Boosting Your Appraisal, Backward BRRRRs, & Capital Raising Risks

David:
This is the BiggerPockets Podcast, show 585. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, here with a Seeing Greene episode. On these episodes, we get questions directly from our listener base, you, and we answer them for everybody to hear. So we have several really cool questions that come up today. We talked about financing and what type of loan would be appropriate for the right type of property. We talk about scaling. That’s one of my favorite questions that we get into today, is “How do I scale without burning out, or without making mistakes, or without taking on too much risk, or without leaving meat on the bone? Can I be going faster, and I’m not going fast enough?” We talk about if we should be raising money from people, and what point that actually becomes relevant. And then I threw in my 2 cents about the way that I raise money, and my philosophy behind the responsibility that we have when we’re borrowing people’s money that frankly doesn’t get spoken about enough.

David:
And then we talk a little bit about how real estate… Sometimes when you talk about it, it seems so simple and easy. Should it be harder? Should we be making it harder? Are we overthinking, or are we under-thinking? So we tackle a lot of the really common questions that people ask, many of them when people are getting started, but we also get into some higher-level stuff. Today’s quick tip. We want to do more live shows. So I love being able to answer video questions like this. The problem is sometimes I have to speculate as to what the person really means when they submit their question. I love it when they’re here and I can dive in deeper and find out what they’re really facing before I answer the question. So if you wouldn’t mind, go to biggerpockets.com/david, leave a video question, and in that question say, “I would be willing to be interviewed live on the podcast and get direct coaching from David and his co-host.”

David:
If you do that, my producer will reach out to you. We will let you know when the time is scheduled to do that. You could be here live. You can tell all your friends that you featured on the BiggerPockets podcast, and I’ll get to answer your question. I’ll also be very, very grateful. I’ve had people that have come to work with me because they’ve been on these shows and I’ve got to talk to them. I’ve had people that I partnered up with to do different things. A lot of relationships are built just by taking that step. So we want to hear from you. Please go to biggerpockets.com/david, submit your question, and let us know if you’d be willing to show up for a live show where we answer it more thoroughly.

David:
All right, last thing I want to say is make sure that you subscribe to this channel, that you like it, and that you’re following me on social media. I’m DavidGreene24. If you’re too shy to ask a question on the podcast, well first off, get over it. But second off, I’ll help you get over it. Send me a DM. Tell me what your question is. I want to be able to help. If you live near me in California, I definitely want to be able to meet you, because I do meetups out here. I want to get you plugged in, and I’d like to hear more about what you got going on. So submit me questions, DM me with anything that you are embarrassed to ask about in a public forum, and without further ado, let’s get on to today’s show.

Chad:
Hey, David. My name’s Chad, and I live in the upstate of South Carolina. We are trying to scale into real estate as we have been taking advantage of the tax-free capital gains that we’ve made on our primary home by moving every two years for the past several years. We tried our hand at flipping a house without living in it while we were in an apartment, and that went really well except for the tax implications from those capital gains. So we decided that wasn’t a way to build wealth or to scale into real estate for us, so now we are trying to get into it quickly. My question for you is: What is the best route for us to take going forward? And are we on the right path? We kind of have an idea based on our knowledge and understanding of real estate and investing from the BiggerPockets community. Where we are at right now is that this summer, we had purchased a property with two houses on it in the Smoky Mountains of North Carolina.

Chad:
We just finished one of the studio houses on the property and have launched it on Airbnb, and the other house we are seller financing and selling to one of our contractors there. We decided that project was too big to take on from out of state. So now that we have that one launched, we just bought our neighbor’s house and are about to launch that on Airbnb and other STR platforms in the next week or so. We decided to go into the STR route, because even though it’s somewhat risky with that endeavor, it does seem to scale faster as far as capital and cash flow there, and I thought this could be a good way to pivot into long-term and commercial real estate once we refinance and consolidate debts. So our current plan is that in the next few months, once we’ve been six months on title on the North Carolina property, we’ll be cash out refinancing that one and hopefully pulling the new equity, if not just consolidating the debt that we have.

Chad:
We used a HELOC from our primary home and a small personal loan to finish and furnish up that property, and we’ll also be getting all of our funds out of the property once the seller financing contract is complete, hopefully sometime early next year. The other home that we just purchased, we used a private money loan, and that’ll be sometime in the beginning of next year that we should be able to cash out refinance once we connect with another local lender. We’re still getting quotes on the rates and things like that for that. So that’s kind of my question, is: Are we on the right path? Because we do want to do this long-term. My W-2 kind of seems to be getting in the way, and we’re very tired at this point after renovating one property and switching right over to the next one. I’m on that lookout for another deal, but I don’t see a way to continue acquiring real estate at the end of this year until we finish consolidating those debts and hopefully have new equity to work with.

Chad:
I know that one thing that will be in the way when we do go and refinance is how much I get paid on my W-2, because the STR income won’t be counted towards our debt-to-income ratio. That’s what I’ve been told by the lenders. So using our own equity from these properties, we’re hoping to get into multifamily 10 or 12 units, or commercial property. I guess I’m a little vague with exactly specific what I’m asking, but does this sound like a good path? Are there other nuances that I don’t see that we could be acquiring other deals during this time? And as far as my own job, I am trying to pivot within my own industry of IT to increase my income to make that debt-to-income look better. And thanks for all your time, and you’ve been great to listen to on the podcast. I appreciate it.

