SOTM 58: Advice for Struggling Landlords with David Greene of BiggerPockets

Aaron Amuchastegui: Real Estate Rockstars, this is Aaron Amuchastegui. Hey, you guys have been asking for me to get this guy back on here. It was just maybe a month or two ago he made some pretty bold predictions and now a lot of our State of the Market news has said that back.

Good friend of mine, David Greene, back on the podcast. David is also one of the co-hosts of the BiggerPockets podcast, the biggest real estate investing podcast out there. We like to say we are the biggest podcast out there for real estate agents, but we know BiggerPockets is the biggest one out there for investors, and also a good friend of mine. David, how’s it going?

David: What’s up, Aaron. It’s going great. Other than California being on fire and choking on all this ash and our firefighters out there working super hard, business is going really good, but our state is in some trouble.

Aaron: No one is saying defund the firefighters right now. I mean, geez, they are working so freaking hard. Though two weeks ago, we were in South Dakota, Mount Rushmore, having an awesome time. My daughter broke her ankle and we realized we’re going to have to postpone our RV trips. We hightailed it over to our house in Loomis which is near Sacramento, and I tell you what? I had heard that there was fire and smoke and there is just smoke everywhere.

We’re doing like a GoBundance get-together at our house in a week there, I’m hoping you can come up for, but I’m just hoping the smoke just dies down. When I send out the invite I’m like, “If it’s just smokey, everyone will be swimming and playing basketball, it’ll be great,” but there’s ash-like all over my patio. I don’t think I’m within 50 miles of a fire, 100 miles, but there’s ash everywhere. It’s like it snowed.

David: It’s amazing how much these big fires how geographically large of an area they will cover. It’s almost the whole state from a couple of different places that are having these fires. Yes, your car is totally covered in ash. The sun looks just like a red globe in the sky.

Aaron: Now, it’s happening in Oregon. We’ve been pretty used to this happening once a year in California, ever since I’ve lived here. Every year, there’d be a fire. Sometimes we’d have smoke for a week or two. Sometimes it’s for a month. We’d have to cancel soccer practices and games. I used to coach a lot of soccer teams, but right now they also have them in Oregon and Oregon hasn’t really seen that much before. I’m sure we’re getting a little extra smoke. What city are you at out in the Bay Area?

David: I live in Discovery Bay, my real estate office is in Brentwood and I represent clients from the South Bay, Silicon Valley, to the East Bay, to San Francisco, and then up in your area in Sacramento.

Aaron: I’ve met some of your team members over here and seen a bunch of the marketing and some of the get-togethers that you guys have done up here. I really liked one of the presentations you guys did for local people, was about investing in certain areas in Sacramento and some other stuff and pretty cool info. You guys are out there really trying to provide a ton of value for people and advice.

Anyway, it’s funny. One of the things that you talked about on here a while back was you said people are going to be leaving the cities and moving to the suburbs. People are going to be leaving the cities moving to the suburbs because of COVID. This was you and me doing this interview I think it was in April or May. That it was how people were going to be changing their philosophy, and now, everybody’s listening to my State of the Markets.

They’ve heard that over the last couple of weeks, San Francisco is the only city in the country that has twice the inventory they had a year ago. Where inventory is actually going up because so many people are leaving. There was an article that I read yesterday that I put on the State of the Market that 2 million renters are leaving the cities with the potential to buy houses now 30 miles out of the city because they can work remotely.

I want to just ask you what all your predictions are since you got that one so right. What do you think about that with the city stuff because you’re out there closer to the Bay area? Are you talking to many people that’s part of the demand? Are you seeing people fleeing San–? The news is like, “People are fleeing San Francisco”. Does it feel like that?

David: No, it doesn’t feel like that. I’ll take it a step further, you read a lot of the news that people are overall fleeing California. There are a lot of people that are leaving here and in spite of that, this is the hottest market I’ve ever seen.

I hear a lot of buyers that say, “Hey, David, everyone’s leaving California. Do you think I should wait and not buy?” I’ll say, “It would help us because it’ll just put more listings on the market that we desperately need, and now they’re no buyers that are also competing for the other listings, they’re buying in another state.”

California has such a strong economy at this point and opportunity and desire to live in it. Even with everybody that’s exiting, often for political reasons, there’s still not enough housing to meet the demands that we have.

The people that are fleeing San Francisco, as it’s being said, they’re not necessarily fleeing the city of San Francisco. They are often fleeing the condominiums and the townhomes and the parts where you paid for a location and proximity to amenities that are now shut down. We’ve been shut down for so long. All the restaurants are closed. All the bars are closed. All the clubs are closed.

