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Episode 076 - Are You Paying Too Much for Your Properties?

acquisitions Nov 01, 2021


Buy low.  Sell high.  It's a simple concept until emotion gets the best of you.  Right now, in several parts of the US, Real Estate prices are soaring and investors are paying way too much for properties that they may not be able to cash flow in the future.  Are you one of them?


Transcript of this Episode:

Hi, this is Michelle, the master of money mindset, and you are listening to BNB dash boss podcast.

And in today's podcast, we're going to ask you, are you buying your houses too high? Are you buying your properties too high for Airbnb? I recorded this podcast in a closet. It feels like great, but it's not. When I recorded it, we thought we had certain microphones on and it was actually another set of microphone.

So it sounds kind of. Sounds like I'm on a zoom call. So let's just pretend we're on a zoom call instead of recording it. Because I said, I really can't record these things just over again. Just take it and use it. It's not that bad. It sounds like a zoom recording. So you're going to hear like a zoom recording, but it's definitely me.

And it's a good listen because right now a lot of people are overpaying for properties just to get on the BNB bandwidth. Let's not make any big mistakes or mistakes that could shoot us in the foot later on. So take a listen. I am excited to be back. I have had one heck of a couple of months actually took another week or two off just because you had another death in the family following Alex's death, it turned into.

Just like we have lost so many people in our family and, uh, not for good reasons, nothing, no one died of COVID. So thankfully that's good. But people have died from the COVID vaccine in our family and, uh, we've had some bad reactions that turned into deaths and that was very sad and just a heck of a 2021.

Honestly, I would've rather redone 2020 if it were me. Like I w I would have rather redone that one, because we here just going to heck in a hand basket here, or 2021. And that's what we're going to talk about today. We're going to talk about going to hell in a hand basket, right? No, we are going to talk about.

People paying too much for properties and what's going on in the market today. We've got home. My gosh, you guys, I get back in, I got email after email, about a bunch of people, just really getting excited about getting into BnBs. And I'm super excited about that because that would be a great thing. But everybody's going into these markets, especially here.

Phoenix. There's a lot of really good markets, right? There's a lot of markets where the property values are going way, way up and shooting way up. But I want you to know that those are inflated price. And we had a podcast about that not too long ago, where I told you how some companies were inflating prices and how well they're doing well, Zillow pulled their butts out of this market.

Why the prices were too volatile? What does that mean? It means they can no longer manipulate the prices. The prices are going to change. Right before the crash and 2006, 2007, you know that, that area, right, right before the last real estate crash, when Robert Kiyosaki was up on stage, we used to have authors.

We had people talking for years before the real estate crash before the bubble burst. And we had that crash, they were talking about, this is a bowl. Here comes a big crash, an adjustment, a nice word for it is an adjustment. Here's the agenda. You guys are paying way too much for houses. We're going to adjust the prices and we're going to bring them back to where they should be, where they should really be.

That's what's been going on in the market, especially in our area in Phoenix. We can see it here. I mean, oh my God. It really, really was standing out, but who was hurt the most when the last real estate adjustment happened, obviously the millions of people who lost their homes, right? Who played with the equity of their houses.

And you never ever want to do that. If you never read the articles, please go to my website. And I've got a ton of articles. And Robert Kiyosaki has talked about this for a year. That your home is not an asset assets. Put money into your pocket. Liabilities, take money out. You should never borrow against your home, the quote unquote, equity of your home, and then play with that because if the value reverses it.

Which is what happened during the crash. Then you're going to owe on that, especially if you have an arm or something, an arm is an adjustable rate mortgage. Let's do a for instance, for instance, back before the crash. And I'm just going to use numbers that are made up, let's say you bought a house for a hundred thousand and it used to go up about five to 7% houses used to go up about.

7% a year annually. And suddenly right before the crash, it really started accelerating, right? So they were going up 10%, 12%, sometimes even more, every single year. For instance, the price of the house that we bought has gone up. It's almost double, like literally almost doubled in price in less than two years.

The house that we just bought that tells you something that's not real, it's not a real number. So, if you had bought a house for a hundred thousand and a year later, it was worth 200,000. A lot of people took money out of that by borrowing more against their property. So when you own a home that's worth 200,000 and you only owe a hundred thousand, you have 50% equity in that property.

