May 2022

David:
This is the BiggerPockets Podcast show 613. The 10-year from now version of yourself can either say thank you 2022, David, for making the decisions that you made that made me more physically fit more financially fit, better relationships, happier person, better life, better family; or you can look back and say, “Man, I wish I would’ve done something before.”
This is the same thing if you start right now and you look back at 2012 version of you. Are you really glad with the decisions you made, what you committed to, what you invested in? Or are you kicking yourself saying, “I should have bought more real estate, I should have started investing, I should have gotten more serious, I should have dove in deeper?”
What’s up, everyone? My name is David Greene, and I’m your host of the BiggerPockets Real Estate Podcast, here today with my co-host, the amazing, infamous and talented Rob Abasolo. Rob and I are teaming up to bring you an episode specifically directed towards newbies.
On today’s show, we’re going to get into the five mistakes and six steps, making 11 things that you need to know to make money in real estate. Rob, welcome to the show. How are you today?

Rob:
I’m doing good, man. I’m excited to get into this because I’m really at the helm of today’s ship of the proverbial podcast ship, really taking us through the journey here, hopefully helping some newbies out and nudging people along. That’s what today’s episode is. It’s like, hey, I know it’s a little scary to get into real estate but let’s freaking do this thing, man. This is what life is about, taking risks and working towards that financial freedom.
For those of the people that get caught up on the analysis side of things, we’re actually going to even be analyzing a deal in a very, very hot market today that, I don’t want to give too much away, but it opened our eyes a little bit to that specific deal.

David:
Yes we are, and we’re going to get right into today’s show. For our very quick tip, I’m going to tell you, listen to the entire episode where you are going to get a discount code if you would like to save money on a pro membership and get committed into real estate investing yourself.

Rob:
Hey, let’s just do quick tip number two here. If you’re too antsy and you can’t wait to become a BP pro, then you can just go ahead and use promo code REPOD22 to save 20% off of your pro membership. You can do that by going over to biggerpockets.com/proupgrade.

David:
All right, without any further ado, let’s get into the show.

Rob:
All right, so today we’re going to be talking about six foolproof steps to get started, five common newbie mistakes that we see investors making all the time, and then hopefully provide the audience with a few tools to help them get started on their path to financial freedom and building their real estate portfolio.
I think the reason that a lot of people want to get into real estate, and David, you can feel free to give your POV here, but I think at the end of the day we’re all looking to build wealth in some capacity or another, and that means a lot of different things to a lot of people. I think the big four components of building wealth in the real estate game is typically going to be cash flow, appreciation, tax benefits and low pay down. When you add all of those different components together, it is sort of what goes into this idea of building wealth through your real estate portfolio.
Did I miss any pillars there? Is there anything else that you think might contribute to that wealth building goal that a lot of us have?

David:
I think you hit right on the head how real estate helps build wealth. I think the only pieces that might have been left out is that you can use different skills to do this in real estate than you can do it in other means, like day trading or starting a business. There’s an element of real estate that once you start doing it, it gets easier and easier and easier and it gets better in time. I think that’s very appealing to people. It’s not the same work over and over and over. Once you start to get more properties, they become easier to manage. The act of managing real estate gets easier the more you do it.
I think there’s also an element of creativity where you are like the captain of your own ship. You can make things happen that you may not like… I don’t know. It’s probably tough to be creative if you want do day trade stocks. It’s very analytical. You’re researching. You can’t go into that company and add value to it like you can with real estate. And so, real estate is more fun because you get to add a creative element of yourself.

Rob:
Yeah, 100%. I mean, these are honestly. the four pillars I just gave, they’re very tactical. These are very tactical goals that you can set. You can set a cashflow goal, you can set an appreciation goal and you can map out what the tax benefits are going to be. But ultimately what I think a lot of this culminates to, at the end of the day what we’re all trying to get here is financial freedom. I think that’s what wealth really is. We always say we want to achieve financial freedom so we can go out and live on a beach, whatever that means to that person.
I consider financial freedom the same thing as wealth, because wealth gives you options. And so for me, I hit financial freedom probably about a year ago. I think what financial freedom truly is for me, it’s not like it’s over. A lot of people think, oh, hit financial freedom. I’m going to drink on my tie on the beach and hang out and it’s over.
I don’t really think that’s what financial freedom is for a lot of people because we work so hard to get there. It’s not like you can just turn it off. I think financial freedom is, well, for me personally, you’re stressing on how to make more money versus stressing about making money. That’s a very, very small but very important detail. For me I’m like, okay, how do I keep expanding the empire? How do I keep building my portfolio? How can I take care of my family and my brother in law and my best friends and how can I help them achieve financial freedom versus a year or two ago I was just like, how am I going to make money? How am I going to do that to actually achieve financial freedom?
I think there’s a little bit of a myth. I mean, of course I like going to the beach and of course I like to get my tie, but for me financial freedom, it’s the freedom to not stress about the paycheck coming in and the freedom to really take big swings in my real estate portfolio, which is something new and I just did recently even with our Scottsdale property.

David:
It’s absolutely true. There’s a certain point in life where something hit me that you are going to have stress in one way or the other. You’re going to have stress from problems that come from business; what property should I buy, how am I going to fix this, how am I going to fund this, whatever; or you’re going to have stress from I got a flat tire and I don’t have any money in the bank to fix it; or someone is sick and I want to go be a caretaker, but I have to be at my job where I’m going to lose my job and I can’t make my payments. You have it in one direction or the other.
What you and I have chosen is to have a better kind of stress. You’re going to have problems in life, we have a better kind of problem. We have more flexibility, we have more autonomy in our lives, we have no limit on ourselves. But that doesn’t mean that we don’t have problems or that life, all of a sudden we found the cheat code to where nothing’s difficult ever.

Rob:
No, no. I think you nailed it on the head. It’s a better kind of stress.

David:
I’m curious, when do you feel… I mean, you’ve probably been in this stage a lot longer than me, but was there a point for you where you’re like, “Oh, I’m financially free?”

Rob:
I’ve done it. I’ve arrived.

David:
Yeah, it happened quicker than I thought. At the time $5000 a month meant I was financially free. That was all that I needed to live on. I luckily had the foresight to see that inflation was coming and the money that I was making every month wasn’t going to be what I could coast on for the rest of my life, so I kept going.
But I remember it was a point where I’m like, “Hey, I have eight rental properties.” I really wanted one of the Corvette’s, the Stingrays when they first came out. I know that makes me sound like an old man, but they were a cheap car and they were fun and they were fast. My plan was I’m just going to buy one of those, I got the house I live in, I got eight rental properties. I’m good. Something inside said, man, you’re selling yourself short by doing that. The goal is not to not ever have to work, the goal is to work on things that I enjoy or make me grow.
And so, to me it wasn’t that I needed more money, it was that I wasn’t going to become the best version of David if I just hung it up and said, “Okay, I’ve accomplished what I wanted to accomplish. I’m finished.”

Rob:
Yeah, yeah. For sure. I think as I ask a lot of people about what financial freedom means to them and getting into real estate, I don’t know, I see the same problem with a lot of people. Because we all want the financial freedom, the autonomy to live life on our terms. I see a lot of these things, a lot of reasons or apprehensions are very commonly expressed by a lot of people that follow me, that DM me on Instagram. And I think the big one, there’s two big ones for me, people are very unsure of how to become an investor.
The listen to BiggerPockets, they watch the YouTube videos, they read the articles but it’s very tough for them to tactically actually execute that because it’s hard to apply that to their specific situation. And so, they lack the knowledge and the tools to be able to begin their journey, which I think is very solvable. That’s the good news for a lot of people.
The other thing which relates to the first thing is that it’s very confusion. They’re not sure what steps to follow. If you watch, for example, my YouTube channel, I put a lot of Airbnb content on there and I teach people how to do that and I teach people how to start their businesses, but it’s not linear. I don’t necessarily, like A to Z here’s how to do it on YouTube. It’s just whatever I’m going through or struggling with or however I’m living my life. Whatever I feel like making a video of, and I’ll teach someone through that.
And so, for people, I think that’s what research is, they’re watching and they’re listening but it’s never really linear. And so, not having the A to Z steps put in front of them prevents people from ever getting started.

David:
Yeah, and that’s the problem. Because most things in life, time in the market, time on task is what makes you better. I think it was Malcolm Gladwell that talks about the 10,000 hour rule that it takes to become an expert in something. I don’t know if everything is the same where it always takes 10,000 hours, but the idea of doing it over and over and over is true. You get your black belt and a martial art by performing a technique over and over and over and over until it becomes second nature. That’s how a lot of things in life are. And so, the sooner that you start, the sooner that you’re going to get there.
I’ll also say that with most things in life, and real estate is no exception, the hardest day is the first day. Everyday gets a little bit better than it was before. And so, the investors that are hanging out on the background, looking in through the window, “I would like to get started, but I’m not ready yet,” they don’t realize that they’re setting their future self back super far because it gets easier when you start doing it more.

Rob:
I feel a very grandiose analogy coming here about ticking away at it little by little. I mean there are so many things that I feel are floating around in David Greene’s head right now.

David:
Well here’s probably the best way that I would compare what success in real estate should look like. First off, people have to get out of their mind that it’s different than anything else. Whenever you are sold on this idea that you can make money here easy, or you can get fit easy, or this is the secret to avoiding the uphill battle in life, that is always a sales technique that is meant to get your money. They’re appealing to your worst nature that’s looking for a get rich quick scheme or the way around the struggle. It does not happen at anything in life. You don’t ever skip the work and just get a result.
You have to resign yourself to the fact that this is a journey you are taking. This is a path that you are going to walk. It is going to be uphill the majority of the time and there are going to be things that can go wrong. Just like everything else that you want to do, being a parent, getting in shape, saving up money itself. All of it works the same way.
And so, what I like to think about is how financial freedom is really a result of being financially fit, being disciplined, being good at money, understanding how to do what you’re doing. And so fitness itself, physical, is the closest example that I can provide to people that helps them understand what it’s like being fit. I’m not fit right now, but I’m trying to get more fit and I think many people go through cycles-

Rob:
Oh, that’s not true. I saw you the other day. I was like, “Oh, homeboy works out.” You work out a lot more than me.

David:
Oh, I appreciate that. Is it that the camera adds like 15 pounds, is that the problem?

Rob:
No, I had you on a wide-angle lens so you look nice and skinny.

David:
Ha, ha. Well, thank you for that. The journey of fitness, though, is a journey. You don’t get fit and stop, okay? Many of us have done that where we got fit. We’re like, “Cool. I’m there.” I stopped working out and I stopped looking at my diet and what do you know? You end up not fit. That’s how it works.
The process of creating habits that are a lifestyle fitness, and people that are into this understand it. They buy their food at a healthy place and they prepare it ahead of time. They put effort into having food there to eat, they don’t just leave it up to happenstance. They put it in their schedule to go to a gym. They probably are in a group with other people that are into that same thing that helps them stay accountable and helps them be supported. They talk about that kind of stuff. It is in their heart. It is on their mind. The more that they stay in that community, the better off they’re going to be with their fitness.
Real estate is the exact same thing. If you’re not in a community of other people that are doing this thing, you’re going to fall out of shape. If you’re not putting it on your schedule to go and do certain tasks like go to the gym or go for a run or go run upstairs or whatever the case may be, you’re probably not going to do it if you’re just waiting for an opportunity to come your way. If you don’t have a membership at a gym, the odds of you just remembering to wake up and work out in your own living room are very low. People tend to not work out very hard when they work out at home.
Think about, Rob, everyone you ever met that bought some exercise equipment and put it at their house.

Rob:
Guilty.

David:
Right? Were their intentions good when they bought it?

Rob:
Always, 100%.

David:
Okay. You did it. Was your intentions good?

Rob:
Yes, every time.

David:
But how often do you use that equipment?

Rob:
Well, okay, for the sake of your metaphor, never. But last night I finally got on the spin bike that I bought my wife a year ago for the first time literally ever, but I see your point.

David:
You’re proving my point. You used it one time in a year, right? It becomes like a towel rack-

Rob:
Literally one time.

David:
… is what this stuff turns into. But if you actually get your butt to the gym, you’re probably going to, “Hey, I’m already here, I might as well work out.”

Rob:
Oh, yeah, 100%.

David:
Would you agree?

Rob:
Oh, yeah. Yeah. By the way, this is exactly what I envisioned for this metaphor. We need to add a feature on the BiggerPockets website that’s like the David Greene Metaphor Encyclopedia so we can just reference all the metaphors you’ve ever done.
Okay, we’ve talked about the two problems that I think a lot of investors face, the two apprehensions that they have. But now I want to get a little nitty gritty here and actually talk about the top mistakes that investors make. We see investors come to us all the time and retroactively say, “Hey, how can I fix this?” It’s like, “Well, you made the mistake, but that’s okay. You’re going to learn from it.” There are five here that you and I have penciled out that we think are very, very common that we see people doing all the time.
First one here is going to be buying the wrong deal. Have you ever bought a wrong deal before? Would you say you’ve ever gone into something that you’re like, “Uh-oh, this one didn’t turn out as good as I had hoped?”

David:
Yes, that’s happened.

Rob:
Yes, same. Same, but it’s a mistake and you always learn from your mistake so it’s not like it’s over. Ideally you’d like to avoid the mistake, but sometimes you have to make the mistake and it’s a little expensive and it’s an expensive version of college tuition.
Number two, they analyze the deal wrong. This is something that I think… I mean, we could talk for hours on this, but I just had a student of mine, he analyzed a deal. He brought it to me literally yesterday and he was like, “Rob, will you partner with me on this? It’s a 50% cash-on cash return. I was like, “Yes. Yes, I will partner up with you on it. Let’s talk about it.”
We hopped on a Zoom, he talked me through all the financials and I said, “Well, what about the CapEx? What about the cleaning fees? What about the utilities? You only have utilities here at 2000. It’s going to easily be $7200 on this.” I literally ripped apart every component of the deal. By the end of it, it was a 12%, which, you know, not the worst deal in the world but it wasn’t the 50% that he thought he had uncovered.
I was like, “So, what did you learn here?” He was like, “Okay, I may have underestimated the cost associated with this deal.” He analyzed the deal wrong and I told him, “Look, I think it can still work in certain circumstances, but if you’re analyzing this conservatively, it’s not really going to work out for you.”
And so, this is one of the main thins, I think. There are a lot of tools out there that can help people analyze deals, and we’re going to actually talk about that a little bit later. But we all go through it. I mean, at this point I imagine you’re probably not struggling with analyzing your deals, but maybe young David, right?

David:
No. I would probably… Let me bring some clarity to that. I don’t struggle with analyzing deals when they’re in an asset class that I know very well, that I’m familiar with. That is something I put in the 10,000 hours that’s very comfortable. But the deal that you mentioned that didn’t turn out like I thought it would was my first venture into a new asset class. I did not have a tool that would help me analyze those properties, and it was a different type of skill. Kind of like switching from one martial art to the next. I had an idea of how martial arts works, but these are completely different techniques and you’re using different muscles and you’re using them in different ways.
To your point, I would say it’s when you are either learning a new asset class or learning real estate investing in general, that having the right tool to make sure you’re analyzing correctly is extra important.

Rob:
Okay, cool. Yeah. Let’s move on to the third one here. A lot of people let the lack of money stop them. Honestly, kind of guilty here because you see a deal and the first thing you think is how am I going to fund it?
I mean, just even reading The BRRRR book, the book that you penned yourself, my friend, that already starts opening my mind to, oh, okay, well, I don’t necessarily have the money, but I can go and get hard money and fix up a property and then do a cash out refi. I think there could be more education on creative financing out there if there is a lot of people just have a hard time really comprehending that.
Was there a moment for you that you’ve ever let the lack of money stop you or do you feel like you’ve always been pretty good at overcoming the financial hurdle for most of your deals?

David:
Well, I will say that I was blessed to be in a situation different than probably the majority of our listeners because I didn’t get married, didn’t have kids, had a strong work ethic, was very driven. I bought almost all my deals with my own money. I just saved up a lot. I did the old-fashioned, really difficult way.
I recognize not everybody’s in a position where they can do that, but there was a handful of times where circumstances came about where all my capital was deployed when an opportunity came around or I was waiting on a refinance but I had to close before I could get the money out.

Rob:
Yeah, that’s a big one.

David:
There are periods in my career where I’m like, ugh, I’m jammed for cash. It’s not that you don’t have the money, it’s just you don’t have it liquid at that time. It’s in a different accounting section on a spreadsheet somewhere.
Every time that’s happened for me, what I’ve typically done is gone to a friend who is a fellow real estate investor, a fellow business person, a person that I had a preexisting relationship with, not a stranger and said, “Hey, I have no experience investing, but can I get a hard money loan or a private loan from you?” That’s really hard. I went to people that were in the business already that knew me, that knew how I worked, that trusted me and that knew if I’m going to buy this deal it’s going to be good. I borrowed money from them and just paid it back. Whenever my funds came my way.
As you’re saying this, I’m realizing it was my commitment to a community that brought those opportunities. Basically, if I would’ve waited to try to build a relationship when I needed the money, it was too late. That was something I had started years before so that when I was in need, I had people like, “Yeah, I can wire you some money.”

Rob:
Yeah. Yeah, that’s… Yeah. I’ve also now realized investors that I’ve worked with or talked with, they’re all very flaky. Not all, but a lot of them can be and I, now as an investor, understand that 90% of the time that that happens is because their money is tied up.
And so, when you’re talking to an investor it’s like, you have to take the money right then and there. If you say, hey, give me two months and then I’m going to come to you with a project, they’ve likely deployed that and it’s very hard to close that deal two months later.
Little things I’ve learned along the way is when I see a creative financing option or an investment money coming my way, I hop on it as soon as possible because, you’re right, real estate is not the most liquid industry out there. It can be, but it’s not always the most liquid.
Moving on to the fourth mistake here. This is a big one. This is perhaps the biggest one, listening to other people’s negativity. If I had a dollar for every single time that I’ve almost had a friend invest in real estate, either with me or just pushing them to do it themselves and they were amped up about it and then the next week they came back to me and said, “You know, Uncle Ben or Aunt Tia said the housing market’s going to crash,” this and that. “Don’t do it,” and then they got scared, oh man, I’d have enough money to buy a house. That’s for sure. I mean, people just get-

David:
You wouldn’t need their money.

Rob:
I wouldn’t need it. Exactly.
The negativity out there from people that don’t actually invest in real estate, a lot of the time tends to trump the actual experience and insight that a seasoned real estate investor can give you.

David:
Yeah, and that is a tough situation to be in when you’re the investor because you have me and you and Brandon Turner and people on BiggerPocket saying you should do this, and then you have people that you love and you trust that have looked out for you for your whole life saying don’t do it. It’s a very difficult situation to be in. I can acknowledge, it’s not as simple as like, “Ah, don’t listen to them,” because how do you know to listen to us? You don’t know us.

Rob:
Right.

