The “Base Hit” Rental Properties That Will Make You Rich

David:
This is the BiggerPockets Podcast show 606. When you find some awesome deal that somebody else messed up on and you can jump in there and grab it, you should, but don’t never swing your bat until you see eventually could be a home run. Take the base hits as they’re coming, work the MLS deals, find different ways to make money, but do that knowing that you’re not trying to achieve your goal with these base hits. You’re just keeping yourself afloat. What’s going on, everyone? This is the BiggerPockets Real Estate Podcast, and I am your host. My name is David Greene, and this is the Seeing Greene version of the BiggerPockets Real Estate Podcast. On today’s show, we are going to take questions from people just like you that want to know specifics of how to move their business forward, how to overcome a particular obstacle, or how to create a business plan to move to the next step.

David:
We have some really good questions and a really good show for you today. So I hope that you stick around in here the whole thing. If you’re new to this podcast, welcome to the best dang real estate podcast in the world. BiggerPockets is a community of over 2 million members. It’s not just a podcast. We also have a website with an amazing forum where you can go and you can pretty much read any question you would’ve ever thought of when it comes to real estate, as well as ask your own and get answers, an incredible blog section and resources like an agent finder, where we will connect you with a real estate agent in the market that you live to help you buy properties. But more than anything, we want to bring you the information, the education, the insight into making money through real estate, improving your financial position, and gaining more financial freedom.

David:
We do that by bringing in different guests that we interview to hear their story, as well as experts in the field that will teach you what they know that will help you on your journey, and doing shows like this. On today’s show, we go into will small multifamily go the way of commercial valuation? A quick 1031 overview, what it looks like to do a 1031 exchange, if someone should quit their job and go full time in real estate investing and when, and the question of, “Should I buy off market on the MLS or both?” And more. If you’re listening to this for the first time, I want to hear from you. So please leave me a comment below on YouTube and tell me what you think about the show, what made you laugh? What made you cry? What made you think? That’s what I want to know.

David:
Today’s quick tip is in addition to leaving a comment on YouTube, please let Apple, Spotify, Stitcher, wherever you listen to your podcast know that you like this. We want to reach more people and the only way that we can guarantee to do that is to get better reviews online. So please go leave a review, tell everybody why this is a good podcast, what you like about it, so that we can reach more people and you can have more people on the journey with you trying to do the same thing. All right, let’s get to today’s first question.

Brendan Trieb:
Hey, David and BiggerPockets. My name is Brendan Trieb. I’m a real estate agent in park city, Utah, and I’m looking to start my investment journey. Business has been really good. And since closing on my primary residence, which is a town home here, it’s appreciated about 80% in value. So based on my calculations, I could pull out roughly 200,000 in a cash-out refi or a HELOC, and then use that to reinvest. So I could use it to reinvest in a new construction house locally that I feel is well under market value and would probably appraise for at least 30% above the purchase price, but if I do that and keep my current town home as a rental, it wouldn’t really cashflow. It’d pretty much be even. And I’m just worried that I might be over leveraged. The alternative is I pull out that 200 or maybe not quite as much, and I put it into something that cash flows today in a different market that’s better for cashflow. So would love to hear the pros and cons and what you guys think might be a better option. Thanks.

David:
All right, Brandon. Thank you very much for your question here. This is a good one. So let me simplify this. What you’re really asking is, “How much money should I take out of my property and how should I deploy it?” Now you’ve mentioned a couple options, the new home construction. You gave me enough detail that that actually sounds like a very good play. If you’re getting up 30% under what it’s worth, you need to find some way to buy that house no matter what. I shouldn’t say no matter what. Assuming you can make the payment and that it’s going to cash flow, or you can float the risk associated with it, you need to get that house no matter what. And then the question becomes what can you do with the rest of the money? So if I was in your position, here’s what I’d be thinking.

David:
First off, can I make sure that I have stable income? So if something goes wrong with my rentals, because again, we’re in a very hot market. We don’t know if it’s going to keep going up or if it’s going to go down. We don’t know what’s going to happen with rents. We don’t know what’s going to happen with the economy. We’ve never been in a situation where we have put this much money into play at one time. So my personal opinion, David Greene, is that… I’m wearing a lot of green today actually. If you’re watching on YouTube, there’s green behind me. There’s green on my shirt and you’re listening to Greene right now in your ear holes. What I would recommend for people to do is to play it safe, right? So for me, that means I keep working and I keep investing. So I mentioned before, I’m not a huge fan when there’s this much uncertainty in the market to go full-time in real estate investing, quit your job and immediately start traveling the world, living off your rent.

David:
You could. I’m not saying don’t do it. For some people, that’s the right play, but for more people than normal, I think you want to keep consistent income coming in because we don’t know what’s going to happen with the market. Now, for your situation specifically, I would absolutely try to get that new home construction. If I could get that house as a primary residence and put 5% down, 10% down, maybe three and a half percent down, probably could get away with an FHA loan or another low down payment loan because you’re not competing with other buyers if it’s new home construction. So now those loans that every buyer wants to use, but every seller hates to take, there’s no downside to them because you’re not competing with other buyers.

David:
So I would get that one. I’d put as little down as I had to. I would leverage more, and then I would use that money to buy cash flowing property somewhere else. So you’re getting a lot of equity in this new home construction home, offset that by going for something safer with more cash flow. Buy another duplex, triplex, fourplex in area with very stable job growth. Maybe look for a place where Amazon’s putting in a super center or other jobs were mid-level employees are going to be working because those people aren’t usually going to buy homes. They need a place to rent. So that gives you a stable tenant base and add focus on cashflow. So you’re kind of balancing it out. You’re making one play that’s more cashflow high. The other one’s obviously coming with a lot of built-in equity and it’s only going to go up more if they’re building in a good area.

