Maximizing Post-Tax Cash Flow with Mike Chang

Quick Summary

Mike Chang, an experienced short-term rental investor, discusses strategies to maximize post-tax cash flow through a combination of rental arbitrage, property ownership, and leveraging tax benefits. The conversation delves into the importance of strategic planning, reducing risk, and building long-term wealth through real estate investments.

Key Points

• Short-term rentals provide unique tax advantages, including depreciation and bonus depreciation through cost segregation studies.
• These strategies can significantly reduce federal income tax liabilities and compound cash flow for future investments.
• Rental arbitrage offers a low-risk, high-cash-flow model for scaling quickly without property ownership.
• Ownership combines appreciation, cash flow, and tax benefits, making it crucial for long-term wealth-building.
• Selecting the right market and focusing on high-quality properties are critical to managing risk effectively.
• By focusing on fewer, high-quality properties rather than sheer volume, investors can optimize cash flow and reduce management complexity.
• Tools like AirDNA and BNBCalc are essential for accurately analyzing markets and properties to make informed investment decisions.

Full Transcript

Check on the full podcast on:

1. YouTube
2. Spotify
3. Apple Podcasts

Jeremy: All right, guys, welcome to the Short-Term Rental Pro podcast. Today, I'm super excited to be joined by one of my good friends in the space, Mike Chang. Honestly, if I'm going to be completely frank, Mike has probably taught me more ideas than pretty much anybody in terms of, like, taxes and how to maximize post-tax cash flow.

It's really not a thing I thought about much before. I just thought about that income—that top line, the revenue. But Mike, what he's really good at and very precise about, is, I guess, what's most important—and that's after taxes—how much you're stacking away and how impactful that is to the growth of your portfolio in the long run when you're saving money.

So, I really want to touch on that today. But really, guys, just so excited to have Mike here. Thank you so much for coming.

Mike: Thank you! Thanks a lot. I've learned a ton from you as well over the last few years we've known each other now, so really happy to be a guest here on the pod and look forward to telling the story.

Jeremy: Awesome, guys. So, Mike doesn't only do one Airbnb strategy; he does rental arbitrage. He is now up to—Mike, how many arbitrage units do you now have in Philly?

Mike: Twenty-five.

Jeremy: Twenty-five, as well as he has an ownership portfolio in the Smoky Mountains of, I think, six. I feel like I know too much about you—six properties in the Smoky Mountains?

Mike: Yeah, we have 25 arbitrage properties in Philadelphia, and we own six in the Smoky Mountains National Park in Tennessee. We also have one long-term rental in Philly, but that's more for tax purposes; it's a legacy thing.

Jeremy: Got it. Okay. And what I think is unique, and what, again, we're going to dive into today, is Mike's precise underwriting and using a combination of strategies to, again, maximize that post-tax cash flow.

So, Mike, tell us—tell everyone—your background and kind of how you got to be one of the leaders of just pinpoint underwriting and all that financing jazz that you do on a daily basis.

Mike: You're far too kind. I mean, I appreciate the introduction.

Jeremy: He is shorter than me! Mike is shorter than me. Just gotta knock him off an inch and all that. I'm not taking him too much right now. We went back-to-back. I'm a half inch taller. But he is!

Mike: It's rare that I'd—so, it's a funny story. When I first met Jeremy a year and a half ago, I went to his apartment. I walked in, opened the door, and it was like—what? Then I kind of took a step back because usually, when I meet someone, we're obviously eye level or I look a little below. But I had to look up to see him. It was like, oh crap, he's taller than me!

But then I had to make sure he wasn't wearing, like, boots or something to give himself an advantage. But no, he truly is half an inch taller than me.

So, I come from a finance background. I was an investment banker—an M&A investment banker—here in New York at Citi and BofA Merrill Lynch for 10 years before I moved into the short-term rental space. I have my MBA from Cornell, so it’s really kind of a finance-heavy perspective that I took into short-term rentals, and that’s how I built my portfolio.

One really cool thing about short-term rentals is there’s no short-term rental degree. We all come in from different angles, and that’s really one of the cool things about this space. Everyone comes in from a different perspective, and they have a different way of doing things. If you meet people and talk about your business, you always kind of learn something new.

And that’s why Jeremy and I—Jeremy’s been great to have conversations with over the last months and years.

Jeremy: Okay, and tell us—so one of the great things—yeah, short-term rentals. There is no short-term rental university. I mean, to be frank, probably the closest thing is this podcast, Mike's podcast, just following folk on social media. But also, one of the things that I want you to, like, touch on—or if we're going to go into Chang University today—is tell us about the specific tax benefits.

