Data-Driven Real Estate Investing With Stefan Tsvetkov – Real Estate For Women

 

The real estate industry has been growing faster than ever because of technological advancements and other factors, leading investors to analyze data more easily. Listen to your host Moneeka Sawyer as she talks with Stefan Tsvetkov about the importance of data-driven real estate investing. In this episode, Stefan shares his knowledge and key insights about the market and different scenarios you can review so you won’t make mistakes. If you understand data analytics, you can make better decisions and generate more income. So, tune in to have a deeper understanding of the market and the industry.

—

Watch the episode here

 

Listen to the podcast here

 

Data-Driven Real Estate Investing With Stefan Tsvetkov – Real Estate For Women

Real Estate Investing For Women

I am so excited to welcome Stefan Tsetkov to the show. Stefan is the Founder of RealtyQuant at RealtyQuant.com. It is a company that brings data-driven and quantitative techniques to the real estate industry. They are on a mission to add industry value through education, investment, technology, and analytics. He is a financial engineer turned multifamily investor, analytics speaker, and live webinar host.

He holds a Master’s degree in Financial Engineering from Columbia University. Entering his finance career, he managed $90 billion of derivatives portfolio jointly with colleagues. He was featured on multi podcasts and webinar events including Elevate, Best Ever Real Estate Show, and Investing in the USA. He is the host of the Finance Meets Real Estate webinar series.

—

Welcome to the show, Stefan.

That was a great introduction. Thanks for having me.

Tell us a little bit about you. Give the executive version of how you got to where you are investing in real estate and why you love talking about analytics.

I’m a financial engineer. Originally, I’m Eastern European. I came to States. I went to Columbia and New York for my graduate degree. I worked in the financial industry for about a decade. In the last couple of years, I’ve been a real estate investor as well as a founder of a technology analytics company in the real estate industry called RealtyQuant. I took on analytics related to that. We publish market evaluations as to how over, under, and fairly valued our different markets are. We also do data-driven investing and build different technology and tools in the industry for that.

We’ve had one person come on and talk about data-driven real estate, but he wasn’t an analyst. This is exciting. Don’t be shy about talking about numbers. We can handle it. I’m super excited to hear how you run this. First, let’s define data-driven real estate investing.

It incorporates different data science or technology techniques for investing or discovering inefficiencies and opportunities in the real estate market. A big part of that is automated underwriting. Automated underwriting where you can pull thousands of on-market and off-market listings and underwrite them even to a partial extent. Later, you would perhaps need to go to the property in person, but it is still this preliminary analysis.

Automated underwriting is a big part. To that, there are different machine learning also that comes into play a bit. These are things like computer vision where you are able to see real estate images and define the condition of those properties. You can define the condition scoring based on real estate images or texture descriptions and also extract other intelligence from texture descriptions.

There’s also financial modeling for off-market inventory in the commercial multifamily space. That’s very useful. It’s a set of techniques for finding deals and markets. On the market side, it’s also engaging valuations. It’s having appreciation predictors and downside predictors for your markets. That’s so very useful in the commercial multifamily space. In residential investing, you’re able to gauge markets and pick the best ones. That’s what data-driven investing is. It’s a slightly different approach than the more local real estate investing, and there are good reasons for that such as you want to be vertically integrated. You want to have your team within a location. You want to understand that location really well.

Data investing is more agnostic to that. Thus, you try to gauge those markets somewhat in a bigger way. You’ll be able to scale and do this anywhere in the US. That is the difference. It’s also getting your own intuition with the data rather than reading reports. That’s not data-driven in my mind. If you’re purely working on reports, it could be, but it’s a little bit hard without also interacting with the data yourself or an analyst on your team doing it. It takes bigger insights with that.

With the reading of reports, do you think it takes more insights?

Yes. It takes more than a summary reports of what are the best markets in the US for this and that. In my experience, at least, you need the whole data for the whole US everywhere. It’s a bigger endeavor.

If someone invested in undervalued markets at the peak of the global financial crisis, they would outperform. They didn't perform great, but they still performed. Click To Tweet

How did you get started investing in real estate? I want a little bit of context. How did you get started and why did you move from where most of us are where we’re looking at reports or listening to the news? We’re trying to invest locally because those are markets that we understand. That’s the more intuitive way that most of us invest, and you moved to more data-driven. Could you give us a little bit of your journey? How did you get started, and how did you get to where you are?

I’m in New York. The first property I bought was with a house hacking strategy. Many people are familiar with that. I bought a multifamily post in New Jersey. I lived in one unit and rented out the other one. I thought it was working well. There was a beautiful discount on the price as well. I thought, “I should work into it more professionally and find investment opportunities as a professional investor.”

From there, I started as a residential investor doing condominium conversions in the New York City area and other projects. I started pulling lots of data. I pulled perhaps 6,000 on-market and off-market properties within three hours from New York City and would have them underwritten on different strategies. It’s not only that, then you can compute your cap rates and different things like that. You can also underwrite on strategies that are otherwise hard to think about at such a scale for so many properties such as condo conversions or perhaps converting a residential to a commercial property. That was the way I started.

I’ve been doing residential deals in the New York City area in the small multifamily space that are close to markets like downtown Jersey City and WeHo which are very close to the city and some in upstate New York. From there, I’ve been transitioning to the commercial multifamily space in the Midwest and working for different deals in places like Iowa, Minnesota, and more fairly valued markets at that time.

When you moved out of New York is when you started becoming more data-driven. Is that true?

No. I am still physically in New York. I was data-driven when investing around in the New York City area as well. We pull residential listings for many. When you’re transitioning to commercial multifamily, the market side becomes more relevant because you’re not in your local market. You want to pick the best markets out of state. There are also concerns about whether they are overvalued or if we are going to have a recession. That prompts some of that analysis on the market side.

That’s a perfect segue. Let’s talk about how to determine if a market’s overvalued or what is the downside risk. Let’s talk a little bit more about that. 

That is a million-dollar question if you think about it. Think ahead of the global financial crisis. Ahead of the global financial crisis, there were investors who invested in, for instance, California or Nevada. Those had a 50% decline, roughly speaking. They were extremely successful investors. That’s more speaking to the residential single-family space for this discussion because the commercial multifamily market is a bit of a different dynamic with cap rates and so forth.

Some of those investors lost all their networks. They were not the biggest investors, but the biggest people you watch in podcasts in the US. They were extremely successful and they were extremely successful with their operational process. They knew how to find deals, yet, they lost a lot of their network. The reason is those markets were extremely overvalued.

On the contrary, there are others. One of the bigger syndicators purchased his property in Midland, Texas. It was his first syndication. It had a super huge return. The reason is that Texas was undervalued. That’s ahead of the global financial crisis. This is a backward discussion. It was undervalued at the time that didn’t decline. They did decline but at a 4% average. They declined very little. They declined on their income, but on valuation terms or normalized terms, they didn’t.

I want to stop right there quickly because you’re going fast. It’s super awesome. You’re coming in with a lot of good stuff. I want to highlight some interesting things that you said. Which decline are you talking about? Do you talk about 2008 and 2009?

Data Driven Real Estate: You don’t just get to compute your caps and different things like that, but you can underwrite on strategies for properties that are hard to scale.

 

Yeah.

That’s what you’re referring to. I’ve been through three of them, so I want to make sure I knew which one you were talking about. In many of the markets in California, we were overvalued. I tell this story on my show many times. In 2009 and 2008, I lost 50% of the valuation of my properties in a period of three months. Things dropped so fast. When you go to a market like what he’s talking about in Texas, it’s not overvalued. It still did have a response to the crash, though, but it was only 4%. That is what he’s quoting us at.

It doesn’t mean that the other markets don’t move, but it’s a gentler move down. The correction is much easier to make that happen. In California, we saw a correction. It took about 6 or 7 years, and not all markets recovered. Only some of them recovered. Location was a big deal. I don’t know the rest of the country, but based on what you said, I wanted to point out that it’s not that because you’re in a low-risk market, you’re not going to see a drop. It’s that it’s a much gentler drop in response to the national or international crisis that we had.

Some markets in North Dakota at the time could see no drop as well. They could see zero drops. That was during the global financial crisis. Since you asked me what is the definition, the definition is price deviating from fundamentals of income population and housing supply. This is a fundamental analysis similar to the stock market.

I did a back study for the past three recessions. The global financial crisis is 1 of those 3 recessions. The correlation for the Metropolitan Statistical Areas or MSAs was of decline with the market evaluation and the peak ahead of the global financial crisis. Price decline peaked to bottom over the next roughly four years and one quarter on average. There are different periods in different regions, but those are declines that took four years forward. The correlation between the magnitude of decline and valuation was 89%. That’s huge. Declines were predictable in magnitude ahead of the global financial crisis.

There were people who were talking at that time. I don’t want to go into too much detail. He was a guy from Massachusetts. He doesn’t come to a local market monetary but he was on CNN in 2005 and 2006. This is practiced by the Quadrants Institution and done by Moody’s Analytics. This is studied for entrepreneurs. It’s done by my company, RealtyQuant. For your audience’s benefit, we do publish the data for every US County. We have 2,700 US counties. We have every single county if it’s over, under, or fairly valued. That is a statistical predictor of declines in the recession. It’s an important one. I’m not sure if it’s a good time to share my screen to show a table on this.