David:
Whenever I’m in a situation like that, I step back and I say, how does this work at everything else in life? Because real estate shouldn’t be different rules than everything else. So, if you wanted to go start going to the gym and lifting weights, let’s go back to that analogy, there is a chance that you could get hurt if you do that. You could drop a weight on your foot, you could pull a muscle, in the beginning your form isn’t going to be perfect so you’re probably going to get hurt. You’re going to make a couple mistakes. But not going to the gym at all is probably the riskiest thing you could do because your overall fitness is going to go down and then you’re going to have heart issues later and like health related issues from not being fit.
So, you have to understand that when someone is telling you don’t do this because something could go wrong, I often look at that like don’t go to the gym, you could pull a muscle or you could drop a weight on yourself, you could get hurt. But not going to the gym at all would be the riskiest thing I could possibly do, and you got to remember that also.
So, what I tend to do is say, all right, who do I know that’s going to the gym? I should ask them, “Hey, you’re really good at this. I see you lift weights and you’re very physically fit. Should I do it too?” Because that’s a person who’s in that world that will tell you yes you should or no you shouldn’t, as well as here’s how you should do it.
I would much rather ask a person that’s in the industry that I’m considering getting into, would this be good for me, than ask someone who knows nothing about that industry if this would be good for me.

Rob:
Basically, if I’m trying to bulk up, I should go and ask Tony Robinson what his workout routine is?

David:
Yeah. I mean, he’s a great example. Because if you say, “Tony, I want to look like you,” Tony’s going to tell you, “All right, well, you’re going to give up all these foods, you’re going to work out this many times a day, you’re going to have to be disciplined in all these areas. Your social life is going to suffer in this,” and you’d be like, “Oh, never mind. I don’t actually want it that bad. This isn’t for me.”
If you go ask someone who doesn’t understand Tony’s regime and what he’s doing, do you think I should go do that, what value is their advice going to be when they have no idea what that’s actually like?

Rob:
Yeah. Yeah, and I think this gym metaphor actually makes sense because you’re saying you have to basically go and work out and get started and nick away at this little by little, which leads us to the fifth and final giant mistake that most investors make. It actually is a very common… The famous four is the last question, right? People just quit or never get started along the way. And so, this big mistake is never taking action.
If you don’t ever take action, if you don’t ever sign up for the gym membership, there’s literally no way for you to go to the gym. If you don’t ever make an offer, there’s literally no way for your offer to get accepted. You have to start throwing some Hail Mary’s out there, if you will, and hope that they land. And then boom, you’re in the real estate world.
That wraps up these five. Obviously there’s 20 top mistakes that investors make, but I think it really does boil down do these five for most people, especially this last one

David:
I would say are the most common things that stop somebody from getting in the gym and getting into being fit. Because the reality is, most people listening to this, it’s not like they’re not interested in fitness. They’re at the gym, looking through the glass in the window, seeing the people inside thinking, “I wish I could be them.” Then they leave and they’re like, “Man.” They look at their stomach, or they can’t see their feet because it’s in the way, or they’re huffing and puffing when they try to climb stairs or tie their shoe. They are aware. I’m not financially fit, I don’t like my life., I don’t like this job that I have, or I don’t like whatever. Then they go back to the gym and they look in the window.
These five things are like the invisible barrier that keeps people from beginning inside. That’s what we want, is for people to get a gym membership, get inside. Maybe start slow. Don’t just run in there right off the bat, but get around the people that are doing it so that they can show you how to use the machines; go with you; workout with you; spot you, get you some momentum, like you said; and then you get sucked into that lifestyle.

Rob:
Yeah. I guess, with this in mind, what I want to do is, considering, for me, the big mistake here is never taking action and getting started, how about we actually run through a deal here? I would like to actually run through a deal and maybe just put some tangible insight and advice on how you could actually get started today by analyzing your first deal. Is that cool?

David:
Yeah. Let’s take our listeners through one of our workouts.

Rob:
In the spirit of never taking action and getting started, I think we should put this into tangible terms for everyone out there right now that does want to get started. I think we have a pretty solid six-step process here for anybody.
If you were looking to get into Airbnb, if you’re looking to get into long term rentals, multifamily, whatever your niche is, if you follow these six steps, then it’s going to be a lot easier than if you’re just trying to go after the big goal at once, right? I think breaking it up into small bite-size, baby steps that you can take, one step a day for example, it’s not going to be quite so stressful as just figuring out, oh man, how am I going to get into a hundred-unit syndication deal? You don’t do that. You do real estate. You get into real estate by biting off small bites of your sandwich, David. By the end of the day, the sandwich is gone.
So, step one here, commit. I know this seems like very, very simple, like, oh duh. No, I don’t think so. I think you have to actually tell yourself that you’re going to do this. You have to really… I don’t even care if you look in the mirror and say, “Today’s the day. I’m going to do it.”
That was me yesterday, literally, on the bike. I wanted to go run yesterday because I haven’t really ran in years. I was taking care of the kids and I was like, “Dang it. My window is closed, the kids are asleep.” I was like, “You know what? No, I’m going to do this. I’m going to find a way.” I committed, I walked up, I got on the bike. Boom. That felt really, really good.
So, committing can be many different things. It can be like buying a book. For me, I always tell people if there’s a way that you can financially commit to something, go buy a book. That’s 12 bucks. The stakes are low here but you can go and read that book however you want to commit. Whether that’s you telling yourself that you’re going to commit, whether it’s you looking in the mirror and poking yourself and saying, “This is the day, Bob,” or if it’s buying a book or any kind of curriculum or whatever it is, just figure out a way that gets you excited to actually get started.

David:
Well, here’s why that’s important, you’re going to fail at your first try at anything. Going back to our gym analogy here, you go to the gym, you are going to try to figure out how to use a machine or do a workout. It’s going to feel weird, you’re going to do it wrong and the thought is going to go through your head, “This is stupid. You shouldn’t do this. Anyways, this isn’t for you. ”
Or you’re going to see another person that’s stronger or fitter or in better shape and you’re huffing and puffing and they’re fine, and you’re going to think, “Why did I even come?” If you’re not committed the second that happens, you’re done. You’re going to leave and you’ll say, “That wasn’t for me,” and you’re going to go back to dancing with the stars. If you’re committed, your brain’s going to say, this doesn’t feel good, how do I copy what they’re doing? How do I find another person to help me?
You’re going to look for a solution. That’s why committing is so important because if you’re not committed, you look for way out; if you are committed, you look for a solution. It’s literally two roads that you can take. One of them takes you to financial freedom and the other doesn’t.
I wanted to ask you a quick side question here, and you can be honest. You recently went running and now you’re riding a bike. When you and I were in Scottsdale, you saw me going for a run and you mentioned it. My understanding is you weren’t running before that. Is there any connection to you saw me doing something and then put the thought in your head, “you know, I really should start doing that too.”

Rob:
Yeah. You inception me, man. After that Scottsdale trip, I was like, “Something’s not right. I need something. I saw someone running, oh, David Greene. I want to be more like him. I should run.” So yeah, man. You can take all the credit for what will soon become-

David:
No, that’s not what it was. I knew you’re going to go there. I don’t want to take the credit for why you’re doing it, but I do want to highlight that that is a part of when you get into community of people, they influence you. Because I was only running because I saw somebody else that was in my community that was running, and it put the thought in my head.
There’s absolutely something to be said for not just looking through the window at the gym or watching or thinking I should do it, but getting around people that are doing it will make it so that you want to do it.

Rob:
Yeah. Yeah. Actually, I think this leads into step two here. I think, here, this is where a lot of people get this wrong. Step two, learn and plan. All right? A lot of people want to start with learning and planning and then commit. But guess what? If you learn and you plan, there’s a lot of information in literally any niche or industry that you want to get into, it can scare you away. And so, if you’re not committed to it, the moment you start learning and planning, quote-unquote for everyone on the podcast, you’re going to get scared and be like, “You know what, maybe I’ll commit later.”
So, for me, I like just jumping in. What this means is maybe that means putting an offer on a house and then figuring out how the heck I’m going to flip it from across the country. That’s actually something I just did a week ago. I put an offer on a house. It’s in Virginia. I don’t really have any houses out there. I was like, I love this house, I’m going to figure it out. I will learn and plan and find my contractors and find the team and research and reread the bird book afterwards. Because if I start trying to figure that out before I’m even in the deal, I’m not even going to get into the deal.
So, I think it’s very important to just jump in and then learn and plan because there’s so much that learning and planning can do. It can really teach you, it can enlighten you but it can also lead to analysis paralysis, in my opinion.

David:
I agree.

Rob:
Step three here, get leads. All right? This is a big one. If you’re looking to flip a house, if you’re looking to get into an Airbnb, if you’re looking to invest in a fund or a mobile home park or whatever, whatever respective real estate niche you want to get into, deal flow is super important. Not only deal flow but actually assembling the team that you need. You’re going to need, we all know, very basic real estate transactions here. You are going to need a real estate agent, which, if you’re in need of a real estate agent, a small little plug here, the agent finder on bigger pockets can get you hooked up with literally anyone in the country. But we know that you need that and we also know that you need a mortgage broker and we also know that you need, if you’re going to do an Airbnb, for example, cleaners and handyman and contractors.
And so, if you can assemble your team and really start figuring those crucial teammates that you’re going to need to execute a deal, a lot of the times the leads are going to come in, like finding a good realtor, if you tell them what you want. If you show them that you’re looking for a flip or that you’re looking for some kind of investment property or an Airbnb, and you show that realtor that you’re very serious, there’s a very, very high likelihood that they’re going to be sending you those deals.
If you’re looking to get into a flip, maybe this means getting in contact with the wholesaler and finding an off market deal that you can then go and flip and rehab and maybe even execute the burst strategy.
How’s your deal flow these days, by the way? Do you feel, now that you’re established, that the deals just come daily for you or do you still have to actually go out and find them?

David:
It depends on what avenue they’re coming to me from. I have deals that will just come to me from the agents that are on my team. They’ll say, “Hey David, this is one that you might like,” or “Hey, our client can’t close on it. Do you want to buy it instead?” That will happen.
I will get random deals in my inbox from different Bigger Pockets listeners in different areas, and so I don’t have to go looking for those. But if we’re talking about deal like that exact type of property I want to buy, those are not just finding their way to me. That’s something I still have to go hunt down.

Rob:
Yeah, but you have a network, right? I think that’s what I’m getting at, is obviously those deals are going to come a little easier to you and me, but platform aside, I think that if you establish a network and people know what you do and you put yourself out there, you put yourself out there on social media, on Instagram, on Facebook, and you proclaim to people that you’re a real estate investor, the chances of these leads coming across your desk more often are going to be a lot higher, I think personally.

David:
Oh, that’s a hundred percent. Yes.

Rob:
Now, I actually want to get into what I think is going to be one of the more useful segments of today’s show. I actually want to analyze a deal because I think here’s where the analysis paralysis sets in. People get really good at analyzing the deal. Even if it’s a really good deal, they still get scared and don’t want to do it.
I think this would actually be in a very appropriate time to use the rental calculator from the Bigger Pockets website to actually take a real-world deal and see if it pencils out.
I’m in Texas now. I’m very partial to Texas real estate here, so I want to just maybe pick a very hot market. What’s a hot market right now? Austin. Everyone wants to move to Austin. Okay, so we’ve found a deal here in Austin, David. I think this one… I mean, who knows? On the surface, I think it’s going to pencil out, but the calculator is the crystal ball that tells all. So, put the address here-

David:
Well, what I liked about this deal, initially looking at it, is it is in a very hot market so people are going to be drawn to wanting to invest there. It has some value-add opportunity. When you look at the pictures of it, you can tell this isn’t completely already done up. There are some ways that you can rehab it, fix it up, make it look like more. It’s currently being used as a rental, so there’s an opportunity that if you like the tenants, you could keep them, but it’s already been a rental property so it’s appealing to investors. And it’s a decent size. It’s not a terribly small home that has what we call functional obsolescence. If it’s too small, the floor plan is too weird, if there’s a bathroom right next to the kitchen. Those are all less valuable. So, at the first glance, this looked like an opportunity that might be worth jumping on.

Rob:
Yeah, yeah. Honestly, 515,000 for Austin, Texas seems like a decent deal at the moment. So, we’ll just pop the address in here. We’ll do… All right, in Austin, Texas 78749. Purchase price $515,000. Purchase closing cost, I mean, we’re typically budgeting about two percent for this, right?

David:
Mm-hmm.

Rob:
That’s going to be about $10,300. Will we rehabbing this property, David?

David:
I would say, for this one, that’s probably budget about $25,000 for the rehab.

Rob:
Okay, so about $25,000 to repair and then our after-repair value. So, after $25,000 of repairs, tentatively for the ARV, we’re going to put about $585,000 here. Obviously, we can get more granular with this but I think, for the sake of this example, this should work-

David:
Based on some of the other houses that we looked at that were in a little bit better shape, 585 seemed kind of conservative.

Rob:
Right, right. Agree. Okay, cool. So, let’s go to the loan details here. We’re probably going to do a 20% unless your lender is a 25%, but I know that there are a lot of investment loans out there that will do 20% down. If that’s the case right now, what are you doing over at one brokerage right now for interest rates? Are we in the sixes right now for interest rate or in the sevens?

David:
No. For investment property, a lot of them are coming in kind of the mid-sixes.

Rob:
Okay, cool. Yeah, that’s what I’m seeing too. Points for this?

David:
We do no points there.

Rob:
No points. Hey, that’s not bad. Then loan term, are we going to be at a 20 or at a 30 for an investment loan?

David:
Thirty.

Rob:
Okay. Cool.

David:
We’ll go 30.

Rob:
Actually, one of the really nifty details here, whenever you actually put the address of the house into the rental calculator, the BiggerPockets tool here will actually spit out what the gross rental income estimate is for this property. So, the median rent for this property would be $1,760 per month.
Now, let’s hit our expenses here really fast. I know in Texas, I believe the property taxes here are like 1.25% annually?

David:
No. I think it could even be higher than that in some places. I think we should be conservative and probably use about two percent for property taxes.

Rob:
Okay, so two percent’s going to be $10,300. I just math that out really fast, and also that was our closing cost, so I’m really not that smart but it sounded cool. And then insurance, annual on a property like this? I mean, I don’t know. That could be anywhere from 1,200 to $2,000 is my guess. I mean, I guess it could be up to $2,500 depending on the Austin market, but what should we input for that?

David:
Yeah, it depends how high you put your deductible. I think 1,200 a year would be good.

Rob:
Great. Repairs and maintenance, vacancy, capital expenditures and management fees. What do you typically budget for your repairs and maintenances whenever you’re doing this?

David:
We usually go 5% for repairs and maintenance, 5% for vacancy, 5% for capital expenditures. Management fees can be about 8% and then the rest of these, electricity, gas, water, sewer, those are typically tenant paid.

Rob:
Right, right. Exactly. Cool. So then, we’re going to finish the analysis here and it should calculate for us exactly how this deal would perform for us. So how does that work? All right, so according to the calculator here this deal is actually in the red. It is a negative $2,206 per month in cash flow. You’re losing $2,200 a month on this guy.

David:
Yeah, and you probably wouldn’t have known that if you didn’t have a calculator like this that would get you this information really fast. Because at first glance this deal looks pretty promising. It’s got a lot of the things you hear us talk about on the podcast; it’s in a great market, it’s in a great neighborhood, it’s already being used as a rental and there’s value-add opportunity. This is some of the big stuff that you’re looking for. A lot of people would pursue this deal, put a lot of time and energy into it and only after hours and hours and hours of their own time was put into it they realized, “Oh, I’m going to be bleeding $2,200 a month if I buy this property.”

Rob:
Yeah. I mean, this is really… Honestly, I agree. If I saw something like this, I’d get excited because right now Austin is the hottest market in the country, right? In theory, almost anything out there should pencil out just because of the demand. But just running the numbers here, the actual mortgage payment on this property is $2,600 a month.
And so, if the median rent here is $1,700, then just right there alone, we’re negative 500 bucks in cash flow and that’s not including vacancy, CapEx, anything like that. So, right off the bat, how long did this take us? Five minutes? Five minutes just saved us 15% more on our car insurance and from a really, really bad deal.
Here’s the cool part about this calculator. Even if you’re not a pro member on the BiggerPockets website, you actually get to use this calculator five times. Five times for free. Now, if you’re a BP pro member, you get unlimited uses of this. If you’re actually very serious about analyzing deals, in my mind you should be hitting deals five times a day, personally. I think if you’re serious about it, you want to get started committing, learning and planning, analyzing a deal is perhaps the most important skill that you’re ever going to have in your whole entire real estate career because it’s what’s going to save you money and it’s also, what’s going to make you money.
So, you get five for free whether or not you’re a member but, yeah, the unlimited use for me has really come in the clutch because we’re doing this so many times every single week at this point.

David:
Yeah, and it has a psychological effect as well where real estate now doesn’t feel as intimidating. You’re not afraid, like, “Oh, my God, what if I get the wrong deal?” There’s this, I don’t know what to expect, so what if is constantly running through your mind.
When you’ve got a tool like this, it answers the majority of those questions for you very quickly, easily, without a ton of energy. Psychologically, it becomes much more easier to feel confident in what you’re doing.

Rob:
So, if you want a negative 20% cash on cash return, this is the deal for you. We’ve analyzed it. All right, maybe it doesn’t pencil out right now, but now I want to get into actually funding the deal and maybe talk about a few creative solutions. Is there anything here that we can do to make this deal make sense?

David:
Well, the first thing that you got to look at in a situation like this is can I add additional revenue? There’s got to be a way that you can bump up the money that’s coming in if you wanted to pencil out so you could reanalyze it. Instead of saying, “Hey, what can I rent the entire house out for,” you could say, “What can I rent a room out for?” You may get more per room if you multiply what you get per room time every room versus what the house is going to rent for.
You may look into doing a conversion. Can I turn the garage into a separate unit? And then the last thing would be, can I build an ADU? Can I put a tiny house in the backyard? Is the lot big enough? What options do I have from there?

Rob:
I will say, I remember there was a BiggerPocket episode, singular pocket, BiggerPockets. There was a BiggerPockets episode that I listened to a couple years ago. It was a gentleman that you had on from Seattle and he was really big on student housing and he had a house-

David:
Todd, I believe.

Rob:
Okay, Todd. He had a house where, it was basically, he was looking for four or five bedrooms and he was tossing like people in every single room and he was making crazy return. I love that strategy. For something like this, maybe this house is only going to bring in $1,700 a month. It doesn’t really work, but I know that it’s close to one of the colleges out in Austin. So, what if you chopped it up a little bit and you rented each room, now you’re looking if you could charge 800, 900 bucks a room, maybe even $1,000 a room depending on the amenities that you’re offering, now this deal starts to work a little bit more. Obviously, I’m going to be partial to the ADU because I built a tiny house in LA. That to me was something that really made that deal pencil up for me and that tiny house now is bringing anywhere from 2,500 to $3,000 a month. The mortgage on my LA property is $4,400 a month. So, it just chops a significant amount of my mortgage just by adding an ADU.
So, there’s a couple creative solutions there. We don’t have to get into the nitty gritty, but I think any of those three can work. This could even work as a house hack too, if you want to live in the main bedroom and then rent out the other two rooms. I mean, that would be great. If you want to do the STR house hack where you rent out each room on Airbnb and charge $50 a night, that could work too. So many solutions here that could make this deal work.
Lastly, now that we’ve figured out funding it and making it work and making it pencil out, if we’re able to do that with this property, the final step here is honestly kind of… It’s a few, but they all go hand in hand together and that’s going to be buy it, right? Close on it and then manage it. Whether you’re self-managing it or you’re hiring a property management company to do it, that is eventually just going to lead to building the wealth of your personal portfolio because if you self-manage it, you’re going to save money. That’s money that you’re going to be able to save and reinvest a lot more. If you decide to give it out to a property management company, well now it’s a completely passive investment. If it’s a completely passive investment, that also puts you a little bit closer to that path towards financial freedom because you’re now making passive income versus active income.

