyers Cotton a Price Squeeze. The housing market already shows signs of a new bubble was a headline from CNBC. We saw similar headlines from the New York Times and Fortune in 2014. And we've seen them every year since. Every year since. I actually went back and chronicled all these in an article called, yes, I'm afraid of a real estate bubble, but I continue to invest anyways. Here's why on the Bigger Pockets blog.

Starting point is 00:07:45 Maybe that should have been the title of this episode. But that's a really good point. You started investing in 2014. Did it feel different to you when you were getting started than the market feels right now? It's hard to tell, right? Like, that's what's so difficult being in this for 10 years. You know, trying to put myself in the shoes of someone new today. What does that look like?

Starting point is 00:08:09 And the best, maybe example to illustrate that is my first house hack, right? I bought a $240,000 duplex. I put 12% down or $12,000 down, 5% down. and the mortgage payment including principal interest taxes insurance and PMI mortgage insurance that comes along with a FHA loan with 5% down was 1550 and each side rented for 1,100. And today, I don't know if those numbers would work. I think that the pity payment would be closer to $3,600 and each side rents for $1,600 on that purchase if I were to sell it at market value today.

Starting point is 00:08:44 So it is clearly different in some ways, but the feeling and the pite of your, the pittier's stomach that goes along with making this all-in bet on real estate, which is almost always is for a first-time investor, I think is the same as just the math. And the numbers are different today. Well, I got to admit, I've been doing this for 15 years and I still get that pit in my stomach anytime I buy a property. I'm still, like, very nervous about how it's going to turn out. So at least for me, the sentiment is the same. Scott, you mentioned back in 2014, this first deal that you got, you know, you're a personal finance expert. You've talked a lot in your content about the concept of fire or financial independence. Like, why back then did real estate strike you as

Starting point is 00:09:31 such an obvious solution or way to pursue financial independence? Yeah. So I was a big follower of Mr. Money Mustache, right? And Mr. Money Mustache's approach to financial independence is get your spending low. When you spend less, two things happen in terms of the fire equation. Right. One is you obviously have more cash with which to invest, but you also permanently reduce the amount that your portfolio needs to generate in order to achieve financial independence. Right. So if I'm spending $25,000 per year at the 4% rule with an index fund portfolio, for example, I need $625,000 in my portfolio. If I want to spend $40,000, I need a million. If I want to spend $100,000, I need $2.5 million. So every time you reduce your expenses, you both increase the rate of accumulation, and you decrease the amount of assets you need to fund financial independence. So that was my all-consuming thought. And a house hack did two very important things for me in that context. One, it allowed me to reduce my housing expenses to close to zero,

Starting point is 00:10:33 which puts a lot more money in my pocket and allows me to have a much lower basis needed in terms of assets to achieve financial independence. And two, it's a good investment in its own right, multiplied by the fact that you can get 95% leverage on the thing. And if you assume regular inflation, regular amortization, nothing special, three and a half percent, you get something like a 250% return on investment in the first couple of years on it. So it's an amazing investment in an average market condition.

Starting point is 00:11:05 Yeah, that, you know, obviously, you know, looking back, it's 2020, but that seems like a no-brainer, absolute no-brainer to do a house hack in that type of environment. But my question to you is, has that relationship between real estate investing and financial independence sort of broken in today's environment? Because prices are super high. Mortgage payments are so high. And when you look at all the data, it shows that renting for a lot of people is actually cheaper and a better financial option than buying a house.

Starting point is 00:11:39 So do you still think if you're someone trying to? to pursue financial independence that real estate is the best option. Look, I think that house hacking is always a super powerful tool in any environment, right? Because yes, it's cheaper to rent than to buy in many markets around the country. In a few markets, it may still be cheaper to rent than to house hack depending on how you're house hacking, right? House hacking is a spectrum of opportunities. But I think that house hacking is a really powerful tool for a lot of folks. I think the problem that people are facing from a real estate investing perspective right now is the fact that because interest rates are so high, someone needs to get really creative about the approach that they're going to take

Starting point is 00:12:20 with real estate investing. They need to do a lot of work to add value. They need to find alternative ways to finance the asset or they need to make major sacrifices on the lifestyle front to get to the same results that I was able to get with a simple duplex purchase 10 years ago. And I think that's fundamentally the challenge that people are struggling with right now. And I think, yes, it is harder and it is less appealing to a lot of folks that are just getting started in their journey. We see that in the numbers, right? There are 1.3 million investor transactions in 2021. There were 760,000 in 2023. And there are even fewer. I think it's like four or five percent drop an investor activity in 2024 versus 2023. I do want to talk about experienced investors