So, uh, there are very unique tax advantages to short-term rentals, and I know that's something that, from the get-go, you're really gung-ho on. But yeah, just to give the TL;DR on unique tax advantages to short-term rentals—what's that look like?

Mike: Sure. Look, first off, businesses—everyone—you always have a silent partner in your business, and it's Uncle Sam. If you don't get the tax part right, they're going to take 40-plus percent of your income. So, if you do that right in the beginning, you really can—you can maximize your after-tax free cash flow significantly.

So, with short-term rentals, there are a number of really unique tax advantages that aren't available elsewhere. First and foremost, on rental arbitrage specifically, it's a rental activity, not an active activity. So, as long as you meet the rules, you don't pay self-employment tax, which is 15.3 percent. So, that's pretty material, right? If you can save 15 percent on your income immediately, that's great.

And when you buy short-term rentals, like I do—I combine both strategies together—we buy short-term rentals. It's kind of the Holy Trinity of real estate investing. You get the appreciation from buying the property, you get the pre-depreciation because you own the property, and you get higher cash flow from using Airbnb.

And on the depreciation side, you want to maximize your bonus depreciation, which basically just means you get to pull forward all the depreciation expense in the properties that you buy using cost segregation studies. And that's a really good way of taking all that depreciation expense, applying it to your rental arbitrage income, and not paying—and deferring—all your federal income tax liability until you sell those properties.

So, I know there's a handful we can unpack there, but that is the crux of the strategies that we employ to be able to compound our cash flow quickly and buy more properties.

Jeremy: Okay, and we were talking about this—not live—beforehand, specific deals we've done and the appreciation. But what would—I mean, you bought—when did you start buying in the Smokies?

Mike: 2020.

Jeremy: If you were gonna eyeball or estimate what you're—and it's hard, because appreciation is something that, until you sell the home, like, there's really no... I mean, you can do a cash-out refinance, and in a way, you're getting an appraisal value of the home. But really, in my opinion, until you sell it, like, that's really when you can define the value of a property.

But if you're going to just guesstimate across your six properties, what do you think your appreciation has looked like?

Mike: Well, I mean, we look at it, right? So, we'll look at it kind of regularly to see where the comps are. I think the stuff that we bought.

So, we bought mostly in '20, '21, and the stuff in '20 is probably 2x—68–100% appreciation. So, there's something that we bought for 550; the house next door sold for 950 about two months ago. It's probably come down just—it's probably come down a bit. But, you know, obviously that's 400k of appreciation in three years, which is, obviously, it doesn't do we underwrote to. We obviously just got lucky with the COVID red bump that everyone has experienced.

The later purchases are probably up 20, 10, 20–25%. So, it's been good. And we had low rates in all of them too.

One thing we do as well is we only use fixed-rate, 30-year fixed-rate mortgages. We don't do DSCRs; we don't do hard money. There's enough volatility in short-term rentals already, and I very much believe I want to compound the equity appreciation over 30 years, over a long time frame. I don't intend on selling it, so I want to lock in that rate. And I don't want to have rates spike up. I can have now, and then something else happens, and I'm not able to retain my portfolio.

So, something else that we do that's maybe different from others.

Jeremy: Yeah, I would say it's different. So, I have two loans that are adjustable-rate mortgages that we got locked in at 3.7% for the first five-year terms, and those are the only loans where we do principal prepay because we're locked in. It's a balloon payment at five years.

And, guys, for those of you—guys, a fixed-rate mortgage—essentially, that monthly payment you get when you buy the property never changes. Like, you're always going to be paying that same amount. Insurance and taxes might change, but that principal and interest is not going to change. Whereas, with adjustable-rate mortgages, generally, you're locked in for a certain time period, and then it kind of changes or adapts based off whatever the Fed rates are at that time.

So, I have two adjustable-rate mortgages where that's a 20-year amortization. So, essentially, it looks like a 20-year loan, but after five years, we gotta pay it. Generally, what folk do is they either refinance or they sell.

So, yeah, we're definitely— as an investor, that was something we knew ahead of time, and those are the only properties where we're doing principal pay down. We made sure we wouldn't have a prepayment penalty. And I don't know if you've seen this, Mike, but probably a lot of folk with the DSCR loans that might be adjustable-rate or something where they have prepayment penalties.

Mike: So those are really tough, which is why we want to get away from—we actively got away from. So, look, DSCR loans—they're good if you need them.

Jeremy: What is a DSCR loan for those listening?

