B (5:46)

Hey, Paula. How are you?

A (5:47)

I'm great. How are you?

B (5:49)

I am excellent. Excited for episode two and all the things that we're going to talk about today.

A (5:54)

Exactly. Episode two of Invest Anywhere.

B (5:58)

We want to make real estate investing approachable for everyone, not just the hedge funds on Wall Street. We want to make sure that no matter where you live, you have the opportunity to invest so that we can move wealth back into the hands of the ordinary people. We're here to level the playing field by teaching you how to invest in real estate at a distance.

A (6:24)

So, Sunny, what's cool about the series is that we're sharing information that builds on what we shared in the last First Friday Invest Anywhere episode. We're sharing information sequentially.

B (6:34)

Yeah, it's almost like a course format so that someone can come in at the very beginning if they're interested in real estate and don't know exactly how to think about it. They can learn about the basic principles and then take that journey with us through all the pieces that they need to think about in order to be able to assess a good fit when it comes to investing in real estate at a distance.

A (6:58)

And a lot of what we are going to be talking about in this first Friday Invest Anywhere series is strategic thinking around investing, how to make important decisions. Especially, you know, if you live in California or New York or some high cost of living area and you're thinking about investing in the Midwest.

B (7:16)

I mean, that's a huge jump.

A (7:18)

Exactly.

B (7:19)

Yeah, that's a really huge jump. And I know a lot of what I hear from other investors and I think what you hear too is there's a lot of fear because you don't know what you don't know. You don't know about the big. There might be some big thing that you're missing. And we really want to take the audience through the big things to help set them up for success.

A (7:39)

So here's what we'll do in today's episode. First, we're gonna talk about what's happening right now because there's some big things, big current events. You know, we're recording this on Cinco de Mayo of 2022. And today the Fed announced another half point rate hike. And today was also the worst day for stocks this year so far. So there's some big things happening in the markets. We're going to talk about that first and then we're going to go into the topic of today's episode. The pros and cons of being a long distance real estate investor. But let's start. And we normally don't start, start by talking about current events. Typically, most of our episodes are fairly evergreen, but I've heard a lot of people in this community worry about whether or not they should sit on the sidelines. Essentially, the fear is, if mortgage rates are going up, which they are, doesn't that mean that home prices will go down? And so that is a question that I want to address now. First of all, the reason the Fed is raising interest rates is because inflation is at its highest point in 40 years. And they want to pump the brakes on inflation by limiting the amount of money that flows into the economy. So when they raise rates, they make money more expensive to borrow. And when money is more expensive to borrow, fewer people borrow it. It's simple supply and demand. When something's more expensive, people buy less of it. So if money is more expensive to access, people access less of it, meaning there's less money flowing around in the economy, which in theory means that the rate of inflation would slow. However, there are still some underlying factors triggering inflation that haven't been solved yet. One is lack of materials, upstream supply chain disruptions. The other is a labor shortage. And when there's a labor shortage, employers have to raise wages and salaries because there's a labor shortage. And that triggers a wage price spiral. Already, wages are about 5% higher than they were last year, and inflation, March to March, is 6%. So given that those two underlying issues have not been solved, there is a likelihood, or at least there are the underlying conditions present, that inflation might continue to rise. And if that happens, which it may or may not, if that happens, then it's possible that the Fed will continue to aggressively raise interest rates even further in order to combat that inflation. But this is something that the Fed needs to be careful about, because as money becomes more expensive to borrow, there's always the risk that businesses will borrow less, thus triggering a recession. Anytime the Fed is trying to combat inflation, the risk of recession is there. And given that the price of both food and fuel are invariably going to rise due to the war in Ukraine, which is also in addition to labor shortages and supply shortages, the war in Ukraine is also exerting pressure on the price of food and fuel, making those prices even more volatile, the need to combat inflation and the subsequent risk of recession that goes hand in hand with it, those are present, and that's why the market is declining. The drop in the market is a reflection of investors being worried about the possibility of an impending recession. But a recession is not synonymous. Despite what we've all, what we all remember from 2008, a recession is not synonymous with a decline in home values. A decline in home values represents deflationary pressure. When something is worth less tomorrow than it's worth today, that's deflation. If something costs $100,000 today and it only costs $90,000 tomorrow, that's deflationary pressure. And so during the last recession, we saw deflationary pressure in home prices as a result of the specific factors, the overborrowing, the easy credit that led to that recession. We don't see right now evidence of deflation happening either in the housing sector or in any other sector. In fact, all of the underlying fundamentals point to the opposite. With material shortages and labor shortages, the underlying fundamentals point to continued inflation rather than deflation. And remember, for home prices to drop below where they are right now, we would need deflation in the housing market.

B (12:36)

And we would need a change in supply and demand. So 2008 recession, supply and demand looked very different from how it looked today. There was an excess of inventory hitting the market that wasn't able to be purchased right away. Whereas the opposite is happening today. Between the shortages that you mentioned and lack of building over the course of several years, there's such a shortage of inventory that it is going to take quite a while for supply and demand to catch up to what would be considered air quotations, normal inventory levels.

A (13:17)

Here's something that I am watching closely. So because home prices have risen so much in the past year, homeowners now have record levels of equity. According to a CNBC article published on February 28, 2022, the average mortgage holder has $185,000 in equity.

B (13:38)

Whereas last time, a lot of people, a lot of homeowners were upside down on their mortgages. They had negative equity.