Starting point is 00:13:02 in a minute, but let's just stick with this new investor idea for just one more question, Scott. If that's the case, then who should be investing and getting started in this type of climate? The person who's going to be successful in real estate long term is going to be somebody who spends less than they earn, who is capable of accumulating liquidity into their life, who is willing to defer gratification and move into a place that may be a sacrifice, someone who's maybe willing to rent by the room, someone who's maybe willing to do the work to short-term rental a property, someone who's willing to maybe self-manage on that property. These are all going to be key advantages for an investor going into a long-term journey with real estate. And that person has a great chance to get rewarded with the long-term appreciation, long-term rental growth, and maybe even some short-term cash flow if they're able to find and utilize some of the creative strategies that the market is offering to investors right now. That's a great point. And it's not really that different.

Starting point is 00:13:58 Like the profile of person who's going to succeed in real estate is probably not changed, even though the tactics have. I mean, I personally lived in my friend's grandma's basement for three years after I bought my first property because that was cheaper and I could rent out the units in the house that I had just bought. The house I had just bought would have been a much nicer place to live than my friend's grandma's basement, but I did it anyway. And so I think that just underscores the idea that even though in retrospect, it was easier back then, it's never been easy to go from someone who, has never bought a property or who's relatively young to having a hugely successful real estate portfolio. It's always taken work, a bit of sacrifice, and some creativity. Absolutely. Yeah, but the long term math of, again, three and a half, whatever you want to plug in for the long term appreciation rate, long term rental growth, those are the drivers. Those are the fundamental reasons why we

Starting point is 00:14:55 invest in real estate as opposed to alternative asset classes. It is an inflation-adjusted to store of value and an inflation-adjusted income stream that you're getting with most types of residential real estate investing. And that's why I do it. And that gets multiplied again by the leverage and then your creativity and the skills you bring to bear on the property, the sacrifices you're willing to make to ensure that return. And that profile remains unchanged. What you can't do is you can't put 25% down on a random property across the United States and expect blowout returns like we got over the last couple of years, right? Another big story in this whole journey is that of the average American home buyer.

Starting point is 00:15:35 I just wrote an article on this on this the other day. And it was like, the average thing that happened in 2019 was somebody bought a house for $258,000. That's a median home price in 2019. Yikes. Then by 2021, that thing goes to 397 in value. And interest rates fall from 4% to 2.85%. So the median American who bought in 2019, saw their property go up 12, if they bought it with an FHA loan, a 12-fold increase on their down payment in two years.

Starting point is 00:16:06 And they refinanced at that point in time, pulled $52,000 out. Again, this is the median or average scenario here, right, that's going on. And reduce their payment by $100 all in one stroke. Like, that's not going to happen. That's the weirdest best return you're ever going to see in really any type of asset class. that is of any type of scale. I mean, it's just an absolutely absurd situation. That's not going to happen. But I am willing to bet on a three and a half-ish, four percent long-term inflation rate and long-term in rents and prices on there. And all of my strategy really revolves around accessing that

Starting point is 00:16:46 in a long-term sense. And that's okay. I think a lot of people are holding on to this like amazing year, amazing couple of years and expecting that to happen again. But real estate was a a really good investment asset class before the pandemic, before the great recession, for decades, even when we saw what is the long-term average of appreciation, which Scott just said, I think it's like 3.4%, 3.5%, something like that. It was still a really good way to pursue financial independence and a long-term wealth. And I think Scott and I agree that that has fundamentally not changed. We've got to take a quick break, but I will continue our conversation with Scott. trench after the break. Do you ever notice how every passive investment somehow turns into a very

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Starting point is 00:20:16 Is you're thinking any different for experienced investors and how they should be considering today's market? I'm seeing an interesting problem emerging on the Bigger Pockets Money podcast, for example, right? So we just interviewed a couple, they're worth $1.5 million on a recent episode, and they had a handful of properties. They're on paper excellent, right? They've got 50% debt to equity ratios, but they're not really yielding enough cash flow for them to feel confident retiring. Their lifestyle expenses say they should be retired at this point in time because they spend like $50,000, $60,000 a year, but their portfolio is not actually generating that cash flow. And so I think that there's three options that folks could face right now if they're experienced investors.