Mike: So, a DSCR loan is a debt service coverage ratio loan. That's what DSCR means—debt service coverage ratio. Basically, what it means is the people that lend you the money are going to lend to you based on what they think the income of that property can produce.

So, if that property, for example, can produce a hundred thousand dollars a year, then they would say they'll lend you 10 times against that money—they'll lend you a million dollars. That's all it really means. It's a cash flow-based loan versus a borrower- or kind of underwriting-based loan, where they're looking at you as a borrower and they're looking at the asset as a borrower, not you as the person.

So, these loans generally are more expensive, and they come with these things called prepayment penalties. Basically, what that means is they don't want you to prepay the loan, and they make it very expensive for you to do so. You have to pay points if you prepay, which limits your flexibility on what you can do with the property.

They also have a balloon payment. For folks that don't know, a balloon payment means you have to pay the entire balance of the loan at a certain point. If your personal situation changes, or rates are really high when that balloon comes, that's a problem, right? Maybe it's harder to sell, maybe you have a lot of depreciation that you've underwritten against and can't pay the recapture tax, or maybe the rates are too high and you don't have the cash to pay it off.

So, it just kind of boxes you in a corner. There are always reasons to do it, but I'm just talking about the reasons why we haven’t done it historically.

Jeremy: Got it. So, guys, Mike is very—kind of—in a game where short-term rentals are new, and there are unknowns. Every year is a new year. Mike and I were just talking about our portfolio composition and some new things that we’re seeing in different markets with different types of properties. There is no historical textbook that dates back 300 years to explain what happens, so you just have to be thoughtful about what risks you have and how you mitigate those risks.

Mike does that by only using fixed-interest rate debt. Also, for your arbitrage, I know you want to make sure you're paying back your furniture investment as quickly as possible.

Mike: Yeah, yeah. Conceptually, I want to reduce the number of variables in my business as much as I can, right? There's already so many things that can go up and down. To the extent that I can reduce the variables that can change on me and have a meaningful impact on the business, I really try to do that.

So, with fixed-rate mortgages, for rental arbitrage, for example, having our rents capped at certain levels so the landlord can't jack up the rate on us, right? Having options so we can renew the lease, so they can't change their mind in the middle of it.

There are just things that, as you're starting any business—specifically short-term rentals—right? To your point, there isn’t a ton of history here, so it is volatile. To the extent that you can control some of that volatility with things like your rent or your mortgage payments, it’s going to help strengthen the longevity of your business because there are just fewer things that can go wrong.

Jeremy: Got it. Okay, and sorry—I need to put on my Do Not Disturb so I don't get any more WhatsApp notifications.

Mike: It’s all those bookings that you get, Jeremy.

Jeremy: Exactly. Well, actually, WhatsApp is like my VA. I mean, I'm sure you use your own messaging—do you use Slack for your virtual assistant communication?

Mike: We use Discord. Discord's better than Slack.

Jeremy: Got it. Yeah, we use WhatsApp. I just like WhatsApp—it’s what I do a lot of my texting on at this point. I probably should have a dedicated software platform directly for our business and operations, but whatever. We use WhatsApp. Shoutout WhatsApp.

But what I want to get into right now is—

Mike: Shoutout, Mark Zuckerberg.

Jeremy: I want to make this a little bit more fun. So, I know we've been pretty technical with DSCR and all that stuff, but something that I think is unique about the short-term rental game and something that the Changs—so I want to get into the Changs—is that you do see a lot of husband-wife combinations where they perfectly complement each other. Maybe the man—I'm just not making any assumptions, but just from what I've seen—sometimes the man’s kind of the underwriting, making sure that the numbers pencil out, whereas you have the wife who might have more of a design feel.

I know firsthand that I'm definitely not naturally a designer. But yeah, tell us about who is the other half of the Changs, and how do you guys complement each other? And how have you guys really grown your portfolio together?

Mike: Yeah, look, my wife Elizabeth—she was the one that actually got us into short-term rentals. She loves real estate. Her dad has a property here in New York, and that's how we started. We rented out one of his apartments when he had a vacancy in 2016 to test out this model, and then it’s been the name of the game for us to grow our portfolio.

Yeah, my wife—she's definitely... I’m not the design person; she is definitely the person.

Jeremy: I didn’t want to make an assumption here. I didn’t know…

Mike: No, you’re spot on. But I think it’s really important to find your relative strengths and weaknesses. My wife actually is really good at underwriting and looking at markets. She’s the one that’s actually found all of our markets for us.

So, I think—

Jeremy: Sounds like we should have Liz on today.