David:
Now you’ve done the best of both worlds. It is true that you’re going to lose some cash flow on the one that you’re refinancing. That’s always the case when we refinance. You just have to make sure that whatever you buy gives you the same or more cash flow as what you had. Now, this is going to give you more debt and it’s going to give you more properties to manage. Let’s just be honest about that. If you’re someone who thinks the market’s going to crash, my advice would be wrong. I’m assuming you’re in the place if you’re looking at buying new home construction that you think the market’s going to continue to rise. Now, to cover your downside, that’s why I was saying, I think you should keep a job, continue selling homes. Maybe let any nerves or fear of what could happen with these investments that’s holding you back, let that drive you to sell more houses, to hold more open homes, to negotiate harder for yourself, to do a better job.

David:
Continue to look to grow your business as the safety net in case something goes wrong with the economy and then make wise choices like you are. You’re in a great position, Brandon. Just want to thank you for your question and for sharing that with us. All right. Question two comes from Catherine Chapman. This is a verbal question. “Asking on behalf of my dad.” It’s funny whenever someone puts that. It’s always like, “I’m asking for a friend,” and we all know what that means. “He recently retired and had a lot of funds in his 401(k). He has a great pension and started teaching as well. So his salary is still pretty high in retirement. He wants to pull out some money for real estate investments, either down payments or cash purchases.

David:
The frustration is of course that will be taxed as ordinary income. Is there any strategy to reduce the taxes on what he pulls out for investment? He’s looking to use bonus depreciation, but it doesn’t look like it can make a dent in a several hundred thousand withdrawal. Any ideas welcome. Thanks.” Okay. Let’s see what I can do to tear this apart. I’m not a financial professional. I’m not CPA. I’m not a lawyer. So don’t take any of this as legal advice. I am going to tell you that this is one where you should get legal advice. So while I appreciate your question, I’m going to do my best to answer it here, Catherine. A quick phone call to whoever runs your dad’s pension could probably help me more than what I can help you with here. Just ask them, “My dad wants to pull out money and he wants to invest it. If we put the profit back into his fund that we pulled it from, can we avoid taxes?”

David:
See, a lot of these funds are structured differently and I don’t know how your dad’s is. When I was working as a police officer, we had our money set aside. If you contributed money that came out of your paycheck tax free, you could put it into a retirement account, and some of those accounts, you could take money out and buy real estate as long as the profit you made from that real estate went back into the account and you never used that property personally. So before you reach retirement age in a retirement account, this is my understanding, you have to treat it like that is another person’s money. Even though it is your money, you just have to treat it like it’s not. So you can borrow from that entity, but you can’t personally go visit the house that entity owns because it’s not yours yet.

David:
You can’t enjoy it and you can make money with the property you buy, but it can’t be you. The entity has to make the money. And then when you hit retirement age, then you could take the money out. Now, I am sure there are some 401(k) financial planners that are pulling their hair out listening to the angles that I’m missing or things I’m saying wrong. I’m sorry, guys. This is probably more than the average person knows, but it’s definitely not as much as you know. But I do think that you can get these questions answered by just giving them a call and asking the question and then structure it in a way so if your dad does take money out, if he puts it back in, he won’t be taxed. Now, there’s also the accounts where you get taxed and then you put your money in, often you can use that however you want. It’s usually only if you’re avoiding taxes before you put the money into the account where they have the more strict rules.

David:
As far as other ways that your dad can reduce taxes, I think a couple challenges he’s going to have is his retirement income is probably going to be determining what he can borrow. So you said he is making good money. His debt to income ratio is going to have to be solid. So make sure your dad doesn’t go out there and open any new lines of credit or get himself into more debt if he wants to be investing in real estate because he is on fixed income. Talk to a mortgage broker first or a lender in some way to find out what his income will qualify him to buy as far as what investment property he can get at. And then when you’re talking about, I believe that you called it bonus depreciation, yes, the way to make that work is you want to borrow as much money as you possibly can and you want to buy a more expensive asset.

David:
So when you’re looking at this accelerated depreciation, what we’re really doing is we’re doing a cost segregation study. That is a way of looking at the property he’s buying, taking all of the materials that will wear out faster than 27 and a half years. So this would be your plumbing, your electrical, your shower heads, your appliances, your HVAC, all of this stuff does not have a useful life of 27 and a half years like the IRS says that the property itself will. And you are taking the depreciation for that in year one or maybe years two or three. You’re taking it in the beginning. So what happens is you have a bigger depreciation right off when you first buy the property. Now, if you can combine that with leveraging to buy the property more, meaning you borrow more and you put down less, what happens is a lot of the time, the money that you put down on a property is similar or close to what you would have paid in taxes if you would not have bought it.

David:
So when you get your tax savings to get close to your down payment, you get a property theoretically for free. So your dad’s going to have to look at buying a more expensive property. He’s probably going to end up looking at commercial property at higher price points, and then he’s probably going to need to not put 50% down or something or not buy cash because the cost segregation studies and bonus appreciation works much better when your higher leverage. This is why Robert Kiyosaki says, “You build wealth by using leverage and avoiding paying taxes.” That’s really what your father is looking to do here.

David:
So I wish I could give you more specific advice. I know I kind of rambled there, but if you go to your CPA or whoever runs that retirement account first, ask them how he can invest, and then you look for a way to invest where you’re buying a more expensive property that will have more tax write offs, combined with more leverage, he should be able to get the most bang for his buck out of what’s in his retirement account. Now, this is also, as always, assuming that your father manages money wisely. So when I say borrow more, he’s not doing something irresponsible.

Phillip:
Hey, David. It’s Phillip from Vancouver here. My question to you is which of my company Left Side Adventures be focusing our efforts on? To give you a little bit more context, we have goals to acquire 100 units in five years. We have nine units after one year. It’s also hot market in New Brunswick, Canada. So properties on the MLS are going for multiple offers over asking. So what should we be focusing our efforts on? Should we be focused on generating off-market leads for the properties, mainly because if we get off market leads, we can go through commercial loans, which takes six weeks or longer to obtain so we have time to actually work with that, to get that obtained?