David:
There you go. That’s it. We did it.

Rob:
We did. We analyzed a deal here in, I don’t know, 40, 50 minutes. The actual analysis of the deal took us five minutes. It helps to run this exercise over and over and over again, which is why that calculator has been so clutch for us whenever we’re actually looking for our deals too.
So I don’t know where everyone’s at today in their investment journey. I mean, we have a really big audience and everyone’s just in their own step, in their own journey. But I do know that there’s one thing that’s true for all newbies, for all the green investors, all the rookies out there that are looking to get started today, the one truth is that it’s scary. It’s scary. It’s a scary thing to get into your first deal. It gets less scary as you go, but you should use that fear to drive you a little bit. Turn your fear into curiosity. That’s how I always approach all of my deals.
This is what it looks like to jump into real estate. The exercise that David and I just ran, we literally just analyzed a property and we took action. This is what it can look like for you too, but you can only ever get started in real estate if you take action.

David:
Yeah. This brings us back to when we said the first step is you have to commit. The first step to action is not getting out of doing something, the first step in action is committing to the process of doing something because there’s always going to be something that makes you want to quit.
I like to look at using tools like this as a sign that I am committed to something. If I started a construction business and I was a contractor and I was going to go out and I was going to build a deck in someone’s backyard, and that was my business, I was going to build decks or build fences, do some kind of woodworking, if I was not committed to that, I would buy the cheapest thing I could or borrow a hammer, get a bunch of nails and I would put them in one by one. I would manually put in every nail because it’s the cheapest way. Therefore, in my head, it’s the last risky.
The problem is it would be so slow going, that as new opportunities came and I could build a new deck, I wouldn’t be able to go do it because I’m still working on the one that I’m trying to put together.
Furthermore, I’m going to hit my finger more times using a hammer. I’m going to bend more nails. It’s going to be overall much more hard on my body and I’m going to get tired faster and need to take more breaks. I’m going to make mistakes, I’m going to do it the wrong way, and I’m going to hurt myself.
It’s the same thing with real estate investing. If you’re trying to do all of this by hand, you’re going to end up losing money and making mistakes that you wouldn’t make if you had a tool.
Now, compare this to someone and buys a nail gun. They load it up with the nails, they go right down, they’re all put in there. They did not make mistakes. They did not get hurt by hitting their thumb with the hammer. They didn’t bend nails. That’s a person who’s committed to working that business, and this is the way that I tend to look at tools. If I’m committed to doing something well, I’m going to invest a little bit of money and time and effort into buying tools to help me do it.
A good example of this, to go back to our gym analogy, is some weight gloves. If you try to go work out and you don’t have gloves, you’re going to get callouses on your hands, you’re going to cut your skin and you’re going to have to take time off from the gym to let yourself heal. If you buy a pair of $25 weight gloves, it is spending a little bit of money, but it’s overall going to make sure you stay in the gym more often and it reduces some injuries.
So, people that are willing to buy… I’m not saying buy a $50,000 truck for your construction business before you have business. That doesn’t make sense. But something as small as a nail gun does.

Rob:
100%. I also want to say, we’re talking about taking action, but if you really want to hit your goals, it’s really more about taking consistent action, right? You don’t just go and bench press one time and then that’s it. You can bench press 300 pounds. Now, you have to do it routine. It’s got to be your regimen. You got to be doing it weekly, right? You got to build those skills.
So, if you’re committed to doing them, you’re committed to taking action and becoming a better real estate investor, then let’s talk about really quickly here how BiggerPockets Pro can help you get into more deals faster with less risk.
BiggerPockets Pro also helps you become a better investor with curated articles and video content. You get webinar replays and exclusive articles covering everything you need to know to make smart investments and avoid bad markets. If I’m not mistaken, David, I think you actually have a little workshop in there that people can go and watch.

David:
Yeah. Brandon and I made a series on buying with no and low money down, that was fantastic. It’s probably, I think, the best work that he and I ever did together. When we were making it, we just knew, like, God, this is so good.
You can access that video and then there’s a lot of other ones. Every webinar that BiggerPockets has ever done, you get access to those. You get access to videos that Brandon did where he interviewed experts on things like driving for dollars, door knocking, using relationships to get deals where he interviewed experts in those fields. The information’s out there for everybody to watch, as well as things like world renowned economists, different, BiggerPockets personalities like Anson Young talking about finding and funding great deals. There’s stuff in there for specific to investing in Canada or SEO-related information. Basically, specific niches within real estate investings where we at BiggerPockets have interviewed experts in there and have made that content available only to pro members.

Rob:
Yeah. It is a wealth of knowledge in that vault, so I definitely recommend diving into that the moment you become a prom. Also, once you become a pro, you get the bragging rights. You get a little pro badge there that shows next to your name that shows people that you’re serious. You get that badge of honor that shows up next to your name that everyone can see on the forum. If you’re vain like me, that’s always very important.
Aside from that too, you can save time and money and, honestly this one comes into clutch often, minimize all of your risk with lawyer-approved lease documents for all 50 states. If you’re in the long-term game and you’re using lease a lot, boom. We supply you with a whole library of documents that you can use, and they’ve already been vetted by the BiggerPockets legal team.

David:
Yeah, that’s big because some people like to manage their own properties. If that’s you and you don’t want to have to try to figure out, like, hey, is this lease good or where do I get a lease, you could download it right off of BiggerPockets. They’ve already had lawyers look over it and give it the good old you’re good to go here.
I feel like just that alone, someone can spend an entire day on Google looking for different lease documents and comparing one to the next. That’ll save a ton of time

Rob:
And I have. And you also save thousands of dollars on loans and other tools that you’ll use in your overall real estate business with BiggerPockets perks, plus you’ll get access to discounted educational boot camps. I know Tony Robinson just did one on short term rentals. Very good feedback from everybody. Everybody loved it. All these boot camps all focus on very specific niches from some of the best pros in the industry.
Another thing, when you got a glimpse into this earlier, you can also accurately estimate rental rates based on local property comp. You can put in your address and the BiggerPockets Rent Estimator tool will help you understand what the possible projections are for that specific property.

David:
Yeah, and that is also huge. What we’re basically looking to do is take away all the points where an investor starts down the journey or starts up the journey, I should say, because this is typically an uphill battle, you’re going to get some exercise but you only get the best view at the very top and you get stuck. It’s like you’re walking, there’s a dead end, I don’t know what to do. That’s when people quit or they turn around and they go back downhill. So, the lease documents is one that people get stuck on.
Not knowing what income to expect, right? The calculator will help you figure out all your expenses, but you need income to put into it to know what to get. Well, the rent estimator tool is very accurate. I rely on it all the time, and it does the work for you. You type in the address of the property you want and it goes, boom. Here’s what you can expect to get for rents and then here are all the comparables that we’re pulling this from. And, oh yeah, click on that comparable and look to see and verify that it does look like your property. It makes it incredibly easy.

Rob:
Right. Ultimately, it just saves you money in the investments that you’re making, which kind of bring me, today, we actually have an offer out. If you decide to become a BP Pro today, you’ll actually save 20% on your annual pro membership. In order to do so, whenever you go and you sign up, just make sure to use promo code REPOD22 that’s R-E-P-O-D 22.
Just for clarity, I know a lot of you are probably wondering how much is BiggerPockets Pro. Annually, BiggerPockets Pro is typically $390. But, again, if you sign up today, after that 20% discount, it is $312. It’s pretty significant, 78 bucks that you just saved today. Most of you were probably already going to sign up for BiggerPockets Pro. If you’ve been thinking about doing it, I would hop on this because the 20% isn’t really around all the time.
So, if you’re looking to take action and get started today, all you have to do is go to biggerpockets.com/proupgrade. Again, the promo code for that is going to be REPOD22, and that’s going to save you 20%. That’s R-E-P-O-D 22, and you’ll get 20% off of your pro membership when you do that.
There’s a ton of other perks that are associated with this, by the way, that we didn’t even get into because we’re running short on time, but just know that there are so much more than we just discussed.
So, truly, you have nothing to lose here. I mean, it’s a 30-day money back guarantee. I think this is about as safe of an investment as you can make because there’s no refunds in real estate, usually.
With all that, I mean, you just took this journey with me and Dave just on this deal, but also, if you’ve been following along in the podcast, you know that we’re taking a journey that we’re letting everyone follow along with. We just bought a $3.25 million house in Scottsdale, Arizona. We’re excited to share that with you because we really do believe in transparency, sharing with the audience, bringing people in with us, and sharing the insight so that you can learn as well.

David:
Yeah, that’s exactly right. I got to say, that property felt like getting to the top of a hike and having the amazing view. I mean, it has amazing views that might be [inaudible 00:56:18] like that.

Rob:
It has an amazing view, yeah. Yeah, yeah for sure.

David:
But it wasn’t just… Other decisions I made were a good business decision, and so it was kind of like, hey, I hiked to the top and now I get to rest. I feel good about myself. This was amazing. It felt so good. It was one of those things where you’re like, this is why I’ve been working so hard and delaying gratification so much. Let’s get access to properties like this that are just fun.
I mean, we’re going to make good money with this deal, but we’re also going to make good memories there. We’re going to be able to have masterminds and groups together where we go out and we teach people about real estate investing and we’re going to get to share this with other people, open their eyes, change their lives. But you never would get this amazing view that we got from that property if we were not steady staying on our hike, if we weren’t surrounded by other people that are doing the same things as us, learning from them, helping them and creating community.
In fact, it’s the community itself that’s going to make this property so fun because they’re the ones that are going to be joining with us at the deal. This is why you want to get involved, get a gym membership and get involved in the community, right? Or find a group that hikes with you and go hiking together, whatever analogy you want to use. You want to get deeper into the real estate investing community.
BiggerPockets Pro is probably the biggest and best community of investors in the world. I mean, there are more people. There’s over 2 million members at bigger pockets and many of them are pro members. This is where you get access to the best stuff. The best podcast, the best webinars, the best videos, the best blog articles, the best books. BiggerPockets were dominating pretty much everything in the investing and educational space.
So, this commitment you’re making to get into pro is less than the cost of a home inspection on a condo, okay? Rob, what did we pay for our home inspection on the Scottsdale house?

Rob:
Oh man, 1200 bucks.

David:
Okay. I bet it could have been worse, right?

Rob:
Oh, yeah.

David:
So, this is like four of those basically that you’re going to pay to sign up here that’s going to get you in the door and get you connected. If part of your goal for 2022 was to get into the real estate investing game, this is a great way to do it.

Rob:
Yeah, I wouldn’t downplay the networking here. The forums are popping off all the time. There are icons even within the forums too. We just had Jonathan Greene on not too long ago. He is very iconic in the forums because he’s just helping people. The community helps each other, they answer each other’s questions, they help build each other up. We’re all here to help each other get into our first, second, third, fourth, 10th deal.

David:
Amen to that. One of the things I like to say is if you do nothing right now, 10 years down the road, 10 years has passed. Whether you take action today, whether you don’t take action today, 10 years is going to go by and you’re going to look back and you’re going to have had that time pass regardless of what you did.
So, the 10-year from now version of yourself can either say, “Thank you, 2022, David, for making the decisions that you made that made me more physically fit, more financially fit, better relationships, happier person, better life, better family”; or you can look back and say, “Man, I wish I would’ve done something before.”
This is the same thing. If you start right now and you look back at 2012 version of you. Are you really glad with the decisions you made, what you committed to, what you invested in or are you kicking yourself saying I should have bought more real estate, I should have started investing, I should have got more serious, I should have dove in deeper. If you make a decision right now and you stick with it, is impossible to not be better off five years down the road, 10 years down the road. But if you don’t make a different decision right now, you can guarantee, you’re going to be thinking the same thoughts, doing the same stuff that you are right now, you’re just going to be 10 years older.

Rob:
Yeah, 100%. Look, it might be a little scary, guys, but I personally think that growth comes from fear. I guess I’ll leave it there, man. That was a very impactful word you said there, my friend. Anything that you want to leave the audience with before we go? How about this? Because usually we ask people where, where can people find out more about you, Dave, if t they want to get your awesome knowledge bombs on the interwebs?

David:
You can follow me @davidgreene24. Instagram’s probably where I am most active. I recently got a social media company making some stuff for me, so it’s finally cleaned up and looking like a professional Instagram should. Let me know what you guys think. On TikTok, I’m official David Greene and then on YouTube, I’m David Greene Real Estate. Recently, I just got on CNN and did an interview there about interest rates, what we can expect in the market, house hacking-

Rob:
Yeah, that’s cool.

David:
BiggerPockets, I saw, posted that today. If you guys want to see it, it was like a five-minute section on Mother’s Day, go to my Instagram. You can check that out.

Rob:
Awesome, man. Yeah, I saw that, dude. That’s very cool of you. I don’t know how I can one up that. You’ve done it. You’re a news anchor now.

David:
Yeah, I’m anchorman, but you’ve got that cough. I don’t think you ever have to worry about one upping me as long as you’re rocking that cough.

Rob:
Yeah, I guess that’s true.

David:
And Rob, if people would like to hear more about your stunning success in the tiny home and short-term rental space, where can they learn more?

Rob:
Oh, just the typical channels. You can find me on YouTube at Robuilt, R-O-B-U-I-L-T. You can also find me on Instagram at Robuilt and then on TikTok at Robuilto. Reach out, say what’s up, leave a comment, leave a like.
Yeah, that’s it, man. That’s the show. We did it. We showed people how to get started. If you get started today from this episode, do me a favor, leave us a comment in the YouTube and this video and let us know because we always like to see who out there is taking action.

David:
And if you are on the fence, I highly encourage you, go to biggerpockets.com/proupgrade, sign up for pro. You get a money-back guarantee if for some reason you don’t like it, but it will change the way that you have a relationship with real estate. Your identity will slowly shift into someone who has committed to it, not just someone who’s at the outside of the gym looking at the windows of the people working out wishing you could be in there with them.

Rob:
Yeah. Don’t forget to use promo code REPOD22 for 20% off. With that, David, you want to sign us off here?

David:
This is David Greene for Rob the Improv Abasolo signing off.

Optimize Advisors’ Mike Khouw looks at bullish bets on Toll Brothers, a beaten-down homebuilder, ahead of the company’s earnings. With CNBC’s Melissa Lee and the Fast Money traders, Tim Seymour, Dan Nathan, Karen Finerman and Guy Adami.

This is by no means the worst economy we’ve ever seen. But with the exception of the first few months after the beginning of COVID-19, it is almost certainly the strangest and most volatile. 

Inflation is the highest it’s been since the early 1980s and will likely remain for the foreseeable future. Real estate prices have increased at a rate that exceeds the pre-2008 crash. There’s a massive housing crisis, various supply shortages, rising interest rates, an inverted yield curve, and economic growth during the first quarter of 2022 was negative. 

Indeed, a recession may be upon us. Some think another housing market collapse may be coming soon.

Wherever we’re going, one clear thing is that we are in a very volatile economy where investors should proceed with caution. Nevertheless, they should still proceed. 

I’m not a fan of sitting on the sidelines and “waiting for the market to correct.” I thought the market would correct around 2018. I was wrong. Had I stopped buying, I would be regretful about it. Had I sold our portfolio, I would be even more regretful.  

Indeed, I’ve known people who have been saying that since 2015. Needless to say, they’re still waiting.

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20-Mile Marching

Jim Collins is best known for his classic Good to Great, but I believe his book on how to invest in a volatile economy, Great by Choice, is even better. One of Collins’s key points is the importance of a consistent approach through both good and bad times. He refers to this as “20-mile marching,” an analogy to the famed explorer Roald Amundsen. 

In 1911, Amundsen and his team faced off against Robert Falcon Scott in a competition to see who could reach the South Pole first. Scott’s team would go as far as they could on good days and then hunker down on bad days. This seems intuitive, but it didn’t work. Unfortunately, not only did Scott and his team not reach the South Pole, they didn’t make it back alive.

On the other hand, Amundsen had a dogmatic belief in preparation and consistency. As Collins writes in Great by Choice,

“Amundsen adhered to a regime of consistent progress, never going too far in good weather, careful to stay far away from the red line of exhaustion that could leave his team exposed, yet pressing ahead in nasty weather to stay on pace. Amundsen throttled back his well-tuned team to travel between 15 and 20 miles per day…When a member of Amundsen’s team suggested they could go faster, up to 25 miles a day, Amundsen said no.”

The relation to business is simple, “The 20 Mile March creates two types of self-imposed discomfort: (1) the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the discomfort of holding back in good conditions.”

Collins found seven companies that beat the Dow Jones and their industry by at least 10-fold over 15 years during a turbulent environment. All seven, including Southwest Airlines, Microsoft, and Intel, followed the 20-Mile March philosophy. 

Hunkering down destroys momentum and creates apathy and perhaps even paranoia about the future. No excitement comes with sitting around and waiting. If you have a staff, the best employees will probably believe that there won’t be much in the way of growth opportunities and move on.

On the other hand, expanding like crazy can create additional problems, from outgrowing your systems to overleveraging to making careless mistakes as the number of your commitments outpace the time you have to vet them properly. 

Growth should be consistent, in good times and bad. More or less, this is the thought behind dollar cost averaging. Of course, you should not take this as dogma. There are times to stop expanding (for example, if multiple employees quit, or your bank won’t renew a big loan) or expand quickly (a killer deal comes around). Still, the plan should be for consistent and quality growth.

Not the Time to Reach

20-Mile Marching doesn’t specify a particular strategy, though. It doesn’t say you shouldn’t sell a property or two now if your cash is tight or cash flow is low. And it certainly doesn’t say you should reach if you cannot find a deal in a hot market like this. 

Indeed, when the market appears a bit irrational (in this instance, too hot), it’s a good time to sharpen your pencil and only take deals that are certain to make sense. This might reduce the number of properties you are buying. You might not even be able to find one for a while.

But not finding a property is not the same as hunkering down. After all, you’re still looking, and sooner or later, you will find one.

Cash is King

Another key point Collins makes is that companies that held large cash reserves did substantially better than those that did not. This is because those companies have sufficient funds for a rainy day and have enough money to pounce on golden opportunities when they come around. 

I made a similar point when reviewing Nicholas Nassim Taleb’s great book Antifragile in a previous article,

“Taleb believes that trying to predict such rare events is mostly a fool’s errand. Instead, one should try to become ‘antifragile.’ Antifragility doesn’t describe something that can survive disorder or even a downturn. For that, he uses the term ‘robust.’ Instead, antifragility is something that gains from disorder.”

“So whereas most companies struggle in a recession, a company that thrives in a downturn would be antifragile… Those who ‘thrive from disorder’ can often grow exponentially while others are declaring bankruptcy.”

Having money to buy assets when they’re cheap can make a real estate investor antifragile.

Of course, “have money” is not the most helpful advice. It is notoriously difficult to maintain strong cash reserves with real estate in particular. I’ve often joked that you’re not a real estate investor unless you’re cash poor. 

That being said, in volatile economic conditions, it is not the time to ride the line. If refinancing or selling a property will get you some breathing room that you don’t currently have, it would be something to strongly consider. 

Likewise, if you are considering quitting your job and going into real estate full time, I would make sure you have saved up a substantial rainy-day fund. If not, it may be worth holding off on that decision for the time being. 