Mike: You definitely should. She—you definitely should. But she’s maybe less trained on the numbers, just given that’s my background. But you can’t train having an eye for real estate. I really believe that’s actually just like an innate kind of feel for the asset, what you can do with the space, what you can do with the property, a market—being able to talk to people, being able to just understand the context of the information that you’re getting.

So, I think that’s why we work well together, because I am very numbers-oriented and I understand the laws and the legal stuff behind it. She really understands the more qualitative side of this business, and I think that’s why we’ve been able to work well together. So, don’t—you should definitely have her on the show because she’ll give you her perspective.

Jeremy: Yeah, no, definitely need to have her. I know right now she’s a little busy. When we went to Nashville together for a conference, she shared that she was pregnant with Chang number two—or I guess Chang number four now because you guys have one kid and a second. So, I’m sure she’s a little preoccupied right now with getting ready for that one.

Mike: Yeah, the thing is, like, having kids really changes your perspective too and changes your risk profile, right? Like, if I was much younger and I didn’t have a family, I probably would swing harder and actually take more and more risks.

But, you know, I’m 43. I’ve had a career, and we want to build this business to create the cash flow so we could buy more properties. But we really want to do this in a very smart, suggested way. I don’t really want to go up 100 and then down 30 and then up 20. And you might actually end up in the same place, but that volatility—it just doesn’t fit what we want in life.

We want 10–15% every year, just to consistently compound our cash flow, compound our equity value, versus these wild swings.

So, I think a lot of it’s just kind of like where you are in life, too. And you can—and it’s a nice thing about real estate and owning your own business—you can kind of construct that risk profile to how you want it, versus just having a job, which, I don’t know. And I think you have a perspective on this as well.

Having a job—it might seem really safe; that check comes in every month. But now I’m working with students, and they’re like, “Yeah, hey.” I had a student come to me today and say, “Our office is going fully remote, and I’m going to be laid off in September. I didn’t know.” So, what might seem safe in the short run actually is fairly risky in the long run.

So, again, just—I think just being very thoughtful about how you want to construct your life and your financial risk profile is something we’re really keen on.

Jeremy: Yeah, definitely. And I was going to make a joke—I’m still gonna make it—but if you guys look at Mike, if you’re on YouTube, he doesn’t have gray hairs. He has none. He’s got a perfectly black head of hair. Maybe after kid two, but the way he’s constructed his risk and his stress levels obviously is telling.

I don’t know—I’m not gonna put you on the spot with your hair routine. But obviously—

Mike: Head and Shoulders, man. That’s what I use. Having low stress, or like—not low stress, but just like—not having bad stuff happen, just controlling the bad stuff that can happen to you.

Jeremy: Got it. Yeah, I don’t know—maybe we’ll look back. We’ll run this back when I’m 43, and we’ll look at my head of hair, and we’ll see if the approach I took worked. You probably wouldn’t want to get into a boat rental business if you were worried about your grayness, because I will say that’s something that—there’s just a lot of variables, like in a boat rental, a lot more than a short-term rental.

Short-term rentals have a lot of variables, but when you learn how to handle them, it’s not that daunting. Would you agree with that? And if you’re gonna say so—like, let’s say for folks listening, you’re looking to get going. Let’s say you’ve decided you want to start with arbitrage, you want to test it out, and then see if you want to further buy or raise money or really go swing for that long-term equity play—what are those key variables, and I guess how do you handle them?

Mike: Yeah, that’s a great question. And you’re right—short-term rentals, there’s a lot of stuff going on, but you really can control that if you kind of find the right market, find the right property, build the right team. You really can control all those variables.

So, if you want to get started right now, there are three key ways to get started. You can co-host, which really just means that you’re going to be someone’s property manager for a fee. You can do rental arbitrage, where you’re taking on more risks, right? You’re responsible for that rent payment, but you capture all the upside on how much cash flow that property could generate. Or you can buy property, which is the most risky, right? It requires the most capital, but you not only get to enjoy all the upside of the cash flow—you also get to enjoy the appreciation in the property and the depreciation tax benefits.

So, that is kind of the spectrum of available avenues. So, I would say—

Jeremy: And we’re glamping. Throw our camper out in the woods.

Mike: Yeah, exactly. And that’s—that’s probably more owning, right? But it’s more kind of—there’s more variables there, right? Because you’re not in the city; you’re responsible for your water.

Jeremy: We had a tree fall on our ventilation fan, and it just shattered, and all the glass fell through the Airstream. Yeah, so fortunately, I have a great foreman on the property. That being—shoutout my dad on Father’s Day—that’s what he was doing. But given that experience, we can go away from glamping. I just wanted to—I like to say there are four strategies, not just three.

