MBA2464 Extended Interview: Dave Meyer - How to Use Real Estate Investing to Retire Early

0:09Heyo! Welcome to the$100 MBA show, helping you navigate the challenges of business. I'm your host, your coach, your teacher, Omar Zinhome. And today's episode is an extended interview episode with Dave Meyer. And he'll be teaching you how to use real estate investing to retire early. I'm so happy I got the chance to sit down with Dave from BiggerPockets. If you don't know BiggerPockets, huge website and brand and podcasts and books and a whole bunch of other stuff that I'll talk about in a moment. But Dave Meyer is a real estate investing expert. and I wanted to sit with him because many of us as entrepreneurs, including myself, want to diversify our wealth, our income.

0:49We don't want to put all our eggs in one basket and just rely on our business for the money we make. We may make a profit, a dividend at the end of the year. What do we do with that dividend? How do we actually put it into an investment that can continue to grow with us and give us some flexibility, give us some diversity of investment? I was really sitting down and really grilling, Dave, because I really wanted to learn to know what are the first steps to getting into this whole real estate investing. Is that as simple as just getting a home loan, buying a house, and getting a tenant? What are the gotchas?

1:23What are the things you got to look out for? What makes a good landlord? How do you scale? Is rent vesting a good idea? We get a whole bunch of topics so that you can consciously invest using your dividend, using the money that you make from your business, and grow your wealth faster. Let's get into it. Let's get down to business. Today's conversation with Dave Meyer is a great one. Dave is a resident housing market analyst. This is what he does. This is what he is an expert at, understanding how to get into this market of real estate investing. He's part of the BiggerPockets team that has a podcast with over 150 million downloads and a following of over a million subscribers over on YouTube.

2:02He's the author of the book, Start With Strategy, a book that I am ordering right now. and the 2024 State of Real Estate Investing Report. But most importantly, he's a down-to-earth guy that really knows how to explain how to get into real estate investing. What are the options? What are the action items you need to put on your to-do list? What are the things you look out for? And what are the things you can look forward to? We're gonna jump into this conversation right now with Dave Meyer, but I'll be back to wrap up today's episode with my takeaways and some homework for you to take action with.

2:32So let's get into it. Let's get down to business. Let's jump into that conversation with Dave Meyer. Dave, so good to have you here on the podcast. I was really excited to see your name on my calendar because this is a topic that I want to explore not only for the audience, but also for myself. I want to get into how to diversify my investments, my wealth through real estate. And I'm not really sure where to start, but before we get into all the nuts and bolts of that, I want to first welcome you. Thanks for being here. Thanks for having me. I'm excited to be here. Awesome. And I want to start by just learning a little bit about, you said you grew up in Westchester.

3:11I want to learn a little bit about, you know, what were some of the influences in your life? What was the first moment where you're like, oh, there's other ways to make money than a paycheck? What was that moment in your life when you were growing up? It happened for me relatively early. My parents got divorced when I was around 11 years old. and that's when my allowance basically just got cut off and my parents were sort of like, we're going through a difficult financial time that lasted quite a while and I wanted to hang out with my friends and do other things and so I quickly learned how to make money for myself and when I was in middle school, I started doing things as simple as walking dogs and shoveling snow.

3:58I did work at formal jobs in high school as well. But in college, I dabbled in a few other entrepreneurial endeavors like throwing and planning parties with and partnering with local event spaces. And so I just always was trying to find ways to make money. I wasn't really thinking about being an entrepreneur. I was more sort of thinking about how to just do the things that I wanted to do at the time. But it does leave a lasting impression on you. And actually, right after college, about a year out of school, I was waiting tables and decided that I wanted to start my own business. And that's how I wound up first getting into real estate investing.