Dealing with Inflation

Of course, we are in a high inflation environment, so you don’t want to hold too much cash, or at least, you don’t want to hold too much cash as cash. Now would be a good time to look into investment vehicles that offer at least a small return to help offset inflation. 

Unfortunately, these are hard to come by. A 3-month treasury bond, for example, still only provides a paltry 0.95% return as of this writing.

That being said, the nice part about holding real estate is that inflation erodes debt while assets continue to (usually) increase in value. As long as most of your wealth is in hard assets such as real estate, inflation shouldn’t hurt you too badly.

But inflation does make it more difficult to cash flow. Prices for materials, wages, insurance, and taxes all go up, making it all the more important for landlords to keep up with rent increases (at least until the market cools). 

Indeed, last year, rents went up some 15%.

Yes, these are challenging times. If you can afford to offer your tenants a break, do so. But only if you’re confident you can afford to.

Otherwise, you need to be more aggressive with rent increases. Most leases are renewed annually, and locking in a below-market lease could severely affect your cash flow as prices on everything else continue to increase month over month.

In the same vein, you need to make tenant screening a priority. This should always be the case, but in volatile times, it will be the tenants on the edge who stop paying first if we tumble into a recession. Thus, it’s even more essential now to screen prospects thoroughly.

The Real vs. Nominal Distinction

In a low inflationary environment, you can take returns at face value. 8% interest is 8% interest.

In high inflationary periods, this is not the case. When inflation is high, you need to account for real vs. nominal prices. For example, if your annual return is 8% and inflation is 9%, then you really lost 1% in real terms.

This is one reason I believe it’s unlikely that the real estate market will collapse. I do believe that in real terms, it will likely decline as real estate appreciation will fall behind price inflation. But if you look at what happened the last time there was high inflation and low growth, real estate just about kept pace with inflation:

But while this shows that real estate didn’t collapse during the stagflation of the 1970s and early 1980s, it also shows real estate didn’t do particularly well either. However, if you had looked exclusively at the appreciation rate without considering inflation, it would look like real estate did great.

Thereby it’s essential to start thinking in real terms instead of nominal.

Fixed Interest Rates

Interest rates may feel high now as the 30-year fixed mortgage just crossed 5% after hovering near an absurdly low 3% for all of 2021. 

But just because it feels high doesn’t mean it is. Remember, we need to think in terms of real vs. nominal. Interest rates are still substantially below inflation, which doesn’t make much sense.

Historically speaking, the Fed’s discount rate (what it lends to banks at) is still very low, and even if it gets that rate up to 2.8 % by the end of 2023, as it says it will, it will still be at the lower end of the historical average. The discount rate is nowhere near the rates that Paul Volker brought it up to in order to “break the back of inflation” in the early 1980s. 

In other words, interest rates are still low.

The more certainty you have in a volatile economy, the better. So, the moral of the story is this: No adjustable-rate mortgages right now. Make sure your loans are fixed for at least five years, 10 if possible.

And if you have loans coming up for renewal in the next year or two, I would highly consider refinancing them now (assuming the prepayment penalty is not too high) at these “high-interest rates.” Trust me, unless you have lived through the interest rates of the 1970s, 1980s, and even the 1990s, you have no idea what “high-interest rates” actually are.

Conclusion

Volatile and fragile economies can be scary, but they can also bring opportunities. It’s been extremely difficult to find properties to buy in the last couple of years. When the market starts to cool, that should change. 

Indeed, the best investors often do the best during recessions or volatile economies. They don’t do so, however, by sitting on the sidelines. Instead, they keep their reserves high, adjust to the environment, sharpen their pencils, and continue 20-mile marching.

David:
This is the BiggerPockets podcast show 610.

Cliff:
Now we’re little in over our heads. This is my first one, so it’s the rookie nightmare sort of speak. But everybody hears about why they don’t get into it. So I’m trying to wonder, “Do we sell it? Do we keep it? Just chip away at the debt over time. Is there other options on what we can do? How do I bounce back from this? And what do I do to continue investing in real estate even with this big item hanging on my back here?”

David:
What’s up, everybody? This is David Greene. And I’m your host of the BiggerPockets real estate podcast, the best real estate podcasts on the planet and also, the number one most downloaded podcast.

David:
I’m here today with my buddy, Henry Washington, and we have a fantastic show for everybody. In today’s show, we are going to be interviewing different investors who have different questions regarding a jam that they caught themselves in, direction that they’re unsure to take, or just overall phobias, fears, flaws, things that worry us and stop us from moving forward. And Henry and I dive into this and help get them unstuck and send them on their way.

David:
It does feel like that when you’re like, “Oh, look, it’s like a little squirrel that’s trapped and if I could just get his foot free, he could run off and find nuts,” and we get to play that role.

Henry:
I love it, man.

Henry:
It’s super encouraging to be able to lift people up, uplift people. You are an expert at reading someone in their situation and providing them not just practical advice but also giving them the encouragement to keep moving forward because you and I both know that this real estate investment journey is one that it helps create not just wealthier people but better people.

Henry:
And so I love the way you uplift people and give them life to keep going, man.

David:
Well, thank you. When you’re born with a face for radio like I am, you got to find some way to compensate for that. So I appreciate you calling out that skill of mine, man, I appreciate that. Okay.

Henry:
Absolutely.

David:
So, in today’s episode, make sure you listen to all the way to the end because Henry and I have a very impressive young man who calls in from another country with questions about severe long distance real estate investing and that was very cool.

David:
If you’re not watching this on YouTube, I would encourage you to just switch over briefly and do so because you’ll notice that I have a green background, Henry has the purple background that he always has, and together we look like a real estate Barney. So visually speaking, it’s incredibly impressive and you’re going to be singing that Barney theme song in your head for the entire show.

Henry:
I do love you.

David:
All right, for… I appreciate that. We love each other and we love you the BiggerPockets audience.

David:
And that leads us into today’s quick tip. Look, if you’re listening to this whether it’s on iTunes, on Spotify, on SoundCloud, on Stitcher, on Youtube, it doesn’t matter. You’re part of our community and we don’t want ninja members of the community. We want to interact with you, we want you to be included. This whole thing only works when you’re actually tied into the community.

David:
You’re not a spectator. You feel like one when you’re just listening from the outside but when you start commenting, when you get onto the BiggerPockets website and check out the forum or the blogs, when you start reaching out to us on social media or you start leaving comments on the YouTube channel, we can actually respond to you and you will start to get included in this and all of a sudden real estate just feels less scary and intimidating. So we want to bring you in.

David:
Also, when this podcast is done, if there’s not another one to listen to, I would encourage you to check out Henry’s show, On The Market. Now, Henry is part of a incredibly impressive ensemble of real estate experts.

David:
Henry, who’s on the show with you?

Henry:
We have Kathy Fettke, Jamil Damji, James Dainard, and it’s hosted by the other Dave, Dave Meyer.

David:
Dave Meyer. That’s right. It’s a very fun crew, right? This is not brand muffin real estate. We’re like, “Oh, I know it’s good for me, but I don’t want to eat it.” We got a little bit of icing sprinkled on to this muffin-

Henry:
That’s right, that’s right.

David:
… of good information. You got a little bit of… It’s like a healthy Pop-Tart is probably the analogy that I would use.

David:
So please consider checking out that Pop-Tart of a podcast On The Market and let us know what you think there.

David:
All right, without any more ado, Henry, anything you want to say before we get into the show?

Henry:
Yeah, man. I really, really enjoyed the segment of the show where we talk to the young rookie investor who bought his first deal out of state and ran into all the nightmares that everybody gets so scared of. But I encourage you to listen to that all the way through because you’re going to learn that this doesn’t have to be as scary as people make it up in their minds and that there is light at the end of the tunnel and you can fall on your face when you get started and still keep pushing.

David:
That is such a good point. This is an example of someone who literally did every single thing wrong. All right, maybe not say wrong, but everything went wrong that could go wrong and he’s going to be just fine. So if you can survive what I think, it was Cliff goes through, you’ll be fine. So don’t make the mistakes yourself, learn from Cliff’s mistakes, help him understand that he’s helping the community, shout out to Cliff, give him a little bit of love, and then you should feel a lot less scared after hearing that story. So let’s bring in our first guest.

David:
Kathryn, welcome to the show. How are you today?

Kathryn:
I’m doing great. Thanks so much for taking my question.

David:
Glad to hear it. And by the way, you’re being such a trooper doing this while you have a cold. We appreciate you fighting through that for us.

Kathryn:
Thanks. I will certainly do my best.

David:
So what’s your question?

Kathryn:
All right. So my husband and I just started real estate investing last fall. So we’ve started with three new builds going up in Florida, South Florida, and those seem to be going very smoothly, everything has been really great to work with as far as the team down there and we expect those to be done by the end of the year.

Kathryn:
So we did take a trip down to Florida, got to meet everybody in person, property management, realtor, builders, everybody that’s on the team down there. And we feel just really good about everybody that we’re working with and we got to talking about short term rentals, they seem very knowledgeable about just how to make those successful, they know which location to put them up in, all the details to make those successful. So we’re really interested in building one of those as well. And the thought would be that we would call it a vacation home so that we can just put 10% down.

Kathryn:
And the issue that we’re running into is with the financing because the price range we’re looking at including the land would probably be in the range of 550,000 to 750,000, maybe half of that would be the lot, because it’ll be a water lot. So what I didn’t know going into this was it seems like it’s unusual to try to finance land. What we’re hearing from all the lenders that I’ve talked to so far is that we would probably need to own the land outright. So if we’re talking this is a $300,000 lot, that creates an obstacle.

Kathryn:
The best that I’ve heard so far is that we could finance the whole thing potentially but it would require 15% down rather than 10% down. And on a property of this value, that’s another 30, 40,000 downpayment. So I’m just looking for any advice, any insight you have as far as how to go about this. If you’ve got any ideas for us, I’d appreciate it.

David:
All right. So what I’m hearing you say is your concern with how to finance land. That’s one thing that you’re thinking about. And then you mentioned the 10% down vacation home but you said you’re buying three of them. So were you originally under the impression that you’re going to be able to get three vacation homes? Is that what you were thinking?

Kathryn:
No. The three that we’re building right now, those are long term rentals. So those are already good to go. Those are under contract. We’ve got the land for those. They’re being built. We want one short term rental.

David:
Okay, so you’re talking… This is in addition to those three? Yeah. Fourth property that you want to buy as a vacation home, but you are wanting to build it and so you’re wanting to finance the land.

Kathryn:
Yep, exactly.

David:
Okay, Henry, I’ll let you take first shot at it. What are you thinking?

Henry:
Man, I was just going to kick this one back to you because I’ve never financed land and built before. So I have bought land that had a dwelling on it that we’ve torn down and we’re going to go back and build and so financing for that was a little easier.

Henry:
I also use small local regional banks and they don’t have a problem financing land if I need it so I can finance land and then get a construction loan to build. No sweat with a small local bank, but they are typically going to want 15% down so that doesn’t solve your downpayment problem from that approach. But I know David’s the lending master so maybe he’s got an idea for you.

David:
I don’t know if I’m the lending master. But I do dabble in a little bit of real estate. And here’s what the problem with building new constructions in general.

David:
So I remember at one point, Kathryn, I was just like you were I was like, “Screw it. The markets item’s going to build my own stuff.” And it can work. It just always sounds much better in principle than when you get into actual practice because it is a ton of headache. This is…

David:
Once you start trying to build something as you probably are learning from the three that you’re building, if you have a good construction crew that knows how to work with the city, knows how to get permits, and you’re in an area where that municipality wants to build, they make it easy for you. Many municipalities in the country are just against building more homes. I don’t know. They may even be against people making money off of real estate so they make it incredibly difficult to be able to create new housing supply which is a huge reason why we’re in this crisis.

David:
Now, Florida, obviously a great place to go, especially South Florida. They’re welcoming this. That’s a great place if you’re trying to pull this off.

David:
But here’s what people don’t recognize, like you said, you’re not going to get a 30-year fixed rate on land. No bank is going to give you that money because if you can’t make the payment and they have to take it back, what do they do with it? Banks don’t know how to sell land, they barely can sell a house that’s on land so they’re never going to give you those loans. There has to be some form of an improvement.

David:
And not only does there have to be an improvement, but the property has to be in livable condition or habitable condition. So that’s another thing people don’t realize when they go after a hardcore fixer upper, needs a ton of work. A bank will not give you a loan on it if you can’t live in it. If it’s got major foundation issues, if it’s been ripped apart and gutted, you also can’t get a loan on those. So the principle here is to recognize that you can only get the best loans when there is a house on the land that is in habitable condition.

David:
Now, you can still do it, but you can’t do it the way that you’ve been describing. You can get that 10% down vacation home deal once it’s finished.

David:
So you got to think about this like a BRRRR but instead of buying a fixer upper and making it worth more, you’re… Part of your rehab process is actually building the thing on the property itself. So it’s by the land with hard money, with private money or with your money, just like if we were going to go buy a BRRR in cash, you have to do it the same way.

David:
Then you’re going to probably get some form of a construction loan to build the property itself and you’re going to need your contractor to have experienced dealing with the city because there’s going to be tons of things that pop up that you never could have anticipated, they’re going to slow you down, they’re going to make that loan that you took out, the hard money loan or whatever it was, to buy this land much more expensive. And then once it’s finished, you can refinance it into a 30-year fixed rate loan.

David:
And the good news is you’re going to be able to borrow 90% if it’s going to be a vacation home. Most likely. Don’t hold me to this. But most likely, you’re going to get 90% out of it. So it’s going to be easier to hit your numbers. You probably will pull more money out of it than you put into it especially with the way the value of real estate is going up in Florida right now.

David:
So hearing that, is there any questions you have that we can clarify this for you?

Kathryn:
Well, one thing I’ve considered up to this point, once the new builds, the three houses that are going to be long term rentals, once those are completed, they’re appreciating the models just like them that are being completed right now. They’re appreciating well above what we went under contract for so we should walk into a ton of equity. So one thought would be I think we could potentially pull out $100,000 in a cash out refinance on each of those houses which would give us 300,000.

Kathryn:
I guess my biggest concern is waiting that long and I do have some hesitation about even the building process at this point anyway since it’s probably going to set us out a year or more before it’s completed. We don’t know what interest rates are going to be like at that point. So are we better off just trying to find something that’s on the market? But because they’re so hard to come by. It’s easier to find land than it is to find a house. But the interest rate thing does scare me not knowing a year and a half from now when we lock into a 30-year mortgage, what’s that going to be?

Henry:
Yeah. [inaudible 00:13:42]-

Kathryn:
So I don’t know. Is that a good idea? Bad idea? To try to pull out cash once these three are completed.

Henry:
Yeah. My question to you was, and you touched on it a little bit, is why build a vacation rental versus purchased a vacation rental because when you’re talking vacation rental numbers, it’s a little easier to find something on the market especially in a place like Florida where vacation rentals are popular, where you can probably meet similar numbers.

Henry:
I would do the math on purchasing something existing in a neighborhood where you feel like you can get great returns as a vacation rental versus going through and building and seeing what your ROI is for both and it might make sense to not have to deal with the headache of building.

David:
Here’s something psychological about… Well, you know what? Before I go psychological, I’ll go practical.

David:
When it comes to your question about borrowing the money at… Should I pull 100,000 out of each property? It’s a good question to ask. Where I see people get this wrong is they look at how much money they put in the deal and they use that as a baseline to determine how much they should borrow against the asset.

David:
So what that means is, well, if I put 500,000 in and then I borrow 600,000, I’m over leveraged. Why are you over leveraged? Because I pulled out more than I put in. That’s risky. They just make this assumption along those lines. And even experienced people will often think this way. I’ll hear this come out of people’s mouths.

David:
The question to ask is not how much did you put in and can you borrow more, it’s how much is the asset worth because I don’t know any lender right now that’s letting you borrow 100% of what it’s worth. You may get 100% of what you put in but that is not the same as being over leveraged. And then how much debt service can you safely afford to take on.

David:
So if borrowing an extra 100,000 puts you at a point where you’re not cash flowing or you’re barely cash flowing, everything has to go perfect, I would say probably don’t do it unless you’re just tons of money sitting in reserves.

David:
But if the property is performing so well that it’s bringing in way more revenue than you expected just like it’s worth more than you expected, then borrowing the extra 100,000 is not risky in that scenario. So don’t fall into that line of thinking where people say, “Oh, to borrow is inherently risky.” Well, not if it’s cash flowing super strong. In that case, it’s actually not. So that’s the first piece of advice.

David:
Then… Oh, shoot. I forgot where I was going with the practical or the psychological thing. Where were we… Oh, I remember now.

David:
When people are building something, they often look at like, “I don’t want to have to spend…” Or they’re going to buy something, let’s go there. “I don’t want to spend $40,000 over asking price. That’s insane. I’m getting ripped off.” And it’s so offensive to them to consider doing that, that they start thinking along the lines of, “Well, I’ll just build it myself and I won’t have to pay 40,000 over.”

David:
But they don’t realize that when you’re doing that you’re taking out a hard money loan at a very high interest rate and you’re having holding costs that go really high and your rehab is going to be higher than what you were thinking and the contractor is going to give you a change order because of supply chain issues and things are more expensive than they thought.

David:
And by the way, what they have to pay their guys to get the job done goes up so they’re going to pass it on to you in the form of a change order. A lot of people took on projects that made sense at the time not understanding that the contingency they needed that they should have been in place, it’d be way, way bigger than what they actually did and they ended up way underwater on these projects, often to the tune of much more than the 40,000 that they didn’t want to pay over asking price.

David:
Okay. So in one sense, I want people to understand that no one likes to pay over asking price but the alternative is often way worse, trying to do this thing on your own and never having done it, you’re going to make a ton of mistakes.

David:
And on the other hand, I’d rather pay 40,000 over asking price at a four, five, six percent interest rate, then 40,000 of money that I had to pay a hard money rate of 10 to 12% on and may never get out of. Not everyone’s thinking about the cost of capital because 40,000 in one scenario is not the exact same as it is in another scenario.

David:
And there’s also risk where it might be more than 40,000 or you might be paying that 10% a lot longer than what you thought versus if you’re paying over asking price. It sucks but you know what you’re getting. You can plan around it. You can make a plan.

David:
So it’s just one of the pieces of advice when someone’s in your position and basically have a fork in the road and you’re like, “Well, do I just say, ‘Screw this hot market.’ I’m going to build it myself,” which is cool or “Do I play by these rules that I don’t really like and pay more than I wanted to for the property?”

David:
In general, my advice is typically, if you’re a builder or if you know a builder, if you have an in into that world, it’s okay to go the route of building yourself if you know what you’re getting into. If you don’t, don’t do it.

David:
It’s the same as people that say, “Well, I don’t want to have to pay that much for a lawyer. Maybe I should just represent myself in court.” Okay, is your best friend a lawyer that can give you really good advice and are the stakes low? Or are you talking about going to jail for 10 to 15 years if you lose this case?

David:
Anyone can learn how to do anything, you could learn how to be a doctor and operate on your friends because they don’t want to pay money. You can learn anything, it just doesn’t always make sense to do that.

Kathryn:
Okay. Just to recap what you guys said, it sounds like if we want to do this, we probably either need a hard money loan to buy the land if we build or Henry, you said if we go through a local bank that 15% is probably going to be the minimum and it sounds like you’d probably suggest just trying to build or sorry, trying to buy rather than build.