But okay, so co-hosting is something that you’ve stayed away from. And I kind of wanted just a quick—why arbitrage? Why buying? Why not co-hosting?

Mike: Just for me, at that point in my life, it didn’t make sense, right? I didn’t want to—it is more akin to a job than investing, in my opinion, because you have to get clients, and then you need to manage the clients and the guests.

So, I think a great co-hosting business is just working particularly all with investors that understand that it’s a business, and not someone that owns—that’s their primary home, and they care about where the pillow is. Like, those people drive you crazy.

Jeremy: Yeah, and I’ll cut in there and say I initially started with a lot of co-hosting. And a lot of my clients initially were the homeowners, which at the time, beggars can’t be choosers. It was the lesser of two evils. If you’re gonna—hey, I’m gonna have clients who might be maybe a little bit emotional, a little bit controlling over their properties and over who’s coming in them, or if you have a boss, like an actual boss who’s deciding your salary on an annual basis and your bonus and all that stuff. Lesser of two evils.

But if you’re at the point where Mike’s at, where he’s already—he’s built a great business—you’re at this point, you’re just trying, and you’re really embodying that kind of freedom that you set out for.

Mike: Yeah, which is where—like, so I didn’t want a boss. I didn’t want, like, a bunch of bosses, so that’s why we stayed away from that. But to be fair, we had, like, we had two co-hosting things in New York that we did while we did it with friends, and they were all investors. And they never bothered—the deal was like, “I’ll do this for you, but you can’t bother me about it. You just cash a check unless something goes wrong.” And they were all really cool about it. Everyone made money, so everyone’s happy.

But going on to arbitrage, I really liked that model because, you know, it takes more work ahead of time to get it right—like picking the right market, underwriting the building, negotiating with the landlord. But you only have, like, one person you need to deal with across all, like, 10, 20, 30 properties, right?

And as long as you pay your rent and you do that work upfront, they don’t really—you don’t have to deal with that person anymore. All they care about is getting their rent and that you take care of their property. Everything else is, like, they don’t actually want to hear from you, neither do you want to deal with them. So, you can just focus on the guest experience, right?

So—and I was always kind of good at the numbers and research—so that suited my strengths a lot better. And so that’s what we did, right? We went to rental arbitrage. We had the capital to do it—furnished through the lease payments and all that stuff—and so that allowed us to grow quickly. We had one person to deal with, and we could scale that portfolio and had really good cash flow as well.

What sets us apart, I think, from others is—okay, a lot of people just do arbitrage. They can’t kind of graduate to buying, and that—it takes—

Jeremy: Do you think—and something I want to touch on here, not to cut you off, but this is just a thought I had, and actually, I was going to probably ask you this. Is it because a lot of times, from what I see with the folk who do purely arbitrage, at the end of the year, they try to, like, get rid of their income? Like, they might prepay rent for six months, they might buy a ton of furniture, but they try to entirely, like, get rid of their taxable income, and then that stuff doesn’t get added back when you then try to get a loan to buy a house.

Mike: Exactly. Now you hit it directly on the head, right? They try to do—

Jeremy: Bingo!

Mike: They try to contort themselves into unnatural positions to, like—they don’t pay taxes.

Yeah, right, like prepay 10 months of rent. And that’s all cash that goes out, right? Rent. They buy cars, right? Like, they can just do a bunch of things that, like, actually don’t go into the business. Versus what I mean by kind of graduating is using more sophisticated tax strategies.

Right. One is—you need to qualify for a loan, so how do you kind of characterize that arbitrage income so that you can actually get loans based on that, right? There’s actually an art to that. It’s not that straightforward.

And then, how do you do that? Then how do you buy properties? Or—it’s just a different underwriting than rental arbitrage, right? So, you have to get that right.

And then how do you use the depreciation—

Jeremy: And capture—Bingo. Yep.

Mike: Yeah, how do you—yeah, exactly. How do you use depreciation in order to generate tax losses that aren’t cash tax losses? They’re non-cash tax losses, and how do you use that to apply against your rental arbitrage production?

So, there are a lot of different steps that you have to not only know, right? Just hearing about it is one thing, but it’s a completely different thing to actually understand it and find someone to execute that strategy for you. It takes time. It takes experience.

And luckily, having the finance, the MBA from Cornell, and the 10 years in investment banking experience, I really understood all those concepts. And applying them was—it was easier for me than for others. And that’s why we don’t have 100 arbitrage units.