Starting point is 00:21:00 One is lock in. Let your properties amortize. Let them run off. Be thrilled with the fact that you've locked in a 30-year mortgage at 2, 3, 4 percent and just ride that thing for the next few decades. That's great. That's what most people are doing right now in the market. That's what's evidenced by lower transaction volume. People aren't selling right now.

Starting point is 00:21:22 Is that meaning that lock in with existing price? properties or continuing to buy new properties with fixed debt? So that's the problem that a lot of experienced investors have, right? Is they don't have a lot of liquidity to buy the next property with that debt. So they're like, what do I do? Well, the last couple of years, folks have been burring or refinancing the properties or otherwise stockpiling assets and then using that to buy the next property. So this couple, for example, does not have several hundred thousand dollars to put down on the next property. And so they have to make a choice here.

Starting point is 00:21:53 So, like, what are those options, right? One is, write it out, right? I have a couple of properties. I'm not selling them. I got three, four percent interest rate mortgages on them. I'm going to let that ride. Okay. Now, if you do have liquidity, I think that a lot of investors are thinking about it in more

Starting point is 00:22:09 simple terms and are simply putting more down. They're putting down, bigger down payments, and they're cash flowing the properties as a result of that. Again, a symptom of that dynamic is lower transaction volume. Many of the purchases being done today are by people with more than. liquidity. And by the way, a lot of these creative strategies like subject to or seller financing deals, for example, typically require that extra liquidity because if someone's selling their house for $500,000 and has a $300,000 mortgage on it, well, they're going to need $200,000

Starting point is 00:22:41 to make that situation work, right? That's, you know, only in a couple of cases someone can be able to buy that with no or very little money down. So that's a really good approach that's available to a lot of investors in today's environment. And the third, third one is to make kind of a harder choice, one that the math doesn't support, but maybe the feeling of financial freedom does support. And so this would be paying off an existing low interest rate mortgage, right? Let me give you some fire math on this. Suppose we have someone who's close to their fire number, ready to retire, but doesn't quite feel right about it because of their existing portfolio, right? They have a $500,000 mortgage. That mortgage is about $2,000.50,000.

Starting point is 00:23:23 $50 per month just in principle and interest. Well, if they pay that off, that's $25,000 a year, right, in P&I payments, well, if they pay that off, their fire number gets reduced by $625,000, right? And they might feel better about actually quitting their job or leaving the environment. And so despite the fact that they have that low interest rate payment, some people are opting to pay off their properties. And I think there's some really compelling fire math to that. There's also compelling math to paying off a 7 or 8% interest rate mortgage. If it can make sense at 3% in the example I just used, it can definitely make sense at 7 or 8%. And if you're not a professional investor really adding a lot of value or build it working a system, that's a guaranteed post-tax

Starting point is 00:24:11 return, which is pretty good in the context of historical averages. So that makes sense. So the three where one, paying off your mortgage can reduce your overall expenses and can actually move you closer to financial independence. The second was, if you have the liquidity, then you can put more cash down. That's something I've been considering for sure. And then number three was to lock in fixed debt and just hold onto it long term. I agree with all of those, but maybe I'm I'm a little nervous now because you didn't mention one of the things that, or maybe two of the things that I've been doing. And so now questioning myself if those make sense. Yeah, well, look, I think that's it, right, is everybody's kind of stuck here. The fact of the matter is

Starting point is 00:24:56 one of the biggest assets you can have is that three, four percent interest rate mortgage. So I think a lot of people took advantage of that. And again, now they're locked in. You know, if a homeowner moves down the street, that median American I just talked about, right, who refinanced their property at 297 and 2021 at 2.85%. If they moved down the street and by the same house over again with the same mortgage, their payment goes up by $800 a month. And so I think that most people in today's environment that own property are choosing option three, or the first option that I presented, which is lock in those properties and let it ride. And as liquidity slowly accumulates, making the next investment, whether that be in stocks,

Starting point is 00:25:40 real estate, private businesses, bonds, or whatever. But I think that that's what's happening right now. And that may not be the worst choice for a lot of folks. Yeah, I feel locked in on my properties in Colorado. You know, Scott and I both started investing in Denver. I still have some properties there. And a lot of them, I guess all of them, have very low interest rates on them. And one or two of them are performing at a level that I think, in terms of cash flow and revenue, are performing at a level that if it were 2021 or 2022, I would have sold those properties. I would say, hey, this one is not giving me a good enough return.