And for the most part you can borrow when you go to buy a house, right? They want you to put 20% down. That means you'll have 20% equity in your property. And 80% will be on a loan. If most of the time, whenever you're refinancing your loans, they want you to have a 70, 30. You will be able to borrow 70% of that property has value, but they want you to have 30% down, 30% of your money down on it minimum.

Right. It's always a good idea to have at least 20. So you don't have to pay any PMI, which is private mortgage insurance. You'd never want to have that. So if your house doubled in value, if it was worth a hundred thousand. And let's say you put 20% down. So you had a mortgage of $80,000. Now, a year later, you house is worth 200,000.

Technically you can borrow another $60,000 and keep that 70, 30 mark. Right? You'll keep 70% as what you owe and 30% will be paid. And if you owe 80, that means you can borrow up to 140,000 of that property is about. Then you can borrow another 60,000 to make it up to 140,000 because you have to have 60,000 in equity of 30%.

So that is what most people did. They borrowed against that property. They borrowed and borrowed and borrowed and borrowed. And when the price is fell, they didn't go back to just a hundred thousand dollars. They went the little. They went below what people bought. So let's say the value of that property went down to $80,000 and they owed $140,000.

What happens, people are doing short sales, or if they have adjustable rate mortgages, a lot of them at that time had gotten into four, one and five one loans, which means that they were paying interest only loans. And suddenly they had these big, massive payments due and they couldn't afford them. They weren't making that much money because they weren't.

Taking people and qualifying them for mortgage loans the way they should have, and they couldn't make those payments. So they had to sell it. They sold, it was worth less than what the value of the loan was right. Less than they owed on it. They'd had to do short sales. There were short sales and foreclosures going on, just all over the place.

Millions of millions of people. And I know that sounds like just number two, you guys, especially if you're new in real estate, but millions of people losing their homes to foreclosure is not a good thing. It's a lot of people, each one of those foreclosures represents a family most of the time. Right. And.

You really need to think about this. People were losing their homes left and right, because they could no longer afford the payments on these houses and they couldn't sell it because it wasn't worth as much as they owed on it. They had played without money. Now, a lot of people made out like, Because they borrowed way more and then they just let it go.

We had people that we knew had done that and beat out like bandits because they just borrowed against it. And when they couldn't afford to make those payments, they just walked away and just let it go. Okay. Let's get off my back. You know, so crazy, crazy things had happened that had seldom happened before.

When a market adjusts itself and the prices go down, which it has, it's gone up and down. Everything runs in cycles. I mean, that's just how the world runs. Right? So before, when there was a crash in real estate, most of the time the rents will continue to be solid. So let's say if the house by you are three, two houses, they usually rent out for about an average of a thousand.

Those rents didn't get touched. But in this instance, when. We had the last real estate crash bill, his rents felt quickly and they felt, you know, they took a big dive too. There were some places where we were getting 1300 a month rents and they went down to five and $600 a month. So what was really cool for us was when Robert Kiyosaki and all the mentors that we had at that time saw this big crash coming.

One of the things that he told us. If you can't cashflow your property for half the rent and this was a long-term renter, not short-term, we're not talking about short-term rents right this moment. Okay. Just think about it. In terms of long-term renters, people who are staying there for a year with a lease and stuff.

If you can't cashflow your property for half the rent, then it's time to sell that property. So we were selling our property, putting our properties up for sale. Right before the crash and people were like over bidding for them, you would list a property for a hundred thousand and that day you would walk in and there would be more than a half dozen offer.

All of them over the a hundred thousand dollar mark. And that included, you know, sometimes where you knew that they were paying so much, that they couldn't get the rights for it. And like, look, they could only rent this out for a maximum of 1300 a month, let's say, and why would they pay, you know, 300,000 for a place that they could own?

Rent for 1300 a month. Like he literally got that crazy where people were paying so much that we knew that their mortgages could not be sustained by the rent that they would be collecting because we knew what the rent values were. And for some reason they thought the rents were going to go up while the rents all went down and people started losing properties left.

And right, right now we have had unprecedented growth in not just the values of our home. That is not real guys. Remember that equity that you see, they're not real equity equity. Doesn't usually grow that fast and it doesn't matter what people say that it can't crash again yesterday. And it doesn't matter what they think too about the Rams, because they're like, well, the ramps are all going out.

Why are the rents going up? Here's why you've got a lot of old time people, old time landlords who are selling their properties because the prices are so outrageously high. So let's say I've been holding on to a property, a multiplex that has tens 23 unit property. That are worth. Let's use a nice even number.