A (13:44)

Exactly. One thing that has happened as a result of homeowners having so much equity is that a record number of people right now are borrowing against that equity, taking out HELOCs, cash out refis and reverse mortgages. And particularly seniors, those age 62 and over have been taking out a record number of loans. So the number of loans to seniors in 2020 hit 759,000, which is, which was up from 647,000 back in 2018. So there's been a significant increase in the amount of homeowners, particularly seniors, who are borrowing against their equity. And what this says to me is two things. Number one, it shows how, by Virtue of the Fed raising interest rates, Fewer people will want to borrow against equity because of the fact that the cost of borrowing is higher and that slows down new money in the economy. So it shows some underlying evidence that rate hikes may work in incentivizing people to borrow less from their home equity and therefore curtailing the flow of new money into the market. On the other hand, the other thing that this says to me is that there's a risk that some people who have borrowed against their equity and may face foreclosure. And if that happens, which I hope it does not, but if that happens, that opens up four possibilities for investors. One is that investors can then purchase foreclosed homes either through HUD or through a bank's reo. That's one possibility. The second possibility, which would be more of a win win, is for both parties is that an investor could spare a struggling homeowner from the stress of a foreclosure by virtue of buying a short sale property. So that's the second option. And then there are two other options. Sunny, would you like to talk about these? Subject to and wraps. These are a little bit more sophisticated.

B (15:55)

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

A (17:01)

Right. You would want some sort of third party escrow to handle those payments. But that is one way. That's another way to create a win win situation between you as the investor and the homeowner. Right. If the homeowner doesn't want a foreclosure on their credit report or doesn't want a short sale on their credit report, then they can create a subject to agreement where an investor can then take over that loan and get the deed to the house and Spare the existing homeowner from the credit destroying ramifications of getting foreclosed on, which would be a.

B (17:35)

Win win for both the investor and the homeowner. Because once a home is foreclosed upon, the homeowner's credit is impacted and their future decisions are heavily. Future financial decisions are heavily impacted.

A (17:48)

Right, exactly. So both subject to and short sales can spare a homeowner from that. Those are three options. Buy a foreclosure, buy a short sale, buy a property subject to and then the fourth one is a rat mortgage.

B (18:02)

Yeah, so that's at a very basic level, that is when you put an additional mortgage on a property, this one can be a little bit more complicated because sometimes banks don't want another lien position. Sometimes you might not want another lien position, but basically you write a note in a mortgage in favor of the seller for the amount you agree upon that basically wraps around the current mortgage. So your note would outline the terms that would include the payments for what is the current mortgage, plus potentially whatever additional loan that you pay the homeowner. So if I was to give this some numbers to make it less abstract and theoretical, let's say you talk to someone who has 120k in a mortgage on their house. It's a great deal, the terms are great, the mortgage is great and they're willing to sell it for 150, but they don't need that 30k. Right now you can write them a note for 150k and make them monthly payments on the 30k and make monthly payments on the 120k for the note that is in place.

A (19:17)

Right.

B (19:18)

But for all of this, make sure you take the time and spend the money to get ironclad legal documents that follow state laws and really respect the mortgage that is in place. Because you never want the bank to call on the mortgage, which means then you would have to probably pay it off all at once, losing the deal and having much larger future ramifications.

A (19:45)

Right. So those are four options that would be available to investors in the event that we start seeing foreclosures. And the reason that I bring that up, and that's purely speculative, but the reason that I bring that up is because we're seeing a record number of homeowners borrowing against the equity in their homes. Given the fact that home equity has risen so significantly, especially in the past couple of years. But we don't know if we're going to start seeing more foreclosures or not. You know, one big difference between now versus 2006, 2007, two big differences. One is that borrowers today have to be much more qualified. So the debt to income ratios that banks will lend on are much stricter. The income verification process is much stricter. You know, banks today, as compared with 2006, 2007, banks have much tougher, tighter lending criteria. So the people who have taken out loans are better qualified than they were. That's one thing. The other thing is back in 2006, 2007, a lot of people took out adjustable rate mortgages and fell into arrears when rates went up and they couldn't pay the new higher rate. But given that mortgage interest rates have been so low for so long, a lot of today's current borrowers have locked in fixed rates. So we don't know if we're going to start seeing future foreclosures. The fact that so many people have borrowed against their home equity does not necessarily mean foreclosures are to follow. So this conversation is, you know, theoretical. Yeah, exactly. It's speculative.

B (21:20)

One thing you shared earlier, wages have increased 5% over the last year. Right. So if you take that wage growth into account, as well as the fact that so many people locked in lower rate fixed 30 year mortgages in previous years and previous times when the rates were lower, that would mean they'd be more able, better able to pay the mortgages that they've locked in.

A (21:44)

Right, Exactly. That's the beauty of having a fixed rate loan during a period of high inflation. Right. You're paying back that loan in cheaper and cheaper dollars over time.

B (21:55)

And I think that's an excellent segue to the subject that we were going to talk about today is, well, part of it is investing in real estate, making that jump to buy property even if it's not in your backyard.

A (22:08)

Yes, the pros and cons of long distance real estate investing. So let's do this. Since we've just finished talking about current events, let's take a break to hear a word from our sponsors. When we come back, we're going to go into the planned topic of today's episode, the evergreen topic, which is the pros and cons of investing in real estate and long distance, meaning investing in real estate out of state, far away from where you live. We're going to talk about that right after this break. Stick around.

C (22:40)

Kevin Harlan here. This Friday, the NBA on prime crew is back with another action packed doubleheader. The night starts with Jaylen Brown and the Boston Celtics going toe to toe with Pascal Siakam and the Indiana Pacers. Then James Harden and the Los Angeles Clippers head to Portland to take on Shaden Sharp and the Portland Trailblazers. It all comes your way this Friday on Prime, and if you're not a Prime member, that's not a problem. Sign up for a 30 day free trial to get started today. The Celtics and Pacers, the Clippers and Blazers coverage starts Friday at 7pm Eastern only on Prime. Restrictions apply. See Amazon.com amazonprime for details.

A (23:26)

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C (25:52)

I've been thinking about buying an income property in another state, but it seems like there's a lot that could go wrong. What should I be aware of and how do I prepare properly?

A (26:03)

All right, so how many challenges are we going to cover? What are the challenges?