Starting point is 00:26:19 I'm going to trade out for something better. But right now, there isn't really anything better. But also, I'm not trying to retire. And so I can wait for two or three years or five years, even if I have to, for that revenue to improve, because they are still cash-shal positive. It's not like I'm bleeding money on them every single month. But they're still doing decently. They're not my best deals.

Starting point is 00:26:42 but I would rather hold on to them for three or four, you know, unoptimized years so that in 15 years, I still have that 3% mortgage rate because I'm going to be pretty happy about it 15 years from now, which I think just sort of underscores this idea of time horizon and like what you want, where you are in your investing journey and time horizon really dictates tactics because for people like Scott and I, I don't want to speak for you, Scott, but I hope you don't retire anytime soon. You know, we are probably down to weather some of these storms, whereas if you're trying to actually make that retirement, you might want to pivot to Scott's third option, which is like take your liquidity, pay down your mortgages, because then you can have that cash flow much more immediately. Yeah. And I don't know what it is about the market or whatever, but recently, you know, I like to get coffee with members, especially the Bigger Pockets Money community on a pretty regular basis.

Starting point is 00:27:35 And lately I've been talking to a lot of millionaires, like two to three, three, and a half million dollar net worth folks. And they don't have a math problem. They have a leverage problem, right? If they just like, it's like, if you just pay off a couple of properties, you're done. You're way past the number of cash flow that you need there. But I can almost guarantee you that if you pay off those mortgages, you're going to have a lower net worth number in 20 years.

Starting point is 00:27:59 But you'll be free now and feel really confident about your cash flow and lifestyle. And that's, I think, the choice that I'm trying to get at earlier is that's not a math problem. No matter how you build your spreadsheet, you are going to be richer if you assume reasonably close to long-term historical averages for stock market returns or, you know, appreciation, rent growth, all those kinds of things. But you may be free today if you make a couple of big moves that are suboptimal math. And I think that's what I've been really grappling with in the context of this higher interest rate environment. Now, a couple other things that get me going on this. One is lending. So a year or two ago, I'm like, oh, interest rates are higher,

Starting point is 00:28:33 I'm going to lend. Simple as that. Boom. Here's the problem, right? I wouldn't and got into hard money lending. I read the book, Lend to Live, by Oursiers and Beth Johnson. And I got into it. And it was great. It was as advertised, right? For me, at least. I bought a hard money loan.

Starting point is 00:28:50 I bought another one, right? So these are two smallish hard money loans. One of them went perfectly according to plan, got paid off. I re put it into the next loan, another set of due diligence. I've done several of these to this point. All have gone according to plan. My last one should. mature in the next two or three months, and I'll get it back. Here's a problem. I earned a blended

Starting point is 00:29:11 13% interest rate on these notes, but I'm in a high tax bracket. So really, it's closer to seven or eight percent after tax yield. And if I just bought the property underlying the asset, I would have gotten a three and a half percent average long-term yield plus a five percent cap rate on the property for an eight or eight or so. And that would have been essentially tax-free or heavily tax advantage with really good tax operations. downstream. So lending, even at those absurdly high interest rates, which do require constant recycling of loans, constant new due diligence on those types of things, that's a best case scenario for lending. I think that one can reasonably expect still wasn't as good as just a paid-off

Starting point is 00:29:53 rental property in my mind after tax for me. Now, where it could be really valuable is, let's say I was to retire and my income from ordinary, you know, W-2 sources was to drop to close to zero or to a much lower tax bracket. Well, now all of a sudden that 13% yield is actually closer to a 10 or 11% after tax return. So that's a really powerful option. Again, for that person who's thinking about deleveraging. Should I sell off one or two of my most painful properties, take that money and put it into something that does earn simple interest, but I'm going to be in a much lower tax bracket after retirement. So those are the thing, the really kind of intricate games to play with thinking about different parts of the capital stack. And I'm glad I did the experiment because I feel

Starting point is 00:30:30 comfortable with the idea of lending and earning interest like that and using that part of the real estate capital stack to drive returns. But it doesn't make any sense while I'm continuing to work and earning a W-2 income and having a lot of these other sources of income going on. I also have gotten into lending a little bit, both in passive ways with funds and recently have bought and participated into sort of hard money loans. And I'm treating it sort of as a learning experience because I agree with you. When you factor in the taxes, it's always taxes. They just come back and bite you in the sometimes. You know, you look at these headline numbers and they look so great. But it's true. It's not necessarily the best. But I want to learn how to do it because I think, you know, as I approach in a decade or two,