Phillip:
Otherwise, if we put in an offer through the MLS using commercial mortgage, we’re probably not going to get that accepted, or do we, B, really focus on just doing JVs with money partners who will fund 100% of the deals and just go for those base hits on that MLS? Yeah. So what should we be focusing on efforts on? Should we do both at the same time? Should we go with A? Should we go with B? Your thoughts and insight is appreciated and thanks for everything.

David:
Thank you, Philip. I really liked this question. So to sum it up, you’re saying should we borrow money from somebody who is going to fund us and use that money to buy the deal on the MLS, which is probably not as good of a deal, or should we look for off-market opportunities, which will be better, but harder to find? I think you’re in a really good position to work on both. So how this will probably look is if you look at a graph, you’ve got the vertical one, the Y axis, we’re going to call that success or money, and then you’ve got the X axis, the one that goes horizontal, we’re going to call that time. When you’re trying to get off-market deals, you’re going to spend a lot of time and effort, and you’re not going to make very much money. So you’re not going to see a very big spike.

David:
It’s just going to inch along where it looks like you’re not having very much success, but you’re putting a lot of time and effort into doing this. That’s how every difficult but worthwhile endeavor starts. That’s how my jiu-jitsu life looks like right now. That’s what it looks like when you first start working out at the gym. Every job you ever first start working, you’re not very productive. When you start to do anything, it’s very hard. So you should give yourself a big runway there. Give yourself plenty of time to figure out how to find off-market deals. If you can, finding off-market deals is always a good idea. That is the best way to pursue real estate investing. It’s just the hardest. So people like me tend to buy more of our properties on the MLS because we spend less time looking for them.

David:
We take that time. We earn money in different ways. That’d be another thing for your company to look at. Can we make money through coaching, through educating, through other ways of bringing value? Can you be commercial bookers or commercial agents or something to earn money while you are trying to get your 100 doors that you mentioned? Because as I’m getting to here, you’re going to have to expect to put a significant period of time in without getting a lot of money. So you want to be able to backfill that time with some form of money so your business doesn’t sink, and then just grind away. Use your direct mail, use your SEO, use your word of mouth, figure out what works for you and start to fill up a funnel with off-market opportunities. In the meantime, go for those base hits. I’m going to use a baseball analogy because you used a phrase, base hit.

David:
It’s like saying, “Do I want to go for a home run or do I want to get a base hit?” Well, of course, you want to get a home run, but you don’t control those. That’s a pitcher making a mistake. When you find some awesome deal that somebody else messed up on and you can jump in there and grab it, you should, but don’t never swing your bat until you see it actually could be a home run. Take the base hits as they’re coming, work the MLS deals, find different ways to make money, but do that knowing that you’re not trying to achieve your goal with these base hits. You’re just keeping yourself afloat. What you’re really trying to do is build up your off-market funnel, where you’re going to get big wins and make big money and you just got to give yourself time to do that.

David:
So sit down with your crew, come up with a business plan, ask yourself what you think you need to do, what pieces you think you need and what skills you need to develop. Then once you’ve got it figured out, throw yourself into it with everything you have, building those skills and working that plan. And while you are doing that, look for deals in the MLS and look for deals to JV on. All right. We’ve had some great questions so far. Thank you guys for all of the questions you submitted. If you’d like to submit one yourself, you go to BiggerPockets.com/David, and leave me a video there.

David:
In this segment of the show, I’m going to go over some of the comments that you all leave on YouTube. And this is my way of encouraging you all to leave me some more comments on YouTube. We read these. We take them serious. We really look for what you guys are seeing and what you’re wanting. This is the Seeing Greene style of the BiggerPockets Podcast where you get to see my perspective, but I’m not selfish. I want to see your perspective too. So leave me comments saying what you liked, what you didn’t like, what you want to know more of, what you wish we would cover. Tell me how we can make this show better and I’ll do my best to do that. First comment comes from Tim Stout. “I have no question. I love the content and jiu-jitsu analogies. I am a BJJ black belt and appreciate them.” Well, thank you, Tim. I do need to be honest for the BJJ community out there. That stands for a Brazilian jiu-jitsu if you’re not in the BJJ community. I talk about jiu-jitsu way more than I actually do jiu-jitsu.

David:
It’s very difficult for me just being a busy person between the work I have, the traveling I’m doing. When I catch a cold, I’m coming down with one right now, you don’t want to be rolling around with people when you could be getting them sick, and the injuries that I get, it’s difficult to stay in there all the time. So please don’t think that I’m sitting here saying like, “I’m a awesome jiu-jitsu practitioner.” It’s a lot of fun. It’s also a lot of not fun and I love doing it, but I just talk about it way more than I actually do it. So I just want to be honest about that. No stolen valor here. Next comment comes from Christine. Quick tip. “I usually have the stern intense look in my face when I listen to the show because I’m taking in all the information, but whenever David does the quick tip voice, it brings a quick smile to my face. I chuckle inside and get back to business. This one in particular was one of his best. Thank you for that.”

David:
Well, Christine, we’ve been playing around with how we should do the quick tip with Brandon, not here. I can go high every once in a while, but it’s always been more difficult for me to get my voice as high as Brandon can get his. I feel like it’s probably just an abundance of testosterone that he doesn’t have to bear the burden of like I do. We’ve thought about the Batman version. “Quick tip.” We’ve thought about the Scottish version, “Quick tip.” We’ve thought about a Russian version. “This is the quick tip we give to you.” I’m not sure exactly which direction we’re going to take, but let me know in the comments how you guys would like to hear the quick tip given, and I will do my best to honor that on every episode we have. Thank you very much for the love, Christine.

David:
Next comment, “Thank you for this video. I have one quick question. If I’m looking at a property that’s been on the market for a while, wouldn’t that also mean it would be difficult to sell it for me too when the time comes? Especially because I’m not looking to renovate or fix it up. I’m looking for long-term rental and I can only afford to buy at a price point where the competitions are not as high.” Okay, Miriam, this is a great question and I appreciate you asking this. It could mean, just to sum this up, that if you’re buying this property and it’s been on the market for a long time, that if you try sell it, it might take a long time also. But the only way we know is if we figure out why it’s taking a long time. There are three things that make a property sell.