Like, we don’t want that. We’re able to generate that cash flow that we want with a few properties because we focus on the higher, better properties versus scale. And then, being able to buy properties—which, in my view, and I think we both share this—if you want to build long-term wealth, you have to own the asset.

The leases aren’t going to get you to long-term wealth. They’re a bridge to get you there, but it’s just cash flow. They’re not appreciating assets.

Jeremy: Yeah, and the Section 179 write-off for sports cars and electronic vehicles—yeah, those are generally quite depreciating, depreciative, and expensive assets versus buying a house.

Mike: Remember, they don’t generate cash. Remember the two things: One, if you buy a car, it doesn’t generate cash flow for you unless you’re gonna put your Lamborghini or your Ferrari on Turo, which…

Jeremy: Or you post on social media and that leads to, right, whatever.

Mike: But it’s a different business. One, cars by themselves aren’t cash-flowing assets. They may retain their value, they may appreciate, but that’s a different thing. They’re not cash-flowing assets. And two, I mean, they depreciate as well, right? You drive them, you use them—they depreciate. And there’s insurance, there’s storage, there’s a lot of other costs involved. So, it’s a fair amount of carrying costs. And remember, once you sell it, then there’s depreciation recapture that you need to pay too.

So, there’s just a lot of things that—if an asset doesn’t cash flow for you, eventually you’re going to sell it, and then you’re going to pay back all the depreciation. Versus a house, for example, which can continue to cash flow for you.

Jeremy: and then roll over when you sell it too.

Mike: Yeah, you can do a 1031 when you sell it, or you can—you can die. Eventually, if you die and you pass the house to your kid, then there’s—it’s called a basis step-up. Then they don’t pay any taxes on where you bought it to the market value when you’re dead. Like, if you have to be morbid, but you know, they don’t pay any of that tax, and they don’t pay any of that depreciation recapture.

So, there’s just so many more avenues to compound wealth more tax-efficiently with real assets—with real estate—versus, you know, things that aren’t real estate. And I’m not a car guy, so, you know, I’m picking on cars as easy.

Jeremy: You also live in New York City, so—

Mike: Okay, fair enough.

Jeremy: Makes it more difficult.

Mike: City bike and subway are sufficient for me.

Jeremy: A city Bike is literally a more practical thing to actually have. A $135 annual City Bike membership can get you where you need to go better than a car in general.

Mike: Very true.

Jeremy: That is unique to New York, but we can digress away from cars here. But yeah, Mike doesn’t have an order. He’s—tell us, are you going to—I haven’t heard of you buying a house yet this year. You’ve got to. You’ve got to depreciate all this—I don’t know—have you kept a couple and not done cost segregation studies on a couple of houses so you can do it this year, or are you about to buy?

I know you just expanded arbitrage to several properties, but yeah, tell us, what have you just done, and then what’s your plan for the rest of the year?

Mike: Yeah, so we’ve gotten more arbitrage units. We need to buy.

Jeremy: He needs to buy, guys. That’s the place he’s in—he’s making too much money where he needs to buy so he can do a cost segregation study and then do bonus depreciation and, bang, get rid of all that cash. Tell Uncle Sam, but then have it re-added back when he applies for a loan next year.

Mike: You hit it on the head. There you go. But buying definitely is harder than it has been. We’ve been just kind of seeing the rates where they are.

Just as of today—or as of last week—the Fed paused the interest rate hikes. The stock market’s up 20%. We’re in a bull market again.

Jeremy: I haven’t looked…

Mike: Oh, we are. We’re 20% from close right now.

Jeremy: I got to look at my portfolio. Not that I have that much in stocks, but

Mike: No, but stocks are forward-looking, rates are forward-looking. So, we hope that there’s more flexibility on rates in a couple of months. But we’re definitely—that is our key focus now in our next six months, to buy.

We just—we want to continue to grow. We want to continue to grow the portfolio. I think that’s the biggest thing. And of course, we have—luckily—we’ve been able to generate free cash flow this year, taxable income this year, that we want to be able to write off against using bonus depreciation on new property that we buy. It’s 100%.

Jeremy: Got it. So, you want to buy right now?

Mike: We want to buy. We need to buy. We’ve been working hard to buy, to buy more. We’re actually. I think now that we’re teaching folks how to run a short-term rental business, we actually are recording everything that we’re doing on buying so that you can watch our journey on how we buy. Hopefully, there are some lessons that folks can tease out from our journey.