Henry:
I’d at least compare your ROI, one versus the other, because one gets you there a whole lot quicker versus having to build and one gets you there with a whole lot less headache. If you’re going to make one, 2% less ROI but you get there a whole lot quicker, is that a better deal? That’s something I think you should consider looking at.

David:
And there’s less variables that can go wrong when you buy something that’s already built. When you’re building something, when people sit down and work out their numbers, they’re only working out what they know they have to pay. You can’t account for what you don’t know you’re going to have to pay and experience is what teaches you what you don’t know that can go wrong.

David:
All of us, real estate investors, we know when we run cash flow on a property, “What’s my mortgage? What’s my taxes? My insurance?” There’s a whole buttload of things that pop up that you did not account for.

David:
That’s one of the reasons that your first couple years of owning a property, the cash flow is never what you thought it would be. It’s similar when you’re building.

David:
There are so many extra variables that mean things can go wrong that I would only advise you to go that route if you have some competitive advantage. Your family does this, you’ve done it before you know someone really well, you have an absolute rockstar they can tell you like, “Well, if something goes wrong, I’ll eat it on my end. I’m not going to pass it on to you,” to where you actually have a firm understanding of what your costs are going to be because you have that firm understanding when you’re buying something that’s already built.

Kathryn:
Okay. Yeah, I appreciate that perspective because I hadn’t really looked at it that way. I was more thinking I liked the idea of a new construction because I know that I shouldn’t have CapEx expenses the first couple of years and just from that perspective, it seems like there’s less to go wrong. But in the building process, yeah, that does make sense. There’s a lot that could go wrong before it’s completed.

David:
Yes. And sometimes you run out of money when that’s happening. And if you have a house that’s 90% done or 95% done, it might as well be 0% done. The revenue it brings in is exactly the same. So that’s an extra risk.

David:
Now the one thing going for you is the state you’re doing this in would make it… I would give someone a hard no if they were in a state like New York right now.

Kathryn:
Yeah.

David:
Right? It is not worth doing unless you’ve just got really big pockets. Shameless plug right there. [inaudible 00:21:21].

David:
Florida makes me feel a little bit better about doing it. But it’s still like make sure you are extra, extra, extra careful because it’s always what you don’t see coming that ends up costing somebody money.

Kathryn:
Okay. Awesome.

David:
All right. Thanks, Kathryn.

Kathryn:
Thanks so much.

Henry:
Thank you.

Kathryn:
I appreciate your advice.

David:
We appreciate you. Hope to see you again.

David:
All right, Cliff, welcome to the show.

Cliff:
Thank you so much. I’m happy to be here.

David:
Yeah. So what’s on your mind today?

Cliff:
All right. So I’m a rookie investor. I listen to almost all your podcasts beginning in 2020 and tried to listen to the pretty much all the BiggerPockets podcast as well. Loved it. Family doesn’t come from money so I know this is a great way for me to build some wealth. I’ve done accounting and I love seeing how the numbers flow and how this stuff works together so I’m very interested in getting into this.

Cliff:
I did start investing September of last year. I bought a rental out of state using the BRRRR method. When I did this, I couldn’t find any investors so I used a personal line of credit which happened to be just a bunch of credit cards, turned them into a wire.

Cliff:
And I was told that the ARV of this house was double the purchase price to do and there’s a few issues with it, a roof, things like that I could fix, got them done instantly. And when we went to go do that, we had a hard money loan, got it done. Everything that’s… Got a tenant in there. Got the 1.8% roll on the first one. Felt pretty good about it.

Cliff:
Our appraisal came in only about 20,000 above purchase price and we had to find more debt to cover those closing costs, cover the difference in the hard money loan and the new mortgage.

Cliff:
And then, right after that, we found out that there was actually a bunch of items that had to be fixed as well, HVAC went out, furnace went out, water heater needed to be replaced, windows were really bad, small items around the place as well. I’m aware that my [inaudible 00:23:31] needs to be fixed up a little bit because we had a bunch of people walk through there. Nobody ever told me about this. I was told to wait the inspection on this pay purchase price. So I wasn’t expecting these items from what I was told and the videos I’ve seen of the house, pictures I’ve seen of the house as well.

Cliff:
And now we’re little in over our heads. This is my first one. So it’s the rookie nightmare sort of speak that everybody hears about. Why they don’t get into it? So I’m trying to wonder, “Do we sell it? Do we keep it? Just chip away at the debt over time. Is there other options on what we can do? How do I bounce back from this and what do I do to continue investing in real estate even with this big item hanging on my back here?”

Henry:
Yeah, man. Where are you located? And where’s the property located?

Cliff:
I’m in Denver, Colorado, and the property is in Ohio.

Henry:
In Ohio. Okay and so let me make sure I understand.

Henry:
So you bought the property, you leverage credit cards, and then to do the renovations you use the hard money loan?

Cliff:
We used hard money loan for the purchase and most of the renovations, the closing cost, and then the downpayment of 10% was used on the credit cards.

Henry:
Okay.

Cliff:
And then the refinance, we had to do the difference between the two loans and the new closing costs on the credit card as well.

Henry:
Okay, so what are you on the hook for now? And…

Cliff:
It’s about 50,000 in credit cards.

Henry:
And the property appraised for 20 grand over what you purchased it for?

Cliff:
Correct.

Henry:
And how much have you put into repair so far?

Cliff:
Out of pocket or cash, it’s been about seven and then it was about 16 or 17 on the hard money loan.

Henry:
Okay. So you’re not much over purchase and asking price all in right now.

Cliff:
Purchase was 90. We have the closing costs so then everything would be about 50 that…

Henry:
And how much more do you have to go renovation wise in a dollar amount?

Cliff:
In a dollar amount, I think about 12, and very conservative.

Henry:
12,000?

Cliff:
Yes.

Henry:
Okay. And the property, what is it anticipated to rent for?

Cliff:
1650.

Henry:
1650, you’ll be all in at what? 150? 140?

Cliff:
Yeah, about 150 I think.

Henry:
So you’d be all in at 150, it’s going to rent for 1650. Those aren’t terrible numbers. They’re not great numbers. Right? But it’s not terrible numbers.

Henry:
Now, if you’re getting 1650 and if you can get the property done, so if you can find the money, the 12 that you need to finish the property, well, that’s 1600 cover your debt service. Will you be able to pay back your loans in a timely fashion?

Cliff:
We’ll be able to pay for the mortgage and all that kind of stuff that goes associated with that. For the credit card and other stuff that we have to put money into it after all the items for the rental, we get some money to pay off those credit cards but then we have to put more in.

Henry:
Right. Okay. So I was just trying to get a sense of what are all the numbers, what’s everything mean once it’s all said and done. And so like I said, you’re not looking at terrible numbers, but you still have debt service to pay back and you’re probably going to have to come out of your pocket to do that.

Henry:
So if I were in your shoes before I looked to liquidate, I would probably be looking at is there another method that might bring me some more cash flow. Can I do short term rentals maybe for traveling nurses or Airbnb? I don’t know the neighborhood that that’s in. It may not be a realistic solution for you.

Henry:
But I would look at those options before I looked to just completely dump the property because even selling the property, you’re still going to be left holding a bag of something that you need to pay back. And so either option leaves you having to pay something. And so I would try to go with the option that still leaves me the asset because cash flow isn’t the only benefit to owning real estate. Obviously, you’re going to get some debt paid down from the tenant, you’re going to get tax benefits from owning the property.

Henry:
And so if I’ve got to pay back these lenders, either way I look at it, I’m going to try to keep the assets. So I would probably look at what short term rental options can I look at to bring in more cash flow, is there a garage or something separate that I could rent out separately to a tenant that generates more cash flow. And so I would be looking at little ways that might be able to help bring a little more cash flow in and then looking at ways that you would be able to try to pay down that debt as you keep it now.

Henry:
And then I’d also look at if you sell it, potentially, what could you sell it for, how much does that leave you on the hook for, and can you afford those payments. You don’t want to put yourself in a more uncomfortable financial situation.

Henry:
But I’d always tell you, and I know you’re learning a ton of lessons in this, I think a lot of the times when people get started investing at a state for some reason as they’re doing their due diligence and their analysis and building their team, for some reason people don’t think, “Just let me pay a couple 100 bucks for a plane ticket and go put eyes on the things myself.” Because at the end of the day, this is your asset and you’re on the hook. A grand or so to take a trip in the grand scheme of things might have saved a lot of headache.

Henry:
So as a new investor investing out of state is the option that a lot of people need to choose depending on the market that they’re in and so I get looking at estate.

Henry:
But man, go put your boots on the ground for your next one and make sure that you are comfortable with what you’re buying. Does that make sense?

Cliff:
Yeah, definitely. And that’s something… We’ve learned, as you were saying, on the lessons. It’s like I think the next one will be out there. We’ll be going into the weeds with whoever is on our team at the moment and trying to make sure that we question everything they do.

David:
So let me see if I can simplify your situation.

David:
There’s three things that when you’re doing this you have to take into consideration. The first is the finished product cash flow. Is it going to cash flow when I’m done?

David:
The second is the equity situation, especially on a BRRR. Am I going to be able to get enough money on the refinance? Will I be able to pay off all of the people that I borrowed money from or pay back myself? Because it’s normal in a BRRR to have to leave some money in the deal. But you’re just trying to figure out like, “Do I have enough money myself to leave a little bit in there?”

David:
And then the third thing is the traditional phrase cash flow, which I’m just going to call capital because it’s confusing. But the real phrase cash flow typically refers to any business, how much money is coming in versus how much is going out. That’s where cash flow comes from.

David:
It’s the flow of cash like a contractor that has to pay their guys, buy the supplies, manage the crew, and they’re spending money all the time, well, then they have income receivable coming in, that’s actual cash flow. But in real estate, we use the phrase cash flow to mean, “I have more money leftover at the end of the month than what I had to spend on the property.” So we’re just going to call that capital for this conversation.

David:
Your real estate cash flow sounds like it’s good. If you’re going to have 150,000 into this thing and you’re going to be bringing in 1650, you’re well over the 1% rule so can we assume we’re good on that sense? This property will cash flow once it’s refinanced.

Cliff:
Okay. It’s already been refinanced.

David:
Okay. So what was… I might have missed something. What was the issue when it comes to paying people back?

Cliff:
So we’re having trouble just with… We have to keep putting money into this property and things are still breaking. We still need to put money into it.

David:
Okay. So it’s not cash flowing from that perspective because you have to keep sinking more money into this than you thought you were going to have to. But it’s not like a situation-

Cliff:
Even after it’s rented.

David:
So this isn’t a situation where you’re afraid if I refinance, I can’t pay back all my debtors. That’s what I originally thought you’re saying.

Cliff:
Correct.

David:
Okay. So what you’re trying to figure-

Cliff:
[inaudible 00:32:04].

David:
… is you’ve got a money pit basically. Things keep breaking and you got to keep fixing it and you’re like, “Where do I come up with the capital to make these repairs?” Is that accurate?

Cliff:
Yeah.

David:
Okay.

Cliff:
Yeah.

David:
How long ago did you refinance it?

Cliff:
Months ago.

David:
Okay. So it doesn’t have a ton of equity where you can take some money out from there.

David:
You’ve got a couple of ways that you can solve this problem quickly. The first would be you could bring in a partner. So how much did it appraise for when you refinanced it?

Cliff:
112.

David:
All right. And then what is your loan on it right now?

Cliff:
Almost 90, 89,600.

David:
And where’d that 150,000 number come from?

Cliff:
That was the purchase price combined with the credit cards.

David:
Okay. So you’re into it for 150-

Cliff:
All of-

David:
… but it’s worth 112?

Cliff:
Correct.

David:
All right. So then my original idea was you could bring in a partner and have them bring some cash into the deal and give them some equity in it. But that’s going to be tough if the property’s worth less than what it appraised for.

David:
Now my guess is what went wrong here was when you looked at the comps and you said, “Well, what’s it going to appraise for?” You found the best comps possible and maybe there’s two or three, but you missed the eight or nine that were lower. Do you think that’s what happened?

Cliff:
Yeah, the ARV I was given was, I think, way too high and when I… Rookie wasn’t sure what I was exactly looking at, so…

David:
Got you. So that’s a problem of having the wrong core four. You had a person who said, “Oh, this is what it’s going to be,” and they had no skin in the game so they had no problem lying to you or at least being incompetent, not checking their work.

David:
And this does suck when you just take somebody else’s advice which is not that uncommon in our business because of many things in life like if you’re going to Foot Locker, the person there isn’t going to say, “Oh, this shoe is great.” If it’s not great, there’s no reason for them to do that. But in real estate, there’s a lot of people that will do that to you.

David:
So I see now why… Well, you’re basically saying, “Hey, this could work but I have to put money to fixing it up.” What things don’t need to be fixed up right away? Is there anything that has to be done in order for this place to generate revenue?

Cliff:
I believe it’s electrical and the windows. I think that’s the last items we have to fix. And those are…

David:
So why did the windows have to be fixed?

Cliff:
The frame around, it’s rotting out.

David:
Yeah, that’s not too expensive. You get a handyman to go in there and put up some new wood, right?

Cliff:
Yeah, well, the windows are falling. They’re breaking as well. Glass pieces are falling out.

David:
The glass is breaking because the frames are bad. Okay. So they’re terrible, terrible, terrible, right?

Cliff:
Yes.

David:
I would make some phone calls to find out what windows supply company will let you pay for windows on credit. There are companies that will do that where you don’t have to pay the cash upfront. You’re like, “Hey, can I finance this situation?” Right?

David:
And then I would look someone to do the labor that wasn’t the window companies recommended person to go do the work. You’re going to need to do a little bit of legwork to find someone who wants a job, who’s pretty handy that can just fix rotting wood. That’s one of the easier problems to fix is dry rot because you don’t have to be super skilled labor to do this. [inaudible 00:35:06] electrician.

David:
Henry?

Henry:
Yeah. You may also look into your electric companies or the city to see if there’s any credits or rebates for putting new windows in your houses. That might save you a little bit of cash.

David:
Now, the electrical is a little bit more of a touchy thing. Do you know how bad the electrical problem is? Or is it like… I’m sure you were told you need to rewire the whole house or something major, but do you know where the problems are coming from?

Cliff:
The load is not strong enough for the new modern appliances.

David:
So is it just not working like circuit breakers keep flipping or what?

Cliff:
Yeah, they keep flipping and when appliances are on they keep flipping. The outside is exposed so that one definitely has to go.

David:
Okay. So when someone gave you a quote on basically… What did they tell you they wanted to up the voltage to?

Cliff:
From I think it was 100 to 200.

David:
Okay, and how much did they say it was going to cost to put in the new system?

Cliff:
This was from the property management maintenance I think it said 6000.

David:
Okay. I bet you could beat that. If you can find somebody that knows how to do electrical work on houses, this is one where you should talk to other investors in your area. 100%, this is when you want to go to the meetups.

David:
Whenever you’re trying to find the deal, investors don’t want to give up their deal source, especially when it’s a really tricky market. But stuff like this, their electrician, their lender, or their property manager, they never mind telling you that information. So if you just start talking to everyone you know, “Do you know electrician?” “Do you know electrician?” And then you talk to electrician and say, “I’m trying to figure out the cheapest way that I can get this from 100 to 200 amp.” See what those people come back and say. That’s one way that you can solve that problem. I bet it would be less than $6000.

David:
Now, the other issue would just be capital in general. Have you changed anything in your personal life to take on more pressure so that you can start earning some more money?

Cliff:
I did recently-

David:
Like a second job, a side hustle.

Cliff:
Recently switched jobs which allows me to get good pay and they cover more benefits. I get more coming home every month. And then my wife’s looking at getting another job and then I’m selling on Amazon at the same time and we opened up new services for her business as well trying to bring in-

David:
Were you going to make all these same moves if you didn’t have this problem with the house?

Cliff:
No.

David:
Okay. This is a thing I want to highlight that’s never fun. Nobody wants to hear this. But I think it’s worth saying.

David:
This problem of the house created pressure, like financial pressure. Most people look at, “Well, there’s all this pressure coming. It’s coming into the house, I got to sell the house to alleviate the pressure.” We’re talking about practical things within the actual house itself that you can do to fix the problem. But that’s always assuming the only way to alleviate pressure is through the house.

David:
You just mentioned three things you’re doing to bring in more money, your wife’s considering getting a job, you went and got a better job, and now you’re selling on Amazon.

David:
Selling on Amazon is going to teach you skills that you didn’t have before. It’s going to teach you a lot about business. Even if you don’t make money right away, it’s going to make you a better person. Definitely going to make you a better business person, gain you some knowledge, help you get out of your comfort zone, and you’re going to have more confidence and more boldness coming out of this because you did that. That is a good thing.

David:
Stepping up your own job. Probably. I don’t know this, but I would guess, Cliff, something that you’ve been kicking around for a couple years. “I really need to get a better job.” “I’m not really happy where I’m at.” “I know I could be doing more. I know I could be making more.” But there wasn’t enough pressure, you were comfortable. Now, this house situation happens, bit of a debacle, you feel that pressure, what do you know? You went and got yourself a raise. That’s a form of cash flow, too. It comes from more than just the house, right?

David:
And then maybe you and your wife were talking and she didn’t want to go to work or I don’t know how that situation worked with you guys. But that pressure definitely got her in a situation where she’s going to go to work and that could be really good for her in a lot of ways too. It might help with her own confidence. Now she’s contributing and she’s learning new things and she’s going to understand your situation better because she’s back in the workforce and maybe your wife ends up doing the same thing where she gets raises and you end up making more from that than the house even made you.

David:
I just want to highlight that these things don’t exist in compartmentalized little modules like, “I’ve got my work and I’ve got my house and I’ve got my relationship.” They are all connected. So by taking a swing, which you did, and you admit you made some mistakes, which is okay, because everyone does, those mistakes created pressure that helped benefit you in other areas of your life.

David:
And then the stronger version of you and your wife that you become from this will affect your real estate investing too. You’ll make better decisions, you’ll screen people better. Maybe part of the reason that you trusted the ARVs you got that weren’t good where you just didn’t like conflict at the time. You’re like, “I just don’t want to tell this person they’re full of it.” Well, after doing what you’re doing over here, maybe conflict isn’t as scary and it makes you better.

David:
So this is why we say if you stick with it, this is how people get better. It just always happens in ways you can’t predict and so it doesn’t get talked about.

Henry:
I love it, David. That’s a phenomenal point. I just love the way you sum that up.

Henry:
Because, Cliff, think about this, right? So David said and I said it, if you’re all in at 150 even though it’s worth 112, it’s rented for 1650, those are decent numbers. You don’t feel too bad about that. But with every test comes a testimony and now you’ve got these lessons that you’ve learned.

Henry:
And you said it, when you first started talking to us, you said, “Hey, I hit this rookie nightmare,” and instead of folding, you’re on here asking questions, getting information, trying to figure out because what I hear is you want to keep the house so you’re here trying to learn, “How do I keep this so that I can continue investing in real estate?”

Henry:
That mindset alone is powerful because a lot of people would have did just what David talked about the beginning and say, “Hey, this house created pressure. I’m getting rid of the house. Real estate investment is terrible. I knew that I shouldn’t have done it.”