He asked me for permission to share his screen. I said yes because those of you that are going to check this out on YouTube will get the visual benefit of this. He is going to walk us through this. If you’re audio-only, don’t worry. He’s going to walk us through this. This also might be a good time to go check things out on YouTube. You can look me up, Moneeka Sawyer, and you’ll see all the YouTube things. It’s all yours.

Thanks. Are you able to see tables in an Excel sheet?

There are a lot of numbers.

That’s a big table with a lot of numbers, but I’m going to give you the gist of it. What I’m showing here is ten years ahead of appreciation or price changes in the US. These are how different markets perform after a mild or a severe recession for ten years forward based on how over, under, or fairly valued they are. It’s the peak ahead of the recession. To repeat, this is how different markets perform for ten years forward based on their evaluation and based on how overvalued the peak of a recession goes, and how different markets perform following that.

The 1990 recession is referred to by most economists as a milder recession. The global financial crisis is a scenario for a severe recession. That is what this table shows. It’s a lot of numbers, but it’s extremely interesting. It gives a perspective for many investors. At this time, investors have had the price performance in Western and Southern markets. The first column on the table shows overvalued percentage. The valuations in some Western and Southern markets are 20% to 30%. Some are in the 40% to 50% range. That’s overvalued. I can get to that part as well.

The goal should be where do you get the best appreciation? That's what you should care about. Click To Tweet

This has a picture of the United States and all the different states and markets. We’ve got a little bit more clarity on which states he’s talking about.

I’m showing a picture of the US and what is the overvaluation or undervaluation in different US states. This is the deviation from fundamentals. The dark-colored states in the picture are to the West and to the South. Idaho, for example, is at the top. It has been reported by Moody’s Analytics and other studies. It had a consistent observation for everyone with Boise, Idaho being the most overvalued city in the US. You can even search for different methodologies by Mark Zandi, Chief Economist of Moody’s and others, or RealtyQuant in my capacity. It’s generally consistent. Boise is at the top of 800 US cities.

Idaho is over 50% overvalued. On the counter, the Northeast and Midwest are under to fairly valued. These variations have been accelerating a lot with inflation since 2021, starting with what was a fairly valued US market at that time. I know it’s a lot of numbers, but it’s extremely important. I could put a lot of work into that myself.

It’s not to get a doomsy perspective. In the Western market, Idaho, Nevada, Arizona, Utah, and Colorado are overvalued to an extent. It’s less so than Idaho, but still to an extent. I speak to investors and syndicators who say, “We think these markets have such strong fundamentals even if they have a bit of a decline for some time. Let’s say they have a 5% to 10% decline. They’re going to do well afterward because they have such strong fundamentals. There’s so much job growth there.” That’s not what history suggests. What happened in the previous recessions was markets were at the very peak of valuation.

I suppose we take either at 54% overvalued. I have a table that shows the valuation ranges of how overvalued different markets are and how they perform ten years ahead. Markets that were in the 50% to 60% range were extremely booming ahead of time. For instance, the 1990 recession is a milder session. We have nothing doomsy. Nobody even knows about this as far as the real state declines.

I know about that one. I lost 20% of my value.

It’s a very milder session. There’s nothing terrible happening in your state. If one invests in a metropolitan area that is valued at 50% to 60%, which is the case of a few metropolitan areas in Idaho and some other states, what happens is not the situation of a milder recession where the market declines quickly a little bit and jumps back. What happens is the market declines a little bit, but it doesn’t jump back quickly. It takes a long time for that decline to happen. In that case, it took eight years. What is more important is, what is the relative performance over ten years of a market like that that was overvalued versus the other ones?

For instance, in this case, older markets in Metro areas that were over about 56% only appreciated a little bit. It was 16% over ten years. They were heavily outperformed by the undervalued ones. That is not intuitive. That’s not what people are imagining for Western and Southern extremely booming markets. They’re imagining that those are fast markets. The Midwest is a small market. Other places have small markets that are steady. They’re not slow and steady. They are expected to outperform another recession. It’s interesting. Undervalued markets following a recession outperform the overvalued ones. It’s important to know that the overvalued ones were also the top-performing ones ahead of the recession.

Ahead of recession correlation between how overvalued they are and how well they’re doing becomes very high. They’re doing incredible. For instance, if we go to 1990, that’s Hawaii. Hawaii was the top state at that time. They were 150% top from their previous market cycle. They were the top market. Nobody would easily imagine unless doing this kind of fundamental analysis that their prices are going to be lower 80 years later. They’re going to have the weakest price performance for the following decade. That was the strongest performer. That’s why fundamental analysis is extremely important.

Similarly, if we go to the global financial crisis, California, Arizona, Nevada, and Florida were the four big overvalued states at that time. In the table, they had the worst bottom performance consistently year after year for ten years ahead. That’s extremely important. On the contrary, if someone invested in undervalued markets at the peak of the global financial crisis, they outperform. They didn’t perform great, but they still performed. Let’s say 20% over the course of ten years is extremely poor performance, but it was not negative. It was better than the others, so they outperform.

This isn’t true of the whole state. California is a huge state. There are different pockets that perform differently. It’s the same with Texas.

Data Driven Real Estate: The Midwest are small markets, and, like other small markets, they are steady. They’re not slow and steady; they are expected to outperform a recession.

 

These are the statistics for the MSAs or Metropolitan Statistical Areas.

What he’s saying is that, for instance, California was 52% overvalued. It went down 50% in five years, but then its recovery up to ten years took it to 25% down. It was still a negative 25%. If you look at some of these other markets that were maybe 6% or 3% overvalued, they went down initially during the crisis by 1% or 2%. One of them went down 3%. After ten years, they had gone up 18%, 27%, or 17%.

As opposed to these highly overvalued markets that are still down 25% from when the crisis started, in ten years, they’re still down 25%. In these lower-valued markets, they went down a little bit. Their recovery was not phenomenal, but at least it was recovery. We weren’t negative. We were closer to 18% or 19% after ten years.

That’s a great summary. Thank you for that. I don’t want to focus on too many numbers. It is the big picture intuition of it. The big picture intuition is valuation is extremely important in general, but it is even more important than the turning points in the market cycle. When we’re at the peak of a market, it’s the most important variable that overshadows fundamentals themselves. At the other times, I’m like, “I’m going to be forecasting fundamentals.” That’s how I get to the best appreciation. The goal of this is not a doomsy thing. My goal is where I get the best appreciation. That’s what I care about.

As commercial investors or residents, we do our forced appreciation. As good business people, we generate our business and business profit in this way by being quality investors on the forced appreciation side. That’s always there. If you do that well in a recession, you do it well in other times. You still don’t want to have the effect of markets overlaying on top of that. That is the goal here. That’s why I want to show this complicated table with many numbers. It’s to point that across different levels of overvaluation ahead of a recession where one is mild like in 1990 and one is severe like the global financial crisis, the undervalued markets is a big shift in what most investors are thinking.

Austin, Texas is an extremely booming market that has very strong fundamentals. It happens to be that Austin, Texas is overvalued. That overvaluation has to find relative to those fundamentals. Some investors say, “There’s so much housing shortage. Real estate is not going to decline because of the housing shortage.” That’s not true because housing shortage depends on how you define it.

If you take the broad housing shortage, which is the US Census Bureau total population in that market versus the US Census Bureau housing supply in that market, that is reflected in the numbers that I’m showing. They’re reflecting income and also population to housing supply ratios. Austin, Texas is the best market, but if prices run too forward, it’s going to underperform. That’s a consistent observation. There are around 400 metropolitan areas here and these are two very different recessions. Investing in a 50%-plus overvalued market, which is likely to be the top performer in the market cycle and going to have a reversal in price performance.

That is so not intuitive. You think that a strong market, once it goes through a recession, will continue to be strong. That’s very interesting. The numbers prove to be exactly the opposite.

It depends. In itself, a strong market would recover better, but that is even the comparison of the 1990 recession versus the global crisis. In 1990, why did they have markets that were over 40% to 50%, but they only dropped 15%? The reason is it’s not that the global financial crisis was a “crash” of sorts so much. It was a severe recession and the recovery of fundamentals was very weak.

I know you did mention a sharp decline in some months. I feel terrible about that. That sucks, but in the big picture, the declines took whole four years. Prices still kept dropping. With those four years of declines, what happens in a mild recession is that the fundamentals are strong and they catch up. Even though the market is overvalued more, it ends up declining less because there is a strong recovery. It’s not that one is a crash and the other one is another crash. It depends on how severe that recession is and how strong the economic recovery is from a fundamental perspective. That’s, at least, my perspective.

From this standpoint, it’s true that a strong market would recover faster. That happens in markets that may be overvalued and may recover fast and well and would get a small decline. That is possible. The question for me is not only predicting downside risk. We don’t have a recession yet. That’s all hypothetical. There’s no official declaration of a recession still, but if we were to have one, how do we forecast appreciation? Where is there going to be the best appreciation? This is suggesting that it’s not going to be in the booming ones anymore and they would underperform. The reason is valuation.

If you think about real estate prices, you could have a change in value and it doesn't show due to illiquidity. Sometimes, that could be a no transaction. Click To Tweet

I can go overvaluations in different cities, but that is what the studies suggest. It’s a very different scenario. For instance, we had a recession such as a dot-com bubble in 2001. I’ve studied that one, too. It’s a different scenario. If we have that and there isn’t any significant overvaluation in the market, which there wasn’t at the time, then nothing happens. That’s because they’re mostly fairly valued and things continued going forward. That’s what happened. They continued going forward and then they became overvalued ahead of the global financial crisis. It was a fairly valued period.

