Evolving with the Real Estate Market for Massive Gains

Dan Austin: [0:00] Is like the ideal, like I want my cake and eat it too, the way you buy, like single family homes or properties. You buy a distressed house, you buy it for cheap because it needs a lot of work. You go in there and you replace and repair anything that can fail, that is major or even little stuff, right? But like, if there's an old ass hot water heater that's 30 years old, replace it right then and there. Right. Get your HVAC replaced, if it needs it, right? Your roof, if it's worse for a replacement, you make this thing nice and then you refi, burr out of it and get most of your money out if you can. Yeah, I mean, I love to say all your money out, but that's just unrealistic these days. Say you can even get 90% of your cash out, so you got 10% in there. At that point, you have a property that should not have any major capex. Your cash flow then will go towards maintaining the property during turnovers and small little failures end up happening. If you have anything left over after that, that's awesome. Yeah. Outside of that, your profit's gonna come from the tax benefits that's going to hopefully use to pay down all the massive profits you're making from flipping and wholesaling and other businesses, and then the debt pay.

Mike DeHaan: [1:05] What's going on, guys? Welcome to today's episode of the collecting keys real estate investing podcast. This is the show where we teach you to make massive income, not just passive income with your real estate investing business. This is the first time joining us on this fine Wednesday. These episodes are called the Mike and Dan show. And they are where I, Mike DeHaan, and my cohost here at Dan Austin Who talk about real estate investing, business, and whatever else we feel like for the week. And we had some deals moving. We had all sorts of things going on. And we're actually just having a interesting conversation right before I push record that I wanted to dive because I thought it is actually a very relevant thing that is kind of an interesting conversation. So I guess to frame this out, so we have this property that we are currently selling, I kinda like on a wrap situation. But the challenge with it is we have the buyer who is trying to figure out, like they're trying to negotiate terms in a way so that they can cash flow it for what do say for ten months. While they maintain their lease in their rental property, but they're planning to move into it after the fact. And the question that we have is why do people do this versus just terminate their lease or leave or buy out their lease and then move into the property when you think that that would be like a better way to do it?

Dan Austin: [2:29] Yeah especially when you're coming up with like large sums for a down payment, it's not like you don't have cash. Like there's better ways to buy properties.

Mike DeHaan: [2:35] So I guess to frame this right, he's he's bringing what like 50 something thousand dollars to buy this property on a wrap from us. So he has no reason to like, he can't afford to buy out of the lease. So like why would he even risk that? Like if he's gonna move into it, could bring in a tenant that's gonna trash the property. He's gonna do like weird stuff in there. Like you have no idea.

Dan Austin: [2:54] So if a tenant came to you and was like, hey, I bought a house. I need to break my lease. What would you say?

Mike DeHaan: [3:00] I would be like, that's great. Where are we at on the month? I would say if it's like the end of the month, I would probably make them pay next month and let them out. If it's like at the very beginning of the month, I would let them know. I would say like try to get them out like a little bit earlier that I had time to try and reduce my EPSiness rate. But I will say that I'm different. A lot of property management companies are not like So

Dan Austin: [3:23] people are stupid about this whole thing. Yeah. It's actually quite frustrating because I'm like you. I would say, because we actually had a tenant, this is exactly what happened to us last year. We had a tenant that was like, don't wanna sign a new lease, I wanna go month to month, I might buy a house. I was like, no you're not, that's probably not gonna happen. So, I didn't say that to them, but in my head I was like, not in this market, it's gonna be so hard for you to buy one with your price range in, because I knew what her price range was because she was renting from us. I said, how about this? You're gonna have to take my word for this, sign a twelve month lease with me, we're gonna keep the rate the same because we are already at the top of the rental market, And if you find a house, I'll let you out of your lease, I'll accommodate you with some terms where I won't charge you extra or anything like that. Guess what? She never found a house, but now she's locked in, so she didn't have a reason just to pop out and move Mhmm. Within the next month because she had that freedom, that's why. And in Washington State where we are, multi month leases are a pain in the ass, because if you do want them to move out, have to give them a hundred and twenty day notice, and you have to give the a valid reason for them to be moving out, or before you wanna move out. So there's an advantage for us on multiple fronts. But in any case, if you came to me at any point in time, would just be like, just pay me next month rent as long as you're out before the first.

Dan Austin: [4:35] Yeah.

Mike DeHaan: [4:36] Totally. And it's funny though because there's a lot of, I'd say career landlords, people out of property management companies, things like that, that would say that we're stupid for doing that.

Dan Austin: [4:44] I mean, what is the option? You make them pay for like six months even though they don't wanna live there?