David:
All right. Thank you, Chad. I appreciate the kind words there. Glad that you’re liking the podcast. There’s a little less beard, but there’s a little more bald. All right. So that was a little bit of a long-winded question, but I think I have an idea what you’re getting after. You’re trying to figure out… You’re saying, “How do I scale,” but then you’re also telling me what your current plan is. And I think what you’re looking for is for me to break it apart and tell you if it is sustainable, if it will work, and what you would do different, which is kind of what I do. As a consultant, I look at all the different pieces that my clients have with what they’re trying to accomplish. I run it through the weird matrix of my brain after seeing as much real estate deals as I’ve seen in the time that I’ve been doing it, and I come up with a plan that will maximize efficiency for the person according to their goals.

David:
So you’ve got several things you’re doing well, and it sounds like you’re willing to do whatever it takes to make it. So right off the bat, Chad, I think you’re going to hit your goals, which is great. So let’s talk about how we could do it the fastest way. When it comes to scaling, a lot of people ask this question: How do I scale quickly? Now, I’m going to paint a picture, or an analogy, if you will. Imagine that you’re trying to run a race, and the further you can run, the more money that you’re going to make. That’s sort of what we’re talking about here. The more properties you can buy, the further can get into growing your wealth, the more money that you’re going to make. The question to ask is: What will stop me from doing that?

David:
Now, some people lack ambition, they lack drive, or they’re afraid. Those are people that we make mindset episodes for. You’re not going to run very far in the race if you’re afraid to get started, or if you’re lazy, or if you feel like you don’t know how to run, or you’re in terrible shape. Those are people that need to learn how to analyze deals, listen to podcasts, educate themselves, because that’s what’s going to stop them from running. The goal is to get as far as you can. There’s other things that slow people down though. Other than that, maybe you’re carrying weights around. Maybe you don’t have enough energy to keep going. So what we’re going to talk about right now are the four things that I think slow most people down. Now, we are assuming that mindset is not a part of this, because from what you’re telling me, it’s not an issue for you.

David:
The four things I wrote down when I was listening to you that will slow someone down from running the race are going to be: running out of capital, that’s a finite resource, running out of time, that’s a finite resource, running out of opportunities like deals to get, that’s a finite resource, and then running out of the ability to finance, because you’re probably not going to pay cash for everything. That can be a finite resource. And you sort of touched on all of those at some point in your question. We’re going to start with capital. Most people will struggle with real estate investing because they don’t have enough money. I’m just being completely honest with you. Brandon Turner wrote The Book on Investing in Real Estate with No (and Low) Money Down. Fantastic book, lots of strategies. Do them. But I will also say those strategies work. They take more time and they are harder than if you just have a lot of money.

David:
I can run further and faster with the resources I have than someone can getting started, even with those techniques. Now, that does not mean they should not do it. I’m just saying if I’m in really good shape and I can run for four hours without getting tired, you can’t keep up with me if you’re new to running. You have to use these strategies to make it work, but you have to stop and take breaks. It’s harder for you to run. What I’m saying is don’t compare yourself to somebody who’s got a lot of capital, because they’re going to run further than you. Just let that inspire you, that someday you will have that capital and you can run that way. The two strategies that I recommend more than anything for people that are capital restricted, which is most new people, which is why I’m starting there, is house hacking and the BRRRR method.

David:
The BRRRR method is a way of buying a property, fixing it up similar to what I think you said you’re trying to do in the Smoky Mountains, and then refinancing afterwards to get your money out of the deal. That gets you your capital back. It can be reinvested. You eliminate the problem of running out of money. That’s why I wrote the BRRRR book. The second is house hacking. Now, I didn’t write the house hacking book, but I could write a book on that because I’ve helped hundreds and hundreds and hundreds of clients as well as doing this myself. It is an amazing strategy. What I tell people is you should always house hack one deal a year before you even try the BRRRR method. If you can get a primary residence loan and put 3.5% down, 5% down, you don’t need to do the BRRRR method.

David:
You don’t need to do all the work to get your capital out of the deal, because you barely put any capital into the deal. So the first thing I would say to you, Chad, is you and your wife should be house hacking one property a year. Find the best neighborhood that you can get pre-approved to afford. Find the right floor plan, get that house, split it up however you do it, whether you do a triplex, duplex, a place with a basement, an ADU, you add an ADU, you switch the floor plan. Whatever you’re doing, figure out a way to do that first. That will be the biggest thing. If you just buy one house a year like that, and then every year or maybe every two years you also do a BRRRR thing, you’ll be good. You won’t have capital restrictions.

David:
Then you’ll have enough equity like what you’re seeing in your primary residence, that you can pull it out and you can just run faster. The next thing I’ll say is time. It doesn’t sound like you’re time-restricted, but if you’re taking this new job on, that is going to become at a certain point a restriction for you. So continue to buy real estate, continue to work, like you are, to save money and to help your debt-to-income ratio so you can keep buying, but know at a certain point you’re going to need to quit that job. The next would be opportunity. Make sure you’re investing, that you have a strategy where you’re investing in an area or in an asset class that will allow your time to be fruitful. If you’re chasing after the same deals that other people are chasing after and you just can’t get anything under contract, you need a change of strategy.

David:
If you’re looking for deals that are just way too good, like there’s someone else that would buy it for much more than the price you want it for, you need a new strategy. You’re limited in your opportunity, and it doesn’t sound like that’s your problem right now. It actually sounds like you’re making some pretty good headway when it comes to finding deals. And the last is your financing, and here’s what I want to say about that. It’s good you’re getting a job to improve your debt-to-income, but you don’t have to do it that way. Companies like mine get people pre-approved based off income that the property is going to make, not the person. So you could switch right now. Now, the trade-off is you might have a slightly higher rate. It’s usually around half a percent or more to do those loans, but those are the ones that I use.