4:43I love this. I've shared before that I started my journey by selling my Halloween candy to my schoolmates at school. Exactly. I was like, the margins are great. It's so funny. My mom loves telling this story that I think I was in like fifth or sixth grade, but she got a call from the school because I was buying baseball cards from kids and then selling them to other kids at a markup. The school was not appreciative of it. I don't really remember doing that, but I guess that's just like - It's interesting that, you know, that was discouraged, but, you know, you didn't do anything wrong, but I guess, you know, the kids were getting angry.

5:27But you touched on something else, you know, bussing tables and then deciding, okay, this is not for me. One of the things I talk about a lot, and I want to hear what you think about this, is sometimes the best ways to figure out what you want to do is to just do a bunch of stuff that you hate. Like, just, I remember one of my first jobs was washing cars at a wash bay in a car dealership. And I remember at the end of the day, my hands were crusty and dry and I was just tired and aching. I was like, I don't want to do this with my life. Like, do you agree with this? Did you have the same experience?

5:58Oh, yeah, there I had a lot of those jobs in college. I worked in sort of an office just doing like clerical filing work. I hated that right out of school. Another side hustle I tried was working in real estate, but I was cold calling for an agent. that was absolutely miserable. You know, there are a lot of things. I actually didn't mind waiting tables. I actually kind of found it fun. But, you know, I definitely understand the sentiment. And there was a lot of a lot of different jobs I had that whether it's poor pay or poor treatment just from either customers or from managers, honestly, I find it motivating or did find it motivating to want to have a little bit more independence and a little bit more of a say into my own career.

6:51And that kind of stems from that whole feeling of autonomy. Like you want to do your own thing. And I think everybody who's listening has that itch and can resonate with that. Having said that, if you meet somebody at a party, how do you describe yourself? Like, Like, you know, we do a lot of things. We're all, you know, we podcast, we write, we sell, we invest, you know, like, so how do you describe yourself first to a stranger? And then if they get interested and they're like, well, tell me more, what do you say then?

7:23Well, for a long time, I would have described myself as a data analyst, which is what I'm formally trained in and I've done for a long time. Now, at this stage in my career, I am a real estate investing educator. And I basically have taken what I've learned both as an investor for the last 14 years or so and spent the last eight years professionally analyzing the housing market. And now I get to combine those experiences and talk about it and help people understand how to invest in real estate, why it makes sense, or I should say when it makes sense to invest and when it doesn't make sense to invest in real estate.

8:03And I get to do that in a variety of mediums. So I've written two books. I host a podcast on YouTube, all the other things, working for a company called Bigger Pockets, which is in the US, the biggest community of real estate investors. We are just a big software and media company. I love it. We're going to get into the investing part, the real estate part. But you mentioned you're an educator. That's what you love to do. you to teach people how to invest in real estate. Talk to me a little bit about when people come to you, what are some of the common challenges they have? What are some of the common questions they have?

8:44What are some of the things that come to you and say, hey, help me with this? There are several themes and barriers that people experience when wanting to invest in real estate. I think the most common these days is fear that the housing market, at least in the United States, is going to collapse. And that fear makes sense, given that most of us, I'm a millennial. I think most people who are millennials or, you know, really most people have a very real memory of the 2008 great financial crisis and what happened with the housing market then. And we can get all into that in a little bit, but that's a common fear that people have.

9:27The other two are funding and figuring out how you're going to fund real estate because it is a capital-intensive industry. And then the second is just how to operate the business because it is entrepreneurship. People call it, quote-unquote, passive investing, but it's not. investing in the stock market is passive investing. Real estate actually operates more on a spectrum where some types of real estate investing are almost entirely passive. You can invest in funds or something called syndications where you basically do nothing. On the other end of the spectrum, you could be actively flipping a house, which is as much work as a job.

10:11And so I think for many people, it's difficult to figure out where you want to fall on that spectrum. I imagine for people in this audience, you already got your own entrepreneurship going on. You're running your own business and you probably want to fall more on that passive side of the spectrum, which is entirely possible. It's mostly how I personally invest. But I think a lot of people feel like, oh, I don't want to actually be on site every day and don't realize that there's a lot of ways that you can invest in real estate without doing that. Yeah. And you touched on that fear, 2008, the financial crisis, the housing crisis, all the stuff that happened.