It's worth $5 million. My property, my multiplex, and suddenly the value of my multiplex in like a matter of a year has doubled and is worth $10 million. How crazy is that you're like, holy crap, I paid 5 million for it. It's now worth 10 million. And I know I'm collecting this much rent on it, which is not with my cap rates and stuff.

That's like, it's crazy amount. I would be an idiot not to sell. Right. So what do they do? They sell it now, somebody else pays the 10 million for that property. What do they have to do in order to make their mortgage payments? They have to raise all the. So that's what's going on in the market. And when you have a properties and B properties raising the rent, it just, everything just goes on this domino effect.

And here in the valley, we've seen rents go up. You know, most of the time somebody's rent will be raised $50, a hundred dollars a month, but not very much every single year, you know, they try to keep people in the best way to be a landlord as to keep people in. Forever and ever, and ever, if somebody is in and they're paying rent and they're a good tenant, you want to keep good tenants.

Keep the people that I already have not have to market, not have to pay people to get new people in there and then take a risk. Because every time you put new people in there, you're rolling the dice and you don't know if they're going to pay you. Just hold out for a while. If you're thinking, why is she talking about long-term runs because everything affects everything else.

So when you've got these people going in and you've got to get new people and it costs you more money to put somebody new in, it costs more money to get a new tenant, put them in there. You're going to have the vacancy time, right. That lag between when the old guy moves out and you collect. Refresh it and find a new person and put them in there's a lag time.

And so all of that costs you money. The marketing costs you money to put an ad out a time, money, everything costs you money. So all these guys, these new investors, they are overpaying for properties. And in order to pay for those properties that they overpaid for, they have to raise the. And we're seeing like rent's going up $500 a month or more.

I mean, it's absolutely crazy. And the rights are just skyrocketing around here because people have overpaid for properties, but then something else is going to happen when these prices start to adjust and correct themselves because they are going to adjust and correct themselves. What is going to happen with the rent.

They can't afford to keep going, because right now there are more and more people moving back in with their parents than ever before. This has been 20, 21 has been crazy crazy year because more young people have moved back home because they can not afford the rent and they don't have the jobs and the credit.

To purchase their own house. Now some do, which is really, really great, but some do not most do not. And so when these prices start to fall, these guys are going to panic. They're going to have to sell the prices will be low again, and the reds can go back down, but guess what? It takes a while for that to happen.

Because most of the time, let's say you buy a house. It doesn't matter what you paid for that house. When you buy it from somebody, they're going to tell you what the current rent is of that house. They're going to say, we've got a renter in there and he's paying $3,000 a month and you're like, woo. I'm only paying a hundred thousand for this house.

And I'm getting $3,000 a month in rent. That's not going to happen because once the prices start to adjust. This is a whole big can of worms that is going to be opening up. We're seeing people not working. We're seeing all this stuff and it's just like this perfect storm of all these things that are going to go on where people are not going to be able to afford these rents.

People are not going to be. To keep it going. And so even when the prices of the real estate fall and the rents are going to start to go down and everything will adjust itself, but everything takes a little while. So it is quite similar to dominoes falling, but dominoes falling at a very slow pace. So one thing will happen.

Then you have to have all the impact from that happening. Then the other thing will happen. The other thing will happen, right? So I'm watching people right now. Let's fast forward to today, these prices are going up and they're going way, way up, way too fast. The houses are not worth what they are selling for, but people are paying and overpaying for properties.

Correct. And if you are doing that for a short-term rental and you're not prepared for the prices to fall or travel to be impacted, because I'm going to tell you something. Travel is going to be impacted within the next five years. Not as many people are going to be traveling within the next five years.

We're probably coming to the top of this market where we've got a lot of people going, oh yeah, this is great time to own a BNB. And it is, it's fantastic. We're booked out. We're booked solid for months and months and months. And I mean, it's a really great time, but I'm telling you. Because of all these scenarios, all these things that are happening, this is the perfect storm.

When everything is going to play out. When people stop traveling, when they start getting impacted by the higher prices of food, because the food prices are going crazy, right? You've seen videos of them tearing up crops because the us department of agriculture is literally paying farmers to destroy their cars.

You're creating a food shortage or holding food outside the U S uh, not allowing trucks in those cargo ships are being held out at sea for weeks and weeks until the food has gone bad. And then they let them in bill gates buying up more farmland than anybody else in the United States. He now owns more far more.