David:
I don’t use my own debt-to-income ratio, frankly, because I don’t want to have to show all of the taxes that I have, the businesses I own. My situation becomes more complicated. I don’t have a W-2 job in the sense where an employer pays me. I own businesses and pay myself out of those businesses, so I have to sort of show this really long paper trail of why I paid myself the amount I did, why I didn’t have to pay taxes because it was sheltered by real estate. It’s just a hassle, so I use loans where we take the income from the property to qualify me. And you can do that same thing. You can reach out to me, and I’m happy to look into that. If you don’t want to reach out to me, just find a lender and ask them about a loan like that so you don’t have to stay work in that job to keep buying real estate.

David:
I don’t know that these loans will be around for forever. They’re good loans. They’re 30-year, fixed rate. They’re not shady subprime-type stuff, like what we saw before, but I’m taking advantage of them while they’re here. Right now, there’s so much money that’s flowing around because we printed so much of it that lenders have a lot of it, and they need to get rid of it, and so they’re looking to make loans based off the income of the property. That’s a way that you could remove your time restrictions. So the four restrictions are capital, time, opportunity, and financing, and I believe I gave you a strategy to help with all of those. The next thing or maybe the last thing that I’ll say when it comes to the situation is we all want to sprint and get as far as we can, and that’s why I like this running analogy.

David:
Because if you’re trying to go as far as you can, you don’t necessarily start off going as fast as you can. Sometimes, trying to run as fast as you can will burn you out, and you’ll end up getting passed up in the race, or you won’t go as far as what you could have. When I go running, I start off very slow and I get warmed up, and I actually speed up as I go until I start to get tired, and then I slowly wind back down again. I think that strategy would be better for someone who wants to scale a portfolio. Don’t go buy 17 houses all at once and then try to figure out what to do. We’ve had people on this show… We’ve had them on different versions of this where they say, “Hey, I just bought six properties and I don’t have enough capital to rehab all of them. What do I do?”

David:
Well, you have a capital restriction. There’s not really a lot you can do. You’re in a bad spot. You got to sell it off, similar to what you have going on in the Smoky Mountains. That was a really good example. You’re having to sell a property to have enough capital to fix up the other one. So don’t try to go fast, but what you want to go is far. You want to do this at a pace that you can handle. Just buying a house a year in a good area puts you in a really good position for your future. BRRRRing another one after that puts you in a really good position for your future. Saving the short-term rental income that you’re making and putting that towards buying more properties puts you in a better position for the future. You’re not going to start off running as fast as you will be running in five years. The important thing is that you don’t too fast too quickly, and never make it to five years to where you can step up your game then.

Lourdes:
Hi, David. My name is [Lourdes 00:16:00]. I’m in Denver, Colorado. Today is January 10th, and my question is how to tell if an area is A, B, C, or D. And what if it’s mixed? What if you have really nice single-family homes, and around the corner, there’s some low-income duplexes? That’s it. Thank you.

David:
Hey, thanks, Lourdes. I really like this question, because we rarely ever get to go into the why of things. Most people just look at the what, but true experience and truism is gained from chasing the why. Why do we call them A, B, C, and D-level properties? Well, if you think about when we bring it up, it’s only when we’re describing a neighborhood to somebody else. I just bought a house in a B-class area. I look for houses in a C-plus area. I only want to buy A-class real estate. The letter doesn’t really matter, doesn’t make sense. That’s why we don’t have F. Why does it stop at D? It doesn’t go to F. That doesn’t make sense. Just the way it is. What we’re really communicating when we convey that is the personality of the real estate, and this is something I’ve been saying more often. Real estate has personalities.

David:
A-class properties are probably not going to cash flow when you first buy them. They might break even, but you may actually lose money on them. But over a long period of time, they’re going to go up in value a lot. The rents are going to increase a lot. You’re going to get equity probably faster than you get cash flow, and they’re going to be a joy to own. You’re not going to have a lot of problems with those properties. Those are good properties for a long-term perspective and for people that make really good money and need a place to park it, but they don’t need cash flow right off the bat. That’s the personality of that deal. A B-class property is also pretty good to own, not a joy to own, but it’s really fun to own it. You’re not getting a ton of issues.

David:
You are going to get still appreciation, but not as much as an A-class property. And you’re also going to get a little bit more cash flow, but not as much as a C-class property, but more than an A-class property. That’s kind of where I end up falling. I’m getting into some A-class stuff now. I used to not touch it very often. Now, I’d say maybe 40 to 50% of what I’m buying is A-class. Before, it would’ve been maybe 10%. But I still buy more B-class property than anything else, I would say. The personality of a C-class property is going to be heavy on cash flow, easier entry, probably a property that’s going to need some work. If you’re selling an A-class property on the market, you probably fixed it up before you sold it because you had the resources to do it.

David:
If you came to me and said, “David, help me sell my house. It’s an A-class property,” I’m going to talk to you about what we can fix up to get you top dollar, and you’re going to be able to do it because you have the money. C-Class properties, the owner might not have the capital to do that, so you’re more likely to be stepping into meat on the bone, and this is why most investors start there. It’s kind of like training wheels. You can add value to it, you’re not competing with the really wealthy people because they don’t want to own it as much, and it’s going to be stronger on cash flow than it is going to be on appreciation, which probably matters to the newer people that don’t have as much capital.

David:
D-class properties are going to be very little appreciation, if anything, compared to the other ones, a lot of headache. They’re not going to be a joy to own. Your cash flow potential is the highest, but the real benefit of a D-class property is going to be how easy it is to own it. There’s not a lot of competition to get it. You can get all these cool tricks, like seller financing and subject to. The people who own those properties are trying to get rid of them, so they’re going to play the game you want to play. You’re going to probably dictate the terms on a lot of those deals because the seller’s motivated, but they’re motivated for a reason. They don’t want to own that property. A-class property is the same owner might have it for 10 or 20 years. D-class properties tend to change hands every couple years, because people get worn out. So understanding the personality of the property will help you know where you want to get into it.