The things that people wanted to have proximity to in San Francisco aren’t there. A lot of those people are going into the single-family homes. They’re going to the East Bay where they can get a bigger house, or they’re actually buying in San Francisco to buy a single-family house. It’s still very competitive to get single-family homes in San Francisco.

A lot of those numbers are misrepresented when they say that there’s twice as much product on the market. You could have had an extreme shortage, you have twice as much out there, that is twice as much that you now have, but it’s still not very much and almost all of it you’re going to find is in the condo space, not the single-family homes.

Aaron: Yes, that’s it. You’re right. It’s like if 20 people are sharing half a pizza or a pizza, there still wasn’t enough for them out there. It’s a good point to say, yes, in one sentence, it’s like, “Oh, there’s so much more inventory there, but what you’re seeing is there’s still high demand. It’s still San Francisco. People soon will forget about the smoke and the–“

Politics is that big driver. I think when people do things for political reasons, it does hit the news a lot. Realizing that you still want to look at the numbers and see how many people are in fact leaving, I feel there is a big opportunity for agents to find the people that were working downtown.

People that are making $50,000, $60,000, $100,000 a year, they were working in offices, inside cities, but they couldn’t afford to live inside cities because it’s just like any city you pick. You’re picking Denver, you’re picking Austin, Texas, or San Francisco or LA, you can’t own a house in the city without paying 1 million, 2 million, something plus. People could get condos but now, if people actually want a house and somebody can work from home now, they’re saying just like you said, they’re leaving the city. They’re going to East Bay. Right now, how big is your team that you’re running out there?

David: There’s me and one agent, Kyle, he’s out in your area in Roseville that are doing most of our production. I have two other agents that are on the team that function primarily at showing assistance for my clients. We have a total of four agents and three admin.

Aaron: Right now, are you having people, clients, that are moving from San Francisco saying, hey, they want to go to the East Bay where your stuff is?

David: They’re almost all people that have condos in San Francisco and they want to move to the East Bay where they can get a bigger house. I’ve noticed that for agents that want to generate business, most of them have been geared towards thinking I have to buy a lead from somewhere else. Part of what I don’t like about that model is that the phrase lead is used so liberally, not everything that’s called a lead is a lead.

If you said, “Hey, David, I have a lead for you.” What I’m expecting you to say is, “My buddy Frank needs to sell his house. I told him to use you, give him a call.” Buying a lead can be you and six other realtors got a name and a phone number of somebody that was forced to register on our website that has zero interest in selling their house. They just wanted to know what the market looks like and you’re trying to convince this person to buy.

A much better strategy that I’ll use, most of the clients that I have, they come out of natural conversations with people and I’ll just ask them, “How do you like about where you live?” They’ll tell you, “I hate it. Everything’s shut down. I’m cramped up in this tiny space. I wish that I wouldn’t have bought this condo,” or “I really like my house, but I really don’t like the area. The commute is way worse than what I thought and my house has gone up $70,000 but this commute to work is killing me.”

Then I will say, “Well, if you could get out of that spot into a spot you’d rather have and not have your payment change very much, would you be open to talking about that?” Everybody will say, “Yes.” Your ability to tell a story or really paint a picture of what it could look like to get out of a spot they don’t like and into a spot they do, is a wildly important skill to develop as a real estate agent.

You’re basically in that conversation giving them permission to sell their house and go buy another one and probably picking up both sides. So many people get stuck on this buy a lead, buy a lead, call FSBO, call an expired. Just take the same path that every other agent has been told to take that they’re missing out on opportunities that they could be helping their aunts, their cousins, their sisters, their friends who don’t like where they’re living or don’t like the house that they’re living in or just want to save money. Maybe they want a house hack that’s going right over their heads, they’re missing those shots.

David: If you talk about like just providing value, just very simply providing value, being able to have a conversation with somebody and say, “Hey, how’s everything going? How do you like your house?” Especially with people that are in the cities where everything- because in a lot of cities– I mean, we’ve been through a lot of states now, and even in the states where there’s very little shutdowns happening, in the most dense cities, they still is, and so if you’re talking to people in the cities, probably throughout a lot of the US, a lot of stuff is shut down, and as you just get 20 miles outside, restaurants are open and bars or things are functioning.

Being able to say, “Hey, how do you like your house? How do you like what’s going on?” If they say there isn’t, it’s saying, “I bet you didn’t know that right now you could get– Like what do you wish you had?” What do you wish you had? Said, “I wish I had more room? I wish I had a yard?” I bet you can actually get that now.