B (26:06)

We are going to cover five challenges. These challenges are. One, the fear of the unknown. Two, the ability to hold people accountable. Three, traction. Four, my favorite stress. And five, the piece that can make the biggest difference in your investing journey. Relationships. Let's talk about why investing in real estate in a far off land can make you feel just so crazy. Point number one, fear. Which can also be thought of as.

C (26:42)

I'm terrified of dumping a lot of my hard earned income into something so far, far away I don't even know where to start. And what if there's an emergency and who's going to take care of it? I don't know what I'm looking at here. And how do I make sure that I don't lose everything?

B (27:00)

And if that was boiled down to one sentence, that one sentence would sound like this.

C (27:07)

I am afraid of what I don't know.

B (27:10)

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

A (27:41)

Antidote number one is education is knowledge, right? It's if fear is fear of the unknown, then the antidote is the known. And how to make the known. Known is by learning as much as you can. And you're starting that process right now by virtue of listening to this.

B (27:58)

And there's so many resources out there. There are podcasts, there are books, there are news reports, there are investment reports, there are courses, hint, hint. And there are those who have successfully navigated the arena that you are attempting to navigate. Those who have already done what you want to do and can give you feedback in real time about the things that you have questions about.

A (28:24)

In addition to knowledge, there's another way to also overcome fear, and that is.

B (28:29)

Networking, which is I really hate the Term networking.

A (28:32)

Yeah, I hate that term too.

B (28:33)

It's just, it's making friends, right? You know, like networking is really pompous, but at the end of the day, the people who are going to help you and the ones you're going to help are the ones that you have commonalities with, the ones that you build relationships with, the ones that you can connect with. That really bounces off the last point of that's also a part of education is talking to other people in the community. Real estate is about people and not properties at all. And as Jo of Stacking Benjamin's likes.

A (29:02)

To say, it's who not how, Ask who not how.

B (29:05)

I've heard that so many times, it's really funny to hear you say it. So like minded and abundance minded friends really want to help each other and the circle that you build can really help. Almost kind of have kind of a safety net for you. So when you're about to make a decision and when your friends are going to make a decision and you're also well educated, you guys can turn to each other and be like, hey, is there anything else I'm, I'm missing here? Is this how much I should pay for this rehab? Is there something about this area that I'm missing where maybe I shouldn't invest? It can help both on kind of like the launch pad of the investing journey or for each investment. But also, like we said, investing can be tough. People don't always talk about the tough points, you know, and all of a sudden when you have to deal with the flood or some sort of damage or a difficult tenant, you can feel a little crazy because nobody talks about these things. So when you have your friends to talk to about this, you have your circle to talk to, you realize that everybody's going through the same thing. And, and if everybody's going through the same thing and money's still made, it helps keep you sane. You haven't made a bad decision, you don't need to pull out of your investment, you're not on the wrong path. You can still make financial progress in the face of obstacles and difficulties by having this perspective.

A (30:19)

And the thing is, when it comes specifically to long distance real estate investing, the friends that you make, the network that you build in the local community is incredibly valuable. So I'll use myself as an example. When I was looking for some alternate location to invest, you know, and I was looking at places where I've never lived, I don't have any firsthand experience there, I was looking at places that I had never set foot in prior to going there for the specific purpose of deciding whether or not I wanted to invest in real estate there. I zeroed in on a couple of places. I looked at Birmingham, Alabama, looked at Montgomery, Alabama, looked at Indianapolis, Indiana, none of which I have any personal connection to. The reason that I chose Indianapolis, a big part of it was because of the people that I met there, specifically the real estate investor community that I found there, the friends that I made there that was incredibly valuable. And so many people from the Afford Anything audience have asked me, you know, they were like, what, what? They were looking for me to state some type of quantifiable thing that I had found some metric that made Indianapolis a quote, unquote, better choice than Birmingham or Montgomery. There is no quantifiable metric. The reason I chose Indianapolis over Birmingham is purely because when I went there to check out properties, I made more friends there, specifically real estate investor friends. You know, I tapped into a better community there, a bigger and more welcoming community. Now, that's not to say that community doesn't exist in Birmingham. I'm sure it does. I just didn't happen to find it. The fact that I chose where to invest based on where I found a network of other investors who could provide that local knowledge, that underscores the importance of building those relationships. When you're investing long distance, because it's those local investors who are going to have local knowledge.

B (32:25)

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

A (33:24)

Exactly.

B (33:26)

The last thing I'd like to say, a lot of people, I think this is overlooked, you know, I know a lot of people, and myself included, who started investing without having the network in place in quite as strong of a manner. And I really don't think that should be skipped. If I had known then what I know now, I would have spent more time building up the local network, the local community, before I did that. I know that would have helped make my initial steps much, much easier.

A (33:56)

Exactly. Having local people, local real estate investors who you can text or you can be in a group thread with. Right. That makes all the difference. And that also is the antidote to fear too. Like if you're living in Seattle or LA or New York or Chicago and you're thinking about investing in Cincinnati or Indianapolis or Birmingham, that's terrifying if you don't know anybody there. But if you are on a group text thread or a WhatsApp thread with eight other investors who are all local to that area and they're all talking about the duplex that they just bought in such and such neighborhood, or the experience that they had with some plumber by being part of that group thread, all of a sudden everything feels doable. And you know, you have the support of the people around you. If you ever have a question that's specific to the local area, whether that's a recommendation you need or whether that's more information that you need about a given neighborhood or a given street. Right. You know that you've got boots on the ground who can share their local knowledge with you. But back to the challenges. What's challenge number two?