Henry:
And so now you’ve learned a ton of lessons, you’ve made yourself a better person. Sounds like your wife is improving as well. So your whole family dynamic’s improving, plus, you still got this asset.

Henry:
And yeah, it’s a headache and I get it. When you got a property that’s kicking your butt, man, every time you get an email about it or something, your stomach turns just because, “I’m stuck here. I don’t want it.” I get it. But it’s making you a better person and it’s making you a better investor. It’s still going to provide you benefits of taxes and appreciation and debt pay down.

Henry:
It’s not all bad is what I’m trying to tell you and now you’re going to have this testimony that you’ll be able to share with other people when they come to you and say, “Hey, I’m thinking about real estate investing, man, but I just heard some horror stories and I’m just afraid I can’t recover.” And you’ll be able to say, “No. No, you can, because I did.”

David:
I love that.

David:
It’s going to make your life better in ways you didn’t predict. And I’m about to go into a jiu jitsu analogy, but you could use this for anything.

David:
There’s a guy in my jiu jitsu class who’s in his mid 40s, maybe upper 40s. He’s been a corporate guy. He flies around the country. I think he works for Safeway or something. He’s pretty high up in the company and I think he looks at the different places where they want to open a location and he’s involved in making the decision if they should or shouldn’t or what type of Safeway they should open. Kind of high level stuff.

David:
So he shows up at jiu jitsu and he’s terrible just to complete spaz. Probably didn’t play… Maybe he’s played sports when he’s really young. Definitely no martial arts.

David:
And he’s been going every single day. Like insane, man. He goes probably five times as often as I do. And he lost 30 or 40 pounds in a couple months. He’s in really good shape now.

David:
Now, he did not join jiu jitsu to lose weight. He did it to learn a martial art. But in doing that, he realized, “I need to lose weight if I want to be better.” And now he has the benefit of losing weight. He also has a little bit more confidence than he had before. He said his relationship with his wife is better.

David:
So what you see is when you do hard stuff like this, that pressure leaks into other areas of your life and if you handle it positively, it will make things better. So I don’t look at this like, “You screwed up. You shouldn’t be investing.” I look at this like… This was like those… What are those paddles called when you put it onto somebody that they shock them. “Clear. Bzzzt.” You know what I’m talking about?

Henry:
Yeah. Yeah, yeah, yeah.

David:
AED, yes.

Cliff:
AED paddles.

David:
That did this to your business life in a sense. That shock does not feel good when you have it. But boom, it gets things beating, it gets a pulse going, and now you’re making progress again.

David:
So do not be discouraged by this. You cannot be discouraged by this. You did an out of state BRRR as your first deal ever. You just lined up the risk factors and all of them went wrong and it exploded in your face and now you’re working your way through it. But you’re not going to make those same mistakes again and you’re actually going to come out of this better than you were before.

David:
So I appreciate your boldness and your courage and coming on the show to talk about this. I know if you stick with this, we’re going to see you again in five years. You’re going to have multiple properties, you’ll be doing really well, you’re going to hit a groove, you’re going to have a lot of confidence, you’re going to be a completely different person than where you are right now.

Cliff:
It’s what I’m looking forward to.

David:
All right.

Henry:
Awesome, man.

David:
Thanks, Cliff. Appreciate you, man.

Cliff:
Thank you, guys.

David:
All right, Karen. Welcome to the BiggerPockets podcast. It’s nice to have you here.

Karen:
Thank you. Nice to be here.

Karen:
First, I guess I need to start by saying that I’ve spent my entire career making money for institutional and private commercial real estate investors and here I am approaching retirement and I realized I don’t have any investments for myself to make retirement actually last.

Karen:
So my question to you is, how can someone start and quickly scale when there’s not 10, 15 years to go about accumulating?

David:
All right. Well, here’s what I’ll start with that. In one sense, you feel like you’re behind the eight ball because of your age. You’re like, “Well, I don’t have a ton of time to let real estate work for me and naturally appreciate.” And as we’ve talked about before, that’s the easiest way to make wealth in real estate. Just bite early and wait. That’s one of the reasons we tell people to get started early.

David:
But in another area, you’re way ahead of everyone else, you’re probably not thinking about it and that’s knowledge and experience. And I don’t mean experience based on your age, I mean experience based on how this industry works because like you said you’ve been making money for people for years in this space.

David:
So imagine you’ve got some 25-year-old, time’s on their side, and you’re looking at them like, “Man, they could just buy a house and wait and by retirement, they’d be set.” But that 25-year-old has the knowledge and the experience and the skill set that’s going to cause them to move it two miles an hour in this industry.

David:
Well, you may be behind in that sense, but you’re going to be running at 90 miles an hour compared to them. You know how to talk to people, you know who to talk to, you know what strings have to be pulled, you know… More than just the X’s and O’s of the industry, you know who the players are and how to communicate with one of those players.

David:
If you get involved in this, you’re going to make so much more traction so much quicker than someone who’s learning for the first time.

Karen:
I know where I’m at. I guess, for me, falling into that analysis paralysis. And part of it too, though, is I’m working full time and it’s like, “Okay, how do I juggle and make the connections that I need for my personal investments versus working and not stepping over any ethical lines in my professional investments?”

David:
One thing I’d say before Henry jumps in here is… Well, let me ask you this question before I give practical advice. Are you in real estate development? Are they developing commercial properties?

Karen:
I’ve actually been in development and management and primarily management of retail, office, and industrial.

David:
So you are very confident and competent when it comes to managing a property that’s already been bought. Is that fair to say?

Karen:
Yes.

David:
Is it also fair to say you know the area that you’re in, you know what you can expect what type of tenants you can get, what to look for in a tenant? All that’s true?

Karen:
I would say yes.

David:
Okay. So what would it look like for you to go out there and beat the bushes a little bit to find one of these people that might want to sell, find a property that you think will do well, paint a picture for what it would look like to own this thing, and then go find someone in your industry with a whole bunch of money that isn’t really working super hard anymore then have them sponsor that deal.

Karen:
Yeah, I’ve actually thought about that. Like I said, it’s just I’m trying to walk a thin line because I don’t want to cross any ethical lines.

David:
Well, does the boss that you work for now buy every single deal that comes their way?

Karen:
No.

David:
Would they expect you to bring a deal to them before you bought it?

Karen:
Yes.

David:
Okay. You can work that out too.

David:
I would go sit down and have a conversation with the boss and say, “Here’s the deal. I’m looking at needing to retire at some point and I’m not prepared for it. So I need to own some property. I would like your help with doing that. On one hand, I want to go start looking for deals. If I find a deal and you buy it with your money, would you consider cutting me into it if I bring it to you? So if I did all the work of finding the deal, I want an ownership stake in the deal and then I’ll just manage it like normal. So instead of paying me a finder’s fee, you just give me a percentage of the deal in lieu of that finder’s fee.” That’s one option.

David:
The other would be, “If I bring you a deal and you don’t want it, would you give me your support as my boss to put me in touch with some of the people that I would need if I wanted to take it down?”

Karen:
That’s a good idea. I definitely think they would go for that.

David:
I want you to understand, Karen, the situation you’re in. I don’t know you at all. You could be completely making all this up. Maybe you’re a supervisor at Kmart for all we know. We don’t know each other. However, you give me the feeling that if I was… What market are you in? I don’t know if you mentioned that. But where are you operating out of?

Karen:
Charlotte, North Carolina.

David:
Oh, that’s such a good market.

David:
Okay. If I wanted to buy in Charlotte, North Carolina, you’d be my first email or phone call. “What do you think about this area? What can I expect? Do I want to be on this part or that part? What’s the play? How do I make this property work?” And I feel like you would shoot straight and direct and say, “Nope, you don’t want to do that. These are the headaches you’re going to get. You want to look in this direction instead.”

David:
And that is one of the most valuable parts of all real estate investing is having that person that knows the freaking market and can give you advice on what to do. Every one of us is looking in life for that human being especially when it comes to what we invest our money in. So you’re operating with this incredible skill set that is very valuable.

David:
First off, anyone in the Charlotte area of North Carolina, reach out to Karen. We’ll have you give your social media, Karen, at the end here so that they can get in touch with you and they can help you here.

David:
But I want you to be walking with confidence. Not cockiness. But you definitely should be operating like, “I have done this for a long time. I know what I’m freaking doing. I’m missing a couple pieces that I can put together.” And you are much more likely to make the deal work than someone who is 25 who has no idea what they’re doing, who hasn’t made the mistakes, who can’t… You’re undervaluing what you know.

David:
This is a problem I see with real estate agents all the time because we talk about real estate nonstop and we’re selling 30, 40 houses a month on my team. We assume everyone in the world knows the same things we do. They know what’s going on with interest rates, they know what’s going on with laws that are passed, they know how many offers houses are getting.

David:
And then you come across somebody who’s like, “Do you think my house would sell?” And it’s in the best neighborhood of the best areas, it’s the best house there, and they’re worried about it and it hits me like, “Oh, my God. I forget not everybody does what I do.”

David:
I promise, you’re living in that space. You have a rare and unique skill set that is incredibly valuable and you just take it for granted because you live in that space all the time.

Karen:
Thank you very much. I appreciate that advice. It kicked me in the butt and gave me some motivation.

David:
Henry, what are your thoughts?

Henry:
Yeah. David’s got a superpower of being able to point out people’s strengths and give them that kick in the butt you’re talking about.

Henry:
But look, I agree 100% with David. I get it. You feel like you’ve waited too long, you feel like you don’t have enough time. Who cares? Right? Because what matters is now you’ve realized it and now you want to do something about it. And so that situation has created motivation within you, motivation to really take off and create a better life. And so it create the retirement that you want. And so great. Now, we all know that. We know that you’ve waited, okay, so what? Now you’re ready to take action.

Henry:
And I’ll tell you, you can build wealth in… I don’t want to say a short amount of time, but you can grow and scale. I’ve only been doing this for four years and I’ve got 65, 70 doors. Now, am I saying you need to buy 70 doors in the next four years? No, absolutely not.

Henry:
But to go full Brandon Turner, everybody has a superpower and your superpower is that you’ve been in and around real estate for your entire career and something tells me you’re really good at your job so you’ve now got the relationships, as David said, to get everything done.

Henry:
You’ve got what some people consider the hard part. It sounds to me you can have a conversation and you can find the funding you need. It sounds to me like you know exactly what to invest in in your market, where to invest in it, and the returns that you’re going to get.

Henry:
I heard you said you’re in analysis paralysis but based on your experience, it doesn’t sound like it. It sounds like you know exactly what you should pay and why you should pay it and what you’re going to get out of it from a tenant perspective. All the main problems with real estate are finding the deal, funding the deal, and then managing the deal. And you already do the third.

Henry:
So it’s just a matter of leveraging the superpowers that you have and making the decision. Putting the past behind you, who cares what you didn’t do in the past, it’s already gone. If you just make the decision in your mind and say, “I am going to buy my first property within the next…” Three months, six months, 12 months, whatever that realistic timeframe is for you. If you say that in your head over and over again, if you write it down five times a day, you will start to see opportunities.

Henry:
These aren’t opportunities that weren’t there before, they’re just opportunities that your brain will now be opened up to seeing and then you’ll be able to say, “You know what? There’s that one deal that we looked at a couple of months ago and we never did anything with it. You know what? I’m going to grab that. I’m going to bring it to my boss, I’m going to tell him the situation and I’m going to see if we can get something done with that.”

Henry:
These opportunities are there for you and you’ve got the relationships to get them done, all you really have to do is put the past behind you, make that mindset shift that, “I am going to get a property under contract within the next…” 30, 60, 90 days, whatever that goal is for you and say that to yourself every day, you will be surprised how many opportunities you’re going to start to see or realize how many opportunities that you’ve already seen in the past that you can bring back.

Karen:
Thank you, Henry. That’s really encouraging. And, yeah, my goal is to try to have my first purchase by the end of this year so I’ll just do like you suggest and remind myself.

David:
I’m going to guess there’s going to be two psychological hurdles that are going to hold you back.

David:
The first is your relationship with your boss. You’re clearly a loyal person. You don’t want to step on toes. You mentioned not wanting to cross any ethical bounds. But you haven’t told us what specifics of that might be which tells me there might not be actual ethical bounds, but you’re just such a loyal person that you’re conscious is like, “I’ll be very careful.”

David:
So I’m going to give you some advice on how to navigate the relationship with him or her, I don’t know, I’m assuming your boss is a guy there. I don’t know if you said that or not.

David:
But the other one would be you getting word out that you’re looking to buy a property. There’s going to be a psychological hurdle there. You’re going to feel like an imposter like, “Why am I talking to these people?” And then it might even feel like you’re cheating on your boss to be looking at these other people.

David:
Let’s start with the boss because I am a boss so I can speak from this perspective because I’m also an employee so I see both sides of it. Your boss is going to be upset if you poach their database. So if you’re going to the people whose properties you’re currently managing and you say, “Hey, do you want to sell it to me?” That’s directly competing with your boss and that would be overstepping bounds that would not be appropriate.

David:
That’s what all of us bosses are worried about. I don’t want one of the agents on my team to go to my friend and be like, “Hey, you’re my client now. You’re not David’s client anymore.” That’s not cool. I do want the agent on my team to go to someone I’ve never met before and use everything that I taught them to get a client for the company.

David:
It’s very, very simple. People can understand this thing. Don’t play in someone else’s database. They’ve already done hard work to build that they’ve trusted you by giving you access to that database. You’re not going to take advantage of them by being lazy.

David:
But if you go out there and you talk to people your boss has never met, has never heard of, doesn’t know, he’s never going to be upset with you for doing that because it’s not taking anything away. And if you say, “If I find this deal, would you want to be in it?” You actually are bringing him something that didn’t exist at all. You’re bringing value, you’re just bringing value that you get to be a part of. Does that clicking? That makes sense to see that perspective?

Karen:
Yeah, it does. It does. Because I guess from the ethical standpoint, what I was referring to was existing investors that my company is involved with and that I managed for.

David:
That would not be cool.

David:
So imagine an admin on the David Greene Team who helps get our clients’ listings ready to go on the market that starts going to those sellers and saying, “Hey, I just got licensed. Can I sell your house instead of David?” Totally not cool. That would be you going to an existing investor and your boss would be furious because he’s paying you and trusting you to do a role in that transaction.

David:
Now, if a listing assistant took the confidence they had from working on all of our clients deals and the knowledge I gave them and the experience that they accumulated selling hundreds and hundreds of houses and they started going to places where I don’t go and meeting people I don’t know and sharing the stuff I did and bringing business into our team, I would love them. I’d kiss their feet. I would do everything I could to support that person.

David:
So if you sit down and have this talk with the boss and say, “Hey, I’m not going to stop doing what I’m doing. I just want to do more. Can I work on the sales side? Can I go look for some more deals for us to manage? And if I find it, I would expect you to make me a part of it.”

David:
I don’t see your boss saying no. That doesn’t make any sense. I wouldn’t turn down one of the listing-

Henry:
“No, I don’t like money.”

David:
… assistants on my team.

David:
Yeah, exactly. Like, “Hey, David, I got a listing?” “What? You’re supposed to only be working my listings.” Like, “Oh, well, that’s awesome.”

David:
Now, the other psychological hurdle I think that you’re going to have is just going to be in this analogy I’m painting here, the listing assistant being nervous about going to talk to people about them selling the house. That’s the reality. That’s why they don’t do it.

David:
“Is that scary? What if they ask a question I don’t know the answer to? What if I sound stupid? What…”

David:
Like, “I’m comfortable just working David’s listing. So I don’t want to step out of my comfort zone.”

David:
That is definitely going to be a challenge you’re going to have to face and you’ve done things the same way for a long time so that trench is a little bit deeper.

David:
So like Henry said, you have to be purposeful about doing this. You have to tell yourself, “This is what I’m going to do.”

David:
My advice is that if I was you I would get a list of all the people that own the type of properties that you would want to own and I would start calling them and I would just say, “Hey, are you super thrilled with your current management? Because I’m a property manager and if you don’t love the manager you have I’d like to sit down and talk and see if we could be a better fit. Maybe save you some money or maybe do a better job.” Start the relationship there.

David:
If he’s like, “Nope, I’m super happy with my management.” “That’s awesome. I’m also looking to buy a property. Is there any chance you’re interested in selling the one you have?” “No, I’m happy. But if something better came along, maybe.” Start a conversation there.

David:
But if you don’t want to cold call someone and be like, “You want to sell your house?” Use that intro of, “Well, I’m a property manager. You’re interested in new management?” To break the ice.

David:
Then get a feel for, “Well, what would make you want to sell?” ” Well, I might want to retire in a couple years. I don’t know if I want to… I might be wanting to sell it then. Or actually I want to buy something bigger, I might need to sell this and 1031 into it.” And now you’re like, “Well, what if I helped find you a bigger property? Would you let me manage the bigger property?” Now your boss is happy because you just brought an account in, “And would you let me buy the one you have so you could 1031 the bigger one?” Now the seller is happy because you just help them accomplish his goal.

David:
You got a piece of the house that you’re trying to buy and you get to manage the new one. You’re happy because you won in two ways. That is the approach I’d recommend taking.

Henry:
Boom. That was phenomenal advice.

Karen:
Yes, it was. That really hit home. Thank you.

David:
Well, that’s why you called us so I appreciate that, Karen. Make sure that you do this again. We want to see you in the future and we want to hear how things are going.

Karen:
Okay. Well, thank you very much, guys.

David:
Thanks, Karen.

Henry:
Thank you. Good luck.

Loic:
Hi, David, hi, Henry, and nice to meet you. I’m from France. I live in France just about a kilometer away from the German border. And so my question is, as I’m an 18-year-old boy from France and so a foreign citizen, how may I partner with my grandpa to invest in Texas to perform a BR deal as we are on a very long distance. It’s more than 10-hour flight.

Loic:
And David, as you’re an expert about long distance investing as I’ve read a book about it. How may I just build my core four and finding great contractor and great agents and property manager as well as the lender? And also, we were considering hiring a hard money lender because we don’t necessarily have all the cash money to buy a duplex because we’re just sticking for a 100,000 or $150,000 deal. And also, we’re planning on starting an LLC because that’s something that most lenders require for foreigners.

Loic:
And so my precise question is, should we do it or should I try maybe being on site and just fly there for a couple of days or weeks? Or should I maybe try it on my local markets with just friends? But unfortunately, it’s just not as great as the U.S. market because there’s not as many deals as we’d like to see.

Loic:
And should I look for MLS deals or maybe off market deals with an agent? And should my grandpa take the loans on his [inaudible 01:01:33] or at least as the primary investor because he holds the cash? And also, how can we just do it without a FICO score because we’re foreigners with friends’ bank accounts because that’s something that most lenders I’ve reached out to have already actually told me that I might need one.

David:
All right. Well, shoot, man. You’ve clearly read the entire Long-Distance Real Estate book.

David:
Your English is fantastic. It’s hard to believe you’re only 18.

Loic:
[inaudible 01:02:06].

David:
I see why your grandfather trusts you with his money. You seem like a special kid.

Loic:
Thank you very much.

David:
That being said what… I’m just going to shoot straight with you. Is it Loic? Is that you pronounce it? Loic?

Loic:
Yes, that’s right.

David:
Loic, your ambitions are large. Trying to find a house in one of the hottest states in America in the 100, $150,000 range without very much money, without understanding how business works in America and being that far away. You’re probably going to need to lower your expectations on some of those things because if you don’t, you’re going to end up just getting suckered into a bad deal.