I bet what’s crazy is the– Now that you can work from home, you can work anywhere, why aren’t you thinking about this and it really is like a soft sale. Like you said, you’re giving them permission to be able to make that adjustment.

There’s a few things in the news over the last couple of days that were pretty big to me that said foreclosures, no foreclosures now till the end of the year, and no evictions until the end of the year, and then in California, the governor extended and he said no evictions until February.

We actually had an eviction for a tenant in Texas that we had already got a writ on. It was supposed to be that today they were going to be moving out and there was a notice sent to us from the judge that said, “Hey, because of this new federal law, your writ has now been moved to January 4th.”

You’re talking January 4th, 2021. That’s- what is it? October, November, December, that’s four months from now, the person that hadn’t paid rent for a couple of months and now they know not only did we win the eviction, but now they know they could stay there for four months. I mean, what’s to stop somebody from just trashing that thing from here on? How do you think that those two things are going to affect lenders, landlords, does it make you want to be a landlord less?

I mean, it reminds me of the cash for keys that we used to do when we would buy foreclosures, and we would literally, pay Pete squatters thousands of dollars to leave. Making a business decision, “Hey, I’ll pay thousands of dollars to leave my property even though they don’t have a right to stay there.” Do you think that’s gonna start happening again? What do you think about that?

Aaron: I think there’s a lot of that where I live that already happens. There’s a lot– People just immediately assume cash for keys, “Hey, I want to sell my house. My tenants live in it. How much do you think I have to pay him to get him to leave?” I’ll say, “Well, have you asked them if they want to leave?” “No, I thought I had to give them cash because they won’t.”

Say, “What if they were planning on leaving anyways? What if they’d be happy with $800 to cover their moving expenses and a month to find another place to stay?” I don’t automatically go to the cash for keys model.

It’s very frustrating in those rare circumstances where you have to pay a squatter who has no right to be in your house to get them to leave. I agree with you that especially as a former law enforcement officer, if you’re not following the rules, there should be a consequence for you, there shouldn’t be a consequence for me. In many of the areas that we live in, that’s just not the common way that culturally people are looking at these problems.

I like to remind myself when you’re in this position like you’re in the perfect storm. A pandemic, rules came out that said, you can’t evict somebody– Like the CDC came out with some of that saying it will spread COVID if people are forced to leave their house, stay there. You can’t evict.

Over a 30-year timeframe owning a home, this is a small blip in the radar, that’s a minor inconvenience. It doesn’t feel like that when you’re going through it, but I remind myself of that a lot. This doesn’t mean that owning real estate isn’t going to build wealth, or that it’s a bad idea. It is an inconvenience.

The advice that I’m giving people because I get this a lot from hosting bigger pockets, there’s a lot of people that come to me and say, “What should I do, here’s my situation?” I think as a landlord, or if you’re an agent, and you’re advising one of your landlord clients, it’s communicating to the tenant very clearly, and non-threatening, just very directly, “You can stay until February and I can’t evict you. You can get three to four months of delayed rents out of me, but I’m going to get that rent back from you,” and they’ll probably say, “How?”

You say, “You’re not actually avoiding an eviction, you are delaying an eviction. If you do this, I will get a judgment against you in court, I will garnish your wages at the next job you go to. Everyone that looks you up and does a background search on you will see there’s a judgment that you don’t pay your debt, you will not be able to rent from another landlord, because they’re going to know that you have an eviction on your credit report. If you can’t pay, I totally understand, you need to willingly leave. You need to move in with a friend, with a family member, you have to do something, you can’t force me to kick you out.”

I think that that is another misconception that anytime a tenant breaks their lease, that’s an eviction. It’s not, if they willingly go, it saves you a ton of money as the owner. An eviction is a forced vacancy, you have to take legal action and literally required the sheriff’s office to come in and make that person go.

If tenants are hearing on the news you’re a victim, these greedy landlords are making you pay, you don’t have to leave, many of them assume that means there are no consequences for forcing an eviction. I advise landlords to tell them, it’s just three to four months of interest-free living here, but the bill is going to come due. “You will get an eviction on your record, you will still have to pay that money, you’re not actually avoiding this. Let’s work together so that I don’t have to put eviction on your record, you can now rent from someone else at some point, and I don’t have to go through this really cumbersome process and expensive process of an eviction.”

I think if more of us could communicate that better, you would see less tenants that were actually forcing the hand of their landlord.