B (35:12)

Challenge number two is what I like to call holding people accountable, which is also known as trying to get people to do what you agreed upon and or maybe what you paid them to do. This can look like a contractor who goes AWOL in the middle of a rehab after you've paid them like a 50% deposit, you know, or you know, you decide you've been, you say you want to buy this house, you've been searching for months. It's hard to find a good deal in this market. And all of a sudden you find the perfect deal, but then you can't reach your agent, you can't even step up to the plate to swing because you can't put an offer on the property in the first place. Or if you have a short term rental and your cleaners don't clean it properly. And then all of a sudden the next guest comes in and it's freaking out because it's dirty. And they're going to give you like a one star rating which will get you delisted. And all of a sudden you're looking at losing a piece of your business, you know. So no matter what strategy you want to go into, by the way, if the concept of different strategy sounds a little foreign to you or you'd like more information on that, our next episode in the Invest Anywhere series is going to go through high level overviews of different strategies so that you can kind of think through what might be your best fit when you want to, not if, when you want to start investing in real estate at a distance. So we're not sharing all of these scenarios to scare you. We want to prepare you for some of the challenges that you face. And one of the big ways to deal with these challenges, the first is to maintain a perspective. There are some things that you can do if you're local, but not that many unless you're a licensed contractor and you're currently unemployed. Right. Because that's the only way you're going to be able to get over to the house to swing that hammer yourself.

A (37:02)

Right.

B (37:02)

You know, it just, it feels so much more helpless because you're like a thousand miles away and you can't, you feel like you can't physically do anything, but you wouldn't be able to anyway.

A (37:13)

Even if you were local.

B (37:14)

Exactly, exactly. So important thing here, adjust your mentality and know that this is going to happen. It happens to everyone at some point in time. Just have to deal with it when it happens. Underwrite conservatively and keep your head in the game. If it was easy, everyone would be doing it.

A (37:32)

Right. And once that happens, once, you know, with an agent who doesn't pick up the phone when you need them or a property manager who doesn't do their job right, once it happens once, then you know to fire that person, you know, to fire fast.

B (37:48)

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

A (38:23)

Right, exactly.

B (38:25)

This is primarily how I get my referrals and how people around me get their referrals. Because that way you can see what a person is really like through all stages of the job. And typically, if someone has a good relationship, if person A and B have a good relationship and person A recommends you to person B, person B is not going to want to do a poor job because they know that the person who recommended them, who they've done good work for, who they've spent the time to build a good relationship with, is suddenly going to get bad feedback which might jeopardize that client.

A (39:03)

Right. So the more tied in a given contractor or agent or lender or property manager is with an overall local investor network, you know, the more tied in they are with that network, the more incentivized they are to maintain a good reputation throughout everyone in that network.

B (39:19)

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

A (40:04)

Right. When they demonstrate good judgment, even when it's not in their own best interest.

B (40:09)

Exactly. And then, you know, you can. You can start to build that trust in them because their moral compass is pointing in the right direction.

A (40:18)

Exactly, exactly.

B (40:20)

And I think the other thing that I really find very important is the ability to take responsibility, because in every project, things are gonna go wrong. You know, sometimes there's a little something that is miscommunicated, and you need someone who's gonna take responsibility for that. Like, if a contractor wants to fix things that he missed in a timely manner without making it difficult or pawning it off on someone else, then you know, you've got someone good or an agent who maybe. Or property manager who makes a mistake that costs you money and is like, okay, what do you need to make this right? And comes to the table with you to help make the situation better for you because they know that they messed up.

A (41:02)

Right. And so challenge number two is getting people to do what they say they're going to do. And the solution to that, again, it goes back to tapping into that local network, a local network of investors that's critical to long distance real estate investing.

B (41:17)

100%.

A (41:18)

What about challenge number three then? Challenge number three is what you refer to as traction. What's traction?

B (41:24)

Traction is defined as the support or interest that is needed for something to make progress or succeed.

A (41:34)

So staying motivated.

B (41:36)

Yeah, staying motivated can be a part of it, but it's also making sure others stay motivated and keep going with whatever they're working on. You know, that can be really challenging when you're at a distance because it feels like things can take that much longer. It feels like the people that you hired might not be making that much progress because you can't pop over to just look at and be like, oh, I see, like the plumbing's done, oh, I see the paint's been done. You know, instead you're kind of just wandering like 72 or 89 times throughout the day. Hmm, I wonder how this is going. I wonder how all the money I spent is being used. You know, it can, it can feel tough. This is another area where maintaining perspective is important. Like I said before, unless you are an unemployed, licensed and bonded contractor, there's really nothing that you can do to speed up a rehab. Almost every rehab takes longer than you anticipate it will, no matter where you, the investor, are located. Last year I had what I thought would be like a six to eight week rehab, take four months, and it was 20 minutes from my house. I can paint, I can do a couple things. I could have done the work, but there's no way I was completing that rehab. And even another friend of mine who's very experienced and very successful needed almost a year to finish rehabbing a triplex. So no matter where you're investing from, there is the challenge of having to deal with lack of traction, lack of feeling like your projects are making progress. When you have money on the line and it's costing you more money because you're not making the income right.

A (43:20)

And that's something that local and long distance investors both deal with. You know, one thing that I do is I'll often have contractors facetime with me and do a walkthrough where they give me an update on, hey, here's how the project is going. And then they'll just FaceTime with me. And show me the progress and that's how I know what progress is being made. It's those daily check ins. Right. Or those every other day check ins. And it doesn't have to be long. Sometimes it's a five minute FaceTime.

B (43:49)

Yeah, that definitely helps a lot. And so the combination of all the things that we talked about can cause a lot of stress when it comes to real estate investing, which is frankly enough to drive a lot of people out of the business that is in your head. But it is a massive challenge because if you're sitting there going, I don't know what's going on, I wish I could do it. This is taking too long. I don't know what I'm doing. All you're doing is feeding yourself this total feedback loop that is 100% negative.

A (44:18)

Right.