David:
But what I’m doing is I’m break down how I see A, B, C, and D-class so that instead of saying, “Is this an a A, a B, a C, or a D,” you say, “What is the personality of this? Well, this would be a great deal to get into because I wouldn’t have any competition, but man, it would be really hard to own it. There’s a lot of crime. There’s not a lot of tenants that want to live there. The school scores are low. It’s not going to go up in value.” We typically call that a D-class property, but who cares what we call it? What you need to know is how would this property work once I own it. What would it be like to operate it? And does that fit for my goals? Okay, to the second part of your question, what about neighborhoods that are both? They’re not really both, but what you described is what if you have a really nice single-family home, and then a low-income duplex that’s right next to it.

David:
It’s probably not a low-income duplex if it’s in a neighborhood right next to a nice single-family home. It’s probably just being rented to lower-income tenants. But that doesn’t mean that it’s a bad neighborhood, or it’s bad tenants, or it’s actually a problem. It just is that specific landlord might have chosen tenants that could be causing problems. Or maybe they’re not causing problems at all, they’re great, but they can’t afford to own in a neighborhood that nice, and that’s why they’re renting there. I don’t know this specific property. Now, keep in mind that’s how I’m answering this question, is I haven’t seen the house. So if this is just a haunted house, just something terrible, don’t hear me saying that you should go buy it, but what you’re describing to me is what I look for.

David:
I want to buy the duplex in the great single-family home neighborhood. It’s very rare to find that. And the reason is that most cities, when they do their zoning, they clump it up. They go, “Here’s where all the single-family homes go. Here’s where all the multifamily homes go.” And the multifamily tends to be buried in the corner, and it’s never looked at, and that’s where all the mildew grows, because it doesn’t get enough sunlight. And then you get nothing but all the tenants, and then more and more tenants start moving in there. There’s no pride of ownership. The income goes down, the neighborhood goes down. The police presence goes up, the crime goes up. That’s what you’re trying to avoid. What I like are the benefits of multifamily property, higher cash flow and less risk, mixed in with a great neighborhood of single-family homes where I’m not going to get all those issues that I described when the zoning is separating multifamily from single family.

David:
It’s better if you mix it all in together and you have a nice ratio of both. So what you described, Lourdes, would actually be what I would be pursuing. I want to find multifamily property in a neighborhood that’s B or A-class, because I’m going to have more appreciation from that property. And just imagine that it’s a duplex there, and I can rent it out and get twice as much cash flow as a regular house because it’s a duplex, or maybe three times as much because it’s a triplex. And then five years later, I want to sell it. Well, if I bought it in the section of the neighborhood that is zoned for multifamily, I’m not selling it for much. I’m going to sell it to another investor. They’re going to be looking at like it’s a D-class neighborhood, and they don’t want it. I’m stuck. But if I’m going to sell it and it’s in a nice single-family neighborhood, maybe someone buys it who wants to house hack.

David:
Maybe the David Greene team is representing a buyer, and we find that house for our client. We say, “This is the one you want to buy. You’re going to be in the best neighborhood, and you’re going to rent out the other unit to someone else to reduce your income.” Now that person’s willing to pay extra to have that property. It’s worth more to them because of the income it brings in. That’s the way that I’m looking at it. I’m actually looking for deals just like you described, so I would highly encourage you to chase after those ones with more vigor than if it was a multifamily property that was not in a single-family neighborhood.

John:
Hi, David. I appreciate your haircut. Thank you for representing. My name’s [John Mark Burely 00:23:35]. I am currently running a roofing company with my brothers. My wife and I have a barn wedding venue, and we had a two-unit rental, first purchased back when I was 18 or 19. Had the option to buy it on land contract here in Michigan. Bought that thing, had it paid off pretty quickly. Recently got news that my job… Over a year ago, a year and a half ago, my job was going away. I managed 11 apartment complexes for a company, and they were selling the whole portfolio. So plan B came on the horizon. Got my two-unit with a wholesaler. Sold that thing, took all the cash, and bought a 12-unit complex. So I have this 12-unit complex. Lose the job, take on this roofing company with my brothers.

John:
It’s going good. I want to keep building the portfolio, the rental thing. I think that’s where to be. I have the opportunity right now to make offers. They’re both off market, but I’m in touch with the owners for a 32-unit apartment complex and then a 235-unit storage unit complex. Both looked like really good deals. One of them I used to manage for the prior company, and it was out of their geographic zone, so I contacted the owner. I said, “Hey, man, you guys want to offload that?” So I’m going to be paying more per door than what we sold it to them for likely. It’s 2021, the beginning of 2022, so market’s hot right now.

John:
I’m curious. Do I try to raise money from other folks to buy these new complexes and hold onto the 12-unit? Or should I sell the 12-unit and try to milk it for everything I can, and use that cash as down payment for these bigger-sized complexes? I don’t like being over-leveraged. I don’t like owing people who I know. That’s a nerve-racking feeling. I’ve just never been in that world, so I’m not familiar with it. And I’ve heard of and seen relationships go sour over money, so I don’t like to get money between friends. So I’m curious what your counsel would be. Is this something where, “Hey, man, leverage the happy investor culture that you’re in, and use other people’s money to make these purchases and then pay them back over time and be over-leveraged”? Or sell and move on, and kind of do it the slow, steady way? So I’m curious what your thoughts are. I appreciate your feedback. Thank you.