David:
Henry, I think you’re probably on the same wavelength as me. Do you want to jump in and share what your thoughts are?

Henry:
No, no. I would 100% agree with you, David.

Henry:
It sounds like there’s quite a few hurdles that you’re going to have to overcome. And is it impossible? Probably not. But outside of finding the deals, the concern is going to be where’s the money going to come from? And if you’re going to have to take out loans, what hurdles are you going to have to overcome?

Henry:
I’m no expert on being a foreigner and then investing out of state, but I tell you that it’s probably going to take you time wise a lot longer than you’re expecting.

Henry:
And then what I was hearing based on your questions is you’ve got a lot of different thoughts on which strategies you might want to undertake as a new investor. Should you buy on the market? Should you buy off the market? Where are you going to buy?

Henry:
And so the first thing I would tell you to do is to get that nailed down. First, you have to know exactly what market that you’re going to invest in because the market that you’re going to invest in will dictate what’s the best way for you to go about finding properties that fit your buy box in that market.

Henry:
There are some markets where MLS shopping is totally feasible based on the exit strategy that you’re going to use and then there are some markets in the country where it’s going to be a whole lot more difficult to just find something on the MLS that’s going to hit your numbers.

Henry:
But the two things that are going to guide you to that are, A, knowing exactly what that market is and B, knowing what you want to do with those properties. And if you’ve got those things nailed down, then that will point you to whether or not you should look on the market or off the market for your deals. Does that make sense?

Loic:
Yes, it makes sense. Actually, because my grandpa isn’t an expert to real estate at all, he doesn’t even speak English, I first considered investing in San Antonio or maybe Houston and just doing a fixed rent deal actually in … I didn’t know if it’s really feasible as a foreigner because we’re just so far from the site of construction and from the property in general. And so yes, so how can I just make it?

Henry:
Yeah. So I think feasibilities are two levels. There’s feasible from a distance, but it’s feasible from what’s legally possible from a financing perspective. And so I probably let David take the latter of those two.

Loic:
[inaudible 01:05:22].

David:
Yeah, I don’t think you’re going to have as hard of a time being able to own property here as a citizen of France. Our company does this for people that are outside of America where you can still take title to a property. Owning in the U.S. is easier than owning in other countries so you should reach out to us and I’ll connect with one of the guys to tell you what would have to be done.

David:
This is more from a practical standpoint. You’re basically saying, “How do I compete at the highest level of what I’m trying to get into as a brand new person?” That’s how people you… If you’re like, “Hey, how do I go compete with all the black belts in this martial art I’ve never done?” Might be a chance you get hurt.

David:
So what we’re saying is let’s start a little bit slower here. If you were 100% committed to this, Loic, I would say take a vacation to Texas and plan to stay for a week or two. Maybe even bring your grandpa. Meet with property managers in the different areas that you’re looking at.

David:
Don’t tell them you’re from France. Even though you have an accent in America, we have tons of different people here. No one’s going to assume you live somewhere else. They’d probably… You speak very good English. I don’t think they can even tell it’s French. Don’t wear a beret and a striped shirt and [inaudible 01:06:27] all of those French stereotypes. Don’t come with a cappuccino in your hand. I’m joking here.

David:
Don’t tell them you’re from somewhere else because if they’re a bad one, they’re going to then think they can take advantage of you. And just get to know, hey, what type of… How are a lot of the people that own these properties finding them? What are the parts of town that you think you want to manage in most? If the property manager will open up to you and explain, “Hey, this is the type of properties that do best.” Now you have a target you want to go for.

David:
I would ask them, “Who are the best real estate agents that you know?” And I would meet with those same agents. Just go out to lunch with them, get to know them a little bit, talk about what you’re hoping to do. If they have a good recommendation and you have a good connection with them, now you’re halfway there. You found some agents that can look for you and you found property managers that can manage the property.

David:
With those two people, start asking like, “Hey, if I need to fix a house up, if I bought a fixer upper, do you have people you could recommend? How do you know them? How many jobs have they done for you before? How busy are they?” Ask a couple of those questions.

David:
And then the lending would be the easiest part. We could help you with that. But if you wanted to use somebody else, everybody would know a lender. This stage right now, it’s the easiest to find someone who’s going to finance your property.

David:
So I would definitely recommend doing that before you just started buying properties in Texas because from someone who doesn’t understand the different cities out here you could easily get put in the worst neighborhood of the worst city but the pictures are going to look really nice of the house and that’s what we want to avoid.

David:
So once you’ve been there and you know the market and you know the people, you don’t have to visit every single house you buy. That’s the part where you’re like, “Okay, I know the neighborhood. I know the area. I trust the people. I know what I’m getting.” But in the very beginning, I think you should come out here and you should meet the people that are going to be representing you.

Loic:
Yes. It sounds… [inaudible 01:08:11] Yes, of course.

David:
And what’s going to happen, Loic, is that it’s going to open up a whole new round of questions where you’re like, “Well, now I need to know this and now I need to know that.” But those questions are one step closer to where you’re trying to go. They’re one step further down the path that you need to be walking in.

David:
And that’s another piece of advice I’d give you and everyone. Don’t think real estate is a thing where you’re like, “All right, what do I have to do and then I just do it.” You’re taking the journey. You’re never going to know the answers to everything after the first step. So the better question to say is, “What do I need to do to get committed to this journey long term, to fall in love with it, to not get some poison ivy on my first step or not step on a rattlesnake on my second…”

David:
Do you guys have rattlesnakes in France? Do you even know what that means [inaudible 01:08:49]?

Loic:
No, I don’t know what it is. I’m sorry.

David:
It’s a poisonous snake that can hurt you. Right?

Loic:
Okay, okay. I see. [inaudible 01:08:56].

David:
Yeah, you don’t want to do something that could hurt you in the beginning.

Henry:
Yeah. David is 100% right. Obviously, you want to take it slow.

Henry:
And another thing that you could and should be doing is because the COVID made the world a place of learning online, it’s pretty easy to find real estate investment groups and meetups in the markets you’re considering investing in and being able to join those meetings online.

Henry:
And so as much connecting you can do with other investors in the markets you’re looking to invest in, you’re going to start to learn a lot of information that you’re going to need to leverage in order to make the decision on what you should or shouldn’t buy or where you should or shouldn’t buy and you’re going to start to build your network of your core four.

Henry:
And so David’s exactly right. People get so caught up in the how. They want one, two, three, four, five, six steps all laid out in a row for them and it just doesn’t always work out like that in the real world. And so sometimes, you’ve got to take the step one and a great step one is getting around people who are successful doing the things you’re wanting to do in the markets that you’re wanting to do them in.

Henry:
And so if you can get in some of these real estate investment meetups and start to network, if you can get a trip over here and go to those meetings in person and start to develop those relationships, your step two and step three and step four is probably going to reveal itself and help you determine, “Hey, yes, I’m going down the right path.” Or maybe it shows you the exact opposite. Maybe it shows that, “Hey, maybe this market isn’t the market we’re looking at. We need to go look at a different market.”

Henry:
But being around the people who are doing it either virtually or in person is a great way to guide you to the information that you need to make the best decision for you and your grandfather.

David:
Henry, you just set up a light bulb in my head, and it’s a green one. Do you see this green light emanating-

Henry:
Boom.

David:
… from around my head? Right?

David:
I was thinking about in what situations in life is it appropriate to look for, “I want every single step lined out,” and in what situations do you need to acknowledge, “This is a path that I won’t have them all.”

David:
And I was thinking about if you’re an employee of a company, it makes sense that they would line up everything they want you to do exactly which is how most of us are used to thinking. But if you’re going to become an owner of a company, there’s no way you can have any idea how that will work out.

David:
The owner’s job is to take chaos and problems and things that go wrong, and find a solution and then delegate that solution to someone else in the form of very easy steps to do.

David:
When I started looking for a jiu jitsu gym, I was in the ownership mindset. I went to different places, I watch how they did stuff. I asked a lot of questions about the instructors. I was trying to figure out like, “What are they like at this place? Is this somewhere where I’m going to get hurt? Is this a place that you go train if you’re trying to become a professional fighter? Are these a bunch of weenies that just don’t try very hard?” I wanted to get to know the place and who was going to be teaching me.

David:
I could have just go sign up and just go start. I would go and watch classes and see how it went. But when I’m in the class, they’re telling me specific. “These are the six steps that you do in order to execute whatever this technique is that we’re showing.”

David:
So your brain has to jump from thing to thing in life and some places, there is a checklist that you’re going to operate off of exactly. Maybe once the house is bought, you got to have a checklist. Turn on the utilities, get a handyman to look at the inspection report, and fix everything. Get some pictures scheduled, get a listing up. That can be done and hey, what are all the things I need to do.

David:
But in finding the deal, never. It’s never going to work that way. It can’t be turned into a situation like that.

David:
So I think that’s going to be really good for a lot of people that are stuck in this place where they are trying to turn real estate into a step by step when you’d make those pictures that you draw by going from one to two to three to four, paint by number, whatever. That it could be part of what’s holding them back is they’re not in a scenario where that’s going to work.

David:
Loic, I know we lost you for a second there. Did you have any last questions before we get you out of here?

Loic:
Well, I guess that’s it. No, you just answer my question in a very good way. So yes, happy to have a conversation with you.

David:
Well, thanks for being on the podcast. Tell all your friends in France that you’re a celebrity now and that you’re famous and share this with them so we get more people listening to this in France.

Loic:
Thanks for having me here.

Henry:
Thank you very much. Best of luck to you.

Loic:
Yes, I hope so. Thank you very much.

David:
Let our producer know if you go to Texas and check things out and we’ll have you back on to give an update on what you learned, what questions are now popping up in your head, stuff like that.

Loic:
Yes, I will see if I ever go to Texas. But that’s definitely something I will consider because I don’t know if just investing in France is the easiest and the safest way to do it or maybe… Yeah, I’m just tempted just going to Texas and see how I can just perform the deal. So yes, I will consider [inaudible 01:14:00].

David:
I think you need to go to Texas and have that to compare to what it would be like to invest in France. If you see both, I bet the right answer will probably make itself known.

Henry:
Thank you, buddy.

David:
All right. Thank you, Loic.

Loic:
Thank you very much, David.

Loic:
All right. And that was our show. Man, I love doing these live call ins where we get to go back and forth and ask questions. You get to know more about the purchase scenario and we have to give more nuanced answers. You can’t just be like, “Oh, you have to refinance at this point,” which is always the same, right? You got to make it specific to that person’s scenario.

Loic:
What did you think about today’s show, Henry?

Henry:
Man, it’s super fun because we all do real estate differently and we get so caught up in the way that each one of us individually does real estate. It’s really refreshing to hear and see how other people are approaching real estate and the difficulties and the problems they run into.

Henry:
And at the end of the day, all of the roadblocks can all seem very similar because real estate’s such a unique vehicle and it’s fun to see how people are approaching it and then how they’re going to navigate around these roadblocks. And the end result is people accumulating wealth and becoming better people and better investors and I love getting to be a part of that.

David:
That’s a great point, right?

David:
I don’t know if it’s possible to commit yourself to investing in real estate and stay on that path and not only become wealthier but become a better person.

David:
The challenges it throws at you are going to force you to think differently, think better, think more steps down the road, and then you start thinking like, “Why am I spending my money on dumb stuff?” And so a lot of real estate investors just become more frugal and responsible with personal finance and then you start thinking like, “Well, now I’ve got this wealth. Man, I’m unhealthy., I want to be around a while to enjoy it.” So then you see you’re starting to get into fitness.

David:
Unless you go down this addictive path of, “I want a bunch of Ferraris to put on my Instagram,” and you go down that road. But absent that, that always ends up becoming something where people get better and that’s cool to get to see people in this part of the journey.

David:
Henry, if people want to follow you and see more of what you’re up to, where can they do that?

Henry:
Best place is my Instagram. I’m @thehenrywashington on Instagram.

Henry:
I don’t have a lot of Ferraris on my Instagram, mostly because I can’t fit in them. But maybe if I work on that fitness we’re talking about maybe I’ll be able to get one. Who knows?

David:
You’re still a tall guy. A lot of people don’t realize that, right? I don’t know that I could be a supercar guy because when you’re just taller and bigger, it’s hard getting in and out of those cars or being comfortable inside of it-

Henry:
[inaudible 01:16:27].

David:
… I definitely want to wear like little Italian people. Yeah, that’s exactly right. Sometimes, I look at those cars like, “I legit think I could pick this thing up.” At least, we’re picking up off of its size sometimes.

David:
Well, thank you everybody. Please go follow Henry. He’s got really good stuff. He gives very grounded, sensible, and smart advice to people when it comes to wealth building in real estate so we’re very lucky to have him.

David:
You can follow me @davidgreene24 I just hired a social media company to take over my page which many of you have been telling me, “Low key,” for a long time. “You need to step your game up, David. This looks horrible.” So I’ve heard you. Tell me how do I look with the new remodel. Tell me if the color scheme works and what you liked my page, what you think could be different. So I’d appreciate that too. I’m davidgreene24 with an E.

David:
As always, if you see what you think is me or Henry messaging you asking you for money, asked you to trade in forex, asking you to buy crypto, anything like that, that’s not us. If you wanted to invest with me, you could, investwithdavidgreene.com. There’s opportunities there. But it’s very easy to make a fake page, take all of our pictures, take what it looks like, and then have somebody who messages you.

David:
Lots of people are losing money from these scams right now. Please until Instagram gives us the blue checkmark, look very closely at the screen name before you send them money.

David:
And follow BiggerPockets. I don’t think anyone’s doing this BiggerPockets yet because they will have a tough one to replicate. So follow BiggerPockets on YouTube, follow us on Instagram, follow everywhere that BiggerPockets is found because you want to keep this stuff at the front of your mind.

David:
Lastly, if you’re listening to this on YouTube, please smash that like button, leave us a comment below, tell us what you thought, and then tell us what you’d like to see more of on this show. So if you liked a certain type of question that the guests was asking, if you thought we should go deeper into a certain area, let us know in the comments. We watch those and we would appreciate it.

David:
I mean to get us out of here. Please consider checking out another BiggerPockets episode if you still have some time. If you’re like me, man, I bought some AirPods, I got an iPhone, I keep them in all the time, and I am listening to this stuff nonstop, it keeps a friend of mine and that’s one of the reasons I keep becoming a better investor. So show us some love on there and I will see you guys on the next episode. This is David Greene for Henry Deep Purple Washington signing off.

David:
This is the BiggerPockets Podcast Show 612. Rather than trying to find a seller and convince them that their numbers don’t work when the market’s probably telling them that their numbers do work, I think you should take those efforts and put them into finding a different seller. This is a mistake a lot of people make as they try to change the mind of somebody who doesn’t have to change their mind. Just go look for somebody whose mind you don’t have to change. You’d be way better to take that same effort and put it into a different property.
What’s going on, everyone. This is David Greene, your host of the BiggerPockets real estate podcast. Here today with a Seeing Greene episode, as you can tell from the green view behind me. In Seeing Greene episodes, we answer questions directly from the BiggerPockets community regarding real estate, what to do about real estate, how to finance real estate, what’s going on in this crazy real estate market that we’re in, and I do my very best job to answer them. If you’re not listening to this on YouTube, consider checking us out there where you can read and leave comments about today’s show.
Today’s show is very good. We get into some very trendy topics that are on the front of everybody’s mind. We talk about if you should get into a cash flow or an appreciation market, what the difference is between the two and how to know which one is right for you. We talk about the fact that you’re not going to get comfortable before you do something. So what a good process is to get comfortable in the process of starting something new.
And we talk about how to understand debt-to-income when you leave your W-2 job and go full-time into investing or a side hustle plus real estate investing. We get into some really good relevant stuff, and a lot of wisdom is shared here. So thanks for joining me. I’m excited for you to hear it.
Before we get into the show, today’s quick tip. Consider getting your tickets to BPCON 2022 in San Diego this year. You can go to biggerpockets.com/bpcon2022. That’s BPCON2022. I’ll be there. Lots of other BiggerPocket personalities will be there, lots of other investors will be there. You can learn from other people about what’s working in their market, what market you might want to invest in, and then meet people in that market that can help you get started.
It’s also a great time. I’ve never seen a person there that had an unhappy look on their face. Everybody is super cool. It’s a lot of fun. There’s tons of knowledge being shared, and it can really get you invested in this community and jumpstart your career. So, consider being there. I’d love to see you there.
All right, let’s get into today’s show.

Ahmad:
Hi, David. Thank you so much for all the knowledge, insight, and information that you share with people every day. It’s been extremely paramount to my growth as a new real estate investor. My question is, my girlfriend and I are both new to real estate investing and we’re trying to build our real estate portfolio. We each have a property in our name already. We want to acquire the next one together.
However, our original plan was for one of us to take in that mortgage separately. That way the other person is freed up in terms of the debt-to-income ratio. And then down the road when we go and get another property, hopefully it would be a little bit smoother because one person still doesn’t have that new debt on their record. Now, with the rising interest rates and inflation and just cost of everything being so expensive nowadays, I’ve been rethinking that and thinking about going in on a new mortgage together, combining our income so that we have more buying power.
Now, my question to you is would that be disadvantageous for us? The reason I ask is I know from your previous podcast when we acquire that new debt, we both acquire it like we’ll both have that new mortgage on both of our debt-to-income ratio. And I wasn’t sure if with that in mind that the rental income would also, if we would both acquire that rental income or if only one person gets to say, “Hey, we’re making $2,000 in cash flow every month,” if I get to claim that, or she claims that, or if marriage changes all of that, so it’s all kind of confusing. And I was just wondering what your take on that would be. Thanks, David.