B (44:18)

It's really, really important to be aware that it's not gonna be easy, they're gonna be challenges and it's going to be stressful. But you need to do that internal work to make sure that you keep your eyes on the prize. Long term gratification, wealth in real estate and income in real estate isn't built in two months and six months. In 24 months, even sometimes in 36 months. Right. It's like over the course of several years. So everyone and everyone goes through these struggles. Literally everyone on every project goes through the same thing. And it is up to you to manage that stress so that you can stay in the game and have a way to keep stepping up to the bat and swinging so that you can keep piling on those investments over time. Every investor has a horror story. I would encourage you to talk to your community and your network and ask them what is the toughest thing that's happened to you personally within I think like a five to six month period between last fall and this year, I lost tens of thousands of dollars between different capex disasters that happened across different properties that I never saw coming. And I thought I was all alone. I literally drank a bottle of wine by myself on the couch one night and was texting my friends until they told me, hey, we've been through this too at some point in time and they have been very, very successful. So that really helped me realize, okay, yeah, I'm on the right path. I just have to make sure I have reserves and I just ride this out and I learn from it and keep marching forward.

A (45:55)

So we've talked about four challenges so far. We've talked about number one, fear. And how the antidote to fear is knowledge. And network. We've talked, number two, holding people accountable and how the solution to that is hiring people who are referred to you by local investors. We've talked, number three, traction, staying motivated and keeping your team motivated. And we've talked, number four, stress. So let's talk about the fifth challenge of long distance real estate investing. Relationships.

B (46:31)

Yeah. So isn't it much easier for you to feel like you've bonded with someone and you've made a friend when you can have a drink at the bar or have brunch together and just talk in person?

A (46:43)

Right.

B (46:45)

When you're investing in real estate at distance, it is like, it is so much harder to make those friendships. It's hard to know who to meet. It's not like, okay, well, we're going to lunch. I'll bring this other person, you know, because you're just kind of like this disembodied voice from another part of the country, and both sides don't have that humanizing element that help people bond when they meet in person.

A (47:07)

Right.

B (47:08)

The thing is, we've just been through two years basically, of a pandemic. And you know what? Like, business didn't stop. The world didn't stop turning. Wealth was still being created. People figured out how to manage this, you know, and we have the technology. So virtual happy hours, zooms, masterminds. There are so many ways to still build those connections so that you can at least build kind of like the skills, scaffolding, so that when you are able to go out there and meet in person and really make those connections concrete, you can do so. There's still investors who are very successful building relationships at a distance and building business at a distance. It just takes a lot more intentional effort to do so.

A (47:54)

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

B (48:19)

Yeah, exactly. And we know how to use them by now.

A (48:23)

Yeah. That's one silver lining is that zoom conversations have become far more normalized.

B (48:30)

That basically wraps up the challenges that we see investors struggling with the most and the things that actually drive investors out of the game or stop them from investing in the first place. So one more time, that's fear the unknown that is being able to hold people accountable, traction, stress and relationships.

A (48:51)

Those are the five challenges of investing long distance. Let's take one final break for a word from our sponsors and when we come back, let's talk about the benefits of long distance investing.

C (49:06)

It's a special Christmas edition of Thursday Night Football and it's only on Prime Video. This week, the Denver Broncos take on the Kansas City Chiefs on Christmas night. Cap off your holiday with an old school rivalry. This is going to be a fun watch when you have head coach of the Denver Broncos calling plays for his quarterback in that offense. Look out. Coverage begins at 7:30pm Eastern with Football's Best Party TNF Tonight presented by Verizon. Not a Prime member, Not a problem. Simply sign up for a 30 day free trial. It's the Broncos and Chiefs Thursday at 7:30pm Eastern only on Prime Video. Restrictions apply. See Amazon.com Amazon prime for details.

A (49:50)

Close your eyes. Exhale. Feel your body relax and let go of whatever you're carrying today. Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class.

B (50:02)

I got them delivered free from 1-800-contacts. Oh my gosh, they're so fast.

A (50:06)

And breathe. Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order.

B (50:12)

Oh, sorry.

A (50:13)

Namaste. Visit 1-800-contacts.com today to save on your first order. 1-800-contact at Capella University. Learning online doesn't mean learning alone. You'll get support from people who care about your success, like your enrollment specialist who gets to know you and the goals you'd like to achieve. You'll also get a designated academic coach who's with you throughout your entire program. Plus, career coaches are available to help you navigate your professional goals. A different future is closer than you think with Capella University. Learn more at capella.edu. And we're back for this last section of today's episode. We're going to discuss the benefits of long distance real estate investing.

B (51:05)

My favorite part, I've been thinking about.

C (51:08)

Buying an income property in another state, but I'm not sold. Why should I think about investing away from where I live?

A (51:17)

So let's talk about four benefits that you enjoy when you invest in real estate long distance.

B (51:24)

I love that term enjoy, by the way.

A (51:26)

Oh, thank you.

B (51:28)

That's very accurate.

A (51:30)

So these four benefits, and we're going to elaborate on all four of these. Number one is the ability to compete, the ability to know that you have a decent chance at winning that bid. That's benefit number one. We're going to talk more about that in a second. Benefit number two, diversification. You get to spread out your capital and your investments in a way that reduces the overall risk of your portfolio. You diversify into other asset classes, other locations. Benefit number three, your returns, the price to rent ratio in the area where you're choosing to invest and the return on your capital relative to what you've invested. And number four, repeatability, meaning the ability to take what you've learned and reapply it over and over and over again. Lather, rinse, repeat. Those are four benefits. And we're going to elaborate on all four of those right now, Starting with benefit number one, the ability to compete.

B (52:33)

There's a reason that we started off with the ability to compete as benefit number one, because it is the ability to compete that sometimes keeps investors from ever starting investing in the first place. So when you live in a high cost of living area and you look around and all the homes are like, minimum, a million dollars. Every time I say a million dollars, I want to pretend to be Austin Powers, but that's neither here nor there. But yeah, everything's like a million dollars. And you're like, how on earth A, am I going to save up that down payment in a decent amount of time? B, how can I make this cash flow and actually get where I want to be and see people? People are coming up with entirely cash offers. So it's, I can't even get this financed. I'm having a hard time finding the down payment. I can't put the entire million dollars on the table as a cash purchase. So why would I even start? It doesn't make sense.