Mike DeHaan: [4:48] There's a lot of different ways that PM companies do this. So I went through the same thing when I bought my first house out in Tacoma back in what, 2015, remember that was? Sure. And so we had a property that we were renting, right? It was like an apartment. And we had basically just re signed a new twelve month lease, but they had like tripled, not tripled, like they had increased the rent like significantly, it was like almost two x, like a lot. Right? And I was like, this is fucked. Like I don't like paying this anymore. And I was at the gym, and I connected with a friend of mine, okay, who had just bought a house, and he was like, he's like, having a mortgage now is so much cheaper than rent in this city. And I was like, really? No shit? And real estate and mortgages weren't even on my radar, and I just went and I called and I Googled like, how much is a mortgage? You know, and I looked at different price points, and I was like, know, and I was like, how do you buy a house? And like all these different loan programs and shit. And you know, said to my wife, you know, she was my girlfriend at the time, but I was like, we could go and have our own house and have a payment that's like 40% cheaper than here, and we would actually own it. Like why don't we do that? And literally we the next day or next weekend, we went out, we dropped in an open house. Didn't even even, I didn't even need a real estate agent. I don't know how that worked.

Mike DeHaan: [6:04] I just like showed up to an open house and like walked in and it was this dude and he was the agent that was running open house, chatted with him. He converted us into a lead or was a client for him. He helped us find our And going through that whole process, I didn't even fully realize I was gonna have to get out of the lease. So I told them, was like, hey yeah, we're buying a house, we're gonna leave. And they tried to strong-arm me and be like, hey cool, now you owe us half of the remaining lease, which was like five months of rent. And I was like, God I'm like, there's no way I'm paying that. So I kinda like threw a stink about it. And I ultimately settled where I paid I think like two months, wrote them a check, and just like got out of it. But in doing so, was able to get into a house that I then sold three years later and netted like a $150,000. Yeah. But I remember going through that process and I was explaining to people, oh yeah, filed this lease. And people were like, you're wasting that money, like all these things. I was like, I guess I wasted you know, $3,500 or $4.

Dan Austin: [7:02] Right.

Mike DeHaan: [7:03] But I made a $150,000 three years later, who gives a shit?

Dan Austin: [7:06] Yeah. Yeah to me, I mean, and maybe that's just the difference in how some of us think. To me that's like just not even a problem. No. I guess to step back, if you're a first time home buyer, you're trying to do a 3% down VA loan on $250,000 house and you're barely making it, that's gonna be a big deal for you. So I guess I understand it from that perspective, but when you're coming in with $50.60 grand, you're gonna make a potentially poor financial decision because of that. Like I would just totally negotiate Yeah. With my landlord. Or even if it's a big institution, like, here's the deal, here's what's gonna happen.

Mike DeHaan: [7:37] Yeah. I mean, this is also where we'd be on the other end of the hill too is I would argue for most people, if you are stretching to make that 3.5 down down payment, you probably should not be buying a house.

Dan Austin: [7:48] They're probably not ready to buy a house, that's a 100% true.

Mike DeHaan: [7:50] Know, you're gonna get wrecked on that early interest plus the primary, the PMI, right, the mortgage insurance. Much so that you're not even gonna have like any pay down, you might as well just be paying rent, you're just paying rent to the bank. Like honestly. Yeah. So You are. Yeah.

Dan Austin: [8:05] And you're taking on the burden of the risk of managing your property, which, I mean property ownership, like I think it was Grant Cardone for a while, he always would preach like, I only rent, I buy, I don't buy, this is why. And there's like a lot of like actually validity to that because like owning a property, like your personal residence, you know, talking about costs money, any house costs money, you have roofs and siding and windows and landscaping and you know, pay someone to pick up your dog poop, whatever you have like on your operational expenses of your properties like, that adds up and so in some cases, especially when you can barely afford to even stretch to buy that house, how the hell are you gonna even maintain it? Yeah. And then guys like me are gonna drive by and say, that house looks like they're in distress. Let me see if they'll wanna sell

Mike DeHaan: [8:49] it. I mean, where all the realtors or a lot of people in general argue against this is they will say, if you look at the net worth over the last ten years, someone who's a homeowner versus a renter, look at how much higher the net worth the homeowner is. Totally. That's also because we just went through an insane real estate market. If you look at that same graph from like the mid seventies to the mid eighties, I'm pretty sure it's not the same.

Dan Austin: [9:12] Well, go into some of these non appreciating markets or non historically appreciating markets and we're buying houses for like the same price that people bought them for twenty years ago, and they're dilapidated now.

Mike DeHaan: [9:23] You mean like around The United States? Yeah, a lot of the places that we go to and some of these Southern markets or Mid West markets, like literally the value of the property right now is less than it was twenty years ago.

Dan Austin: [9:33] Yeah. That's a possibility for a lot of people.