Starting point is 00:31:21 the time, what I do want to stop working full time, I think lending is a fantastic way to do that using real estate. And so I kind of want to learn slowly and start building my skill set there. But I agree with you. I don't necessarily think it's as good as it's advertised. And it is learning, at least in my experience, a pretty different business. It feels different to me than learning how to operate a small portfolio of rental properties. And it brings us back to another question here, which is for someone just getting started on the journey to financial independence, that is not a good tactic, right? It seems like a great return. That's a really terrible way to compound that growth towards long-term, you know, that long-term goal of becoming a millionaire or multimillionaire and actually having

Starting point is 00:32:06 the ability to retire early from a portfolio. Like, what does that person do? Well, I think we're back to house hacking. We're back to earning as much as possible, spending as little as possible, finding creative ways to use a variety of assets, including real estate to do that. But really, I think that if you're going to use real estate, at the end, whatever that, whatever those creative tactics, whatever that value add, whatever the local market that you're in gives you, it's really the compounding effects of leverage that you have to trust or have to rely on to drive you toward financial independence. And you have to figure out how you can do that creatively and responsibly. Yeah, that is very well said. It's kind of like a diversification

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Starting point is 00:35:23 Welcome back to the show. Let's get back into my conversation with Scott. And Scott, before we let you get out of here, I have one question about a tactic and strategy that I'm using, and I know that we disagree on. And so we both started investing in Denver. I obviously, I live across an ocean now. And so everywhere is long distance investing for me. And I decided about a year or so ago to start investing in what I would say are more

Starting point is 00:35:53 affordable markets where you can. find cash flow. It's not amazing cash flow, but you can find MLS deals with cash flow. I like this tactic. It's been working out great for me. I know you don't do it. And I'm curious, why not? I don't do it because I'm local and I believe I can get advantages by operating locally, knowing the people that I work with and having the option to take over management and those types of things. If I was in your shoes, Dave, I'd absolutely go to the best market that I could possibly find and invest there. I think it's a interesting question about over the next 25 years, is there a spread? Like, what I actually get better returns, if I just went to the best

Starting point is 00:36:31 market that you found with your ridiculous analytics brain and crazy data sets, would I actually get a better return if I just went there instead of investing in Denver? Or does the 5 to 10% advantage in operational results and maybe, you know, subjective opinions of the market that I get by being boots in the ground here? Like, is that there to offset that? And I think that that's the million dollar or maybe $10 million question, depending how long your time horizon is and how much money you make, around where to invest. But absolutely, if I wasn't boots on the ground, I would be doing exactly what you're doing and going to one of those markets. If I were you and you live in Denver, you're rooted in Denver, you have a family in Denver, you have operations

Starting point is 00:37:14 in Denver. I agree. I probably wouldn't do it differently. For me, I'm on sort of on the other end of the spectrum where I'm nowhere in the United States. And so I can invest sort of anywhere. But I'm curious, again, let's just go back one more second to people who are kind of new. You know, if you were new and you didn't have operations set up like you do, where you have that benefit, do you think it ever makes sense for people in a high-price city like Denver or Seattle or San Francisco, whatever, New York, to like pursue out-of-state markets even when they're new and haven't done any investments before? 100%.

Starting point is 00:37:51 So I think there's a couple options. One is we heard a story recently about an individual who moved to like Cleveland or Columbus and started serial house hacking, made several hundred thousand dollars in the last two or three years and is off to the races. That's one option. Not a lot of people are going necessarily willing to do that. Let's say that we had another story from an individual who works at a church choir, right, does not make a lot of income, but was able to build an ADU and use that to drive well in California. So that's an advantage. Like that person is probably not even a good candidate for investing in the Midwest because you still need to generate $10,000, $30,000 per property. Now, there's other folks that are going to be executives or, you know, higher income earners in a place like California where it's just really difficult for them to accumulate the $300,000 needed to make a duplex, a kind of bread and butter duplex cash flow. Those folks are probably great candidates to invest out of state in the best markets in the country for cash flow or high.