David:
And this is what I wish every real estate agent would tell their clients and would tell you, but they don’t because if we told everybody that, they would just go find another real estate agent that had a little parrot on their shoulder that said, “Marketing,” or, “Buyer’s list,” which is what every seller wants to hear. But here’s the truth. I’m going to give you guys the brass tacks about what makes a house sell. The location, the condition and the price. Those are the only things that buyers are looking at. So the first thing they look at is location. And you’re the same way. Like, “Do I want to buy a house? Where do I want to live? I want to buy in that city.” Boom, location. What neighborhood? Boom. That’s where you start looking. Then you start to look at the price point, right? You say, “Okay, I can get approved for this much.”

David:
Then you find the house in best condition possible at your price point and that’s the one you want. There’s really not much else to this. So as real estate agents that are trying to make our clients money, I can’t control the location. So really what it comes down to is the condition I get your property in and the price we list it for, and then my negotiating skills come into play if I can get more than one buyer, which I always do, and this is why I’m good at selling homes. So here’s what I want to say. If this house has been on the market a long time, it’s in a bad location, it’s in bad condition, or it’s priced too high. So if you go in there and pay too much, you’re going to have the same problem when you’re trying to sell it, unless the prices have significantly improved.

David:
Okay? If you improve the condition and that’s why it’s not selling, you may be able to sell it quicker, but you’re saying you’re not going to do any work. So just have an open mind. Maybe after you’ve owned it for five years, you can do some work and you can improve the condition. If it’s in a bad location, just don’t buy it. Okay? This is what I always tell people. The only thing about a house that I can’t change is the location. Can’t pick it up and move it somewhere else. I suppose, theoretically, you could. There’s actually a house moving company. My dad had a friend when he was a kid and that was their business is they literally moved houses as crazy as that sounds, but we don’t do that anymore. So Miriam, if the location is bad, don’t buy the house. If it’s an issue of price, get it at a better price or don’t get it at all. And if it’s an issue of condition, consider the fact that you might have to prove that before you sell it.

David:
All right, this next comment comes from Alexis Quiterio. And this message is for my co-host, Rob Abasolo. This was left on the episode we did about how to buy a rental property in 10 steps. This comment came from there. Rob couldn’t figure out how to find his voice notes or how to keep them. They would always disappear. So Alexis is sharing for all of us, how to keep your voice notes from disappearing. You click on settings, messages, scroll down to audio messages, click expire, and then click never. So this came from a little back and forth we had where I would send a voice memo to someone and they would listen to it and they would say, “Oh, this is gold.” And then it would disappear and they couldn’t listen to it again.

David:
So thank you very much, Alexis, for your tech knowledge there. She ends or rounds out her comment by saying, “Thank you for another incredibly insightful episode. You guys have changed my life with this knowledge sharing and I can’t express enough gratitude. PS, David, your analogies have been the reason for many light bulb moments, so never stop.” Ah, well, thank you, Alexis. I always wonder if I’m using too many analogies. Some people don’t like him and that’s what they tell me. So if you guys like my analogies, tell me to keep coming up with more and I will. We might even may be do an analogy challenge where in the comments you guys could say, “David, I want to see you make an analogy out of…” And put something in there. And I will try to figure out how to make a real estate analogy out of whatever you say. Duck-billed Platypus, whatever it is that you come up with, I think that’d be funny.

David:
All right. Our last comment comes from Marlin S550. Sounds like somebody out of the first Fast and Furious movie. “My journey starts today. I’ll keep y’all updated as I progress.” Marlin, ensure to submit questions as you get going on your journey, because I want to see them. Wherever you are at, someone at BP can help. Make sure that you leverage our community here on the forums, on the comments on YouTube, in our Facebook community. Make sure you’re telling people what you’re doing and asking for the help and support that you need. Now, I want to ask you, are these questions resonating with you? Do you like these comments? If you have questions that are similar, let me know. Tell me in the comments on YouTube. And then let me know what are the ticks or trips that helped you as a new investor? What did you have to learn that got you over a hump and what were you struggling with that once you overcame it, you started to make some progress?

David:
Leave a comment below and let me know what you think about. And then don’t forget to subscribe to the channel, click the like button or smash it, if you will, and share this with someone that you care about so that they can learn about real estate investing too.

Tim:
Hello, BiggerPockets. I have a question for you and before I ask, I just want to say thank you to every single person who’s helped make a video on BiggerPockets channel, and then also everybody in the forums, because without both of you, the videos and then watching people apply the knowledge in the forums and walk through the process themselves, I would’ve never had the confidence to start investing in real estate. I started investing in real estate around four or five years ago and I own a fourplex, a mobile home park, two Airbnbs, and I’m closing in on another mobile home park. Sometimes when I’m working my day job, I feel like it’s at the expense of my real estate portfolio and I don’t know when it is time to leave the W-2 job.

Tim:
I, multiple times throughout the year, have felt that when I’m doing my day job, which doesn’t make net as much as the real estate makes, quite a bit less, I feel like I’m spending time working a job that if I wouldn’t have been working that job, I could have actually saved more money, taken advantage of an opportunity that would’ve made money just by having more time working on my real estate portfolio. So I don’t know when it’s time to leave. And oftentimes, I tell myself, “Well, you should stay because you want the most favorable terms with lenders on any deal that you’re doing.” So they like the W-2, so continue it and get more assets while you can with the W-2. But I really am… Especially with this new mobile home park that I’ll be purchasing, I just feel like I almost could make a lot more money by focusing on that full time and moving in houses much quicker. So compared to doing it from afar, I’d be able to go there and do it myself.