David:
All right, John. Your hair’s looking great as well. Soon as I saw your video, I thought, “Oh, looks like I’m looking into mirror.” Let’s see if I can break down the question you’ve got here. You mentioned that you left a job as a property manager, so I’m assuming that means you are capable of managing and analyzing a property. You started a business, a roofing company, so you have some income coming in from that. And that tells me that you are a problem solver, and you don’t need someone else to lay a path out for you, so I’m going to give you advice based on those things. That’s what I can tell from listening to your video. Your question is: Should I raise money from other people to buy the bigger unit that I want to buy? And you gave two examples of self-storage or an apartment. Or should I sell what I have and use that money to buy the bigger property?

David:
And then you mentioned some of the concerns you had, some of the emotions you were feeling, like you don’t want to raise money from other people. You don’t want relationships to go bad. Let me give you my perspective on capital raising. So I do it as well. I have the website investwithdavidgreene.com. People can go there if they want. They can invest with me. I take a different approach than most people do. The average… [inaudible 00:27:27] the average, but just the more common person that I see, much more common, is they say, “Hey, if you want to invest in real estate, you can invest in this deal. I’m going to buy this apartment complex, this self-storage. Look at the prospectus, look at the proforma. If you think it looks good, you make the decision to invest in it. And if it works out, you’re expected to get this return. But if it doesn’t work out, you’re going to lose your money.”

David:
And that has gotten along pretty well, because most real estate has been going up in value. So even if they make mistakes, it’s sort of covered by all the appreciation we’ve seen. This has been a good time to be lending money. I don’t love that, because it should be the operator’s skill that determines how well the investment goes, not the market just helping them because we’re seeing so much appreciation. When I let people lend money to me, when I borrow money, I’m not doing it by saying, “Look at the deal and see if you want to invest. Lender beware. You’re doing this at your own risk,” type of a thing. I understand most people that are investing with me don’t understand how real estate works. Otherwise, they’d probably be doing it themselves.

David:
They want the benefits of real estate. They see the strength of it. They like the safety of it, but they don’t know how to do it themselves. So they’re really not invest investing in the deal, they’re investing in David. So I have mine structured to where they get paid independent of how well the deal does. If somebody lends me money, they get their interest payment, and it’s not quarterly like most syndicators do. It’s every month. It just goes right into their bank account, as if they were getting direct deposit from a bank or interest from a bank, and it doesn’t matter how the deal does. And I do it like that because I don’t think that they’re investing in the deal.

David:
I think they’re investing in me and my word, and my word matters more to me than if a deal goes bad and I go, “Hey, sorry. I lost all your money.” You’re exactly right the relationship goes poorly, because in their mind, their expectation was they were investing in you, John. They weren’t investing in that deal. They don’t know how real estate works. So if you lose their money, they’re mad at you. They were trusting you. And I think this is important to recognize. Most people investing in real estate, I don’t think you’re investing in the deal. That’s the cop out the syndicator uses to be like, “Hey, don’t blame me. You knew what you were doing,” and that’s why I just don’t do that. My word matters too much. The platform I have here on BiggerPockets matters too much. I can’t default on debt. I just wouldn’t be able to sleep at night, and people would lose trust in me, which matters more to me than whatever wealth I could build by borrowing money and doing what other syndicators do.

David:
So this is my perspective on the advice that I am going to give you. That’s why I wanted to kind of put that out there. That’s also a bit of a pet peeve of mine that I think just raising money is so easy that people are doing it fast and loose. They’re not very good at what they do, they’re not very careful, and they’ve been getting away with it. But musical chairs is going to end at some point, and all those people that put their money in real estate are going to lose it, and then they’re going to blame real estate. And I hate that. I hate when people blame real estate, rather than blame the operator who screwed up or the decision they made that was unwise. For you, I would say there’s a way we can do this where you can do both.

David:
If your gut is telling you you don’t want to raise money, it sounds like you haven’t done it before, don’t do it on your first deal. Sell your 12-unit, then go buy the storage facility or the apartment, whatever you’re going to buy. Use your own money. Put a lot down, more than you normally would. That’s going to give you quite a bit of equity in that deal. After you’ve done that and it’s been stabilized, you’ve improved the rents, you’ve made more money with it, then go raise capital and say, “Hey, I’m not raising money to buy a deal. I’m raising money for a deal that I already bought. So I can secure your money with a lien on this property in second position,” which is probably the same thing they were going to get if you used it to buy it. But you’re not making them take all the risk of what if you screw up managing and operating the property. You’ve already shown, “I’m managing and operating it well.”

David:
So it’s less risky for them to give you the money after you’ve stabilized it. Now, many people hear this and go, “I never thought of that.” It’s because most people that are borrowing money and raising money to buy real estate don’t have any of their own, and it’s because they don’t have enough experience. They can’t do what I’m describing, because they don’t have the resources to do it, because they don’t have the track record. They’re trying to learn on the person’s dime who’s giving them the money, and that’s what I don’t like. It’s better if you do it the way that I’m saying. Once you raise the money, after it’s been stabilized, you’ve effectively paid yourself back. And this may sound unconventional, but it’s not shady. It’s not shifty. There’s nothing wrong with this. People do the same thing with the BRRRR strategy.

David:
They go, “What do you mean you’re going to refinance it after you already bought it? I thought you use a loan to buy?” Well, you do, but you could also use a loan after you buy it. It’s kind of the same process. This is the same thing that I’m describing. When you raise that money on the property you’ve already bought, so it’s safer for these people, then go buy another 12-unit or comparable to what you sold with the money that you’ve raised. Now you’ve got both. You didn’t have to give anything up. You also eliminated the risk for your investors, and you forced yourself to prove that you know what you’re doing before you raised money. That’s the way that I look at problems like this. I usually put the onus on myself to take risk off of other people’s plates instead of saying, “Well, here’s the risk. Make up your own mind if you want to do it.”