A (53:32)

Right, right. Yeah. Investing in a high cost city is very difficult and probably not worth doing in a lot of cases.

B (53:40)

In a lot of cases, especially if you're focused on the cash flow. So when you move your investment focus to another city that is maybe at a lower cost of living but still has a strong economy, you can see the price points drop. When I was living in Boston, I couldn't compete in that market at all. And that's when I eventually found Indiana and Indianapolis to invest in. The price points were much lower and that allowed me to just get my foot in the door and place more competitive bids so that I can actually start learning and start getting a little bit of practical experience under my belt. The thing is, this is the ability to compete almost has kind of like a snowball effect because the more often that you can Step up, up. The more you can build relationships needed to get the better deals and get better returns, and then you can step up even more. So that's another thing that I really like about this aspect, right? Because even if you do have the ability to invest in a higher cost of location, in that million dollar duplex, you have two units, let's hope two units don't require that much work. Whereas if you have 10 units, and that does require more work, and then the local contractors will see you as someone who gives them repeat business and they will take you more seriously and treat you better as a highly valued client, which then increases your returns. You have more money in your pocket, you can more quickly save up for that next down payment or cash purchase, however you want to go about it, rinse and repeat, and it just kind of snowballs on itself.

A (55:28)

And the thing is, when you're competing for lower priced properties, you know, once you, let's say you take out an investor loan, you have a 25% down payment on a $100,000 property, right? So you save up $25,000. Say you save 30,000 just to have some, some extra cushioning. You buy $100,000 property, you hold it for two years. And that $100,000 property, if it was the last two years, where property values have gone up substantially, you know, if you did that two years ago, that $100,000 property would be worth 120, $130,000 right now. And not to say that property values are going to keep climbing in the future the way they did in the recent past. But If a person two years ago had saved up $30,000, purchased a $100,000 property, held it for these past two years, that property might be worth between 120 to 130 today. Which means that you've now earned in equity the value of that down payment, and you now can borrow 80% of the equity that you hold in that property and pull that back out and use it to buy the next property. And so that's how the flywheel starts spinning, right? The more properties you own, the easier it becomes to buy the next one. Going from zero to one property is much more difficult than going from four properties to five, right? And going from four to five is much more difficult than going from seven to eight or nine to 10. And when you're competing in these low, low cost markets where properties are inexpensive, then accumulating more properties in places where properties cost less is a huge benefit to deciding to invest in places where Properties cost less, which if you don't happen to live in a low cost city, that means long distance investing. So that's what we mean by the ability to compete. And that's the first of four benefits. The second benefit is diversification, which is.

B (57:38)

To recap spreading out your capital and and investments in a way that reduces the overall risk to your portfolio of investments. The cool thing about diversification is that there are many ways to diversify and you can choose based upon what is the best fit for you. For the sake of today's discussion, we will limit it to four. You're welcome. These four, which I will dive into in a second, consists of economic diversification, strategy based diversification, business cycle diversification, and asset based diversification.

A (58:23)

All right, so four types of diversification, economic strategy, business cycle, and asset base. Let's talk about the first form of diversification. Economic diversification.

B (58:34)

So that's basically being able to invest in different economic areas. You want to choose more diverse areas that will be less impacted by events in a single market, like an employer, a large employer relocating, or even something that sounds as mundane as property taxes being increased. If you only knew how to invest locally or in one specific market that you had experience in because it was easier to do, and you didn't know how to analyze different markets versus finding a market that had more employers or stronger economic track record, you wouldn't be faced with trying to save a portfolio of a few properties if the employer shuts down or your returns are suddenly a lot lower because of the fact that property taxes have increased and people can't quite afford to live in that area. And so demand drops. And then when demand drops, property prices and rents will follow suit.

A (59:38)

So essentially, if all of your properties are concentrated in one geographic location, then you are subject to the risks of that specific geographic location. Whether that's natural disaster risk or tax risk, employment risk, or population decline risk. You're subject to the risks that come from consolidating all of your properties into one geographic location. But if you spread your properties into multiple geographic locations, whether that means multiple neighborhoods in a city or multiple cities in multiple states, that gives you the ability to diversify your risk. Like, I've got properties in Atlanta, Las Vegas and Indianapolis. And so I know that I've diversified some of my risks because if something happens that impacts the economy of Indianapolis, unless the thing that happens is nationwide, it's unlikely that that thing will also impact the economy of Atlanta or Las Vegas in the same way.

B (60:45)

And real estate is hyper local. I only Invest in Indianapolis and the surrounding suburbs, but the properties are in different counties. So if something happens in northern Indianapolis, where there is an employer that feeds that part of the city, but not southern Indianapolis. I have properties in both northern and southern. Right. So my southern Indianapolis properties are impacted very differently and they're still okay. So you can invest in economically diverse areas on a macro scale by going to different states, or even just spread out that risk by going to different parts of a city.

A (61:25)

Right, exactly.

B (61:27)

But it's the ability to analyze that is really important here. And that is what we want to teach you. The ability to analyze different parts of the market so that you can make the decision that best suits what you need as you grow as an investor.

A (61:42)

So that is economic diversification. Let's talk about the second form of diversification, the second out of four, strategy based diversification.

B (61:49)

Yeah, so that's it. Being able to invest in different markets so that you can invest in different asset classes which can drive different strategies. If you want to be a flipper, if you want to buy a distressed home, fix it up and sell it within six months or a year and retain that income, or if you want to do something a little bit more residual like buy a multifamily small apartment building, the markets can look very different for that, you know, and so you would have to find the market that best suits what you're passionate about and where your skill sets lie.