Mike DeHaan: [9:36] And that's still including inflation. Yeah. That's still including inflation, major inflation. Like actual book number is less Yeah. And there's also that money is worth less than it was previously.

Dan Austin: [9:45] And you gotta put enough money into that it, the amount of money you have to put into it to get it like really market retail ready is what you're paying for.

Mike DeHaan: [9:51] Yeah. Yeah. And you know people like when you're in that phase, you do a lot of your own work. I mean even when I bought my first house here in Spokane, we opted to not have the base. It was a new build house that we bought. We got it with a really good deal because we bought it with the lower level like not finished because we were gonna finish ourselves at And the school I remember when we talked about that, well he wants to finish the lower level and it was gonna be like an extra $70,000 on the list price for the house. And I talked to you and you're like, that's fucking ridiculous. I mean this was kind of my foray into real estate a little bit, was just school YouTube, me and my wife we were like, you know, trussing out the HVAC, and like doing drywall, and like doing all the shit. And it cost us like $9 to do all that.

Dan Austin: [10:33] Trussing out to what?

Mike DeHaan: [10:35] That's just like it's done. You're trussing out the HVAC, what did you call it? Furring out.

Dan Austin: [10:40] Furring it out? Were you furring

Mike DeHaan: [10:41] it Yeah. I'm I'm a construction guy. Fuck out of here. But

Dan Austin: [10:46] Somebody's laughing right now.

Mike DeHaan: [10:47] Yeah. Hey. There's a reason that I've always been on the back office like marketing acquisition side of our business. Yeah. Did even on our coaching call the day where you and Mason were talking about the surveying, I was like, I don't know what the fuck that means. I know we've done deals that involve this, I'm just so far removed from it.

Dan Austin: [11:04] You're like, don't wanna do that. Yeah, no I hear you, I hear you.

Mike DeHaan: [11:07] But yeah, mean that was kinda like, my fore into real estate was going through that, I was like, this isn't that hard, can like face up a normal house, it costs us $9,000. And then at that point, you know, the market had gone up like a little bit, it took us almost a year. I refinanced our property, we bought it for like $2.10. And when I refinanced with the extra square footage, appraised for like $3.25.

Dan Austin: [11:26] Yeah, that was awesome.

Mike DeHaan: [11:27] And because interest rates had come down, I should have fat cash out refinance, got a bunch of money in the bank, and my monthly mortgage payments in almost the same. Like, I think it went up like maybe a $150. But I was like, I don't care. I got $85,000. I'll just use that to pay the $150 right now.

Dan Austin: [11:42] And you know what? That's actually another good point that that was during what I would call I guess the ZERP period is what people refer to it as the zero interest, whatever they call that, zero zero interest rate something.

Mike DeHaan: [11:55] I've never heard

Dan Austin: [11:55] that. Never heard that? Mm-mm. Yeah. Yeah. So that was the time when the federal fund rates were like zero for so many years, right? It was super low. That's taking advantage of that, right? You were basically taking advantage of the growth during that period as rates were coming out. Because you bought that house in, was it '20

Mike DeHaan: [12:11] It would have been 2017. '17?

Dan Austin: [12:14] 2017, right? And then you probably refi ed it in 02/08 2018, 2019.

Mike DeHaan: [12:18] We would have refinanced it, I think like late two thousand eighteen or early two thousand nineteen. Right. Yeah.

Dan Austin: [12:24] Yeah. So that kind of that time in the market where cause rates came down even further and there were some speed bumps there and then values had gone up, you're able to take advantage of that, which if you were sitting on the sidelines during that period, you missed out on a ton of wealth. Mhmm. Know, there's a lot of people taking, doing refinances and like remodeling their kitchens, but not really actually taking the equity and doing something because you took that equity and invested in other real estate as Yeah.

Mike DeHaan: [12:48] Mean, that that honestly, that lump of money that I got was a huge part of my nest egg that ultimately that I knew was gonna be coming that allowed me to leave my job, to leave my w two's bench.

Dan Austin: [13:00] Yeah. Because you knew you had it. You're like, yeah, got some money now.

Mike DeHaan: [13:02] Yeah. I'm feeling Well, where it got sketchy though too is I'm about to admit to this on live on air. But I had left my Avista w two

Dan Austin: [13:12] Mhmm.

Mike DeHaan: [13:12] At the utility right by the time I was like doing this refinance. And they're like, oh, you got a job, can't get approved of this. I was like, yeah. Here's my w twos. You're knowing yeah, you're gonna quit.

Dan Austin: [13:24] You're like, I'm quitting tomorrow once I get it approved.

Mike DeHaan: [13:26] I had already quit. But like I hadn't actually left yet, but I had already Yeah. Know, like had a foot out the door.