David:
So I’m hoping more people will raise money the way that I’m doing it, so that there’s less bad of a reputation that gets out in the real estate investing community. We haven’t had a lot of that right now, but I promise you if you were raising money in 2005, there’s a lot of people that lost money letting people borrow it in 2005. And they blame real estate, they don’t blame the operator. So let’s not do that. Let’s keep a solid relationship with real estate. Let’s invest our money with the right operators who have experience doing it, and let’s make sure that we’re not chasing after the highest returns ever, which is also exposing us to more and more risk.

Andrew:
Hey there, David Greene. Andrew Cushman here. I don’t have a question, but I just wanted to say great job on the Seeing Greene episodes. They’re awesome. I listen to every one of them, even though most of the questions don’t apply to me, simply because you do such a good job explaining things to people that by me listening to you do it, it helps me answer questions better when I get asked similar questions. So anyway, just want to let you know you’re doing an awesome job with those episodes. They’re great, and keep it up.

David:
Well, Andrew, I don’t know what to say other than thank you. That’s very sweet of you. It actually means quite a bit, because this is a nervous and scary position to be in. I don’t know what questions are coming at me. They could be anything related to real estate. I could look like a fool. It is a little nerve-racking, so the fact that you’re saying that means quite a bit. And that just goes to show Andrew’s character. He’s such a cool guy. Andrew’s a very good friend of mine, and I would encourage you guys to follow him as well as check out some of the episodes that he and I have done together. So Andrew is my multifamily investing partner. We’ve created a system of how we underwrite, analyze deals, and then pursue them, so the LAPS funnel. How we find leads, we analyze them, we pursue them, and then we have success.

David:
And if you would like to learn more about that, check out the show that we did with Andrew featured here. All right, we’ve had some great questions so far, and I want to thank everyone for submitting them. You can submit your question at biggerpockets.com/david, because we need them so we can make awesome shows like this. I wanted to play some feedback that we had from YouTube comments so that you guys can hear what some of the people have been saying on YouTube, and I also want to encourage you to head to YouTube and leave me some comments that I can see there. My producer wanted me to let you know that we’ll be seeing Andrew Cushman on the next episode of 586. Make sure you check out 571, episode number 571 on phase one of multifamily underwriting, and then tune in for phase two, which is where we go into it deeper.

David:
So Andrew is basically my partner, like how we just heard from John and he was describing how he wants to raise money. Well, Andrew and I do the same thing. We raise money from people, we go invest it into real estate and multifamily, and we have a screening process that we use to make sure we’re not buying the wrong properties. And Andrew’s my really, really good friend, and I trust him quite a bit. And we basically break down for you all: This is what our underwriting process looks like. These are the exact steps that we do. We actually, now at this stage, leverage those steps to other people that come work for us. They started as interns, and now they’re employees of the company, and that’s how systemized we are that other people can do this work. So if they were able to learn it, you are absolutely able to learn it yourself.

David:
So make sure you check out that episode. It’s going to be 586. And before you listen to episode 586, listen to episode 571, where we get into phase one. 586 is going to be phase two. All right, next comment comes from Dave H. “You asked for comments and feedback, and here it is. This series of detailed Q&A has been some of the best content for a newbie like me. Some of the questions are exactly what I would’ve asked. Other questions from more experienced investors got me thinking about things I hadn’t considered. Keep it coming.” Well, Dave H., thank you from Dave G. I will do my best to do that. Now, if I’m being fair, while I appreciate your compliment how good the show is, the show is only as good as the questions I get asked. If people don’t ask questions or they ask lame ones, I can’t really make a good answer out of that.

David:
So I want to give the attention here to the people who have been submitting their questions. Please keep doing that. Go to biggerpockets.com/david. Submit your question there. Make it as good as you can. I really love these consulting-type questions where you say, “I’ve got this asset and I’ve got this goal, and I’ve got these things working for me and these things working against me, and I can come up with a strategy.” It’s sort of like how Brandon and I would talk about how you got to have tools in your tool belt so that when different problems come along, you know what to do. I feel like the contractor with a tool belt full of tools, and I get to show you guys which tool that I take out based on what problems are being presented to me, and then everyone gets to learn. So please keep those coming, and also thank you for the kind words, Dave.

David:
Next comment, “I would like you guys to cover getting financing in an LLC and keeping away from your personal credit for investors looking to scale, but coming with that strategy, making your personal credit and your business credit worthy to get mortgages in your LLC’s name.” Okay, this comes from New Image Properties LLC. Please, come on here and ask us a question about what you’re trying to do. I would’ve to speculate to get into this now. I’d rather be able to have you on maybe on a live show, where you could tell us what you’re thinking. Based on what you’re saying here, my understanding is you look at it like an LLC has its own credit, and then you have your own credit, but most lenders don’t see it that way. They see an LLC as an entity.

David:
But you are the manager of that LLC, and as the one making decisions for that LLC, they’re going to look at your credit. Now, if you want to get a corporation, doesn’t have to be an LLC, but a corporation and use that business to buy property, you can, but you need to usually show a track record of that corporation making real estate payments. So we can talk about that more. If you want to submit your question, I’ll get into how that works. It’s something that I do myself. So I own C corporations and S corporations, and I can buy real estate in the name of the corporation, but only when I can show a track record that those corporations have owned real estate have been making the payments. That’s sort of how you develop credit for a corporation. But it doesn’t work the same as a FICO score, which is what most of us are used to when it comes to understanding how a company looks at credit, because that’s how they do it personally.