It was very fairly valued, but we had a lot of people that lost jobs. People couldn’t afford homes. We did see the markets pull back a little bit to accommodate all those people that couldn’t get homes. Rent went way up because people’s credit got screwed up. Some other issues that happened there that did cause the market to go down a little bit, wouldn’t you say? They’re not strictly statistics.

That could have been perhaps in new listing prices or some of the more transitory kind of data of sorts. At least in the recorded statistics for prices, they’re showing no decline anywhere. It’s quite interesting.

This is the difference between real life and statistics. I want to talk about 1990. I’m sorry. I was mistaken when I said we lost valuation on that one. I do remember that. I was in college. I was listening to my dad and what happened there. I wasn’t personally involved. In 2001, I was personally involved. In 2008, I was personally involved.

In 2001, it was interesting. It was the dot-com crash. It was in Silicon Valley, which is where I lived and where I owned all my homes. This is a market-specific thing. During that time, because of the bust, so many people lost their jobs or had this weird thing that happened with stocks. If you would get laid off, you would have to exorcise your stock and then owe taxes. They couldn’t afford the taxes, so they would have to either sell their homes. There were some weird things that were happening in Silicon Valley. Your numbers are probably national.

What was interesting to me was property values dropped about 20%. During that time, they recovered very quickly. Interestingly, rents went up dramatically during that time because people that would normally buy were not able to buy anymore. When you say you look across all metropolitan areas and you didn’t see anything, that’s interesting to me. San Francisco, San Jose, and Sacramento areas are big metropolitan areas in California. They didn’t see what we saw in 2008, but they saw some discomfort. They recovered quickly, but there was some distinctive discomfort.

That is extremely interesting. If you think about real estate prices, you could have a change in value and there’s illiquidity. The price at which those transactions would happen would be lower. There could be a big decline in unrealized terms. Let’s say it is something like COVID.

What he’s talking about is what I always say. You don’t lose money and you don’t see the valuations change until selling happens. It’s all on paper. That’s all I wanted to add.

That’s the Federal Housing Finance Agency or the main government agency following US prices. The specific thing for 2001 is the 400 or so metropolitan areas in the US. There is San Jose and San Francisco. In the MSAs, they don’t have the data, but then, you did experience it in real life. That’s quite interesting.

That surprises me and confuses me a little bit. How is that possible?

It’s interesting. That’s what you observed, but on the other hand, we haven’t heard anyone else say about any real estate declines in 2001.

Data Driven Real Estate: What happens in a mild recession is that the fundamentals are strong, and they catch up. Even though the market is overwhelmed more, it ends up declining less.

 

What is true is that anybody that could hold, did. Rents were going up so fast. My property dropped 20% in value during those couple of years. It was not immediately, but it was over those two years. It recovered quickly. During that entire time, rents were going up dramatically, so I could hold property. When you’re talking about the numbers that are only going to show when people sell, maybe people were holding. What do you think? Is that a possibility?

Was it multifamily, perhaps?

Mine was all single-family. I’m sorry to challenge you, but it’s interesting, isn’t it?

It could be segmented in the market or possibly in neighborhoods. Still, that’s the whole MSA. As you are saying with the dot-com bubble with some people losing their jobs in some regions in Silicon Valley, perhaps some neighborhoods had declined and others still continued going up. It flattened out the metropolitan area. This is still a pretty high level for the whole metropolitan area. That one that did not have declines is another single metropolitan area. You’re making a very good point. If you’re in a neighborhood, the decline doesn’t matter. You have the same effect. It doesn’t matter what the market did. It appears that perhaps other neighborhoods did better.

What I’m learning from this is that the market went down, but then it recovered very quickly. Rents went up, so holding was easier. What I love about this is that as you talk about the market data, it showed that there was no real decline. I was in a pocket where I experienced a decline. As long as I held, I had time to be right, but it was still a good time to buy. This is such an interesting thing for people. People were asking these questions every day. They were like, “Interest rates are going up. I want to capture the lower interest rates, but markets feel overvalued. Is it a good time to buy?”

Your statistics show that even during that time, it was an okay time to buy because everything was valued fairly. Even though I personally experienced a decline and many of my friends did in Silicon Valley in this little bubble that we were in, it recovered very quickly. We were able to hold. It was still a good time to buy even then. The recovery happened very quickly even though you saw a dip. That’s what I’m taking from that. What do you think?

I agree. You’re making great points there. If we think of what we are doing here, it is a very high-level fundamental analysis. If we start making it super granular, it’s going to be working less well, I suppose. If we go to super tiny neighborhoods and try to do fundamental analysis, it’s not going to work too well. For instance, in my data counties’ predictive power is less strong than states’ predictive power, but it happened with metropolitan areas for some reason. I don’t know if it’s the quality of statistics of those versus counties.

Metropolitan statistics have extremely high predictive power. That’s a little bit interesting. I’m sure if I went to ZIP codes, neighborhoods, and so forth, it’s going to get harder because there are going to be so many other factors. You’re making a point that there is also the liquidity thing. These are quarterly governmental price statistics. If your price dropped for two months in between and jumped back to the same level, then that’s not even detected. If the neighborhood dropped, other neighborhoods increased. It is smoothened out.

On the other hand, for a fundamental analysis like that, perhaps we want it smoothened out. It’s not even going to be tied to fundamentals if it’s too not smooth. It’s like these other things that are either not fundamental. That is the thesis there. You make a great point that it is not applicable to where your property can still decline or your neighborhood can still decline. It’s the broad market.

You were talking about appreciation of the properties with these statistics. We’re not talking about increases in rents or any of that stuff. In a lot of these stable markets, rents continued to go up even though they didn’t appreciate as fast. They didn’t go down as much. Their rents went up dramatically. When you’re looking at which markets to invest in, you want to look at the statistics of whether the markets are going to appreciate whether they’re going to take a hit when the markets go down or when we have a recession. If you’ve got some markets that you’re interested in, you want to keep in mind what your cap rates are, what the rents are looking like, and how those are going up, wouldn’t you say?

I agree. That is a great point, especially for commercial multifamily investors. We’ve seen that very much in this period with humongous rent growth in some markets. Those are different dynamics. If we think of cap rates in the commercial space, they’re driven in a theoretical sense. They tie to something in finance called the Dividend Growth Model. It’s the denominator in that one. It’s the discounted cashflow analysis for commercial property. There are interest rates there. It’s the risk-free rates and then risk premium on top of that.

If prices don't decline too much because we have a robust economy or strong recovery, then the decline is about 18%, which takes a long time. Click To Tweet

Also, what is reducing the cap rates is the expectation for future income growth. That would be the same for any business and valuing other companies as well. That wouldn’t be only for commercial real estate. It would be the same methodology. That methodology derives from a mathematical series of discounted cashflow analysis of any company, business, or property. Rent growth is extremely important, and that drives cap rates in a theoretically valid way. That is a whole different dynamic. We’ve seen that in the commercial multifamily space.

We see it in single-family homes, too. If you’re out there buying a portfolio of ten homes, or for me, whatever I own, we see that in the cap rates also. When we’re buying a single-family home, how is that? We want the property to appreciate, but we also want to know that we’re going to be cashflowing within a certain number of years or hopefully, right away. Those sorts of things matter. When we had our bubble burst here in Silicon Valley, it was the rents going up that saved us from having to sell because we could carry our mortgages still.

This is so interesting. I feel like we could talk forever, but we’re running out of time. First of all, thank you for all that information. You blew up my brain. I’ll have to read this again. Ladies, you do the same. There was a lot of good information. What I want to talk about a little bit is the states. Who’s overvalued? Who’s undervalued? Where are the opportunities? Where should we stay away from?

From your perspective, this is the end of the first quarter of 2022. It’s only the first quarter. The second quarter hasn’t come out yet because that’s a fundamental analysis based on the governmental statistics of income, population, and housing supply. Those will come out soon. Those take time. This is the first quarter of 2022, but it’s not going to be too different. It changes a little, but it has kept increasing. What’s important to notice is that US real estate was quite fairly valued even through the first quarter of 2021 at the broad level.

This surprises me a lot.

The way to see that at the country level is there is a study by Niraj Shah at Bloomberg Economics. He had it for different countries in 2019. It came out at the beginning of 2021 as well. US real estate has pricing combinations, for example, and that’s a good one I can explain why that works well, but in another discussion. It was around zero. That’s very contrary to some countries.

Other countries were reported to be SCANNZ Economies. That’s Sweden, Canada, Australia, Norway, and New Zealand. They were overvalued even as early as 2018. They still don’t decline because there are economic conditions. There’s no trigger for them to decline. There are low-interest rates and so on and so forth, but they are overvalued since then. That’s driven by central bank policies in water and small coast oil-exporting economies. Their real estate has been reported to be overvalued. That’s by Bloomberg Economics and other sources.

US real estate was fairly valued. I had it in my data as well that it was fairly valued. I started doing this in 2020, the beginning of COVID, on my end, it’s RealtyQuant. This is data powered by RealtyQuant.com. As late as 2021, the first quarter of US real estate at the broad level was close to 0%. If we take the US real estate broadly at this data, it is around 13% only. The whole nation would be only 13%.