Tim:
So I’m wondering when do you know it’s time to leave the W-2 job? And then secondly, when I do leave the W-2 job eventually, I’d like to get my real estate license and show a house, maybe just one or two houses a week. And I don’t know how to set up a brokerage to allow me to do that. I feel like if I work under somebody else’s brokerage, they’ll want me to work 40 hours a week and do showings every day and I’ll have full another job. That’s what that would be. So I would rather just do one or two a week and I’m wondering is that something I should be setting up my own brokerage for when that time comes, list it, maybe connect it through Zillow, I would guess and just take on one or two showings a week? Is that probably the safest and best way to do that? I’ve never worked on the brokerage side or the agency side, so I’m not entirely sure. I appreciate your guys’ time and you guys have a nice rest of your day. Thanks so much, BiggerPockets.

David:
All right, Tim. I’m going to start with your second question first because I can answer that one more succinctly, and then we’re going to move on to the first question, which was when should you leave your job? When it comes to getting your license and working in real estate, there’s a few comments you made that I think are giving me the impression that you don’t have a great insight or understanding into what the job or day of an agent is like. So I’m going to clarify that for you as well as anybody else that might have those same misconceptions. Hopefully, that makes your decision easier to make, and then we’ll move on to the next part of the question. First off, there’s a difference between becoming a broker and owning a brokerage and becoming an agent and working under a broker. You’re probably not going to be eligible to get your broker’s license.

David:
I don’t remember if you said where you are, but most states require you to be working in the industry for a certain period of time, or have a certain educational degree with a certain amount of classes of real estate taking. Most of the time, you start off as an agent. After you’ve done it for a couple years, you’re eligible to then take another test and become a broker. That’s what I did, but that isn’t really what’s important. What you’re describing is you’re thinking if you work for a broker, they’re going to be putting you to work and most brokerages, in fact, almost every brokerage nowadays doesn’t work that way. When you hang your license with a broker, they’re going to take a chunk of your commission in exchange for the value that they bring you. Now, part of that value is that you legally have to hang it under a broker because agents don’t do deals. Brokers, do.

David:
Agents work under the authority of a broker. So when I say, “I listed a house,” it’s actually not true. Keller Williams Realty, the office that I’m at listed the house. I represented Keller Williams with the client. I know that sounds complicated. So we usually just say it’s David’s listing, but as an agent, it’s never my listing. It’s only the broker’s. I also said I was a broker. That’s true. I’m what’s called a broker associate. So I’m a broker, but I use the Keller Williams license instead of my own. Now, when you get your license and work for a broker, you are going to be finding your own leads. So you’re not going to be showing homes. You’re going to be looking for clients nonstop, and then you’re going to be getting a bunch of leads. You’re going to be trying to get them to work with you nonstop.

David:
And then you finally get them to work with you, and then when they want to go see a house, you’re going to show them the house. You’re not in control of when that’s going to happen. You’re working for them and that’s going to be nonstop. And then you’re going to put it into contract, if you are lucky and then your job starts and you’re going to be working on that file nonstop. And that’s just one person. And the majority of them that you work with are not going to be closing and you’re going to do a lot of work and not get paid. So you got to work with a lot of people at one time and manage a bunch of balls in the air. So if what you’re looking to do is get your license and do less work, this is a bad idea. Don’t go become a real estate agent and don’t pursue that world.

David:
That’s an entrepreneurial venture. You are starting a business from scratch. I believe 88% of agents fail within the first 60 months of working the job. It’s very difficult to make it in. So if you’re not completely committed and willing to do whatever it takes, probably not a good idea to get into that world. Now, let’s get back to your original question, which, “Is my job holding me back?” Okay? It is. Yes. If you had more time to put towards real estate investing, you would be getting more real estate. You would most likely be making more money. There are very few jobs that can produce more money than what you can make when you’re investing in real estate, because real estate makes you money in a lot of ways. It makes you money in cash flow and appreciation and equity buildup, in tax savings and loan paydown, there’s a lot of ways real estate will make you money, and then it’s pretty easy to leverage.

David:
You can keep getting more properties and leveraging out the work of managing them to other people. Very few jobs can keep up with that. But there’s a reason everybody works a job. And here’s what I want to just run by you, Tim. So many people look at real estate investing or entrepreneurialism or being a business owner and it’s appealing because they don’t like the ceiling that they have on them where they are right now. They see that in their job, they can’t get higher. They can’t make more money. They don’t have opportunity. This is what everyone talks about. And it’s true. When you work for someone else, you don’t have as much upside. That is absolutely real. The problem is it’s not the whole story because when you work for yourself, you have no floor to protect you.

David:
See, when you work in another company, even if you’re not productive that day or that week, even if none of the work you do turns into anything, even if you’re able to hide all day and not do work, you still get paid. There’s very little consequences for doing your best when you’re at a job where someone else is paying you. A lot of people do a great job just because they have the character to do it and God bless them. I love people like that. The world tends to reward them, but there’s a lot of other people that are unhappy at their job. I’m not saying this is you, Tim. I’m just using this to describe the reality of what it’s like to work for someone else. They’re taking the risk. Not you. They’re paying you even if you do nothing productive. So you have a floor. You can’t fall.

David:
You’re going to get a paycheck no matter what, until you get fired. And most of us learn how to do at least enough work to not get fired and there it is. There we have our chop. Okay? So when you leave that and you go into the world of real estate investing or business ownership or real estate agent or any entrepreneurial venture, the trade off is your ceiling is removed. So you can go as high as you want, but your floor is removed. You can also fall and fail much easier. And I’m not discouraging you from doing this because I did this. I think more people should do it. I am trying to prepare you mentally for where you’re going into so that you’re not completely caught off guard and you don’t feel betrayed when you realize that once you leave your job, it’s not just that it’s harder to get a loan. It’s that if something goes wrong with those properties, there is no money coming in.

David:
So when I left my job, when I was a police officer and I decided I didn’t want to do that anymore, I had some injuries and one of them in particular is becoming excruciating and I couldn’t deal with it anymore, I focused on building up passive income, cash flow for my rental portfolio, so that if I didn’t make it as a real estate agent, I would at least have some kind of backstop to prevent me from falling. I had a form of a floor, although it was not as secure as my job as a police officer. If you’re getting into mobile home park investing, that makes me more optimistic because that specific niche of real estate investing is one of the more safer niches. A short-term rental, man, that’s high risk care reward.