A (62:31)

Right. And so one way to diversify in terms of those strategies is you could, you know, I know some people who do this, they will buy multiple properties, flip half of them, and use the proceeds of those flips to pay down the other half, for example. But where they're buying their flips is going to be different oftentimes from where they're buying their buy and holds. Right. They're going to be different neighborhoods, different age and condition of properties. They may even be different types of properties. It might be that they're flipping single family homes, but they're buy and holding four plexes.

B (63:07)

Right. And some markets might not have that fourplex inventory for them. So they need to be able to analyze different markets to figure out where they can buy fourplexes. One strategy that's kind of very hot right now is medium term rentals to those in medical professions like traveling nurses. And let's say you have a passion for those in medicine and you want to be able to also build a business off of that while helping them and providing good housing for those who work in hospitals. You would have to find A market or an area where there are a lot of hospitals in that vicinity in order to be able to do that. So that's another way you can diversify into that and then maybe have another portfolio somewhere else that has those quad plexes for your more, I guess, generic long term rentals.

A (64:00)

So that's strategy diversification. And that is also facilitated by opening up the map. Like when we talk about long distance real estate investing, really what we're talking about is opening up the map so that you can pick whatever environment, whatever city and state is most conducive to the type of investing that you want to do. You know, to the strategy, to the approach that you want to execute. And that map, I mean, it really opens up to you when you are no longer tethered to your own backyard. That's why we're having such a long conversation about all of the different ways that you can diversify your investment holdings by virtue of opening up the map to yourself. We've talked about economic diversification, we've talked about strategy diversification. What is business cycle diversification?

B (64:47)

Business cycle diversification is knowing that real estate again is hyperlocal. And just because something is happening in one market, all markets won't necessarily follow suit. Just because everything's been in a boom cycle at this point for a while doesn't mean all markets are going to remain in boom cycles. And different cycles of the market mean that there are different returns that can be achieved. So let's use an expansion phase to start off with, because that is, I think, what we're most familiar with and what we have the most recency bias towards at this moment. Okay, expansion phase, strong wage and job growth. There's dropping inventory because demand is outpacing supply, property prices are increasing, and deals are hard to find. That sounds pretty familiar to me, right? So with those dynamics and especially the increasing prices, it can be really hard to find cash returns on properties. When you're looking for that residual income from a buy and hold. Because property prices are increasing, the mortgage payment that you make every month is suddenly going higher, which then shrinks the gap between the mortgage and the rental income you'll be bringing in, which is the cash in your pocket that you are looking to build this real estate portfolio on. That is the backbone. However, if real estate prices are continuously increasing like they have been for the last couple of years, what about thinking about a fix and flip scenario? You underwrite your numbers. What has been happening is a lot of people underwrite their numbers for scenario A. When they buy it in January, by the time it has hit the market in September, all of a sudden the scenario is different and the selling prices are higher. That likely will not continue to be the case indefinitely. But that is what's been happening, making fixing and flipping a very attractive option to many. On the flip side, maybe not the flip side, that was fully unintended. I'm more clever than I think so on another aspect of business cycle diversification. What if you have another market that is entering the recovery phase, so they've gone through some kind of struggle. Real estate prices have dropped and now they're starting to plateau after that period of dropping. And maybe they're even just starting to increase a little bit. Demand starting to increase a little bit. But people are still nervous about investing because everyone is geared, their mindsets are geared towards that recency bias of a negative and a difficult economic time. Right. So, so property prices aren't increasing. That mortgage rate after you buy will kind of allow probably for a little bit more of that gap between the mortgage and the rental income, which will allow for better cash flow. And this could also be an opportunity to optimize appreciation because if you're going up the recovery cycle, the demand's going to continue to increase as the property travels up and the market travels up that recovery phase, which means that demand is increasing, which means that prices are increasing.

A (68:18)

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

B (69:04)

Cool, cool. So this refers to having on one hand more units for X dollars versus the other hand of having fewer units for the same amount of dollars. So if I'm going to put that into a real life example, that means that million dollar duplex in a high cost of living location. What if you took that million dollars and took it to the Midwest, let's say, and were able to buy 10 units. With that, you're able to diversify your stre across more units. That way if you have your 10 units in the Midwest and one person moves out, you still have the other nine units to bring in income. Whereas if you have just the duplex in the high cost of living location, and one person moves out, you've lost half your income.

A (69:54)

Right, exactly. So the more units you own, the more diversified you are. And all else being equal, you can own more units for the same amount of money in a lower cost location. Zooming back out. So what we're talking about right now are four benefits of long distance real estate investing. Benefit number one is the ability to compete. You can actually place competitive bids. Your money goes further when you're investing in a lower cost area. Benefit number two is diversification. And that diversification shows up as economic, as strategy based, as business cycle based, and as asset based. The number of units that you hold. Benefit number three, which we can now talk about next, are returns, the potential to get higher cash returns, as well as to diversify the way in which you receive returns, whether you receive those returns in the form of equity growth or cash flow or a combination of both. So greater returns and a more diversified composition of returns, there can be more.

B (71:08)

Arbitrage opportunities between the monthly mortgage that you pay and the rental income that you receive when you do a thorough market analysis and choose a lower cost of living location. So one rule that many investors like to use as a generic rule of thumb is the 1% rule. So that means for the price of the property that you're paying, you should be able, on a monthly basis to be able to get 1% of that purchase price in gross rents. What does that mean? If you have a million dollar home, you should be getting $10,000 in rent gross a month. That's very difficult to do. Whereas if you have $150,000 home, that means what you would need would be $1,500 in rent per month. That is a much more feasible option to seek out and to bring into your portfolio.