Dan Austin: [13:33] Yeah. Yeah. Yeah. It's hilarious. Yeah. You're like, I got that one pay you just gotta like have just to show it to them, you're like, yeah, got it.

Mike DeHaan: [13:42] Dude, yeah, was like raise against the clock, was like, like I I think I actually ended up doing it in January, it's like when the money came in and I was like, I don't have this job anymore, please don't call

Dan Austin: [13:50] to verify. Keep your job until you need, till you get all your money. That's lesson learned there. You got out by the skin of your teeth.

Mike DeHaan: [13:57] No kidding dude. I mean we've bought so many houses, the only ones that I've ever had, the only mortgage I've ever had a problem with was a mortgage for this house that I'm currently living in right now. Even though we had, I mean I had enough money in the bank to buy this house cash. And that's what I ended up doing, and then refinance afterwards because our original lender decided they weren't going to do the loan like a week before closing.

Dan Austin: [14:20] Right before, yeah, I remember that.

Mike DeHaan: [14:23] Yeah, remember because you you were my agent on it, you remember how it when? So I ended up having to buy cash, rent it back from the builder, and then work with a lender that actually understood how real estate businesses work and do a cash out refinance.

Dan Austin: [14:36] Yeah, is kinda funny because a lot of people do actually talk about like, hey, get all your loans before you leave your job. It's like that is kind of true, but it's also kinda not true because for like from rental property standpoint, if you're going out and getting commercial loans, you're good, you can still get lending and financing. It's where if you wanna get those good government debt basically, right? Yeah. Like the Fannie and Freddie stuff where you want the the thirty year fixed, you know, that, yeah, and you can only get 10 of those anyways, so if you're working out in real estate, might already be maxing that out anyhow, you're gonna go commercial loan. So if you quit your job, could still get a commercial loan. I don't know if they would have done that on a primary though.

Mike DeHaan: [15:11] A commercial loan on a primary? No. Yeah. No.

Dan Austin: [15:13] Don't think you can do that. Right. It has to be like an actual has to have income, right?

Mike DeHaan: [15:17] It does. Yeah. So with the DSCR, right? Debt service coverage ratio.

Dan Austin: [15:20] Yeah. That's the number one thing

Mike DeHaan: [15:21] to look at. And even with all the commercial loans that we do on our residential properties, for a while, now they just have it actually rented. And for a while when like you could get loans left and right, they would just go off of the market perceived rent. There was that golden period in there in 2021, don't

Dan Austin: [15:38] even remember, we would just text our banker. And he'd like, yeah, I'll

Mike DeHaan: [15:40] drive past it tonight. And he's like, go drive by like, cool refinance out refinance you in two weeks.

Dan Austin: [15:44] Yeah, dude. We had such a great run there. It was a good period of time where I I just thought that's how it was.

Mike DeHaan: [15:49] I said, no, we did not.

Dan Austin: [15:50] It is not that way. That same banker's like, nah, bro, we're not lending on shit right now.

Mike DeHaan: [15:53] Dude, like impossible. It went to any Makes it hard. But yeah, going going back to the initial conversation though about like the homeownership piece and the appreciation different things, you know, and the FHA buyer that's like sort of over leveraging themselves. This is something else that's my current pet peeve that I'm starting to see, I mean I'm not starting to see, I've seen this a lot. A lot of these people, these influencers, investors that are in these very hot markets typically, which I guess is everywhere, But they are very proclaiming on stage, I think it's because we're in a hard cash flow sort of market right now, that you need to be buying everything for appreciation. And all of their success has come from their appreciation from their properties. And like the most current one that you post on Instagram was Thatch Wynn out in Seattle, who's a stellar investor, super solid guy. But he is really into like, I am so successful because of this appreciation. I'm like, yeah dude, you started buying properties in Seattle twenty five years ago. In like the late nineties, early two thousands, some shit. But the problem is I think like if you just look at the trajectory of the economy, what the sort of situation is for so many people with the affordability issues, there's a very real situation that exists in most markets that like the cost to maintain or update your properties is probably gonna be more than the appreciation over the next ten years.

Dan Austin: [17:18] Could be, for sure. Seriously. Absolutely. Especially if you're buying dumps.

Mike DeHaan: [17:21] Especially if you're buying dumps, you're buying like kinda like starter home price point. It's like, and the cost of labor has gone up so much, the cost of materials has gone up so much. Like if you're buying like a $300,000 house right now, over the next, say over the next ten years it's gonna go up 10 to 15%, It'll go up between thirty to forty five thousand dollars. If you look at the roof, the HVAC, the air conditioning units, the hot water heater, general wear and tear, It's highly possible that all those things will equal significantly more than 45,000 Right. Dollars for ten years. Right? And you're also not gonna cash flow on it because interest rates are so poor to the rent rates, plus they're gonna keep increasing your property taxes and your insurance. Like I honestly don't know what the best long term play is for real estate right now.