It’s not a small number because if you take the global financial crisis, it’s the same government data in the FHFA data, the global financial crisis in the same one would be past 20%. That’s already 2/3 of the global financial crisis. You have to keep in mind that’s a history many years back. Most other time periods tend to be slightly undervalued. This is the material overvaluation, but that is at the whole level. The whole level doesn’t matter so much to particular investors.

If you go to specific states, it gets more overvalued. The reason is that we have undervalued states like Illinois. We have fairly valued states like New York, Pennsylvania, New Jersey, and so on and so forth. What was overvalued is Idaho. It is above 50%. Idaho has been the leader. The states of Nevada, Utah, and Arizona are above 30%. We have Texas, Florida, and Colorado at above 20%. There are, in total, ten US states in Q1 of 2022 that are above 20% overvalued. They’re all Western and Southern states. That’s Idaho, Arizona, Utah, Nevada, Florida, Washington, Texas, Colorado, and Montana.

On the contrary, if we go to the opposite end of the spectrum of what’s undervalued, I’m not saying that’s necessarily desirable. That ends up being desirable over the next decade, but not necessarily until a recession hits in that period. The undervalued ones are still the markets that are not performing well, which are Illinois, North Dakota, West Virginia, and Connecticut. They are not trending. They are poor in their fundamentals, but they do tend to carry less downside risk simultaneously in a recession because they didn’t get overheated.

Data Driven Real Estate: If we go to super tiny neighborhoods and try to do fundamental analysis, it will not work too well. For instance, a county’s predictive power is less strong than a state’s predictive power, but it happens with metropolitan areas for some reason.

 

Boise is at the top. There is Boise MSA and Austin. There are some other MSAs in Idaho, Nashville, Phoenix, Tampa, and Dallas. These are booming and strong markets. They’re incredible markets. They have incredible people who have made fortunes in those markets. That’s completely true. In the past few years, things accelerated with inflation. Those are some overvalued cities. It’s half at the county level. Perhaps, there are some other ones that can be based on county data as well. That’s a good list around the top ten.

The important thing to notice is it’s not that it’s predicting necessarily big declines in something. Let’s say Boise’s overvaluation is at 74%. That sounds very high. In Boise, if we experience a severe recession like the global financial recession, that would be a decline. I have predicted declines in different scenarios. If you have a GFC-like recession, which nobody expects, then the decline for Boise’s overvaluation of 74% evaluation will be 46%.

That’s if we have a huge crash in the market.

If we have a milder recession like 1990, even though it’s overall at 74%, but because the recovery is going to be so strong, the decline is only 18%. To clarify, that overvaluation is still a real thing because that 74% overvaluation is going to go to zero. It always does. It’s not that the number is fictional. Some investors might say, “If something is overvalued, it stays overvalued.” That doesn’t happen. It doesn’t stay overvalued. It will go to zero in valuation terms. If prices don’t decline too much because we have a very strong economy or strong recovery, then the declines will go about 18%.

That decline takes a long time. It takes six years. Especially for small declines with big overvaluation, it tends to take a long time. It could be even eight years forward. Over these eight years along that period of time, incomes increase and populations and housing supply ratios change in whichever way they change. Those fundamentals shift in a way that they compensate for valuation. They drive it to zero. That is a strong recovery case, but this is an example of what would happen.

We take the case of Austin, Texas. It is an incredible city with hugely strong fundamentals. Though exceeded by the pricing, what would happen to its valuation is it will be around 66% overvalued. The model for the severe recession that I have has a 40% decline and only 15% in a mild recession. Those are all possible. It’s not a doom thing. I’m a positive and eager investor who wants to continue investing my funds in a recession as well. What is important to me is how to make a model to forecast appreciation and what is the best one.

Here, it’s suggesting that even without incorporating in a model fundamental forecasting itself but purely looking at market valuation at the peak ahead of the recession, so to say, I can take the simple model and invest it in the undervalued MSAs. Those would be very counter-intuitive at the time. Those would be MSAs like San Francisco and San Jose. They were undervalued at the time with population issues and all kinds of issues.

Purely, what the history suggests from those two different recessions at different times in US economic history, if you will, is in both of those cases, the lowest markets of most undervalued metropolitan areas outperformed over a decade forward. That is extremely interesting for me. We have to keep this in mind. They were performing poorly at that peak. That’s why they were undervalued at that time. It’s a mix of those weak fundamentals. It would be below the prices or those weak fundamentals, but they do tend to have weak fundamentals.

There is a strong correlation between how strong a market is and how overvalued it becomes towards the end of a market cycle by overheating, like investors taking up more stuff there and so forth. That’s an interesting thing. For me, this is the perspective of how you forecast appreciation in those. It becomes counterintuitive because that’s shifting the whole expectation of investors. It’s also how we’re accustomed to the west and south as the booming places and how it perhaps is statistically likely to shift in the next market cycle.

That was awesome. How can people get more information? I know that you’ve got a free report. It’s the free state-level market valuation report. To get that, go to BlissfulInvestor.com/Markets. You can download that. How can they reach out to you?

My website is RealtyQuant.com. That’s the best way to reach me. They can also read my blog about some of the things we discussed. They can look up the data that we have there for 2,700 US counties. I also have a YouTube channel. It’s Stefan Tsvetkov – Finance Meets Real Estate on YouTube. It’s a weekly webinar.

We don’t have time for three rapid-fire questions. We are going to try to do an EXTRA. We’ll see how this goes. Stay tuned if you are subscribed to EXTRA. If you’re not and you’re leaving us, thank you so much for joining Stefan and me for this portion of the show. I appreciate you. I hope it was helpful. I look forward to seeing you next time. Until then, remember, goals without action are just dreams. Get out there, take action, and create the life your heart deeply desires. I’ll see you soon. Bye.

 

 Important Links

• RealtyQuant.com
• Finance Meets Real Estate
• Moneeka Sawyer – YouTube
• BlissfulInvestor.com/Markets
• Stefan Tsvetkov – Finance Meets Real Estate – YouTube

 

About Stefan Tsvetkov

Founder of RealtyQuant, a company that brings data-driven and quantitative techniques to the real estate industry. On a mission to add industry value through education, investment, technology, and analytics.

Former financial engineer (Columbia MSFE) managing ~ $90 billion derivatives portfolio jointly with colleagues. Multifamily investor, analytics speaker, and live webinar host.

Featured on over 40 Podcast/Webinar events including Elevate, Best Ever Real Estate Show, Investing in the U.S. etc. Organizer of Finance Meets Real Estate live webinar series, with ~3000 subscribers and over 80 live webinars.

• www.realtyquant.com
• www.youtube.com/c/StefanTsvetkovFinanceMeetsRealEstate

 

Love the show? Subscribe, rate, review, and share!

• Here’s How »

Join the Real Estate Investing for Women Community today:

• https://blissfulinvestor.com/
• LinkedIn
• Twitter
• Facebook

Get Dr. Shaler’s free EBook: “How to Spot a Hijackal”  at https://www.forrelationshiphelp.com/help-handling-hijackals-spot-signup/

To listen to the EXTRA portion of this show go to RealEstateInvestingForWomenExtra.com

——————————————————

Learn how to create a consistent income stream by only working 5 hours a month the Blissful Investor Way.

Grab my FREE guide at http://www.BlissfulInvestor.com

Moneeka Sawyer

Moneeka Sawyer is often described as one of the most blissful people you will ever meet.   She has been investing in Real Estate for over 20 years, so has been through all the different cycles of the market.  Still, she has turned $10,000 into over $5,000,000, working only 5-10 hours per MONTH with very little stress.

While building her multi-million dollar business, she has traveled to over 55 countries, dances every single day, supports causes that are important to her, and spends lots of time with her husband of over 20 years.

She is the international best-selling author of the multiple award-winning books “Choose Bliss: The Power and Practice of Joy and Contentment” and “Real Estate Investing for Women: Expert Conversations to Increase Wealth and Happiness the Blissful Way.”

Moneeka has been featured on stages including Carnegie Hall and Nasdaq, radio, podcasts such as Achieve Your Goals with Hal Elrod,  and TV stations including ABC, CBS, FOX, and the CW, impacting over 150 million people.

blissfulinvestor.com

Get In The Real Estate Game With Kenny Simpson And Krystle Moore – Real Estate For Women

The real estate industry presents various opportunities where you could grow your wealth. There are many ways to succeed in real estate, but you must get started. Listen to your host Moneeka Sawyer as she talks with Kenny Simpson and Krystle Moore about tips on how you can get in the real estate game today. It’s not yet too late. It’s time to get your action plan together. In this episode, Kenny and Krystle share the importance of constantly growing and not making decisions based on fear to achieve your goals and attain financial freedom. They discuss the benefits of owning multifamily properties and what kind of investments will help you beat inflation. Tune in to learn how to be in control of your financial future.

—

Watch the episode here

Listen to the podcast here

Get In The Real Estate Game With Kenny Simpson And Krystle Moore – Real Estate For Women

I am so excited to welcome to the show, Krystle and Kenny. Krystle Moore is the Founder of Pacific Shore Capital, San Diego’s leading expert in commercial financing and real estate investing. She began her career at the age of nineteen. With over eighteen years of experience, Krystle has funded over $1 billion in loans, helping over 1,000 clients with their commercial and multifamily financing needs. Between managing over 1,000 units, rehabbing, and designing countless properties, she is committed to sharing her immense knowledge and industry expertise with our clients.