Jeremy: Got it. Yeah. And for folks listening, buying, in my opinion, is that long term—but really like, yes—I think everyone during the last couple of years has had like a very specific, like, cash on cash—“Oh, this needs to hit this cash-on-cash return in order for this to be a good investment.” But I’ve seen people shift—not everybody, maybe Mike’s in this mind—where it’s like, “I’ve got to buy for the tax benefits. I’m willing to…” Whereas you may have been like, “I need 35% cash-on-cash return in 2020, 2021,” maybe you’re like, “I’m cool with 15% this year.”

Is that kind of where you’re at, where you’re willing to sacrifice the cash-on-cash a little bit in order to still get the majority of the tax benefits that you would have got before?

Mike: Yeah, so it’s a slightly more nuanced answer than that. We’re definitely—our hurdle rate has come down. So, we’re willing. We were underwriting to 30%, like, we’ll do something in 22–25% now. So…

Jeremy: And it’s still incredible. You’re not doing that pretty much in many other investments. Yeah. I mean, right now, it’s hard to make 2% in most investments.

Mike: So, really, what we try to do is—so what I do is I—excuse me—I sensitize the cost of financing, right? So, I still want to make sure that it’s a good property, in a good location, with good regulations, and that it will cleanly cash flow. But what I do is, like, “Okay, well, rates are 8%,” right? The last quarter, I was at 8.25% with three points up front, maybe, very expensive.

Jeremy: Oh, goodness.

Mike: Like, it’s like, “Okay, well, this is very expensive.”

Jeremy: Right. Is that an investment loan?

Mike: That’s an investment loan. 20% investment loan. And I’m like, “Okay, well, my cash-on-cash return might be 17%,” for example, for this case. But it’s still 17%, and it’s still going to cash flow for me, right? But I look down to, like—they don’t have to reduce the rates to 5%. Six. Seven and a half. Six and a half. Five and a half. Four and a half. Like, I’ll run that sensitivity analysis.

So, I’ll know that, okay, like, I do believe the cost of financing will go down in the next five years. And wherever that is, then I know I can refi, and then I’ll be able to kind of hit those numbers—hit those numbers. But in the interim, I’m able to enjoy those tax benefits as well.

So, it’s just a more nuanced way of looking at it. Now we have to kind of be a little more creative. But, you know, I do believe in the attitude—you marry the asset, right? You really marry the asset. It’s long-term. I want to keep it forever. You date the rate, right? It may not—I may keep it for a long time; it may not.

So, money’s your money. You can change the rate that you have. You can’t change the property that you bought.

Jeremy: Yeah, and I would say right now, what’s unique about this time—there’s a lot of unique things. I mean, you could say that inventory is not as high as it should be because there are so many people locked in at those three percent interest rates.

But what I’ve seen—so I’m closing on my property Monday, next Monday.

Mike: Oh, wow. Where?

Jeremy: Carolina. Okay. Back home, sweet home.

And then we bought in November, and like, yeah, definitely pretty high interest rates. But these were properties where I feel like in 2020, 2021, they just would have been gone. Like, they would have been listed, and five offers in the next 24 hours. So, you had to be ready with waiving inspections and waiving appraisals and literally willing to go 25k, 15k over asking in order to buy.

Whereas now, you can be more patient. And I like that. Maybe I’d have probably a few more gray hairs if we would have had 2020, 2021. Well, I don’t have any gray hairs yet—knock on wood.

Yeah, I don’t know how this kind of divulged into a hair podcast.

Mike: I mean, I’m having a good hair day.

Jeremy: So, yeah, I think that’s what it was. But it was like—times were kind of crazy. So, we’re having like a huge counter to that. But are you seeing that, like, properties just staying on the market longer and getting to, like, do a little bit more diligence before making offers?

Mike: Yeah, definitely longer. Definitely more time. It’s not as heated, but it’s still really competitive. It’s not—I don’t think it’s a seller’s market.

It’s still—I don’t think it’s a buyer’s market. It’s just, I would term it as less of a seller’s market versus a year ago.

Jeremy: But I did get both of the property—or this one, the last one—25k under asking.

Mike: Congrats! What rate did you get?

Jeremy: Like, seven.

Mike: Okay, good. Well, good. Yeah, I need to call your—I need to call your mortgage person.

Jeremy: Shoutout. Shoutout Brian.

Mike: Shoutout Brian. Okay, I know—oh, I know Brian. Maybe I’ll give him a call.

It’s definitely more—it’s definitely less competitive out there. They have just put far fewer homes for sale. So, you know, you got to be ready. For us, a lot of it—we’ve still—we’ve found one market that we like. There’s just not a lot of inventory there, but it’s definitely a lot more work. It’s a lot more work to get things to pencil.