10:51My parents are Egyptian and the Egyptians have this saying that says, those who burn their mouth on soup, blow on their yogurt. So they're like overly – you can use that if you want. So people are blowing on their yogurt right now. They're like, oh, this thing is going to burn my mouth. You know, just being burnt once causes them to be, you know, obviously, I don't say pessimistic, but cautious. And that's healthy, I think, in some regard. And it also depends, like you said, on the market itself, U.S. versus other places. Like, for example, here in Australia, the housing market is absolutely insane.

11:31Like, it doesn't make any sense. The housing prices are going skyrocketed high. The rent yield is just not there versus rent versus buying and all that kind of stuff. But people are so bullish on buying property here in Australia because of how fast the property increases in value. People that bought before COVID, their properties have went up 20 % already. It's just pretty insane what's happening here. but I want to talk a little bit about the business owner that I know who's listening right now is like, hey, I am making dividends. I'm making profit in my business. I usually just reinvest that money into my business.

12:13Sometimes I take some money off the table so that my family can go on a vacation. So this heartache is not worth nothing. But I'm thinking about investing in real estate, maybe in an investment property. Maybe I'm looking for other opportunities. What is a way for them to say, hey, I have maybe a lump sum I can put as a down payment. Where do they get started, especially for the fact that this is not their focus. Their focus is really just running their business and making sure that doesn't go sideways. Give us some advice on a little bit about is there an education piece they need first? Is there something that they are not aware of?

12:53Should they just jump in two feet forward and don't worry about it? I'd love to hear more. I think that you hit it on the head when you said that there's an education piece. I think just getting a beginner understanding of the different options for real estate is a great way to start and just understand all the different things that you can be considering. For people who are running their own businesses like your audience, I think there's probably two critical questions that you want to think about first. First and foremost is, do you want to be actively managing your investments or do you want to be passive?

13:28And the critical distinction here is whether or not you are an accredited investor. For people who don't know what that means, it's this somewhat arbitrary distinction made by the US government where if you make$200 ,000 a year or more, or you have a net worth of a million dollars or more, you are considered quote unquote accredited, which will open up opportunities to you, like investing in real estate funds or syndications, sometimes called private placements, where it's basically you take your money and you give it to hopefully a very experienced operator who will go and buy probably a commercial asset for you, which is like a large multifamily building that's going to probably be a relatively stable investment, throw off a cash on cash return somewhere between 4 % and 8%, going to provide you with phenomenal tax benefits.

14:20You probably won't pay any taxes on any of the income that you earn on that rental property. And so that is a really good way if you're busy with your business, but you want to diversify to go into that. So I can talk more about that in a minute, but that's a critical sort of distinction. If you want to be an active investor, there are benefits to that. Usually your returns are a little bit better, but you have to put in the work as every entrepreneur knows. I would recommend for most people who have other things going on to consider the most stable vanilla type of real estate investment, which is long-term rental properties.

15:04So that's just buying what I would say is either a single family home or a two to four bedroom multifamily. So four units or fewer. And buying that out and renting it out to long term tenants who are going to use it as their primary residence. This is a very good long term way to build wealth. It's not going to make you huge sums of money by next year. But if you're trying to say, hey, I'm running my business, but I want sort of a secondary income plan. I want to be able to retire in 15 years. It's amazing because 15 years from now, your cashflow is going to be excellent. You're going to have amazing tax benefits.

15:44You'll have paid off most of your mortgage and you'll be in a really, really good position with relatively low risk. And again, happy to talk about sort of the risk element too, if you want to get into that. You mentioned multi-unit properties. Is that like a few apartments in a building? Is that what you mean? So yes, in the US at least, anything that is four units or fewer is considered a residential property. And this is a key distinction because lenders, people who are going to provide mortgages for you, see them very differently. And you can get much better financing terms if you're buying something four units or fewer.