Kenny Simpson, Head of The Simpson Team, is San Diego’s premier residential financier and real estate investor. He has worked with over 1,000 clients on 1 to 4-unit financing, helping them shift their mindset, and have confidence about qualifying for a loan, whether for a primary residence or investment properties. He is a Co-host of San Diego’s most popular real estate podcast, Get in the Cashflow Game with K&K. Kenny has over seventeen years in the business, including his own investment and management experience, having managed over 1,000 units, helping rehab, and design countless properties. Welcome to the show.

Thanks so much for having us.

I’m excited to have you on the show because I want my ladies to know this. It’s important to have mentors in the industry that have been here through the cycles. You guys went through the 2008 and 2009 crash. Many people that are in real estate now got in the last 10 to 12 years. They got in at the bottom when things were easy to get into. They didn’t have to ride that wave. That wave was a rough one. I love that you guys have been in the industry long enough to know that things can go bad and what to do when that happens. Congratulations on your success around that. I’m so excited to be having you chat with my ladies about financing.

I’m excited too. I’m passionate about women being involved in their financial future. I was honored to be able to be on the show.

Thank you so much for that. What’s important for us to all understand is that as women, we need to be in control of our financial future. We’re not taught that as younger women. We have to figure that out ourselves. Our allies, the men in our lives, are an important part of that success. Kenny, I super appreciate your support of our ladies. My husband is the same way. My husband is not as involved in my business though. He is a good support staff. This is big. Could you talk a little bit high level about how you got into the industry and what your story is?

I got started when I was nineteen. I was taking some community college classes. Quite frankly, my family couldn’t afford to pay for college or anything like that. It was all on me. As a young 19-year-old, I thought, “Why am I paying to go to school? I should get paid to do this.” I needed to pay my bills. My mom worked as a rep at Washington Mutual at the time. I was begging her to give me an in, call somebody, and let them interview me. That’s all I’m asking for. Don’t give me a handout, but give me an opportunity. When she felt I wouldn’t embarrass her, she finally gave me a couple of recommendations.

I interviewed and did residential for about four months, but I always wanted to do commercial. I did what they tell you to do, “Tell everybody. Tell your friends. Tell your family. Eventually, someone is going to give you a shot.” I met my first client at the gym. I was super into fitness at the time. I winged it from the beginning. I had no idea what I was doing. He knew that anyways. That’s how I got my first deal. From there, it was a good time. We were on the upswing on 2003. His partners referred me to their partners and his partners’ partners. It was a snowball effect from there.

Why were you so interested in commercial rather than residential?

Real Estate Game: We’re taught to get an education and a good job. That may have worked a long time ago, but now, having a W2 job your whole life is not going to work out well for you when it comes time to retire.

I thought to myself, “I’m not as the emotional touchy-feely first-time home buyer. I wanted to work with business people.” On the commercial real estate side, even when you’re getting a real estate commercial loan, it’s a business loan. We assume that you’re a sophisticated business person. That’s why we don’t have RESPA and all these other crazy things that came as a result of the 2008 financial crash. I liked working with more sophisticated investors, generating wealth for people, and figuring out how to get more cashflow. That’s what lights me up. That’s why I went in that direction.

Kenny, how did you get started?

It’s a bit similar. I was in college, paying for my own way too. I had a lot of friends. In 2002 and 2003, they started making a lot of money around me in real estate and I’m sitting there going to college day after day. I woke up one day and I said, “I’m over this.” I want to go to work and make money. I always wanted to be in real estate, not sure which aspect. A friend reached out and said, “Do you want to come and join my team?”

I started off in the business as a loan processor which is good. It gave me a lot of well-rounded skills and I learned the background. Quickly, we ended up starting a branch, and then several years later, I’m here as a mortgage broker and enjoying what I do. I dove in and figured out residential was the way. I knew I didn’t want to sell real estate. I didn’t know I wanted to do financing, but now that I’m into it, I enjoy it.

I was a mortgage broker for years and it was so much fun like the puzzle of a loan package. Whether it’s commercial or residential, it’s like a puzzle. Putting the whole thing together, getting exactly the right product for the right person and the right property. There are so many moving parts. I love that you started as a processor because so much of the time, the processors don’t understand what mortgage people go through on the front end.

We’re trying to put together a puzzle. They’re trying to get it to underwriting. They’re the middleman. They are a key part of our success. Many of them don’t understand what it takes on both of those sides, the front end and the real back end. That’s amazing that you did that. What an asset for you because you understand them then.

The business has come a long way with technology. Lenders have tried to figure out how to make the process as easy as possible. As we’ve gotten further away from 2008 and 2009, Fannie, Freddie and a lot of the banks have eased up on some stuff and got a little bit more realistic. The pendulum swung way too far then way too far the other way. We’re getting some normalcy. It’s helpful because getting a loan sometimes cannot be fun. As we all know, it’s paperwork and it’s a stressful time when you’re buying a house. We try to make it easy as possible.

You wanted to talk about multifamily properties which is a topic that my audience is interested in. Let’s start by talking about why. Why did you get started in multifamily to supplement your income and how does that work?

The thing is we’re all taught in school to get our education, go out and get a good job. That may have worked a long time ago, but if you’re living in a major metro like us in San Diego, it’s not cheap to be here. Having a W-2 job your whole life is not going to work out well for you when it comes time to retire, even if you contribute the max to your 401(k) and things like this. We backed in to see what lifestyle we wanted to have.

I had the benefit of seeing that since I was nineteen. I got to see tax returns. I worked with a lot of real estate investors that own multifamily. It seems like they didn’t have to work. They were always on vacation. Their idea of work was driving by the properties or having lunch with brokers. It seems so fun for me. I’m like, “I love to fill my days doing this.” I started realizing the cashflow that they were getting because it doesn’t look like that on tax returns.

That’s the benefit of being a real estate investor. A lot of real estate investors don’t pay taxes. They provide housing. In exchange for that, they get a lot of tax benefits. I find that multifamily is the absolute safest investment vehicle that has the most tax benefits. That is why I truly believe in owning multifamily properties.

I would like to add something interesting that shines a light on my own life. That’s similar to what you said, Krystle. First of all, Krystle, congratulations on starting at nineteen, both of you guys. The younger we started, the more opportunities we have to create huge amounts of wealth and a huge legacy.

Those of you ladies reading that are 19, 18 or 20, you need to get started. Even later in life, there are so many opportunities. I always say there are a million ways to make $1 million in real estate, but the sooner you get started, the easier it is. Congratulations on you guys. To anybody who’s reading that’s young, get started. It’s important. The thing that I wanted to comment on is my husband and I bought another property, a primary residence. I was dismayed at what we can afford.

There were a couple of things that I noticed that I want to highlight to my ladies. Because of the write-offs, the depreciation, and all of that stuff, in real estate, it looks like you’re making no income. Plus, you get to do a ton more write-offs. For me, I’m showing huge losses. That means we pay fewer taxes. What that also means is that because of me, we can’t qualify for loans. My husband does all the loans.

This is how we’ve distributed it. What’s also interesting about this is when we were young, our first house was $200,000. Our next house, five years later, was $700,000. Our next house was $750,000. What’s interesting is that even now, all we qualify for is $750,000 to $800,000. Why? My husband is a superstar at work. He gets nice raises, 3% to 6% raises each year. Think about that. Have property values gone up faster than 3% to 6%?

What do we qualify for? It’s still about the same number of dollars because he has only been going up 3% to 6%. We can do a little bit more if we dig into the numbers. There is stuff because of losses and stuff like that shows up on the tax returns. That’s not about me. Everybody who’s reading this, take that in. It has been 25 years that he and I have been together buying real estate. We still qualify for the same property value now almost that we did twenty years ago.

If you are going to rely simply on your W-2 income, are you going to be able to grow your wealth? We have to buy in bad neighborhoods to qualify for our loans. We didn’t have to use to do that. You hope that in life, you’re improving your lot. You’re improving the neighborhood. You’re improving the house size. Why are we not able to do that?

There are a lot more conversations around that. I don’t want to say that that’s the end of the story. It was an interesting thing for me to notice. How is this even possible? We have been in the business for 25 years. We made some adjustments. We did some different things, stop writing off things, stop taking losses or do some other things that we can do. If you’re just relying on your W-2 to plan your future, that’s what you’re in store for. It does not keep up with inflation. It does not keep up with house prices. The cost of living is going up. Your income will not keep up. It’s important to find ways to supplement that income. Does that make sense?

Real Estate Game: Multifamily is the absolute safest investment vehicle that has the most tax benefits.

That is such a good point. We’ve always been commissioned-based. We’ve never had that idea. Even thinking about a W-2 job, that’s what we’re trained to do. That’s the safety that we run to and the safety is not winning in this environment.

In any environment, it’s never one. If you look at W-2 versus housing prices, over time, we’re not able to keep up. People have to move to cheaper areas to afford the homes that they like or you need to be a dual income. You’ve got to do something other than being a W-2 employee to keep up with housing prices. There are some interesting things there.

First, that’s your cost of living. The other thing that tells us is real estate is a good investment. It is increasing significantly faster than inflation and our incomes. It’s not true in every single market. If you do your homework and you pick the right markets, that is true. Ladies, I’ve never said this on the show. It’s important to understand where you’re headed if you’re not going to invest in real estate and you’re not going to create those other streams of income and cashflow.