David:
Thank you for that, though. All right. Are these questions resonating with you? Have you also thought, “Man, I wish I could avoid having to use my own credit,” or, “I want to buy more properties in the name of an LLC, because it’s safer”? Have you wondered what you should do to scale faster? Well, if you have questions that are similar, please go to the comments and tell me what you’re thinking. Leave a comment below and let me know what you need to think about, and don’t forget to subscribe to this channel. So take a quick second while you’re listening, get your finger out, stretch it a little bit. Hit the like button and hit the share button, and tell somebody about this podcast, and then subscribe to it, because we want you to get notified every time one of these Seeing Greene episodes comes out.

Pedro:
Hi David, this is Pedro. It was great meeting you at the BPCON2021. I have a question regarding the BRRRR strategy. So currently I have a house hack in Long Beach, California, and I also have single-family BRRRR rental in the Kansas City market. I’m now looking to buy a fiveplex in Kansas City as well. For the single-family BRRRR, I did the rehab in a way that would put my property in a higher set of comps so I could get a higher ARV, therefore getting more money during the cash out refi process. However, I know that as I’m getting to the fiveplex space, I’m going to be relying on commercial lending, and therefore they’re going to be looking at the net operating income. Therefore, I know that in order to get a better appraisal, I need to either increase my rental income or decrease my expenses or do a combination of both. Therefore, I wanted to get your thoughts on what’s the best way to BRRRR a property that relies on commercial lending for the refi process. Thank you, and have a great day.

David:
All right, Pedro, thank you for that. I totally remember meeting you at BPCON. I believe we spoke a couple times, and you’re one of those people that has the “Whatever it takes, I’m going to get it done” attitude. So I love that. You also brought up a great point that I want to highlight here. When you’re using the BRRRR method, what you’re really doing is starting at the end and working backwards. What you’re trying to do is make a property worth as much as you can so that you can refinance it so that you can put a renter in there. And in order to do that, you have to rehab it. And in order to have that, you have to buy it. So even though we describe BRRRR and the steps you take, you actually start with the end in mind and develop a strategy backwards from there.

David:
Now, the common way we describe BRRRR is for residential property based on comparable sales, and the fastest way to improve the value of a residential property is to improve its condition, so the rehab is typically where that happens. But you bring up a very good point. If it’s a commercial property, they may be looking at comps, but they may be looking at the NOI, the net operating income, and they may be looking at some combination of the two. So what I would say is you need to talk to your lender before you do this. If it’s us, talk to us, if it’s another lender, talk to them. But guys, everybody who’s hearing this, please hear me say this. Pedro, I love that you’re asking the question. You’re just asking it to the wrong person.

David:
All you have to do is go to the bank or the lender or the broker or whoever that’s going to refinance it and say, “David, I want to refinance my five-unit property. How can I increase the value of it?” And then we’re going to look at the different people that we’re going to broker your loan to, and we’re going to say, “Well, this one’s going to use comparable sales, and this one’s going to use net operating income. Which one of those do you have the most control over?” And you would say, “Well, it’s already pretty nice. I don’t think I can improve the condition. And there’s no comps around that are actually going to be much higher than this one, so I could probably improve the net operating income by jacking up the rents.” We’d say, “Okay. If you could get the rents up to this amount, this is how much they borrow,” and then you have your strategy.

David:
And it might work the other way, where you can’t move up rents, but there’s a lot of comparables that are priced higher because you got to at a good price. Then you know how to move forward. So I’m using this as an example for everyone. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy. But someone like you, Pedro, who’s got the attitude you have, I have zero doubts you’re going to make it work. Just find the right lender, talk to them, and they’ll set you straight.

Dominic:
Hey, David. Thank you so much for taking my question. I currently do not have any rental properties and I’m looking to get my first unit, which is going to be a two to four-unit small multifamily. I want to use either a NACA loan, which Tony Robinson talked about on the recent Rookie Reply podcast, or an FHA loan. And from there, what I want to do is add value to it, kind of BRRRR, but I don’t want to take my money back out. I always want to transfer the loan from either a NACO or an FHA to a conventional, so that way I don’t have to have the owner occupancy restrictions of those loans over my head, and have a little bit more flexibility with it.

Dominic:
So I guess my question for you is this. I know what I just said, it’s simple in nature, but it’s not going to be easy. But because it seems so simple, I feel like I’m missing something. My specific question is am I off-base here? Am I missing something? And I guess my follow-up question would be how do you navigate real estate knowing that there’s a lot of simple concepts that are very powerful, even though they’re not going to be easy in practicality? How do you know that you’re still on the right track and not oversimplifying something? Hopefully that makes sense. Thank you so much, David.

David:
All right. Thank you, Dominic. I really like this question. Here’s where I want to start. Most of the strategies that you hear described on how to scale with real estate, if you really think about it, almost all of them are based on the financing of real estate. The BRRRR strategy and everything that’s involved is all about how you get your capital back out based on the fact that financing is in your benefit. If the property’s worth more, you can refinance it. You’re just capitalizing on the power of a refinance. House hacking is capitalizing on the power of a primary residence loan to buy property that will still generate income. Most strategies you hear about are based on financing. So you’re asking the right question, because you’re talking about financing.