Dan Austin: [18:10] I think that's where you're gonna make your money right now. And so, because you have to find what's going to work in this environment, what's gonna work for you and your position. When people ask me, they're like, hey, when you wanna do like a deal analysis, like hey, how would you look at this property? And the first thing that always comes out of my mind is like, it's different for me, it depends, because I'm maybe in a different situation than you are, for better or worse, right? That's for, in this example. He can say invest for appreciation, which I agree with him. If you can invest for appreciation, always invest for appreciation because making $2,300,000 on appreciation of like a property over a few year period is always gonna be better than collecting the cash flow. So much more massive. But, like you could do that, and you could do that as slightly negative even for a few years, if you've already got $400,000 a month in passive income. Yeah. It's like, because whether people like to under, believe it or not, once you get to a certain amount of wealth and income, little decreases or little losses don't affect you nearly as much. So if you're making a $100,000 a year and you lose 20% of your income, that affects you drastically compared to a guy making $400,000 who loses $60 or $80 of their income. Mhmm. That you just have more buying power because you're at a higher scale. Right?

Dan Austin: [19:20] So it's so it's different in that sense, but also your risk profile changes. So there might be some things that I would have done three years ago starting out when I'm trying to grow that I won't do right now because I'm like, well I don't have to do that right now, and I'm looking at different opportunities instead.

Mike DeHaan: [19:37] Yeah. I think that just like that whole situation, it's never been more true in in real estate that you make your money when you buy than Rick right now. Absolutely. Because you can't bake on like longer term appreciation.

Dan Austin: [19:50] Well you can't cash flow it, right? Yeah. So we were talking about this earlier on one of our coaching calls like taxes, looking at some of our properties, we've had taxes go up between 30 and a 100% since we've owned properties, right? We've had insurance looking at some of them literally double in a year. Right. So if you go from $75 to a $150 overnight, that's not a lot comparatively, but percentage wise that's huge.

Mike DeHaan: [20:12] Yeah.

Dan Austin: [20:12] So say you had, you know, a good example for for a baseline for us, we we typically would have like $60 budgeted for insurance. We definitely have, we have one of the, a property that's now a 120. That same property's taxes were 2,800, those, that property's taxes are now 4,000. So just in the taxes alone, that's $1,200 increase plus then the insurance monthly, which is double, which is another $720. Yeah. So you already had about $2,000 in lost cash flow. I can't necessarily increase my rents this year by that much. That would be over $100 a month. Yeah. You know, almost $200 a month.

Mike DeHaan: [20:44] And if anything, rents are going down, right? That's kinda like the challenge with all this is people were locking in their long term cheap debt, but now you're getting all these extra expenses that are increasing so dramatically. You know the taxes because property values have gone up, the insurance because insurance companies are all a bunch of crooks. Mhmm. Right? You might as well have just bought a property for 6.5 or seven percent two years ago. Yeah. But you still have this sunk cost that is going to something, right?

Dan Austin: [21:11] Your maintenance still goes up, you're still gonna turn your property on average probably every twelve to eighteen months. And I don't know how you can turn a property for less than 2 to $3,000 if it's perfect, You know, between like lost rent and like just just small little things you have to do and pay your property management leasing fee, that's another half month's rent to a full month's rent depending on what you're paying.

Mike DeHaan: [21:31] Yeah. And like, I just don't see like real estate values booming again like they like they have in the past like couple years. Like I think this thing stuff will stay steady or to like sort of slowly creep up, but I think it's just that combined with the higher cost to do everything

Dan Austin: [21:47] It's expensive.

Mike DeHaan: [21:48] Naked. So that like, it's gonna be like a net zero. I mean, I really do think that the best place to be, if you're gonna be a real estate investor right now, is to be in a position where you make a lot of money, like you learn how to make a lot of money and you use it purely for tax benefits. Right? Like honestly.

Dan Austin: [22:03] I think the debt pay down benefit exists, it's just not as magnified when you don't have 0% rates. Sure. You're gonna be paying down on six to 7% debt, means you're not getting the max benefits till probably like year three or four on or not max but better benefits till like year six or seven on that just because you're gonna have to to pay down enough interest to where you're actually hitting $3,400 a month in actual debt pay down. So I think that still exists. Yeah. But the cash flow doesn't, the cash flow solely has to be used for maintaining the property over the long term. Or you know, recycle your properties quicker. Yeah. You're gonna have to do a little bit, like pay attention to that, because I think there's a curve in property ownership. Ideally, if you buy, this is like the ideal, like I want my cake and eat it too, the way you buy, like single family homes or properties. You buy a distressed house, you buy it for cheap, because it needs a lot of work. You go in there and you replace and repair anything that can fail, that is major or even little stuff, right? But like, if there's a old ass hot water heater that's 30 years old, replace it right then and there. Get your HVAC replaced, if it needs it, right? Your roof, if it's worse for a replacement, you make this thing nice and then you refi, burr out of it and get most of your money out if you can.