I have a good example for your story on that because you do bring up a valid point. I do residential financing. Krystle is different. A lot of her clients might not even have a job. They might be real estate investors. Mine typically have a job and they’re just getting started or some. I happen to do her clients, but I have a client that worked at Qualcomm for 25 years. He did the retirement. He did the stock thing but never bought real estate or bought a house, and the crash came.

He said, “I’m going to go in and buy real estate. This is it. This is my time.” I remember meeting him. We probably ran into him 5 or 6 years after the crash. He bought all this real estate. He went crazy and worked crazy hours. I remember sitting down for lunch. He goes, “It’s crazy. I worked 25 years as a W-2 employee for Qualcomm.”

He did well and saved for retirement. He’s a conservative guy. He’s like, “I built more wealth in five years from real estate and cashflow than I have ever done with this job over 25 years.” He realized and said, “I should have started younger.” To prove your point, this is why you start younger and as soon as possible. What you can do at 5 years, 10 years or 20 years is unbelievable.

I am so grateful that for some reason, I figured that out also when I was in my early twenties. There’s a huge amount of my audience that is not in their early twenties. They’re in their 40s and 50s. There are many different ways for you to make money in real estate. If you’re not getting started early, it’s not the end of the world. It’s not the end of the game, but it is easier and takes less effort to build that wealth if you start younger. There’s a compounding, inflation, appreciation, and all of those things that aid intuitively and naturally so you don’t have to think about it.

Getting started is the most important part. It doesn’t matter how old you are. We have clients who got started later in life. We have a huge investor we know here now who didn’t get started until he was 35. He was a musician playing in bars. He borrowed $3,500 from his broker to buy his first property. He owns over 6,000 units now. He’s in his late 60s. From 35 to let’s call it 65, he owns 6,000 units, 100% by himself in San Diego, the most expensive market in the country. There are stories for every person. It’s not like if you didn’t get started in your twenties, it’s over for you. Get started at any point in time and you will exponentially improve your life going forward.

I’ve talked about this on the show all the time. Before you pick a strategy, you have to figure out who you are and where you’re at. What is your risk tolerance? What are the things that you’re trying to achieve? Part of that has to do with the timeframe that you have to achieve your goals. How much time do you want to spend each week and each day, but also how much time do you have? That’s one of the components to think about when you’re picking your real estate strategy. You’re not out of time, but more time gives you more opportunities. Kenny, what do you look for in an investment property?

We have this conversation a lot because we do get referred to a lot of first-time home buyers and also first-time investment property buyers. I have the same conversation. I said, “Why are you buying a house or an investment property?” I then said, “You need to answer that question.” I tell people that a husband and wife should be on the same page. If you don’t have a husband or a wife, then you don’t have to be on the same page with anybody. It’s your own money.

That’s the question. Sit down and say, “Why?” The other questions are, “What are the goals? What are you looking to do? What is the plan?” Some people are like, “In five years, I want to make $5,000 a month in income.” When you come up with the why, the plan and the goals, then we back into, “What kind of property do you want to buy? Are you going to buy a single-family? Are you going to buy a four-unit? Are you going to buy a five-plus?”

We always push, if you can, to buy the most units as possible because that’s what we push to. At the end of the day, if it’s your first deal, you might not understand it. If it’s your third deal, you’re like, “I should try to buy as many units as possible.” When you’re looking for your first real estate investment property, when you answer all those questions, it gets easier. If you’re getting pre-qualified with somebody like me, we back into it, “How much money do you have? Is it just you or are you bringing in other partners?”

We then back into, “This is what you can afford. This is what the gross rents need to be. This is how we can get you a loan.” Krystle could be a little bit different because the property has to qualify. When people say, “What are you looking at in your investment property?” I’m more like, “What’s your why? What’s your game plan? What can you afford?” From there, then we go, “Where are the areas we might want to look at?”

For example, here in San Diego, you might not want to go buy an investment property. We have to drive 45 minutes away every time you have to go somewhere. Maybe you’re going to look for something closer. My idea for your first property is if you can buy close to you or near you, it’s easier. Especially if you’re buying it, rehabbing it, and managing it, you want to be close by. What I’m looking for is probably not the first question I ask. It’s more backing in and getting all those questions answered and all the pre-qualification. I feel it makes it so much easier to identify what you want.

That’s exactly how I operate and used to work also with my clients. I love that. Krystle, how about your perspective on that?

It’s similar to Kenny. A lot of times when I’m working with new investors or even people who own a couple of 2 to 4-unit investment properties, and now they want to take the next step, it’s great that Kenny and I worked together because people don’t know when they’re making that crossover to apartments that the property has to qualify. They come to me and they say, “I have X amount down. I can get 75% LTV, right?” Technically, yes, but the property has to support the cashflow.

This is why having your criteria, your goals, and understanding exactly what you’re looking for is so important. You can go buy a 2 to 4-unit property and put 25% down and cashflow negative. If you don’t do your homework upfront and you don’t understand how to run cashflow, and you don’t have criteria, you could be in a property that doesn’t even cashflow. On apartments, we won’t let you do that. It’s difficult to fail. At the same time, you might have to come in with a lot more money down than what you anticipated.

The first step for me is talking to someone in getting qualified. It’s not just a broker. A good broker is going to want you to be in contact with a lender as it is, but you want to take a handful of deals to your lender and say, “What do I qualify for on these deals?” You can start understanding all of the different terms that we use in multifamily. It’s much different.

Real Estate Game: Getting started is really the most important part. It doesn’t matter how old you are. So it’s not like if you didn’t get started in your twenties, it’s over for you. Get started at any point in time and you will definitely exponentially improve your life going forward.

Every building that you look at is a business. I’m underwriting the business. That business needs to cashflow. Based on that, I can tell you what loan I can give you. For most of us, if you don’t have a loan, you don’t have a deal. We usually start there. Pre-qualifying for multifamily is a much easier process than it is for residential. It’s a different way of looking at it if you’re used to residential.

I want to highlight quickly and summarize for my ladies. I’ve said this before on the show, but I want to say it again. The big difference between lending in residential and in commercial is in residential, you qualify. In commercial, the property qualifies. There are completely different ways of analyzing whether you’re qualifying or not.

Keep that in mind when you’re looking at switching over. Maybe you’ve got 1 to 4 units. You’ve been doing residential. If you’re going to switch over to multifamily, understand that the big key to remember is it’s not about you. It’s about the property, which can be amazing if you don’t have the income or the credit. There are a lot of things that we need in residential that we don’t need necessarily in commercial. That’s true, correct?

That is correct. In your example of you guys buying a house and the fact that you only qualify for about the same as you did over the last twenty years or whatever, that doesn’t necessarily hold true in multifamily. I have plenty of real estate investors who cannot get a home loan but can go get a $5 million apartment loan.

Isn’t that amazing?

I like to say we use common sense.

It’s also interesting how we define common sense, but it’s a business loan, so you don’t have to qualify. Your business has to qualify. I love that. Let’s talk too about how to maximize your ROI.

One of the things that are so important when you’re buying a property is when you’re looking at properties, for example, some people might say LoopNet is the worst place to find apartment buildings. I’ve heard that so many times. I found some of my best deals on LoopNet. Why is that? I can look at a building and see the income potential that other people didn’t see. I get it and I get deals because of that.

When you’re looking at properties to invest in, you want to look at other ways that you can increase the ROI. The beauty of multifamily too is that the higher your NOI, your net operating income, the higher the value of your property. We value properties based on the cap rate. If you can increase the NOI, and multiply that by the cap rate, then you’ve already got an exponentially higher value.

I look at other things. When I walk into a building, I not only look at, “Does this building have RUBS, utility billing? If the landlord is paying all utilities or some utilities, can I come in and charge the tenants for their utilities to offset that cost?” A lot of buildings are doing that nowadays. “Is there storage? Is there parking? Are there other ways that I can increase?” In California, we have ADUs, which not every state may have. You can add an Accessory Dwelling Unit. “Is there a potential for me to add some ADUs or granny flats on the property? If I make small improvements to the property, can I increase the rent? Does that make sense?”

Also, I take a look at expenses. “How can I cut expenses?” Sometimes I go in and energy costs are astronomical. They haven’t converted to LED. The trash bill might be high. You can go renegotiate. There are a couple of different trash providers. You can negotiate the price down. There are so many ways to increase your NOI on a property. You have to be a forensic investigator when you go in and look at a property to see how you can maximize its potential.

Ladies, as you’re reading this, there are a lot of terms thrown out there that can be a little intimidating. Understand that that’s why you need a pro. When you’re looking at your financing and starting this journey, talk to somebody like Krystle. She’ll explain all those numbers and the way that the lending works around this so that you can understand it. Once you’ve talked to a pro, now you know what to go out and look for.

One thing that has been helpful for us in our business and also with other clients is when you’re looking at somebody to work with, it would be helpful that that person is also a real estate investor because they understand. They’re looking at the property as if they owned it. They know things that someone who has never invested in real estate would never know because they’ve never been there.

It’s helpful when you’re looking for somebody to work with that you go to somebody like that because we can be more of an advisor. I’m not just going to come and throw out loan options for you. I’m going to say, “What if we can do this? Maybe we can increase rents during escrow to push loan dollars. Maybe I can get this insurance quote down.” I’m doing everything I can to maximize your loan or get you the loan that you want. That’s the person you want on your team.