David:
Now, what you said was “I want to use an FHA loan,” or I believe you said a NACA loan, “to get into a house, but then I want to refinance it into a different loan so that I can use that FHA loan again to buy the next property.” So let’s start with that. There’s several kinds of loans, but I just want to give a broad overview of what you’re looking at. You’ve got government loans and then you’ve got non-government loans. Government loans are typically VA, USDA, FHA, and then just conventional. And when you hear us say Fannie Mae or Freddie Mac, what we’re describing when we say that are companies that sort of ensure loans that… These companies have partnered with the government so that once they give you the loan, Fannie Mae or Freddie Mac will buy it from whoever gave it to you so that that company gets more money. They can go give another loan out. That’s how that works.

David:
And they have tighter guidelines for those loans than they do for non-government loans, but you typically get a benefit. An FHA loan is a very low down payment with the very low credit score. A VA loan available to veterans could be no down payment and no PMI. The Fannie Mae Freddie Mac loans typically have the best interest rates. That’s the benefit of those loans. But then you get into the space where you don’t qualify those anymore, and you’ve got jumbo loans, you have nonconforming loans, you have debt-service coverage ratio. You’ve got all these different types of options. And then I guess the third one could be credit unions and savings and loans institutions, typically what we call portfolio loans. So that’s banks or lending institutions that lend and keep the deal on their own books. They don’t go sell it to anyone else. So when it comes to your specific situation, you’re asking, “If it’s that simple, why isn’t it easy?”

David:
It could be easy. If you bought a house with an FHA loan, you put 3.5% down, and you wanted to refinance out of that so that you could use another FHA loan, that wouldn’t be too hard. There’s conventional loans that you could refinance into where you put 5% down. So let’s say you buy a $500,000 house, and you put down 3.5%. So that would be $17,500, and then you want to refinance into a conventional loan that needs 5% down. Well, that would be 25,000. As long as you have $25,000 of equity in that deal, plus enough to cover your closing costs, you can do that. So you walked in with 17,500. If you gain another 20 or 30,000 in the year, you would have enough at that point to refinance into a conventional loan. You could buy another house with an FHA loan. But you might not have to.

David:
FHA loans are not the only loans you can use to buy a primary residence. There are conventional loans with 5% down. Now, right now, they’re not able to used for multifamily, in most cases. Those are for single-family residentials, because the government guidelines shift a little bit, but still, you can just buy another single-family house with another 5% down loan the next year and not even have to worry about refinancing. Then the year after that, you can do the same thing again. That strategy is simple and easy. And that is why I say every single listener of this podcast, every single real estate investor, assuming they can manage a property or pay someone else to do it and have the funds to do it, should buy a primary residence every year and house hack it.

David:
You should go in for 3.5% to 5% down. You buy in the best neighborhood, the best area that you can. You live there. You rent out parts of the home to other people. There’s tons of ways to do it. You do it with a duplex and a triplex and a fourplex. You do it with a basement. You do it with an ADU. You do it with two houses on one lot. You rent out the rooms of the house. You buy the house, you put up some walls, and you make it into separate spaces. There’s lots of ways you can do that, but it is simple and it is relatively easy. It’s just not convenient to have to share your house or share your space or whatever, but there’s ways of doing it that you don’t have to share the space. I house hack, and I don’t have to share the space.

David:
I just take a portion of the property, I wall it off. I make sure it has its own bathroom and its own little kitchen area and its own bedroom and that it has a separate entrance, and I never would ever have to see those tenants. And I can do that any time I want, so I know everybody else can do it too. Everything in addition to that is what gets a little more complicated. That’s when you’re chasing after really good deals with tons of equity where there’s a big rehab. That’s where it becomes a little more complicated and not easy. But Dominic, just start with what I said. Buy a house every year and house hack it. And then in addition to that, if you want to buy out of state, if you want to do the BRRRR method, if you want to buy commercial property, you have all these options that will become known to you that you don’t have to jump into right away.

David:
Just do those in addition to the meat and potatoes that I described. And if you do it the way I’m saying, it won’t be hard. It won’t be complicated. It won’t be as risky. You’ll be paying yourself instead of a landlord. You’ll benefit in so many ways. This the best strategy. Everyone should be doing it, and everything else in my opinion should just be considered supplemental. All right, I want to thank all of the people who called in or who left a video message for me today. I appreciate you. We got some really good stuff. We got to hear from Dominic there, who had a question about “This real estate thing seems like it should be harder than a really is. Am I missing something?” We had John, who’s trying to figure out if he should raise money or if he should sell a property and buy something else.

David:
We had several other people that came in here, and they had questions that I thought were really, really good that I hope as you listen to it, you both learned something and you had your eyes opened to how you can make a strategy work. The goal of this is not to overwhelm you with information. It’s to equip you with the information that you need to take action, start buying real estate, and start building wealth. I am really, really glad I get to be the person who walks through this with you, who gets to experience this with you, and who gets to teach you, a lot of the time from my mistakes, in what I think you should do. If you’d like to reach out to me, I’m @DavidGreene24 on all social media. Send me a DM. We can talk about loans. We can talk about real estate representation. We can talk about consulting. We can talk about a lot of the other stuff that I have going on that might be able help you.

David:
And if you’re not on social media, just send me a message through BiggerPockets. I check that. I have one of my team members check that sometimes. We want to make sure that we get in touch with you, because helping you build wealth is what BiggerPockets is all about. Please consider sharing this show with anybody else that you know that’s into real estate and might have fears about it. The more that they know, the less that they will worry. And make sure you leave me a comment on YouTube, and tell me what do you think about this show and what would you like to see more of. And then lastly, I want to talk to you, so go to biggerpockets.com/david and submit your video questions so you can be on the podcast. I can help you, and all of our other listeners can benefit as well. Thank you very much for listening. If you’ve got some time, please check out another one of our videos or podcasts, and I will see you on the next one.