16:26You can get a lower interest rate. You can get longer fixed debt. So there's a lot of advantages to that, which is why I recommend for most people to stick with that asset class. The other reason is that they're sort of tailor built for the small to medium size real estate investor. 80 % of home sales in the US go to primary residences, which makes sense, right? And those people are primarily looking for single family homes. So you're going have a lot of competition in that market. On the other hand, you have big hedge funds, private equity, institutional investors. They want to buy real estate, but they don't want to buy thousands of small properties.

17:03They want to buy a couple dozen 300 unit buildings. And so that sort of leaves these small residential buildings, the two to four units, as sort of a sweet spot for a lot of what we call mom and pop investors. But by mom and pop, We mean people who have other stuff going on and are trying to use real estate to diversify their portfolio. Okay. That really paints the picture. My uncle does exactly that. He actually has – I guess it's like a townhouse kind of thing or a mother-daughter it's called. But there's I believe three or four apartments in there and he lives on the top apartment and then he rents out the rest.

17:42So I could see when you mentioned those benefits, that's one of those education pieces that a lot of people don't really know. What about commercial real estate? I'm sorry, go ahead. Yeah, I was just going to say, it sounds like what your uncle's doing is what we would call house hacking, which is living in one of the four units that you're buying. And to me, that is the single best way you can get started in real estate investing if you want to for a host of reasons. One, again, you get residential financing, but you also get owner-occupant financing, which is even better than residential financing.

18:21The best loans that you will get, at least in the United States, are owner-occupied residential financing. So that is really beneficial. The second is you learn a ton. I personally did this and living at the property, interacting with your tenants, doing a lot of the maintenance yourself is a great way to learn if you're going to try and build up a portfolio. And the third is that it doesn't necessarily even need to cash flow to be financially beneficial. As long as you can reduce your cost of living significantly, it's going to benefit you. So I know a lot of people who work full-time jobs and want to get started in this, and they basically buy a triplex, rent out, live in one unit, rent out the other two.

19:03And they may not be making$1 ,000 a month, but they've essentially gone from paying, let's say,$1 ,000 in rent a month to paying nothing and getting the benefits of appreciation and all the tax benefits that come with real estate. And fun fact, that's actually how Arnold Schwarzenegger became a millionaire before the movies. These types, yeah, yeah. Is that true? I'm a big fan of his in this part of his documentary. Before he even got his first role, he became a millionaire through this type of real estate strategy. And he did it because he didn't want to have to take roles that he didn't want to take.

19:41He wanted only leading man roles. So he was like, I don't need the money because the real estate is taking care of me. So fun fact, yeah. Wow, that's super cool. I had no idea. So what I was asking before was all about, you know, I have a friend that's in commercial real estate. So what about like, you know, buying property like a warehouse or an office building? You know, are there any advantages to that or is that a little bit more risky? I do think it's riskier, particularly right now. Now, we talked a little bit about 2008 and housing markets and crashing. And while I personally believe that the residential housing market, at least in the United States, is in a pretty stable spot right now, could go down a little bit, could go up a little bit right now, but relatively stable.

20:34Commercial real estate in the U.S. and in a lot of ways globally is experiencing a real big shock right now. And there's a couple of reasons to that. And commercial real estate is a pretty broad term. But office space, as you mentioned, is the most is the riskiest asset right now. We've seen actually property values decline almost 50 percent in some cities, 30 to 40 percent in a lot of others. So commercial is kind of almost quietly, unless you're in the industry, almost having its own like 2008 moment where we're seeing just massive declines in value, a lot less demand. And that to me makes it a little bit risky right now.

21:19Now, personally, I think in six months, 12 months, 18 months, there's going to be huge buying opportunities, though, because we've seen these industries really see big price adjustments after huge property value growth during the pandemic. It's sort of correcting right now. But if you are new to investing, I would not recommend commercial real estate unless you're going to do one of those passive options that I said, where you are essentially investing in an operator. So you find someone who really knows a specific asset class. And that's really important because operating an office building is very different than operating a multifamily unit is different than retail is different than self storage or data centers or all the different things people invest in.