So, there’s still opportunity out there, just not as—it’s like most of life right now that people better understand short-term rentals, there’s more competition.

So, I think people like us, that have been in the space for longer, we have to upgrade our game, or we’re not gonna be—we want our advantage against newcomers to be as significant.

Jeremy: Yeah, definitely. And I want to get into that—we have a few minutes left here—but something that I’ve definitely personally tried to do is just level up the listings. Like, they can’t, they’ve got to continually be nicer and nicer.

And right now, I’ve probably done more design revisions on this newest house than I’ve ever done before. Like, to be frank, before I’d probably be like, “It looks good enough, let’s do it.” Now I’m like, “Nah, we gotta really make this perfect. Every room has to be perfect.”

Are you kind of seeing that too, like the emphasis on design is more and more important?

Mike: 100%. The last apartments that we’ve gotten—we put way higher—we put more money in there, actually, on design and on amenities. It’s just—you have to level up your game.

So, it’s definitely—I would say three years ago you could do anything. You could kind of put anything on Airbnb, and it would still do fine. Now, it’s absolutely not the case. There’s still definitely money to be made there, but you have to operate—

Jeremy: You gotta be a pro.

Mike: Yeah. You gotta be a pro. That trend is going to continue. It’s going to get more and more competitive. You’re going to have to actually have good listings, good amenities, keep your operations tight, fix the... The days are long gone where you could just go to IKEA, spend $4,000 to furnish a unit, and have it make money. Those days are gone. You have to really put some effort and design sense into your properties to make money.

But there’s still plenty of opportunity out there. I very much believe that.

Jeremy: Yeah. Well, we’re both—I mean, you just expanded; I’m expanding. We just know, like, yeah, in the back of our heads, like, “Damn, it was really freaking easy,” and now you just gotta keep sharpening those pencils, and you’ve gotta execute. Like, I appreciate that fighter.

But what I want to do—and this is kind of like how I end the shows—is first—normally, I feel like I know you so well—I want to give some pro tips that Mike has given me before I ask him what his pro tips are for those listening.

But LastPass—Mike, I was having issues and, like, little things. So, we have virtual assistants who manage the day-to-day operations of our business. And I was like, “Oh, how do you deal with all these passwords?” Like, this was new to me. I was just texting them the passwords, and I was like, “I’m kind of worried. They kind of have all my passwords for everything.” So, I asked Mike how he deals with that. He just gave the simplest answer. He just said, “LastPass.” I’m like, “Oh, what is that?” Bang. Password manager. I didn’t even know those existed.

Mike: It’s five bucks a month It’ll save you.

Jeremy: Yeah, I’m glad. Yeah. Pro tip. But yeah, give another pro tip for those listening.

Mike: Pro tip. Well, look, use AirDNA when you’re running properties. I know it’s expensive—I don’t get—I don’t make any money from them, so this is not a promotion for them. I’ve looked at all the different platforms. I do believe that AirDNA is a great platform to underwrite your properties. Jeremy, I know you have BNBCalc that uses AirDNA and has the models and everything in front of that. So, great tool.

But I really—I like the underlying data in AirDNA. We started using it in 2018. I met all the people there. It’s expensive for a reason. It takes time to have good data.

So, utilize Airbnb—excuse me, utilize AirDNA. Utilize the tools out there to help you make a better investment decision. Because what you don’t want to do is spend all this time and effort and money and, like, not do the right work upfront in underwriting a property and underwriting the market.

So, that’s my pro tip, because, like, for me, that has been one of the key drivers of my success—really understanding numbers and getting into good markets, getting good properties. And even if I mess up on design or mess up a little on things, if I pick the right property, then I have that tailwind behind me that will cover up those mistakes.

So, for folks out there that are looking to get into the business—do the work upfront. It will save you in the long term.

Jeremy: Awesome. Got it. So, they have some very tangible advice—look at the data, make sure that you’re underwriting like a champ. So, Mike, or like STR Like the Best, that’s actually the name of your podcast. But yeah, how can folks find you if they want to reach out or if they want to hear and see what you’re doing?

Mike: You can find me on Instagram. My username is MichaelChangBNB—M-I-C-H-A-E-L C-H-A-N-G BNB. And if you have any questions, feel free to reach out to me there.

And Jeremy, thank you for having me on the show.

Jeremy: Mike, thanks so much for coming. Well, guys, that’s a wrap. Thank you all for joining. Stay tuned for next week.