David:
You might have a month go by where no one books your place. Flipping houses is very risky, right? Your deal flow cuts off, or your numbers don’t work out, or your contractor screws up or something happens and you don’t make money in that. There’s nothing safe about it. But mobile home park investing is very safe. In general, there’s very limited vacancy issues. There’s very limited maintenance issues. The tenants are owning the mobile home. So you don’t have to worry about something breaking. They have to worry about that. They’re just paying you lot rent, and it’s probably relatively cheap compared to the other expenses in their life. So it’s not like those people have a hard time making their payments as much as a luxury grade apartment might be. So what I’m getting at here is I am more optimistic about you making this jump if you’re in mobile home park investing than somebody who’s maybe doing some riskier form of investing.

David:
I just want to say when you’re asking the question of, “When should I make the jump?” Don’t do it if you could have a couple bad months of real estate ownership and lose a property or not make a payment. You should have so much money set aside, so much equity in these property, so much cashflow coming in, just more than you would ever need that if you leave your job and you lose the security of that paycheck, you’re going to be okay. And I give this advice because for a long time, people said the safest way to buy real estate was to focus on cashflow. And that is true. We always want to get that if we can, but in today’s market, it’s getting harder and harder to find that and you guys are all seeing that, right?

David:
So the way that we offset that is we make adjustments in other parts of our life so if something goes wrong with cash flow that we can’t control the areas of life, we could control, the reserves we had, the money that we saved, the money that we were earning make up for the areas that we can’t. Hope that advice helps you, Tim and I will be rooting for you on your journey. All right, next question is from Drew Preston. “My question is instead of waiting to save enough money for my house hack and W-2 income for my next down payment on another investment property, I’ve recently been thinking a better option would be to 1031 this duplex into a larger deal. Can you please explain the steps of what a 1031 exchange process would look like for a first timer? Thank you for the awesome content and thank you for your time on this question.”

David:
All right. Drew, this is a great question, especially for a show like this. Now, again, I’m going to start it off by saying I’m not a 1031 specialist. I’m not a lawyer. So I might say something that’s not perfectly accurate. I’m going to do the best I can to answer the question, but you should seek legal advice, and luckily it’s not hard to do. I can put you in touch with the 1031 person that I use or there’s probably some all over BiggerPockets that you could find. Here’s the gist of what’s going to happen. You’re going to sell this duplex and while you have it on the market or when it’s in escrow, you’re going to tell a 1031 escrow company, which is independent and different of the title and escrow company that you’re using to sell the house, that this is a 1031.

David:
You are going to take what you bought for the property, whatever the purchase price was of your seller, you’re going to subtract what you paid for it, you’re going to subtract all of the costs of sale, like real estate commissions and closing costs that you pay, then you’re going to subtract any improvements that you made on the property when you had it, and what’s left is going to be called your capital game. You are going to have to reinvest that amount into new real estate and the debt you take on is going to have to be equal or greater than what you owe on the duplex right now. Here’s one point I’m going to hammer down and super emphasize for everyone listening. You cannot do a 1031, close on your property, get the money in your bank account, then start looking for the next property. If you touch that money, if you have constructive receipt, you’re ineligible for a 1031.

David:
This is why you have to use an escrow company first, because they’re the ones that are going to hold that money, not you. I’ve had people that made this mistake and they said, “David, I just sold my house. I don’t want to pay taxes. I want to do a 1031. I got 150 grand sitting in my bank account. What should I buy?” And oh, I mean, maybe there’s some fancy lawyer that knows some way around this, but my understanding is you just made yourself ineligible. So that’s why I’m telling y’all right now, don’t do that. Now, once the house closes, you’re going to have 45 days to identify potential replacement property. These are the houses you’re exchanging your duplex for. You’re going to have 180 days from the day you close on your duplex to actually close on that new property. Okay? So within those timeframes, you’re going to be working.

David:
So once the property closes, you’re going to identify the properties that you would want to buy in a 45 window timeframe. You’re going to give that information to your 1031 company, and then you’re going to start working to close it. You’re going to have to close it within the 180 days. Hope that helps. And if you do that, you won’t have to pay any taxes, at least for right now. You will defer them to later. Next question comes from John Encwot. “Hi, David. I have a question about the general market for small multifamily, two to four units homes. Where I’m from in Columbus, Ohio, it seems that home appreciation is outpacing rental rates by a wide margin. Because of this, most homes are being sold for much more than can be justified by cashflow alone. It seems to me that small multifamily home appreciation will be held back long term by rental rates compared to single family homes, and that they will be eventually valued similarly to commercial properties based on their income.

David:
This leads me to look to buy single family homes over small multifamily. Even though the cash flow isn’t quite as good right now, I would think higher appreciation will more than make up for it in the long run. I just wanted to get your thoughts. I appreciate all of the Seeing Greene episodes you’ve been doing. They’ve been extremely helpful to get perspective on what’s going on in the market in general.” Well, thank you, John. Here’s my two cents on the question of the single family versus multi. Traditionally, single family has appreciated more, multi-family has been stronger in cashflow. And this is why most real estate investors have got their start in the small multi-family space. The two, three and four unit properties have been largely, “Can’t miss.” If you play Street Fighter, this is Ryu. This is the one everyone starts off learning how to play, and then you move on to something later, when you get better.

David:
We are seeing them go up in value faster than the rents can keep up because people are valuing cash flow more than they did before. So if you know what a cap rate is in commercial properties, the lower the cap rate is, the more people value the cash flow that asset’s going to put off. So one way to look at this is cash in a really rough area or a way that’s very difficult to make it is worth less than cash flow in Malibu, California, where you know you’re going to get massive appreciation. So the lower cap rate is the more demand there is for that stream of income. All right? And I want you to think about multifamily property as a whole, the cap rate’s compressing. People want those more than they ever did before and that’s why they’re paying more for them than the rents they can keep up. Now, let’s talk about why.