Starting point is 00:38:53 depreciation growth, a blend of appreciation and cash flow, like the markets that you suggest. So absolutely, I think it depends on the situation and that the relative income, the relative levels of commitment and energy that one wants to put into it. But I think there's a huge slights of America who should be thinking about investing out of state and doing it very carefully, thinking about both the context of what are the numbers for these markets say. And do I have a network that I can build there, people I can trust on the ground. Totally. Yeah, I say that all the time.

Starting point is 00:39:26 People, you know, it is my fault. I publish these lists. So people are always asking me, like, what's the best market? What's the perfect market? I really think for most people, you just narrow it down to a couple and then where you have the best operations is going to actually win out over the long run. There's a saying in real estate where people say you make money when you buy. And there's definitely some truth to that.

Starting point is 00:39:45 But so much of the money you make in real estate is about operations. And no one wants to talk about operations because it's boring. It's not as sexy and as cool as buying a property well under market value. But just running a business well is how you actually really make money over the long run. Let's go back to that first duplex, right? I bought this thing for 240. It's probably worth $550 to $600 now. So 70% of my return has been probably just from long-term appreciation.

Starting point is 00:40:10 The next 20% comes from how I operated the business. I'd probably be about $20,000 to $30,000 richer if I was reasonably competent in the early years at operating that rental. And then the last 10% at most comes from how I bought the property, right? If I'd overpaid by 20 grand to 240, it would have been immaterial to the overall outcome. If I'd underpaid by 20 grand, it would have been immaterial to the overall outcome. That's not to say, don't worry about getting a good deal. That's a huge thing. You make sure that you get a good deal.

Starting point is 00:40:39 But far more important is letting the decades pass and then how you operate and absolutely. So I think that that's a good time to actually pitch some of the stuff that we're working on here at Bigger Pockets. We have a new market finder tool that has a lot of Dave's input. You can filter by rent-to-price ratio. You can filter by appreciation. You can filter by affordability. You can filter by hybrid growth prospects, all of these really cool features that, and some of which are Dave Meyer originals. They're hand-picked, curated by me.

Starting point is 00:41:14 And we're going to add to those over time as we plug in more and more data sources. I'm excited in the coming months or coming year to get good at supply, which is a huge factor, right? Like that's a super interesting thing that's going on in the market right now is, you know, Chicago. Chicago real estate prices are holding very steady right now. And Austin, Texas prices are plummeting. People are moving to Austin, Texas. That's not the problem. There's not lack of jobs, income, you know, net inbound migration.

Starting point is 00:41:40 There's just so much darn supply coming online, 10% increase in supply, that the market is essentially crashing in real time. And so that's a really important component of this that I think will be really exciting for us to add into the data set here. Well, we got it. We got it coming. Yeah. And then once you have the data, it's the team, right? We have agents, lenders, property managers, and tax and financial planners all in there for each of these markets that you can interview and feel comfortable with. All that's available at biggerpockets.com slash market finder. Yeah, I definitely check that out. Also, great ways for you to find property managers and all that. Scott, this has been really great. And honestly, I really appreciate the sober conversation because the market has changed. It is difficult. Different tactics are required. And I appreciate you giving us your true, honest opinion about who real estate is right for and how people can succeed in this market. Is there anything else you think the audience should know before we get out of here today? I think the last thing you should know is that most real estate investors in this country own 10 or fewer properties and are million.

Starting point is 00:42:44 air next door types, right? These are people who save their pennies, invest for the long term, often are doing some or part of the work themselves and those types of things. And while there's a lot of stories, including on bigger pockets about folks who build really flashy, huge businesses, that's not the norm. 90% of single-family rentals are owned by people with 10 or fewer properties. And that is where many tens of trillions of dollars of American wealth are. And it's totally okay to be in there. And in fact, that may be a sweet spot for driving returns. So, you know, yes, we want to celebrate the big success stories, but it's totally okay to have a small and mighty portfolio as well. And there's a lot.

Starting point is 00:43:23 Real estate is an excellent option for folks as part of that diversified portfolio. I love that. And we're actually going to be doing a show next week about that very topic. So definitely make sure to check that out. Scott, thank you so much for joining us today. We really appreciate it. Thank you, Dave. Do you ever notice how every passive investment somehow turns into a very active investment, somehow turns into a very active.

Starting point is 00:43:44 lifestyle. Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10% below market value in the best markets across the country, without making real estate your second job? That's exactly what rent to retirement does. They're a full service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with bigger pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more.

BiggerPockets Real Estate Podcast - Episode 1,000: Real Estate Is Changing, and So Is BiggerPockets

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