And he's closing down all the farms, they're creating a food shortage and as they do that, the price of food is going to soar. And we're going to see the housing prices when that drops, because remember that domino will fall right away, still going to be overpaying at first. And you're going to see like this perfect storm of how it all falls apart.

And so in the next five years, we're going to see a big correction and that's going to include the travel industry because people won't know. Be able to afford to travel, especially if they can't afford food. If your hamburger meat is going from three to $10 in just the next few months, I mean, think about this.

This is really going to impact Americans, and this is not just their food. This is everything is going up. Right. Everything is going up or gasoline has gone up. This is probably before. The worst case scenario for America sends Biden, got an office that is ever been for Americans, especially low, and middle-class Americans.

They are trying to wipe out the middle class. And if you don't own at least 10 properties, then consider yourself low to middle-class. Right. You've got to be making a good seven figures. I would say a high six figure seven figure. To not be nearly as impacted as everybody else. And that's money going into your bank account.

Your expenses are probably really high. You can make a million dollars. Anyone can make a million dollars easy in this business and still have close to a million in expenses where they're only bringing home 90,000 a year or 150,000 a year or something with their expenses. So just because you're making a million dollars, doesn't mean you're keeping a million dollars.

And I want you to know that there's a lot of people out there they're making a lot of money and it looks like they're making a lot of money, but they're really not keeping a lot of money. And right now everybody was free and easy and they're happy. But as these prices go up, there is just going to be a ripple effect.

And I want you to think about the ripple effect. Now, if you've bought a proper. That you cannot fill with a short-term rental. What do you do? What did we do in 2020? Right. We started marketing towards longer stays. Month-long stays two months, three months with traveling nurses and other people like that.

Correct. When that starts going to hell in a hand basket, then we're going to have to go towards long-term renter. If you overbought a property better, know what the long-term value is for the rents in your area. And I don't want you to look at today's rents. I want you to look at two years, two to five years ago because that's what the rents will probably fall back to.

And maybe even farther. So you got to look at those prices because that's what you should be looking at. I've done program after program on how not to buy your property using short-term rental prices, because the rest should be just icing on the cake for you. You always buy looking at long-term rents and then everything else is icing on the cake.

So if the rents in your area are a thousand. And you can cover that. You can cover all your expenses, your mortgage, your insurance, your taxes, your HOA is all you were holding expenses for that property. And still have a little bit coming in with a thousand a month as an income for a long-term stay. If you take that and turn it into a short term rental and you're pulling in 3000 to 3,500 a month.

Yes. All the rest is icing on the cake. That's perfect. It doesn't matter, right? It doesn't matter. But if you buy that property and you're using the income of the short-term rental of 33,000 a month or 3,500 a month, and your mortgage is high, you won't be able to make a payment of only a thousand a month.

Do you see? So there was a reason why Robert used to say to us, if you can't cashflow your property on half the. Then dump it. And so I want you to look at that and realize that that same scenario in the next three to five years is going to be happening. So right now you're seeing older investors. Older, meaning we've been through this shit before.

Right? We have been there done that and it wasn't pretty, but a lot of us made a lot of money. Right. We, you know, we did pretty darn good when we sold at the top of the market and the properties that we held, not so good. Right. I want you to think about that and start looking, start looking to your future because if you can't cash flow, your.

Unless than what the regular rent is now on just slightly less than you might want to think about selling that property and then just do rental arbitrage for awhile until this all adjusted. Because there is going to be a shakeup. There is literally going to be a shakeup and everybody is talking about it.

And I know you think it's a left right thing. It might be because the majority of people who wrote books about it before the last crash were conservatives, but not all. Not all of them were people who write books afterwards, you know, taking a 2020 look. A lot of them are very liberal. So obviously, you know, uh, the big short was written by a liberal guy, but he left out a lot of key information, but by all means go watch that movie because it has a lot of truth.

But it also hides a lot of the facts. The fact is right now, our government is not working for us. It's not working for the little guy. It's only working for those big giants and they keep saying, oh, they're going to do this. They're going to do that for us. And it's all bullshit. They want the small business owners out and they want the middle class got.

These businesses, they're the ones making all the rules right now. And I'm talking big pharma and talking to all these big companies, places like Amazon, social media sites like Facebook, but right now these guys run all of it. And our big media company. They're telling us exactly what they want us to hear.