David:
Well, for one, they make awesome house hacks and as home prices have increased, people have gotten smarter. Podcasts like this one, websites like BiggerPockets and others have been touting why house hacking is so smart. I’ve written some articles for Forbes about this. The information’s out there. So more and more people are saying, “Hey, I don’t need to live in my dream home. I just don’t want to be house poor. I’ll take the triplex, live in one unit, rent out the other two and only have to pay 1200 bucks a month instead of $4,800 a month.” And that gives more demand for those assets. You also have people that are selling properties and trying to 1031 into something else. So if in my area, if you sell a home in San Jose that you bought for 400,000 and then you go sell it for 2.2 million, you’ve got a ton of money that you now have to deploy and you want some kind of cash flow.

David:
So you’re going to move into a cheaper part of the Bay Area, maybe get into the Central Valley like Modesto, Manteca, Tracy, and you’re going to take your freaking million and a half dollars or whatever you’ve got, and you’re going to buy a couple fourplexes and you’re going to pay more than everyone else because you’re not evaluating it the same way. You’re looking at it like, “If I don’t buy something, I’m going to lose $700,000 in capital gains taxes,” versus the individual investor who’s like, “I’m trying to get an 11% return and I’m stuck on nine.” So they don’t want to go up in price. You just got to think about who you’re competing with for these properties. And then the fact that you just don’t have much inventory at all and there’s not a lot of cities that are zoning for more multifamily, not many people are building these. They’re becoming more rare, which means people are willing to pay more.

David:
So you’ve got to squeeze on that particular asset class. All the new investors want it, all the house hackers want it, all the 1031 step ups want it, all the out-of-state investors want it, everybody wants those. And that doesn’t mean that the tenants are going to pay more in rent because rents can only go up as far as what a tenant can afford. They’re only going to pay market rent. So in most cases, the rent for a fourplex, one unit of a fourplex and the rent for one unit of 150 bedroom apartment are largely the same. They’re looking at bedroom and bathroom and square footage count and then location. So rent comps may be limited by what somebody is charging that owns 150 unit apartment complex a couple blocks down. And then your little fourplex can’t get rents higher than that one, and that one doesn’t need to raise rents as much because they got 150 units to rent out. You only have four.

David:
So as you can see, there’s different dynamics that are at play here that are making it so that rents cannot keep up with the value of the property. Now, your question is at some point, are we going to value multifamily properties like they’re commercial properties? Probably not. We would already be doing that now, except for the fact that Fannie Mae and Freddie Mac will let you get them with a government loan as a primary residence if they’re four units or less. Okay? So that fact alone means that they’re looked at like residential property, even though they are used like commercial property. If Fannie Mae or Freddie Mac got rid of that guideline, I would totally expect for these properties to now be analyzed and evaluated much more closely to commercial property on those same terms.

David:
Now, the last question you’re saying is, “Even though cash flow isn’t quite as good right now. I would think higher appreciation will more than make up for it if I buy single family homes instead of multifamily.” Well, in general, there’s different ways of looking at real estate, right? But what I tend to say is you’ve got a spectrum and on one end it is cash flow and on the other end is appreciation. There’s always someone that can come up with an exception to the rule. I get it. Please don’t hammer me with your exceptions. There’s always an exception. Okay? We’re speaking in general terms on one end, you’ve got cashflow-heavy properties. These are apartment complexes. These are small multi families. And on the other hand, you’ve got appreciation. These are properties in the best locations, the best school districts, the best weather, and they’re very rare. Okay? And then everything falls a spectrum somewhere in between those two polar opposites.

David:
So what I tell most people is you start with cashflow and you need to get cash flow, especially as a newer investor, but as an investor, you always want to be getting cash flow. But the more wealth you get, the more you move on that spectrum from cashflow towards appreciation. Now, please, again, this is a mistake I’ll have a lot of people jump down my throat about. What they heard me say is you jump from cash flow to appreciation and that’s reckless. That’s not what I’m saying. You inch that way. Okay? Think of it like all I bought were fourplexes in the worst part of town and then I could buy triplexes in a better part of town and then duplexes in a good part of town and then high cash flowing, single-family homes in a better part of town, right? You’re moving on a spectrum. As your wealth grows, you are leaning more towards appreciation. It does not mean you are completely gambling on speculation or appreciation. So that will probably happen. Right?

David:
One of the strategies that I like to use is to buy a single family home with a ton of square footage and a funky floor plan that’s not being used well in the best area that I can possibly get it in and then run it as a multi-family. So that’s where I would convert garages or parts of the house to an ADU and a junior ADU and I could get three units out of one property in the best part of town and yes, my appreciation is amazing. I’ve got one project going on right now. So I recorded a podcast for BiggerPockets about a property I’m buying and that property, I paid 2.25. It appraised for 2.65 before I closed on it and after I make the improvements, I think it’s going to be worth right around 3.2. This is in a really nice area and I’m doing what I just described. I’m going to be adding square footage to it, making additional units. So I’m going to end up with a property that cash flows and has a lot of appreciation.

David:
You see what I’m getting at? So I wouldn’t abandon the multifamily. You’re just in a hot space. It’s harder to get them. I would just broaden my horizons and I’d look for wherever the opportunity was the best. If you get a great opportunity on a single family, make it work. If you get a great opportunity on a small multifamily, make it work, but do understand that as your wealth grows, you’re going to be moving more towards appreciation and less from cashflow, but that doesn’t mean you should start at appreciation at the expense of cashflow. You need cash flow first, whether that comes from real estate, from passive income and other investments, from business that you sold, from a job that you have, you need cash flow coming into your life so that you don’t lose your real estate. All right. Thank you very much for your question there, John. I appreciated answering that.