That’s going to be true, whether you’re buying a single-family, multifamily or commercials like offices, retail, or whatever. Anybody that you have on your team should be investors themselves. If they’re not walking the walk, they don’t understand your pain points. They also don’t understand the opportunities. That’s a good point. Kenny, do you want to add anything?

Some of the obvious things for ROI is you go into a dilapidated unit. You go put your cabinets, flooring, countertops, and all that. That’s a way to generate higher rent. That’s going to increase the value of the property. The other thing here in California that is huge is jet parking. I know that sounds weird. You have a garage. You have access to storage. We try to put laundry-in units, instead of a laundry room because people pay $100 to $150 more for a garage and $150 more for a laundry-in unit. We’ll also put AC and wall AC units in because people will pay more money.

As you get further along in the journey. We had the privilege of managing a lot of units. We learned a lot. We tested it. We would say, “Let’s remodel this unit. Do all this fancy stuff. What did we get? Why do we keep this one plain Jane over here?” We realized you’re getting a lot more money. It was worth it long-term. When you sell the building, some of these are going to pay you a premium.

When you’re doing ROI, what are you doing for the short-term for the rent game, but also what is a potential buyer if you are going to sell that property and exchange up for something bigger? Are they going to pay you a premium? We’ve found that there are a lot of buyers, especially here in California, who might be in a different part of their life and age.

Real Estate Game: Your first property should be close to you so that it could be easier managing it.

They’re like, “We own this property. It’s got a lot of issues. We don’t want to deal with it. We have it free and clear. We want to sell it.” When you want to buy something that has market rents, is completely rehabbed and completely done, we will pay a premium for that. There are many reasons why you would increase the NOI and fix up the building, not just for the cashflow, but it could be if you’re going to sell in exchange for the building.

We refinance too. That’s another key.

This is an intuitive thing, ladies, to think about. When you walk into a house, if you look at it and go, “It needs air conditioning. This fridge is old. This doesn’t look nice. It was livable,” and then you walk into a comparable property that’s got air conditioning, it looks nice, and it’s a home for you and your family, would you pay a little bit more? It may not be dollar-to-dollar, but there’s this intuitive sense of, “I would much rather live here?” This is how I run my business too.

I want to make sure that people walk into the house and have a sigh of relief, “I could live here. This is so nice. This is so much nicer than these other places. I can do laundry inside. I can park my cars without getting sap all over them. I don’t have to pile the kids into the car and run to the car wash every week.” There are these intuitive feelings that we have in our gut when we’re moving into a home. Taking care of those pieces may not necessarily be a direct relation dollar-for-dollar, but you will notice it’s so much easier to rent, sell or maintain if you’re doing those things.

Not to mention retention too. That’s one of the things that we found. When you put laundry and/or AC unit, people stay longer. That reduces your turnover costs and vacancy. That’s our goal. We want you to get cozy and stay there.

Most of my tenants stay between 10 to 12 years for exactly that reason. They love the property. They don’t want to have to move to someplace else that’s not as cozy. I’m proud of my tenants. They usually buy something. Once they’ve lived in a happy home, they’ll usually buy something, which I love. It encourages them. They understand what it feels like to live in a place that feels like home.

Let’s talk about inflation. Everybody is talking about this. There’s a lot of fear around this. I can understand the fear, but we have had inflation before and real estate investors still have done well. It’s something to be aware of. It’s something to consider, and it’s something that you can use to your benefit. It’s not a time to sit on the sidelines and go, “It’s inflation. We’re not going to touch real estate.” I would like to get both of your guys’ perspectives on that, both in residential and commercial.

Frankly, I would advise in high inflationary environments that you should be running to real estate. Most of us want to feel the safety that we have all this cash in the bank. The truth of the matter is that the higher the inflation, the less your dollar is worth. You’re losing money by keeping money in the bank. That’s not to say that you shouldn’t be able to pay for your expenses for 6 to 12 months, whether it’s in your business or your personal life. You need to be able to cover your costs for a period of time.

In terms of the fear of inflation, I get that. The best thing to do in a market like this is to understand that there are things that you can’t control. While you need to be aware of them, you should not make decisions based on fear. You need to make decisions based on getting the knowledge, understanding where you’re at, and that you can’t change it, but you can have some control in your personal life about growing your wealth, making smart financial decisions, and changing some habits. It’s more like, “Let’s get an action plan together,” rather than, “Let’s be scared and be paralyzed.” This is the problem. Most people freeze because they’re scared. That’s the worst thing you could do in an environment like this. The most successful people take action.

How about you, Kenny? What do you think?

For residential, because people are buying their homes, their costs and bills have gone up. If you bought a home, the rate is high. We’re in the camp that rates will come back down in the future. In 2020 and 2021, we saw all-time crazy low rates. We saw inventory at all-time lows. We saw buyer demand crazy. That resulted in crazy inflation in real estate. People overpaying all this stuff. We come to 2022, demand is going down. Supply is coming up. Some are selling for different reasons. Now, the buyers are going, “What should I do here?”

I tell everybody, “We have already seen price reductions. Some things are coming down and cooling off.” People are sitting here and listening. You hear this over and over. This is the story we’re having. “Should I buy now? Should I wait?” There’s probably a window from now until when the Fed says, “We’re going to do QE again.” That is quantitative easing. It means they’re going to put money back into the system. Now they’re taking it out at a rapid rate.

If you look at the ocean, it’s a low tide. They’re pulling money out. The water is draining out and they’re going to flood the system back. When that happens, interest rates will drop. Demand will go up. People feel more confident, but that’s also when everybody decides, “I’m going to get off the fence and buy.” Between now and whenever QE is, if we knew, we would write a book. This is what it is. We wouldn’t be here. This is the time to buy.

I would encourage people to look at inflation. It is now to your advantage. If you know rates are high and you think, “I’ve done my homework,” there are plenty of YouTube videos, podcasts and stuff to study, that interest rates go up and they’re going to lower the interest rates. Even if I lock in at a high-interest rate, I get a deal on a house. Let’s pick a house. A $500,000 house in 2021 was selling for $550,000.

The $500,000 house listed now is getting an offer at maybe $500,000 but they’re asking for a $15,000 lender credit. That is a huge difference between what was happening now and yesterday. If you’re seeing that, you are getting a discounted house. If you have a higher rate, it might not feel good, but if you can be in the camper, you’re refinancing in a year. You’re getting a lower rate and you’re not in the camp where everybody else is. You now have to buy. You’re amongst all these people and this whole wave of people that are going to come in.

I think now is the time to do it. Inflation is fearful for most because they don’t understand it. Putting your money in the bank is when they’re paying you 2% and inflation is 8.5%. We know it is more than that. You’re getting crushed. You might see a dip in real estate for now because of inflation and the rates are being manipulated up. In the long-term, you’re going to wish you look back. This is an opportunity to buy.

I loved your analogy of the ocean and the tides because that is how real estate is. There are low tide and high tide, and seller’s markets and buyer’s markets. It has been that way since the beginning of time. To understand that what’s happening is not permanent. You’re not married to the system. The system is going to change and you get to pivot and adjust based on what’s possible.

Even though interest rates are high, rents are raising higher. Interest rates are going up. They have gone up to 2% in the last few months. That’s too high. Anyways, they have gone up quite a lot. What have rents got up? Rents have gone up 30%. Even if you buy a place and you’re paying more, you’re getting significantly more in rent.

Real Estate Game: Most of us want to feel the safety that we have all this cash in the bank. But the truth of the matter is that the higher the inflation, the less your dollar is actually worth. So you’re losing money by keeping money in the bank.

Inflation is playing on your side. You can be afraid of interest rates. You’re also losing a huge amount of money in the appreciation. The market is cooling down. We might see some corrections. Over time, if you guys can see me on YouTube, the real estate market is market specific. This is not true everywhere. In general, you have a correction and then it goes about higher. Over time, the general curve of real estate goes up.

In 2008 and 2009, we saw some people weird. It was a complete crash. Still many markets are significantly higher than they were before that crash. If you’re looking at real estate as a long game, what rates are doing is going to influence inflation, inflation influences rents, which influences your cashflow. Over time, appreciation is steady growth. There are different strategies in different markets, but I can’t say, “Don’t invest in real estate.” You have a good opportunity to benefit from inflation by investing. Would you guys agree?

Yes. Not to mention that you talked about buyer’s markets and seller’s markets. It shifted to a buyer’s market. You don’t have to go out and put an offer on a property, non-contingent, money-hard, day one anymore. You can ask for your proper due diligence timelines. You can get your financing contingency and your appraisal contingency because it’s not a seller’s market anymore.

It’s a much safer time, especially if you’re new to investing, to get that time to do your due diligence. Whereas before, it was this extreme pressure situation. You’re competing with all of these people. Nothing makes any sense. You just want to win. Now you get a lot more time to do your due diligence and research and make sure that you’re making the right decision when you’re making offers.

That’s a good point because it’s so much less stressful. You’re not scrambling constantly. Also, your taxes are based on your purchase price. In 2021, if you bought something for $550,000, as long as you own that property, you are going to have increases every single year based on a property value that started at $550,000.