So trust no one, I watched the news and I'm just like, I'm so appalled at the lies that they're willing to tell. They always scream. Uh, well, we have to cut this off because we don't want any misinformation out there and you're like, you should shut your whole news station down because. If you're watching CNN, you're watching CNBC MSNBC, you are getting the most just information you have ever gotten.

Fox has got just as much disinformation on there. They tell you half truth. When I was growing up, my mom used to say that the devil is full of half-truths. He tells you a little bit of the truth mixed with a whole lot of. But I want you to be sure that you're not over purchasing property, paying way too much for it.

And that you are, if you are buying property, you're getting a really good deal. I always recommend doing the burn method and buying something you can fix up so that you're getting it way undervalued. You can put the equity into it. Correct. But not just that, make sure you're buying it in mind with long-term rental prices because that's imperative, right?

Yeah. You cannot count on our short-term rental income being the way it is for a whole five years. I would say somewhere in this period and not I'm counting on it before them dropping, but who knows? It could hang on for a good five years. This is about when you know, Kiyosaki and all these guys started telling us, and they're telling us now, watch out, it's getting really tricky out.

And I remember, oh my gosh, here's, here's the sad thing. When things change like this, you've got a lot of people warning you, all the books that are going out by our guys who talk about these things. Dent, great authors. They've been talking about this for a while. This correction that's coming up and we've been waiting.

It would have happened a lot sooner. Had Trump not gotten into office. Obama was printing up money left and right. And borrowing billions of dollars a year and printing out a trillion dollars a year and putting that into circulation, which devalues our money. Right. But in order to keep it valuable, he had to borrow almost just as much.

So we were ready for that nail in the coffin before. And with this budget, there's no way Tony. Robinson's got this really great. What is a trillion dollars? He's got a video about what is trillion dollars and how much that is, and that's a great video to watch, but he also had. Uh, video talking about pain off, and this misses the old debt.

When Obama was president paying off these trillions of dollars of debt, where you could literally tax every person in the United States, a hundred percent of what they make. And you could take all the biggest businesses. Take all of what they're worth liquidate though. And you still wouldn't be able to touch a fraction of what we owe other countries.

So we could tax everybody at a hundred percent. We'll never pay this off. You can tax your grandchildren, your grandchildren, now, your children, your grandchildren, and your great great-grandchildren. If everything stayed the same, they would be born into indentured servitude to the U S government for tax.

Because that's what's going on. That is what's going on. Tony has always talked about this taxation and the fact that our government overspends, right? Well, Ashley, he's got a great book. You guys should all read. It's called money. If you have not read that, you should definitely read that. So I want you to be super duper careful.

About over purchasing properties. And if you have over purchased, if you cannot right now, look at your property and say, I could rent this out as a long-term rental for slightly less than what the market is. So let's say, you know, the market is 2,500, let's say, can you rent out for 1800 a month in cashflow?

Or maybe a few years back. It was 2000 a month. Can you cashflow that at 2000 a month? And if you. And maybe you should think about selling that property and doing some rental arbitrage right now, because I've seen, this is really sad. I have seen some Airbnb gurus out there telling everybody to buy, buy, buy you don't buy high, you buy low and sell high.

You don't buy high. That's an emotional. Right. Oh, everybody's getting into short-term rentals. This is awesome. Look at it. Go look at it. Go look at it. Go guys. It's been going like this for a while. We've been in short-term rentals for a long, long time. We've been riding this wave for a long, long time. If you're just getting in now, you're not on the ground floor.

Sorry you missed the ground floor. So don't get in now. And buy super high and buy these really expensive places that you will not be able to cash flow because it's just not going to work for a while. It will, we might be able to ride this wave. Like I said it for another three to five years, who knows, but the shit could hit the fan really quickly.

I'm a better safe than, sorry, kind of. So I've been liquidating my properties for years. Just picking out the best ones and holding onto the best ones. Probably since about 20 12, 20 13, I started like literally trimming out and just keeping the best of the best of right. And now we're looking at stuff and we're trimming out even more.

And now we're keeping the only the cream of the crop. And the cream of the crop are going to be the ones that we know that we can rent long-term and still have money. The rest 10 31 into something else. 10 31. If you don't know what that is, go talk to your accountant, buying something else that you can cashflow long-term and short-term is just icing on the cake.

Okay. So that's today's podcast. I'm glad to be back. And I look forward to talking to you next week, and then remember Fridays, we have our Friday repeats of short-term rental revenue, and I encourage you to listen to those because those have a lot of wisdom. So glad to be back, talk to you soon.


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