Dan Austin: [23:14] Yeah, I mean, I love to say all your money out, but that's just unrealistic these days. Say you can even get 90% of your cash out, so you got 10% in there. At that point you have a property that should not have any major capex. Your cash flow then will go towards maintaining the property during turnovers and small little failures end up happening. If you have anything left over after that, that's awesome. Outside of that, your profit's gonna come from the tax benefits, that's going to hopefully be used to pay down all the massive profits you're making from flipping and wholesaling and other businesses, and then the debt pay down. Yeah. That's your profits.

Mike DeHaan: [23:45] I think most people ignore all that though because otherwise you can't justify the investment most of the time. You're looking at a near term horizon what people do. But I remember reading, I think was Brandon Turner's book on rental properties from Bigger Pockets. You know, they came out with it in 2018, whenever that was. And he literally says in there how you should calculate your capex expenses is you figure out what the lifespan of all the major expenses are, right? And then you figure out the actual cost to replace those things, and you take the actual cost divided by the number of months lifespan to basically get your monthly cost to do that capex. And I remember going through that exercise back then, and I was like, this fucking, nothing works. Like it's impossible if you take things like that seriously. And I was like, so instead the game kinda became, you gotta get so good enough for your holding horizon, you can make money then you gotta sell it and like pass off the problem much to the next buyer. Yes. Right?

Dan Austin: [24:44] Yeah. That's the truth though. Because there is a To round out the conversation is there's there's a crossover, you can imagine a graph where your your appreciation and debt pay down like kinda add value to you, but then the repairs take value away and there's like a crossing point where you wanna sell before the major capex items. And that's why I say, if you buy it and you fix all those, you're gonna get a good solid seven to ten years out of that property before you're like, oh shit, I gotta really repair this. And that usually, the idea is that we'll get you through a market cycle. So, you know, market cycles they say on average last seven years. So if you're at the bottom of that trough, that gives you time to get to the peak and sell that before you have to go replace a full HVAC system for 8 to $10.

Mike DeHaan: [25:25] Yeah. For sure. Right? And then you can negotiate that on the sale price, you know, when you go to get to that point in the future, if it is like on the end door of it and like the seller like, oh, I want you to replace this furnace. Those are great things that are always negotiable. Right? You can split it with them. You can tell them no, find a different buyer. Right? Can like have some control over the process versus like when you own it, totally it is your problem. Yeah. When you own it and it's like a 90% end of life and you're going to sell it, you can probably get away with much less of an expense because your buyer's gonna be pretty motivated to get into the house at that point.

Dan Austin: [25:57] Totally. Absolutely.

Mike DeHaan: [25:58] It's just, I don't know, my perspective has been changing so much on real estate. I'll say this is kinda like a universal fact as well that I'm starting to find with people that are actually investing, and aren't just like talking about investing on the internet, or aren't like living in their nostalgia about like how they were investing back in like 2010, and now they're so rich.

Dan Austin: [26:17] They should have bought everything.

Mike DeHaan: [26:18] Yeah, exactly. And they're like, man, I regret everything that I ever sold ten years ago. So fuck, of course. I wish I'd kept all my crypto from 2013 too, but I didn't. I use it to start real estate. I'm an idiot, right? Yeah. But it's how it works.

Dan Austin: [26:32] Well exactly, right? You can't ever go back and change your decisions. Have to realize you did sell properties like we're selling properties, you know, at a regular, you know, clip because you kinda need the money to grow. Yep. Otherwise, yeah, nobody would have a reason to buy, sell anything. You just just keep building your kingdom.

Mike DeHaan: [26:47] Mhmm. Mean, that's the mature way about it. And and that's something else too, is that like, if you look at people that are active investors that have large portfolios, like Aaron Wichestegi is probably the largest residential investor that we know. He owns like almost a thousand individual properties all through Texas and But different he's always selling stuff.

Dan Austin: [27:05] Yeah. Good.

Mike DeHaan: [27:06] Right? Is they look at the ones that have issues coming up or they look at the ones that aren't performing well or they have like a really lower return on equity and they'll sell those and they'll move on to the next deal that they're also buying with an equity upside at the point of purchase. You're adding value by doing reparations or increasing square footage, doing all sorts of things there, or by buying the entire neighborhood and saying the wrong comps, right? That's like the But big dog level of it's not like there's people that are out there and they just buy everything and they keep it forever. You know anyone that says that they do that is kinda suspect because what they're probably doing is they cover any of the expenses or bills as they're going and they're raising more money, right, to re stabilize their own properties and they're paying it out on some kind of debt. But that's almost like robbing Peter to pay Paul a little bit, so something thousandly going on there.