David: Yes. I think that it’s great advice right now, because it’s something to remember, as laws happen, it’s really easy to start to feel powerless. I had interviewed an agent this week that they had shut down real estate in the city, but he had just bought another office and he was like, “I couldn’t shut down, two weeks after I bought another office, we had to keep going,” and so he said, “We found ways to do it and ways to market and ways to–” Within guidelines, he said, we walked the line a little bit, but there’s kind of two mindsets when stuff happen, people can use– You can use something as an excuse to say, “Hey, it’s not my fault, so now I’m not going to do anything,” or you could say, “Hey, what can I do here?”

That’s a great reminder for me that I need to talk to my property management team about out there for these new ones that are coming to where it’s like, “So now he’s been given the notice that he can stay till January 4th, getting to have those conversations.”

It doesn’t mean it’s going to be easy, but it also means that if people can work a little harder, there are other options than just waiting until January waiting for a resident to trash a property, and really kind of push it all the way there. Do you think that lenders are going to be–? Let’s say there’s a year where people don’t pay their mortgage, do you think lenders are going to be less likely to lend? Or you think there’s going to be bailouts?

This is just straight conjecture, but part of me goes, “The problem with no fear of foreclosure is more and more people might not pay their rent and then get themselves where they’re too far behind.” Do you think that government will have to do bailouts for lenders who want to lend again?

Aaron: I think the government is going to do bailouts if lenders stop lending. A lot of people don’t understand how the lending world and the government are tied together. I’m a mortgage broker now, not just a real estate broker, so I’ve learned quite a bit more about the lending world.

When a mortgage broker originates a loan, they then sell that loan to somebody else so that they can get money back to lend to the next person. A lot of people don’t like the idea of their loan being sold, but if that didn’t happen, you’d pay a lot more money for your loan. It keeps money flowing in.

Then eventually, those loans end up being owned by Fannie Mae or Freddie Mac, which are government-sponsored enterprises that buy these loans and insure them as mortgage-backed securities on the stock market.

When people don’t pay their mortgage, Fannie Mae and Freddie Mac tend to come in and they basically bail everybody out so that loans keep getting made. I think that if we see something that really disrupts the typical lending industry, like a lot of foreclosures that all happen again, they will– Fannie Mae and Freddie Mac will tweak their guidelines and every mortgage broker that originates a loan, does it to those guidelines because that’s who’s ultimately going to be buying the property.

I can see scenarios where your type of occupation is given a rating, like how risky it is. If you work for a company like Tesla, maybe you’re considered less risky. Whereas if you work for the post office where we’re hearing all this talk that they may get rid of it, you’re considered more risky. It’s not just your credit score, but your occupation’s actually given a rating.

As we see like, “Well, this industry is severely affected by a government shutdown. This one’s not.” For these people, they can get a better score. Or for these people, they have to have a higher down payment if they work in an industry that’s riskier for the lender. I don’t think that will happen on its own. I think like most things will react and respond when something goes wrong.

It’s not just something goes wrong that everyone says, “Okay, how do we stop this from happening?” They come up with a new plan. That’s something I would expect to see. It’s hard for me to see lenders actually saying you can’t put 3% down anymore, or 5% down, you have to put down more. Just because the government is now tied to the lending industry and they would look at that like discriminatory, “Oh, you’re saying these people can’t buy a house just because they don’t have 20%.” That’s discriminating against a certain people group, so because those two worlds are tied together, I don’t think that’s likely to happen.

Yes, it’s true the anti-discrimination, especially in predatory stuff in lending and in housing, there are– that probably does stop true market action from happening where if people were truly making the decision based on supply demand and business metrics would be a little different.

I had a couple of questions. I had a bunch of people message me on Instagram this week kind of asking for different advice. It was from the BiggerPockets interview that I did with you and Brandon and David Osborn a couple of weeks ago. This guy reaches out to me. He says, “I’m currently working at construction industry, working in heavy civil construction.”

His dad owns a small residential company as well, construction is in his blood, real estate gets him super excited.

He’s ready to take a leap into real estate investing but he’s stuck. Where he lives, houses are really expensive. He’s leaning toward out-of-state investing, but he’s not sure where to pull the trigger. How does he start? I wanted to ask you that. That’s obviously a very loaded tough question, but you were doing a lot of that.

You were a police officer in the Bay Area and you were buying houses out-of-state to start investing in them. When I met you, the first time you and I got to hang out, you were still a full-time police officer, but you were also an investor. You were making more money through investing that we were like, “Dude, why are you still going and getting shot at? Just take care of investments,” but it still seem like you were still an officer for a while after that.