22:09And so if you're new, I think you find a good operator and you can invest with them. It's sort of like angel investing or VC investing basically for real estate. It is not super liquid, which is something to consider because usually you invest for five to seven years with these people and you can't really get that money out. But it is a great way to invest. I personally do it a lot myself, but it is not advised, especially in today's climate, to jump into commercial by yourself, trying to buy it and trying to operate that business because there's a lot of complexity to the operations. And right now, actually, the biggest complexity is financing.

22:52It's really difficult to get good loans on those type of assets. And that comes with a lot of risk. Interesting because I was noticing in Sydney, in the CBD and the Central Business District, a lot of the commercial offices are now being converted it to residential buildings, which is quite hard because these windows now have to open and they have to change infrastructure and the ceilings and all that kind of stuff. And it's a big investment. So they wouldn't be doing it if they didn't think that this is sort of a situation that's going to stay for a while. Going back to, okay, let's say, for example, I have$200 ,000 where I want to put a deposit it on something.

23:37And maybe it's a four unit little apartment complex, or maybe it's, you know, a few homes. Is it as simple as going to the bank and saying, hey, this is what I want to do? How can you finance me? Is there a way for me to shop around? Do I need to do this under the umbrella of a business entity? Or do I just do this under my name? You know, like, I'm asking all these nitty gritty questions because I know people are thinking of them. Oh, for sure. Yeah. Honestly, it kind of is that easy. I think the main steps that I would take if I were new to this is one, just educate yourself, basic 101, how to be a property owner.

24:20I think it's important that if you're going to do this, that you take the responsibility of being a property owner seriously. It is your duty to provide safe, good quality housing to the people that you are renting your properties to, and you should know what you're getting yourself into. So I think that that's number one. The second would be to pick a market that you want to invest in, because, you know, my expertise is in the United States, but there are many other countries where people are able to be, you know, investors. I think, honestly, the better word is real estate entrepreneurs. Like it's, you know, for the people on the show, like you are starting a small business.

24:58And so I think picking the market that you want to invest in is super important. And I'm happy to talk about some of the nuances there. Then you basically just have to find a deal, which usually just involves contacting a real estate agent who understands investing. Not all of them do. And then once you have a property, that's when you go to the bank typically and say that you want to get a loan because the bank needs to evaluate your credit worthiness against the asset that you're trying to purchase. Because, you know, if you're say, let's just say you make a hundred grand a year, if you're going to look, buy a property that's 300 grand, they're probably going to be fine with it.

25:39If you're going to buy something that doesn't cashflow and it costs two million dollars, they're not going to be fine with it. So I think you have to present them with the property that you're looking at. But the good thing is if you do this four unit or fewer, they're not like looking at a business plan. They're not trying to understand you. No, it's residential. So they're treating that as if you were buying your own home. And they will, in most cases, it depends on your background. But in many cases, they will consider the rental income or the potential rental income as part of your income.

26:16And that's important because the bank is evaluating something called the debt to income. Oh, interesting. So they just basically want to make sure that you service your debt. Incorporate that in the loan application. That's interesting. Okay. Yes. And those have been some changes that have happened recently to benefit, I think, real estate investors, that's not the purpose, but it does benefit real estate investors because now if you buy a property and it has an ADU, an accessory dwelling unit, basically like a garage with an apartment over it, you can count the potential income for that apartment as your income.

26:54So the bank says, okay, we can lend to so-and-so because they're going to be, they have their W-2 job or their business that they operate plus the money that will come in from this property. I found that very interesting because just from a business point of view, that's not like guaranteed cash, but the bank is so willing to give the loan that they're willing to kind of say, hey, you have the potential, you have the earning potential to make that and we're going to consider that in your income so that we're able to approve the loan. So they're actually going to do whatever they can to give you the loan is basically the answer.