Dan Austin: [27:49] I mean there is the, in the long term game, is the life cycle of like refinances. Yeah. But that becomes challenging when you can't refinance.

Mike DeHaan: [27:57] Like right now.

Dan Austin: [27:58] Like right now. Yeah. So if you were in that situation where you were banking on a refinance last year and this year and probably into the beginning of next year, that's two, maybe three years where it just wasn't going to be favorable for you to refinance. So now, overall, your your cost of money, like your your IRR of this is being reduced because you're not able to get the cash flows at the earliest time possible. Because that's really, you have when you're looking at return and you're calculating things, you're not only just looking at how much the total cash flow is, you're looking at the timing of when it comes in because that means you can take that money and get a compound interest on it by reinvesting it.

Mike DeHaan: [28:31] Yeah. Well, I mean that's why all the commercial real estate is tits up right now. You know, because you have all these people that were buying properties five or six years ago on these five year balloon debt that forces them to refinance and they were basing their future valuation off of their past experience which is not what happened. For sure. And instead we ended up with higher interest rates for a very long period of time, plus lenders just generally not having an appetite for commercial real estate at all. And so all these people are getting these properties foreclosed on. And I saw the number kind of recently, I should I should look to find it. But it was like several $100,000,000,000 worth of commercial debt that are gonna be coming due this year.

Dan Austin: [29:08] Yeah. It's a lot.

Mike DeHaan: [29:09] I say how like what are they gonna do? On those properties, they've appreciated zero. Like they've dropped in value an incredible amount.

Dan Austin: [29:17] They dropped very yeah. Well the argument has been the whole year is also that those are most of that money is held by regional banks. So it's not like Bank of America that can like go and get a bailout or have just the balance sheet to absorb it, right? These are regional banks. Think about San Francisco, people like regional banks there that you know, went through the boom and now they have a billion dollars worth of one office building block, right? That is just upside down. That's what you're gonna see. So the idea is is these lenders should, if it worked out, would love to restructure that debt with these operators, but there's just no income coming from some of these buildings. It's problematic, but you wanna restructure it so that you can get to a point to where rates are a little bit lower and that you can actually start like generating income because people want to use the buildings or someone's just gonna have to buy it out of distress and reposition the property.

Mike DeHaan: [30:09] Yes.

Dan Austin: [30:10] All I know is you don't wanna be be the owner or an investor with a big office building. When I talk big office, I'm talking like a downtown core area. Nobody seemingly wants to be near the downtown core of most of these cities anymore and they're kind of like still flooding out and not wanting to go back. Some employees are holding their employers hostage, like hey, I'm not going back to the office, I don't care. And there's these edge cases, A lot of this is in these extreme cases, but even where we're at, a tertiary market where we don't see like, you know, in Eastern Washington where we're at, we don't see these big huge bump ups and downs even though we've been a hot market recently, it's not compared to like what you would see in these big metros like San Francisco, Seattle, LA, New York. But even then, you like, I have a friend that does a lot of stuff downtown with with leasing and office spaces and like, it's ghost town out there.

Mike DeHaan: [30:58] Yeah. Yeah. I mean, especially in the Northwest though, it's such a homeless issue and such like a, just like general.

Dan Austin: [31:04] I think that's just becoming major metros now in a lot of these areas.

Mike DeHaan: [31:07] I mean, I don't know man like, West Coast thing. The West Coast thing, like when I've been in Texas, and I've been to Austin several times, like there's definitely homeless people there, it's not here.

Dan Austin: [31:17] You know? That's unique. That's like going to Boise, they make sure there is no homeless people there.

Mike DeHaan: [31:21] Do they? I haven't been to Boise in a long time. I don't know.

Dan Austin: [31:24] You're like, why is there no homeless people here? There's a reason.

Mike DeHaan: [31:26] Yeah, so.

Dan Austin: [31:27] Do you go to like some of these other cities though, Atlanta, another good metro on the East Coast, like there's some pretty rough problems there. I can't speak to their downtown as far as office goes, but I know they've got a lot of rough problems in the metro and crime and stuff like that. So I think it's just, it's a challenging market to be in for multiple reasons.