If you buy it and it’s at $500,000, even if you’re paying a higher interest rate, you’re paying less in taxes. It could balance it out. You get exemptions on your tax returns too. It’s all a numbers game. Instead of running away in fear, take a look at the way that the numbers are working out. You may be pleasantly at what the opportunities are. If you take a look, you will be pleasantly surprised by what’s going on.

This is the thing. I’ve seen this so many times, even with clients who were experienced real estate investors. Every time they close a property, they go, “I don’t know. I don’t think it was a good deal. I think I overpaid.” Of course, you feel that way. You just paid the market price for the property that you bought. Let’s talk in three years and tell me how you feel. With property management, I did budgeting all the time for our clients. Every year I would have this budget and then, at the end of the year, I would look at it and calculate what their actual returns were on their properties.

In year one, they would be like, “That’s all right.” Year two, “Okay, fine. It’s a little better.” Year three, they’re like, “This is great. I made a good decision.” Everything feels expensive on day one because you are paying the market price. Sometimes you’re going to get a home run, but you can’t count on a home run every time. If you pay a market rate for a deal, and 3 or 5 years from now, you will look back and be happy that you did.

Even in the financial crash of 2008, our apartment values didn’t go down for us at least. There were some pains in a lot of parts of the country, higher vacancy, management companies going bust, mismanaging properties, and things like that. You’re going to have to watch those things. If you can hold on and responsibly manage your real estate, you’re going to win in the end.

I feel like I could talk to you forever. We’re getting to where we don’t have time. I want to make sure that we complete the show and then we’ll talk some more in EXTRA. In EXTRA, ladies, we are going to talk about hacks to get your first deal. We’ve got two people. We’ve got commercial and residential. Both of them are going to weigh in on that. I’m super excited to be talking about that in EXTRA. Before we move towards the end of the show, could you tell us a little bit about how people can get in touch with you? You got a free offering for my ladies which I’m excited about.

We are almost done with a course on how to buy multifamily properties. It’s called the Real Estate Hustle Course. We’re going to offer the first ten people who DM us to Get In The Cashflow Game. That’s on Instagram, @GetInTheCashflowGame. We’ll offer the first ten people free beta access to the program. It will be a subscription-based program. People who will come into it are going to pay a monthly fee. We’ll give your first ten readers free access for a year.

That is so generous. DM is a direct message, ladies. It’s a DM on Instagram and it’s Get In The Cashflow Game. We’ve got so many ladies. I did a poll. I was like, “What social media are you on?” They’re all like, “I’m not on social media.” That’s what that means. Thank you so much. That was a generous offer. I love that. Are you guys ready for our three rapid-fire questions? I’m going to ask each of you separately.

Let’s go.

Who wants to go first?

I’ll go first. Krystle asked me to go first.

Kenny, tell us one super tip on getting started in real estate investing,

One super tip in getting started is listening to podcasts like this. We live in a day and age where you can go on YouTube, Apple or anywhere and find so much great content. It’s unbelievable. That is where you should start. Swallow and absorb as much content as you can.

What is one strategy for being successful as a real estate investor?

Real Estate Game: The best thing to do in a market like this is to understand that there are things that you can’t control. And while you need to be aware of them, you should not make decisions based on fear. You need to make decisions based on getting the knowledge.

Stick to your discipline. Know your numbers and what you want to buy. Don’t start wavering on that and making bad decisions. Stick with what you set out to do. Don’t start doing crazy things and getting out of your comfort zone just to do a deal because they can come back to bite you in the butt.

What would you say is one daily practice you do that contributes to your personal success?

I am an early riser. I get up probably between 3:30 and 4:00 AM. I’m not saying I recommend that, but I would tell anybody is whenever you get up, maybe you get up an hour extra and take that time. I call it “Me Time.” If you have two kids or if you’re a mom, tell your husband, “You’re going to watch him,” but go spend an hour on making yourself better, whether that’s learning about real estate, meditating, or going for a walk. That hour extra added up over one year over 20 to 30 years, I guarantee you, will change your life.

Thank you for that, Kenny. Krystle, are you ready?

Those are some good answers. Let’s see if I can come up with something original. I promise you it won’t be telling people to get up at 3:30 or 4:30.

That was painful to listen to.

I’m tired just thinking about it.

It’s true. Each of us is different. We’re all built differently. When you’re picking your strategies or how to run your life, be aware of who you are. That works for Kenny. It wouldn’t work for me, but it works for Kenny. If it works for you, that’s awesome. No judgment at all. Krystle, tell us one super tip on getting started investing in real estate.

The super tip is to get started. First, you want to know your criteria because you’re not going to go anywhere without knowing your criteria and your goals. Once you identify that, you get off the sidelines and get in the game because you’re going to keep analyzing over and over. If you don’t get started, you’ll keep analyzing and never do anything. Know your criteria and your goals and just move.

What is a strategy for being successful in real estate investing?

My strategy for being successful is that I’m constantly growing and learning. I not only have listened to podcasts, YouTube, and things. If you have the benefit of investing in yourself, that is one of the best investments that you can make. I had a hard time with that over the years. I would invest in real estate any day, but then investing in myself for marketing or courses seemed silly, which now I know that’s silly. I have a mentor. I am in coaching groups. Kenny is part of mastermind groups. We are investing in ourselves, growing our knowledge, and being better every day. That is how we’re able to be more successful every day.

What do you say is a daily practice that you do that contributes to your personal success?

For me, I keep up with the news. It goes along with all of the podcasts and things. I don’t turn on the news in the morning, but I look at things on my phone. I listen to people that I respect in the industry, whether it’s economists or real estate investors. These are people I’m always trying to stay up-to-date with the newest strategies. Who are the newest lenders? Maybe there are newer types of loans available. Maybe there are other things I can do to improve my portfolio.

For example, we’re looking at doing solar and common areas to increase cashflow. It’s all these little things that I’m looking at to do to better my investing, but also me as a person. I focus on that. I don’t listen to the noise of the media, but I do look at people that I know and respect and people who are where I want to be. I look at what they’re doing.

I love all of it, but that last point of looking at people who are where you want to be. Don’t listen to the people who are not. It’s important to stay focused on the people that are where you want to be. They’re going to help you to get there faster. This show has been amazing and I’m so excited about what we’re going to be doing in EXTRA. Thank you so much for what you’ve contributed so far.

Thanks so much. This has been so fun.

Ladies, we’re going to be talking in EXTRA about hacks on how to get your first deal. If you’re subscribed to EXTRA, please stay tuned. There’s more. If you’re not, but would like to be, go to RealEstateInvestingForWomenEXTRA.com. You get the first seven days for free. Check that out. For those of you that are leaving us, thank you so much for joining Kenny, Krystle, and me for this portion of the show. You know how much I appreciate you and I look forward to seeing you next time, until then, remember, goals without action are just dreams. Get out there, take action, and create the life your heart deeply desires. I’ll see you soon.

Important Links

• https://www.Instagram.com/GetInTheCashflowGame/
• Pacific Shore Capital
• The Simpson Team
• Get in the Cashflow Game with K&K
• YouTube – Moneeka Sawyer
• RealEstateInvestingForWomenEXTRA.com

About Kenny Simpson and Krystle Moore

Kenny Simpson is San Diego’s premiere Residential Financier and Real Estate Investor. He’s worked with thousands of clients on 1-4-unit financing, helping them shift their mindset and have confidence about qualifying for a loan whether for a primary residence or for investment properties. He leads the Simpson team and is the host of San Diego’s most popular Real Estate Podcast, Get in the Cashflow Game with K&K. Kenny has over 15 years in the business, including his own investment and management experience having managed over 1000 units, and rehabbing and designing countless properties as well.

Krystle Moore is the founder of Pacific Shore Capital and San Diego’s leading expert in Commercial
Financing and Real Estate Investing. She actually began her career at age 19 and now, with over 16 years of experience, Krystle has funded over one billion dollars, helping over 1000 clients with their commercial and multifamily financing needs. Between managing over 1000 units, rehabbing and designing countless properties, she is committed to
sharing her immense knowledge and industry expertise with her clients. Krystle’s expertise has been featured in SD Voyager and the San Diego Business Journal and she spoke on investing in Real Estate for the “MAX NOI” event. She shares insights and strategies as the host of San Diego’s most popular Real Estate Podcast, Get in the Cashflow Game with K&K as well as her Pacific Shore Capital YouTube Channel.

To listen to the EXTRA portion of this show go to RealEstateInvestingForWomenExtra.com

Learn how to create a consistent income stream by only working 5 hours a month the Blissful Investor Way.

Grab my FREE guide at http://www.BlissfulInvestor.com

Moneeka Sawyer

Moneeka Sawyer is often described as one of the most blissful people you will ever meet.   She has been investing in Real Estate for over 20 years, so has been through all the different cycles of the market.  Still, she has turned $10,000 into over $5,000,000, working only 5-10 hours per MONTH with very little stress.

While building her multi-million dollar business, she has traveled to over 55 countries, dances every single day, supports causes that are important to her, and spends lots of time with her husband of over 20 years.

She is the international best-selling author of the multiple award-winning books “Choose Bliss: The Power and Practice of Joy and Contentment” and “Real Estate Investing for Women: Expert Conversations to Increase Wealth and Happiness the Blissful Way.”

Moneeka has been featured on stages including Carnegie Hall and Nasdaq, radio, podcasts such as Achieve Your Goals with Hal Elrod,  and TV stations including ABC, CBS, FOX, and the CW, impacting over 150 million people.

blissfulinvestor.com