A (72:08)

Right? Exactly. Particularly if that shows up in the form of, let's say, buying a 300,000 duplex where each unit rents for 1,500 on each side. And the 1% rule is a broad filtering tool that investors use to reduce a basket of properties. So if you're looking at a basket of a thousand properties and you want to very quickly assess which properties have the highest likelihood of having a good cap rate, then you'll use the 1% rule to just be a blunt instrument that filters through this big basket of properties so that you can then do deeper due diligence on the properties that hit that metric. That doesn't necessarily mean that you buy every property that does hit that metric, nor does it Mean that you pass on every property that doesn't hit that metric. It's just a way to filter through a big basket of properties so that you can find a property that has a higher likelihood of having a strong cap rate. Because at the end of the day, what matters is the cap rate. You know, the cap rate is the measure of your unleveraged dividend that you're getting on the property. And at the end of the day, you want to get a strong dividend on the asset that you're holding. And to take this back to long distance investing, frankly, you're likely to find higher cap rates, that is higher dividends on properties that are in areas where the price to rent ratio is much more investor friendly.

B (73:43)

And with that, I think we can go on to our very last benefit.

A (73:47)

Absolutely. So what's our last benefit?

B (73:50)

Repeatability. Throughout the series and afford anything in general, the overarching theme is discussing how to think about things. And this is kind of where that skill set really comes into play in the repeatability benefit of investing at a distance. And this just means you're developing a skill set to repeat the strategy in another area to increase the chance of success. When an area is popular, it gets saturated. You might have to move somewhere else if you want to continue your strategy and to keep getting the returns that you want to get. And the hardest part is learning how to think about investing at a distance. Knowing what you don't know, knowing what questions you need to ask, knowing what you need to look at. And once you've learned that skill set and you've done it once, talk about opening the map. You have so many different options at your disposal once you learn the skill set right.

A (74:51)

I often tell the students in my course, in your first rental property, I tell them that the first property is the training wheels property. Anytime you're doing anything for the first time, whether it's your first time riding a bike, your first time driving a car, your first time trying to swim a lap in a pool, anything that you do for the first time, you're gonna be a beginner and it's gonna be a little awkward and not graceful. Like, no one jumps into a swimming pool and swims their very first lap with a perfect, graceful stroke. It's a little messy and it's choppy waters, but the more you do it, the more graceful it becomes, the smoother it becomes. And real estate investing is no different. So the first property, yeah, it's the training wheels property. But the more you do it, the better you get at it just like anything. And when you're in an environment that allows you to buy five or six or seven or eight units because units are cheaper, then you get to lather, rinse, repeat, you get to repeat this skill set and diversify into a bunch of different units and get better. You know, you're gonna know what you're doing at that 8th unit much more than you'll know what you're doing in that first or second one.

B (76:10)

And then you get confident and you get more efficient and you learn how to squeeze better returns out of whatever you're looking at. And it just. Yeah, the flywheel.

A (76:21)

The flywheel, exactly.

B (76:22)

Starts to spin then.

A (76:23)

Exactly. So those are the four benefits of investing long distance. And you'll notice thematically a lot of what we've talked about, we're sort of using investing long distance as synonymous with investing in a lower cost of living area where properties are cheaper and where the price to rent ratio is more friendly to investors. And of course, we're using those synonymously because you wouldn't invest long distance into a worse market than where you live. Right?

B (76:55)

A market where you can afford less.

A (76:57)

Yeah, exactly. Exactly. By definition, anybody who is interested in investing long distance is necessarily interested in investing in a market with better price to rent ratios, lower cost properties, better returns.

B (77:14)

And so that wraps up our discussion of the benefits of investing in long distance real estate.

A (77:23)

The challenges and the benefits both. Well, thank you, Sunny, for this first Friday bonus episode. Afford Anything presents Invest Anywhere.

B (77:34)

Thank you for having me.

A (77:35)

Our new First Friday theme.

B (77:37)

Yeah, this has been super fun.

A (77:39)

We offer a course on real estate investing. It's called you'd first rental property. To learn more about it, go to affordanything.com VIP list. That's affordanything.com VIP list. We are going to be opening our doors for that course once and only once this year. So in the year 2022, we are only offering the opportunity to enroll in this course once and we are going to be opening our doors for this course in June. If you want to take the course, there will be a 10 day window in June of 2022 and those are your only 10 days to enroll. So. And that's next month. It's coming up. So please, for all the information go to affordanything.com VIP list. That's affordanything.com VIP list that will tell you everything that you need to know. It'll answer all your questions. We can't wait to see you inside the course. If this is something that you really want to learn more about we also have a great community of students and alumni. We've had more than 2,000 people go through our course. It is our premium flagship offering. That's the reason that we only offer it. In previous years, we've offered it twice a year. This year we're only offering it once a year so that after we open our doors for enrollment, we can then close our doors and focus on the students and focus on making sure that we follow through on our commitment to our student success. So again, affordanything.com VIP list for all the information about our course. Thank you so much for tuning in. My name is Paula Pant.

B (79:15)

I'm Sunny Rao.

A (79:16)

This is the Afford Anything podcast. We will catch you in the next episode. I hope you enjoyed that episode. Merry Christmas Once again. You just finished listening to an episode that Originally aired on May 6, 2022 on the topic of 4 benefits and 5 challenges of long distance Real Estate investing. I hope that you enjoyed it. I hope you learned a lot from it. The website that we listed at the end of the episode is still active. Afford anything.com v VIP list if you want to learn more, I strongly encourage you to join our wait list. Get lots of updates about real estate. Again, that's affordanything.com VIP list. It is 100% free and we will send you lots of real estate information and education that will prepare you for 2026. But first, we're gonna round out this week with an episode tomorrow dedicated to the letter E for Entrepreneurship. So make sure that you follow this podcast in your favorite podcast playing app so that you don't miss that. Thank you again for being part of the Afford Anything community. Merry Christmas to all who celebrate. Happy Holidays to everybody and I will meet you tomorrow. See you then.