Jake:
Hey, David. My name’s Jake. Thank you so much for taking the time to answer this question. Big fan of the show. So thank you for everything you do. You guys have helped a lot, yourself and Brandon, and all the other guests you brought on. So I got to thank you first for that. I’ll try and make this really quick. So I currently have three duplexes that are in a small town just outside the city in which I live in. And the inventory is super low out there. Inflation is helping obviously increase the price of those homes. Sometimes opportunities like this, you can jump on and you can sell your home and get way more than you thought for them. My concern is that if I don’t sell them today, because the inventory’s so low, that not a lot of homes are selling in that area that come the future when I do want to sell them, there’s not going to be enough comparable properties that sold that are going to allow them to sell for what they would for today, if that made sense.

Jake:
Now, the answer question to maybe ask, “Specifically, why do you want to sell them?” Well, I would like to get myself into the multifamily space and selling these three duplexes is going to provide me to do that because the amount of money I’m going to make from them is going to put me into that multifamily 10, 12 unit, maybe even more, which is where I ultimately want to be. So I’m just trying to decide like, do I continue to have these homes, cash flow the way they are and be paid down the way they are? Because ultimately I don’t really need to sell them. I’m just trying to decide how do I go about getting my foot in the door in the multi-family space, and right now this is an option that I’m considering and I’d love to know if you think it’s a good option to do as well. Thank you for your time and I really appreciate your input and look forward to hearing what you have to say. So thanks.

David:
Hey, Jake, I really appreciate your question. This is a cool one. So let’s start off by breaking this down into some smaller chunks. The first thing is should you sell now because the price could drop? It could. I don’t know that it won’t. I don’t believe that it will. I believe that we printed a ton of money. So the prices going up are not really indicative of the value of your asset going up. You probably didn’t do much to improve the actual property. Your money just became worth less. So the price of your property went up, even though the value of it didn’t, if that makes any sense. So even if we have a recession, prices may not actually go down because everything just becomes more expensive. That’s one thing that I want to highlight. The second is a more interesting part of this question.

David:
It’s, “Should I sell it and move into something bigger now?” I think you’re asking the right question when you’re getting at it there. I don’t like the line of reasoning that says, “I’m going to sell my asset, my duplex, my home, my whatever, because we’re at an all time high and I’m going to put the money aside and wait for the crash and then I’m going to jump in and buy it all.” That typically is like the day trader attitude, and it doesn’t work as well. I have a couple people that I sold their house two or three years ago. I begged them buy another one. They wouldn’t do it. They thought a crash was coming. Home prices have gone up so much and it doesn’t look like they’re stopping. Their money’s just becoming worth less and they lost that on the equity if they would’ve kept their home.

David:
So unless there’s some fundamental reason to think the market’s going to crash, stuff like what we saw in 2005 or in 2006, where it made no sense, right? Or some recession that the country looks like that they’re going to be having, anything absent that I think if you’re going to sell your real estate, you want to put it in something else, because it’s mostly if you sell high, you buy high and if you sell low, you buy low. It’s very difficult to time everything because when you sell, you got to buy into the same market. So what I like would be the idea of selling a couple duplexes and trading that in for a 20-unit property, a 30-unit property. You’re going to be taking on more debt. That’s your risk. Anytime you add more leverage, you are also going to be increasing risk, but if you believe prices are going to keep going up, then that’s the play that you make.

David:
Because instead of having rents go up on three duplexes, which would be six units, you’re having rents go up on 20 to 30 units. You’re also going to be learning to manage an entirely different type of property at a relatively safe level. You’re not going right in at 300 units. Okay? So what my strategy is in general, my big picture is I buy a bunch of single family properties and I bur them or a bunch of multifamily properties like yours and I hold them, but I get real estate, I add value to it and I hold it, and then I sell it and I trade it in like a bunch of small hotels in monopoly, sorry, small houses in monopoly for one big hotel, which would be your 20 or 30-unit apartment complex. That should significantly increase your cash flow. You should be making a lot more cash flow than you were.

David:
You saved that cash flow and used it to buy more duplexes. Once you’ve saved up another three or four of those duplexes from the cash flow from your big apartment, you 1031 them into another big apartment. Now you’ve got two of them or maybe you sell the one you have and the duplexes, then you buy a 60 to a 100-unit place, right? More cash flow comes in, you buy more of these duplexes. You see how you use the equity from one to get more cash flow and then the cash flow from one to buy properties to build equity? And you create this ecosystem, which is how I like to look at real estate. There’s synergy between how all the pieces operate that make them all more efficient and therefore, better wealth builders than if you’re just doing it independently. I hope that strategy works for you.

David:
I want to encourage you to take it. The only caveat is don’t buy in a bad area. Don’t buy into an asset class you don’t understand and don’t buy into an area where you have a bad tenant pool or bad management or anything that makes it hard. You want to make sure if your duplexes are in a good area, you’re only buying a multifamily property in another good area. Thanks for the question. All right, thanks again for taking the time for everybody that sent me a video question or wrote in a written question. I want to hear from you the listeners. So go to Biggerpockets.com/David and submit your question there. People love the videos. So don’t be afraid. Sitting in your car, sitting in your office, sitting at your house, sitting by the pool. We had one guy do it sitting in the spot with his shirt off, whatever it is, send me the video.

David:
I want to hear your question. I would like to answer it. The questions we got today are awesome. This is exactly what I like to see. Please keep them coming. Lastly, if you’re not already doing so, please follow BiggerPockets on YouTube, on Instagram, on Facebook. They’re all over the internet, even on LinkedIn, and you can follow me in all of those same places @davidgreene24. So if you live in California, where I am, I want to meet you. Let me know where you live. We have a team in Southern California. We have a team in Northern California. I bounce around between the two and if you’re not in California, still give me a follow. Let me know what questions you have and hopefully I can get you featured on this podcast. Thanks a lot, everybody. This has been another awesome episode of the Seeing Greene Podcast. I appreciate your time and attention and trusting me to help teach you to build wealth through real estate. At BiggerPockets, we want nothing more than to do just that. Have a great day.