Mike DeHaan: [31:43] I think the big part of that is that there is a limited population that wants to live in a city, like actually live in a city, and those people that wanna do that, they're going to all congregate to like actual cities. I saw this statistic recently that was very interesting that New York City, the vacancy rate in their properties is at the lowest that it's been in like forty years. Yeah. Because there's this huge draw for young people that want like the city lifestyle. Right? So they're moving to New York City, right? Which makes sense. It's like, you know what, I really wanna live in a city. You're not gonna live in fucking Cleveland, right? Or like Spokane.

Dan Austin: [32:20] I mean, Cleveland's not bad this time of year.

Mike DeHaan: [32:22] They're gonna go to like the city. It's the way that young people are. It's like, if I'm gonna do something, I wanna do it to the max. Right? They wanna live life to the fullest extent, they don't wanna like compromise or so they're gonna go to like the most extreme example in the city that they can think of. It's just like the other part of it is people that don't wanna live in a city, right? You see all this major trend of people being like into home setting or going and buying land, and living on a freaking They're trailer out in the like, I don't wanna be the city person, not gonna live in the suburbs.

Dan Austin: [32:49] Yeah, yeah, yeah. They wanna have chickens.

Mike DeHaan: [32:51] Yeah, they wanna have chickens.

Dan Austin: [32:52] They wanna have chickens.

Mike DeHaan: [32:53] You know? So I think that's like the mid sized cities, someone's gonna really be in trouble with that and commercial real estate will be the first thing that really gets punished but

Dan Austin: [33:01] Well, it's harder to reposition, right? Because like down here it's gonna be hard to go and like reposition an office building into like a condo because we're not a condo city. Nah. Like we generally speaking don't have a lot of downtown loss or downtown living and most people in our area don't want that. You know you can probably go, still go to the Bay Area, San Francisco and some these big cities and maybe if they're able to reposition those buildings, then they will. Yeah. But other than that, yeah, I don't know what's gonna happen there, but I do know that the big scary thing is people like, who cares about these people that own these big buildings? Well, it's the hedge funds and these big institutions that have people's retirement accounts Mhmm. That are the ones investing in it. And so the everyday blue collar worker that works for New York City for example, his pension is relying on that office building being worth 1,000,000,000, not 700,000,000. Mhmm.

Mike DeHaan: [33:50] Yeah, it's gonna reduce their returns. It's also a lot of insurance companies. Yeah. Yep. Like life insurance companies or general insurance companies, they hold a lot of their value in those properties. And if they start to lose that return, guess where they're gonna get it from? Your premiums.

Dan Austin: [34:02] Mhmm.

Mike DeHaan: [34:02] Right? And then so it all kinda like trickles down after a while. Yeah. Who knows? I don't know like the the real estate space in general is so tricky. I just really think it's now more than ever, it's so important that you learn how to like actually make massive income, and be fully in control of yourself, And be willing to be agile. And don't ever be going into things with this like super fixed mindset of like, I'm just gonna buy 10 properties and pay them off and live on them forever. Because you will have issues and you will ultimately fall behind.

Dan Austin: [34:32] And

Mike DeHaan: [34:32] if you're able to figure that out, might be on the high horse for a while but over like the middle and long term, you will just get further and further and further sort of like backwards from where you started.

Dan Austin: [34:42] Yep. Yeah. If I could like add to that what I would say, what I'm thinking right now, what I'm feeling right now is like, what you saw worked really well the last five years is not going to be the way to make wealth. It is to be able to learn how to generate true income, just passive income from rental properties. You can still make passive income other ways. I'm just saying that for right now in the near term, rental properties are probably not gonna be the way to do it. You should still try to buy them and still accumulate assets, but you just need to make sure you're doing it the right way and then generate income through what we would call like your wholesaling flipping business or replace that with whatever business that generates great income, so that you can invest in that real estate and it doesn't have to be this perfect burr. But then I would also say that the gurus out there on the stages, telling you how to do it, they made their money in the last five years and so that way probably won't work. So don't take it, you know take it with a grain of salt, don't take it as scripture and as the you know, whatever. It can be vastly different going forward for you to make your money and the next gurus are gonna make their money

Mike DeHaan: [35:43] a

Dan Austin: [35:44] way.

Mike DeHaan: [35:44] Totally. And I think the key is to understand the concepts they teach, but learn the implementation for yourself and don't try to like copycat. Think that's probably less doable than it's ever been before.

Dan Austin: [35:57] It's not not as easy as it was.

Mike DeHaan: [35:59] Yeah. So cool. Anyways, alright. We'll wrap up there. Well, thanks for listening everybody. We hope you enjoyed this edition of the Mike and Dan show. Give us a follow on Instagram. We've both been really trying to push that recently, and so we'd appreciate a follow. I'm at might underscore invest. Dan is at investment. Dan, go over there. Sure. An EM, and let us know what think of the show. We appreciate it. Thanks for listening, everybody, and we'll talk to you next week. See you.