What advice would you give somebody who says, “Hey, I love this stuff. I’m in construction.” Now, one of the ideas, if you’re in construction then you want to be local, but just construction knowledge doesn’t help you as much if you’re doing something out-of-state, but if somebody really wants to pull the trigger and he’s living in an expensive area, what advice would you give him?

David: That’s a really good point you made. As you were talking, I was trying to piece together how I would advise this person specifically. I like that you pointed out that it won’t be the same advice that I give to somebody else who says, “I’m a software engineer and I can’t afford where I live, I want to buy out-of-state?” Because you got to look at your own unique skillset, where you’re strong, and if this person loves construction, he’s going to feel a lot more comfortable when he’s doing the work on the property.

It’s like a superpower he has that doesn’t apply if he goes to invest out-of-state. Now, I wrote that book Long-Distance Real Estate Investing because that’s how I did it. My strength was numbers. Maybe the creative ability to look at a property and see how it could better be used. Then the ability to just work seven days a week and save up money so I could go invest in other areas.

Then I got really good with systems, so I was able to buy out-of-state properties, but that’s why I took that road. That doesn’t mean everyone should take that road. If he has a unique ability to rehab properties for less or manage that project better as you and I both know, Aaron, that’s a huge, huge risk factor in buying properties is how that rehab goes, he should be looking local.

What I would say, this is the same thing I tell all my clients that are in the Bay Area, especially Bay Area, sometimes Sacramento, but definitely the Bay. They know to look for properties that are close to the 1% rule.

That means if it rents for 1% of property’s value every single month, it’s probably going to cashflow. When you get into higher price points, you can get a lot more loose with the 1% rule. If you buy a property for a million dollars, but it brings in $6,500 a month, that’s not 1%. It would have to bring in $10,000 a month to be 1%, but 6,500 will still most likely cashflow in the million dollar price range. It will not work in the $50,000 price range. It’s got to be 500 a month when you get there.

What we do is we look for properties that other people are missing. That’s the advice I would give to this person. If you’re wanting to end up ultimately with a rental property, we’re assuming this isn’t a flip. If it’s a flip, an expensive markets better, you have more meat on the bone for the same work. He needs to look for something that has more than one unit that can be rented out.

Now, the obvious answer is go find a duplex, go find a triplex, those are there. There’s just a lot less of them. What we do is we look for houses with basements that need to be finished, ADUs that are not being used right now, with unpermitted square footage that was added, that was done safely, but it’s not included on the tax records so the agent advertises the house as 1,300 square feet, but really it’s 2,100 square feet. That this contractor who understands the permit process, who understands the construction process can buy this 2,100 square foot house, make that unused square footage a part of the actual tax assessor’s square footage, and they can sell it for more. Or maybe convert the unused square footage into a separate unit. Run, plumbing, run the electrical, put up some dry wall, turn that into what basically function as two different units that can now be rented out and still cashflow. You can easily do that in an expensive market. If you have an eye and you know what you’re looking for.

Aaron: Yes. I love that part of advice because it’s really easy, especially for people in expensive markets to say, “Hey, I’m going to go to this other state, rentals are doing really good over there.” I mean, ultimately that’s why I live most of my time in Texas now instead of California, because I was able to find cash-flowing rentals in Texas more than I could find in California, but at the time I was looking for something different.

I was looking for long-term rentals and I really like systems, and the systems I was trying to find was places that needed not very much construction work. I wanted something that was simple construction that I could do over the phone, 10,000 bucks take a week, something like that and I needed to go over there, but for somebody that really, really likes construction and knows the permits I love that.

Even in your local area where it’s really expensive, you have to go find the ones with the value, find the ones that need major fixing, the unpermitted stuff, the errors, the stuff that’s kind of that unique idea. The other thing that you said was an expensive market is better for flipping and so I think a lot of people, it’ll be harder to get investors and partners and loans and things like that but a lot of people think that if I flip a house in Texas, if I buy it for 100,000 and I make 10% profit on it, we work on it for a month, we work really hard and we make $10,000, right?

If you do it for a $500,000 house or $600,000 house in California, it’s the same amount of work but the profit is 50,000 or 60,000 and if you’re going to flip houses out there, don’t let that discourage you, don’t let price discourage you, figure out what your strengths are. I really like that advice from David, if your strength is going to be analysis and spreadsheets and stuff like that, then, yes, go find the places where it’s easier because you can hire teams. If your strength is construction, get to do that. I love that answer.