David:
All right. So thanks, Ahmad. This is a good question. Let’s break it down. You’re thinking about buying with your girlfriend. First thing I want to say, you didn’t ask this, but I would just recommend that you maybe hold off on taking title together with someone that’s not your spouse. I’m sure your relationship is great now. You never know what’s going to happen. And if you’re buying something with your girlfriend and only one of you is on title, if the two of you split up, the other one might not have any protection.
You’re going to put both of you on title. There’s ways to do it without having both of you on the loan. But in general, you’re going to end up both being on the loan. That’s the smoothest way to make it happen. And now you’ve eliminated the ability to have the mortgage and only one of your names. So just in general, whenever you’re buying with a partner, which is what this is, I advise people to probably try to not invest with a partner unless they have to, unless it’s your spouse.
Now, let’s get into the details of what you’re asking here. I like where you’re going. You’re trying to keep the mortgage in one of your names not the other, but you’re realizing you might have to combine incomes in order to get the property you want. That is sort of the conundrum. I think I mix conundrum and quandary together and made up a Voltron word that doesn’t exist, quanundry. Ignore that part. We’re probably not going to edit it out and everyone’s going to see what it looks like when you’re trying to record a podcast and you end up making up a word.
The good news is if you buy investment property together, you don’t have to worry about the debt-to-income ratio taking a hit, because you’re bringing in income from that investment property, just like you’re bringing on debt. So it usually ends up working out more or less to be equal. And in time, it actually helps your debt-to-income ratio because you’re making more income than what you’re spending on the debt.
Now if you’re buying a house to live in, that’s an exception. Usually, you cannot use income from a house when it’s your primary residence. There’s a handful of very small exceptions, but in general, it doesn’t work the same way. So I would say, if you have to combine incomes to get the property you want, make sure it’s an investment property. But you’re probably going to want to buy it in an LLC that you’re both half owners of to make sure both people are entitled. And that brings us back to the issue of buying a house with your boyfriend, girlfriend, not always the best idea.
So I would ask you, is there a way that you can afford this one on your own and you buy it, and then you work with her so that she can afford one on her own? I just think overall, when you’re looking in the future, that’s probably going to be a better approach. The other option you have is a debt service loan. These are loans where you take the income from the property not from yourself, so you don’t have to worry about the effect that this is having on your personal debt-to-income ratio.
The other questions that you ask are this is a good example of, this is best asked to a CPA, a title company. You can ask your agent or you can ask someone like me, but I’m probably going to refer you for the nuance of this to go talk to an expert. So if you’d like, feel free anybody to reach out, I’m happy to connect you with my CPA. If you end up signing up with them, they can answer questions like this one right here, because they have a better understanding of how to do this legally the correct way.
Thanks, Ahmad. All right, our next question comes from Haruka from the East Coast. Haruka says that she has bought a single family home. She’s renting it out. She likes it. And now she wants to expand. She wants to get into 5 to 10 multifamily properties or clusters of single family homes in areas with steady population growth.
The problem is she’s been looking in hot areas like Raleigh and Atlanta, where houses are super expensive that don’t really cash flow much. And then in other markets, which she calls medium like Indianapolis, she sees that she can find relatively decent cash flowing properties, but you’re not getting the growth that you get in one of the hot markets. Should she focus on one market and try to get as many deals as she can there or spread her attention over several markets?
Thank you for this, Haruka. Here’s what I’m hearing behind what you’re saying. You’re very frustrated because it’s very hard finding cash flowing properties in today’s market. And that is a thousand percent true. This is from what I’ve seen in my investing career and from what I’ve talked to some of the older investors, the most difficult time to find any cash flowing asset.
And it helps if we understand why that is, I won’t go into it too deep, but a lot of it has to do with the fact we printed too much money. That money needs to find a home. Real estate investing is the easiest way to deploy a lot of capital and capitalize on leverage without a ton of work. So more and more businesses, companies, hedge funds, institutional capital investors like us, everybody’s flocking into this space because it’s the best place to put money with the lowest overall risk and the highest return.
At the same time, the increase in education in real estate investing has taken a lot of the mystery out of this. That used to be a barrier to entry for a lot of people to get into the game. So now it’s easier to get in than ever, and there’s more people getting in than ever, and there’s more capital getting in than ever. And boom, you’ve got a very hot and competitive market.
Here’s something that I’ve come to understand when it comes to how I look at real estate. It’s a spectrum. But in general, you have cash flowing markets and appreciation markets. Now that does not mean speculating markets. What it means is you’re going to make more money by the value of the asset going up in some markets. We call those appreciating markets. And you’re going to make more money through cash flow in other markets where your property is not going to appreciate as much.
The problem is when we want both, there was a time you could get both and many people set their expectations that that’s what they should get through real estate investing. But I don’t see it like that. Now, I understand that when I’m buying a property, what I’m really doing is buying an income stream. Some income streams are very difficult and take a lot of time and effort to manage. Other income streams are easier to manage.
The income streams that are easier to manage are in higher demand. And therefore, they tend to have a lower amount of income that comes out of them because there’s more people looking to buy them pushing up the prices higher. So what you have to ask yourself is what is more important? Are you playing the long game? In which case, appreciation is usually better because you’re going to make more money over the long term or are you playing the short game where you want cash flow right off the bat?
Now, there is no right or wrong way to do this. Some people like their job or already have a lot of money. They’re able to play the long game. And so they go into the hot markets like you talk about where there’s very little cash flow in the beginning, but over time, they start to develop more cash flow as well as a higher appreciating asset.
Other people don’t have that luxury. They have a need for supplemental income. They just had a baby. They need to get some more money coming in. They don’t have their job. They lost their job. They’re not happy where they’re at. They need cash flow in order to get them a platform to get to the next level in life. So when it comes to choosing what the right market is for you, Haruka, do you want to be in an appreciating market, which is long term or a cash flow market, which is short term, what do you need?
So here’s the way that I’m doing it right now. I’m overall looking for the long term approach real estate investing. I know I’m going to make way more money buying in an area where people are moving to, what you call the hot market. There’s to be more demand there, businesses are going there. People are going there. Over a 5, 10-year span, those houses or those assets are going to appreciate a lot.
So I’m looking in the markets like you’re talking about. The Raleighs, the Atlantas, the South Floridas, the Arizonas, places where I think wealth is going to move and I’m buying there for the long term. Now, to balance out my portfolio, every time I buy a property or a set of properties that are more of an appreciation play, I’m also buying a series of properties that are a cash flow play. So then I may go into some of the, what you called medium markets like Indianapolis. And I’m looking for something that’s going to cash flow very steady, but probably isn’t going to go up a lot.
It’s kind of like if you use a fitness analogy. You need to eat protein for your muscles, that’s long term. But you need to eat some carbs, so you have energy for the short term. If you’re trying to grow, you have to have a balance of both. Now, if you already have massive muscles and you don’t need to work out a ton or whatever, maybe you just eat more protein.
That’s the question you have to ask yourself, where are you in life? If you need cash flow right now, go to one of the markets where you can still get it, the medium markets like you said. Build up a steady stable of cash flow. And then once you’re good, consider going into one of these hot markets and playing the appreciation game.
Also, let me just add this one piece because I always get comments if I don’t clarify this. When I say the appreciation game, I am not saying the speculation game. I am not telling anyone to go buy a property that they cannot afford in the hopes that it goes up and they can sell it later. I am talking about buying a property that you can afford that may produce less short term cash flow for the delayed gratification that comes from more cash flow later in the game or a higher appreciation value.

Jesse:
Hey, David, love BiggerPockets and all you guys do. So I have a scenario. I just kind of wanted to see how you would tackle this. I have a property in Green Bay, Wisconsin. It is a duplex that I used to live in. My understanding of the tax code, I lived in it two of the last five years. I moved out of it two years ago. So I would be able to sell it without paying capital gains, which is very enticing.
The problem is what I’m looking to buy is basically what I would be selling, small, multi, my units in that area, or I could get adventurous and do something different. But that’s kind of what I’ve been looking for, is two to four unit properties in that market that cash flow and also have done well with appreciation.
So how would you tackle this situation? How do you figure out if this is a wise move to sell it or to just refinance it and keep it, but especially with the caveat of the fact that I would not be paying capital gains if I did sell it. So, I don’t have to mess around with the 1031 or anything like that. I look forward to hear what you have to say. Thanks.

David:
All right, Jesse. Great question here. And what I love about this is it is a philosophical real estate question. So I get to break down the philosophy of real estate, not just here’s a tactical answer to a specific situation. First off, your understanding is correct. According to the current tax code, if you’ve lived in a property for two years out of a five-year-period, you can sell it and avoid capital gains. There’s a limit on that. I believe it’s $250,000 is exempt as a single person, $500,000 for a married person. Again, I’m not a lawyer or a legal advisor. This is not legal advice. You should look that up, but that’s my understanding of it.
Now you’re also asking a very good question and it comes to the fact that in real estate, when we sell and then look to buy, we typically are doing it in the same market that we just exited. So if you sell high, you buy high. If you sell low, you buy low. And this gets a lot of people tripped up because what they’re looking for is a situation where they can sell high and buy low.
Now, when I wrote Long Distance Real Estate Investing, this was one of the issues that made long distance investing great, because you could sell high in a certain market and then find a market and then you could go buy low. Unfortunately, we’ve had such a flood of interest in real estate investing since we at BiggerPockets have done such a great job of getting the information out there that now there’s very few markets that you can actually go buy low.
So you have to change the way you’re looking at it. If you’re going to sell, one of the benefits is you can avoid capital gains. But I wouldn’t look at it like you’re making a bunch of money and then reinvesting it so that you can make even more money. That isn’t exactly true because you’re selling high to go buy high. In a lot of ways, you’re just going to get a reset basis on your property taxes. You’re probably going to get a higher interest rate than you had before. I’m not deterring you from doing it. I’m just asking you to look at it differently.
Here’s how I look at it. When I sell in one market and then buy again in the same market, what I’m really doing is I am adding leverage to my portfolio. So if I sell one property and I take a $500,000 game and then I go buy two or three properties with that, what I’ve really done is increase the amount of money that I have borrowed. My equity didn’t necessarily change because I took 500 grand from one and turned it into 500 grand over three others.
My cash flow might have changed some or might have changed maybe not at all. I might have taken $2,000 of cash flow over one property and traded it out to, say, $800 of cash flow over three properties. So maybe I got one from $2000 to $2,400, but that’s largely insignificant. You don’t have a huge, huge bump in your cash flow when you do this. What you’re doing is betting that prices are going to continue to go up and therefore, leverage is in your advantage.
When you’re trading in one house for three, if prices raise, you are making three times as much equity and you borrow money that you’re paying back with cheaper dollars. Now, if you think the market is going to go down, this would be the worst thing you could do. You don’t want to have one house and turn it into three with a bunch more debt. And that’s the question that you really need to be asking yourself. Do you believe the market’s going to continue to rise in the market you’re talking about, or do you believe that the market is going to fall?
Now I don’t believe you mentioned the market you’re in, so I can’t give you any specific tactical advice on that specific market. But what everyone listening needs to understand is when we buy real estate, we’re always making a bet. We’re making a bet that tenants are going to continue to pay. The market is going to continue to go up. Rents are going to continue to go up. Businesses are going to continue to employ people. And therefore, we want to own assets that are dependent on tenants.
And when we’re not buying, we’re also making a bet. We’re betting that prices are going to come down or our money would be better put somewhere else. So what everybody needs to understand is you’re going to make a bet one way or the other. Once you make up your mind, which way you think you’re going to go, that’s where these strategies that we’re talking about today can come into place.
We’ve had some great questions so far, and I want to thank everybody here for submitting them. Please make sure as you’re watching this on YouTube to like, comment and subscribe to the channel so you get notified when BiggerPockets comes out with some new stuff. I got all dressed up for you today. I’m trying to dress to impress. What do you guys think of what I’m wearing?
This segment of the show is where we take comments from previous episodes. And I read them to you, hoping that you will also go comment on our YouTube channel and let us know what you think about today’s show. I want to know. Should I answer longer or should I answer shorter? Do you want to get more commentary from me or would you rather have shorter answers with more questions?
Also, how do you like me to dress? Do you like me more in a T-shirt? You like me more in a realtor specific button-down type of a shirt? I want to know what you guys think. Leave your comments below. We will read them on one of our shows.
Our first comment comes from Giselle Morales. “I totally agree with you on cash flow. To be able to live off of it, two to three properties only is pretty risky. In my case, I had my goal and numbers aligned to get nine houses and that will cover my budget times two. And I was able to do it. So now I cover my budget with half the houses and what I do with the cash of the other half is keep saving to keep investing.”
Thank you, Giselle. This is an awesome comment. And what you’re hitting on is the philosophy that you should buy a handful of properties, quit your job, go full time into investing and figure out how to make it work. For some people that may be the right move. For others, it becomes much more difficult in the market that we’re in.
So 10 years ago, that advice applied to a bigger segment of people than what it applies for today, which is a much smaller segment. And I’ve lately been saying, you shouldn’t be looking at cash flow as a way to replace your income. You should be looking at cash flow as a way to supplement your income in today’s market for most people.
Next comment comes from Miguel Montreal. “Hey, David, great episode and questions from listeners. I just wish, and maybe you can recommend this, that those asking questions can get right to the question. It seems to take forever just to get back to you to give an answer. Thanks.”
Miguel. I really appreciate. And here’s the dance that we’re having. I want you guys to submit questions, so I don’t want to discourage anyone or make them feel bad because they took too long to ask the question. And I also recognize that many of you don’t talk on a microphone like I do for a living, so speaking can be hard. It can be hard to get to your point. Maybe you didn’t think about what you were going to say before you started talking. Maybe you were just super nervous and that’s why it took a long time to get to the point. But I do see it as well.
What we would love would be for more of you to ask questions, but just be a little more succinct. So if what you really want to know is, “Hey David, what market should I buy in?” Start your question by saying, “I would like to know what market I should buy in. Here’s where I’m concerned.” What we typically get is someone that tries to explain the background of what they’re thinking. And then at the very end five minutes in, they get to the question and that’s just harder for the listener to sit through. And so oftentimes, we don’t air those questions.
So Miguel, thank you for offering some advice. When you guys submit your questions to BiggerPockets.com/david, be more succinct. Get to the point. Maybe practice a few times before you record it, and you get a higher chance of getting put on the show.
Jeff Mueller. “David, what is a good return on equity on a property I want to buy and hold, 15%, 35%?” All right, Jeff, it’s very difficult for me to tell you what the right return on equity should be. And what you’re talking about is for the equity in a property, how much cash flow is it generating? Those numbers are huge. 15%, 35% are typically very high because return on equity is usually lower than return on investment.
In fact, it’s almost always lower, assuming a property is going up in value. You can only get an ROE that is higher than the ROI if your property’s actually losing value, which would be bad. And since most people aren’t hitting anything close to a 35% ROI, that wouldn’t happen on your return on equity. But you’re asking the wrong question. Don’t say, “What is a good return on equity?” What you need to be asking is, “Is this return on equity close to the return on investment?”
So, if you buy a property and you’re getting a 20% return on investment somehow, but then the property goes up a ton in value and you’re only getting a 3% return on your equity, that difference between 20% ROI and 3% return on equity, the higher the difference is, the more you should look into selling that property and reinvesting your equity to get a better return on investment. The closer that your initial ROI is to your ROI, the more likely you should keep the property and hold it.
Are these questions and comments resonating with you? Do you like hearing my take on this stuff? Well, guess what? This show is only as good as the questions and comments that we receive. So comment on the YouTube channel. Tell me what you’re thinking. Am I talking too fast? Am I talking too slow? Do you want me to talk in different accents? What kind of close do you want to hear? Let me know. This is for you. And then also, I need you to submit more questions that I can answer on the show. So, go to BiggerPockets.com/david, and leave me your question there.
All right. Let’s take another video question.

Bill:
Hey, David. Bill from Charlotte here. Just a quick background, I’ve got a high paying W-2 job in the tech industry here. And then I’ve sold a couple long-term rentals and I’ve currently got one long term and five short-term rentals through a combination of myself and some partners. Pretty close to being able to pay for my expenses through the rental income and would like to no longer work in my at least current W-2.
Concern I have is my debt-to-income is pretty shot with the loans I’ve currently got in my name. And after potentially leaving W-2, I don’t think I’ll have really any room at all to purchase a new primary home. I’m wondering how others or you’ve seen others deal with this in the past after they’ve quit their W-2 and have lived off their rental income. Thanks.

David:
All right, Bill, great question here. Let me see some different steps I can give you that you could possibly take, paths that you might take. Number one, you don’t quit your W-2 job, but you look for a different position within that company where you can work less hours or work on something that you enjoy more, so you have more time to put towards real estate investing.
Number two, you work in the same industry you’re in. I don’t believe that you mentioned it. You just said it was a high paying job. Can you get a consulting job? Can you be a freelancer? Can you do some way to earn money, but on your schedule where you have more flexibility to focus on real estate investing, but you haven’t wasted all the skills that you’ve built in the industry and now you’re not making money. You’re still making money, but more in an entrepreneurial position. So even if it’s less than the W-2 income, it’s still more than nothing that you’d be getting if you quit.
Number three, you said your debt-to-income ratio is pretty much maxed out from properties you’ve already bought. I don’t quite understand that because if you’re claiming the income that you’re making on your taxes, most lenders will let you take 75% of the gross income that you’ve collected and use that as income for yourself in your debt-to-income ratio.
So when I’m buying real estate, even though my debt is going up, my income is going up with it because I’m collecting rent. And my income actually goes up higher than the debt if they’re making me money. So when you’re cash flowing, you should have more income, not less income. So unless you’re having a specific loan product that won’t let you use income from rental properties, then the only reason you’d be having trouble is if you’re not claiming the income on your taxes and then just start claiming your money on your taxes like you’re supposed to be and that will go away.
I’m not sure if the lender you’re working with is telling you this, or it’s just maybe a false impression that you’re under that you can’t use the income from your properties, but definitely reach out to us at The One Brokerage if you’re willing. And we’ll figure out what is going on with you there.
The last thing is use a different loan product. Use a debt service coverage ratio loan that says, “Hey, this property is going to make this much money. We’re going to qualify him based on the income the property is making not on the income that he is making. We do these loans. They’re third-year fixed rate. They’re not risky. The interest rate is a little bit higher, but if the deal works, it doesn’t really matter.”
What is more concerning to me is when people get into adjustable rate mortgages and what’s even more concerning than that is when they’re short-term adjustable rate mortgages. So if you have one or two-year period before it adjusts, very scary.
You didn’t ask this question, but I’ll throw it in for the audience. I’m not super opposed to an adjustable rate mortgage if it has like a seven-year period or even maybe a five-year period before it adjusts, because the odds are over seven years, you should have seen increased rents and increased profit. You should have stabilized it and had more income coming in so that when your interest rate adjusts, if it does go up, you should be okay because theoretically, you’ve seen rents increasing. I don’t like them over a short period of time like two years. That’s not giving you enough time to stabilize a property, reduce expenses and let rents increase.
So, I think that this could really be solved by having a good conversation with a good loan professional that should be able to look at this and give you some answers. I’m guessing maybe you haven’t talked with one of those yet. So reach out to me, or one of us, or find another one of these amazing people on BiggerPockets that lives to serve the investment community. Get some answers from them and you could be that much closer to quitting your job.
Now, specifically to you saying Bill, “Hey, I want to buy a primary residence.” On a primary residence, you’re not going to use a debt service coverage loan like what I talked about. You’re likely going to use a conventional loan or you’re going to use a portfolio loan through some credit union that you might be involved with, whatever it may be.
But it’s the same fundamentals. If you’re claiming the income that you’re getting from your rentals and your long-term rentals and your short-term rentals are profitable, you should be able to use that income to help you qualify for the primary residents that you want.
Next question comes from Nathan Holt in Ohio. “Hey, David. I’m a 23 year old college student, a full-time worker at Capital University. I’m looking to buy a small multifamily in Central Ohio east area. I had received a tip that there was a guy looking to sell a triplex unit in Johnston. My realtor contacted him with an offer of $200,000. He said he’s looking for closer to 370. I do not have the funds at the moment for that, and the numbers don’t make sense for a house hack. It would only be profitable if I didn’t live in the building and rented all three units, but then I have to put more than the 5% down on the mortgage, which I don’t have. I’m wondering if it might be a good idea to try and sit down with him, the seller, and show him how the numbers really don’t work and see if I could persuade him into moving the price down to more affordable area and go from there. Do you have any ideas or recommendations?”
All right there, Nathan, I do. Your realtor really should have told you this. It sounds like your realtor is not very experienced. If you’re being told to write an offer at the price you did and the seller wants that much more, one of two things is going on. Either he has ridiculously unrealistic expectations, or you do. And that’s really what it comes down to.
What’s the house worth? Whatever the market says it is. Now what is the market? Well, basically that’s all the other buyers. You’re not going to be able to convince this seller that his numbers are unrealistic because what it really is, is they’re unrealistic for you. Your situation makes this the bad deal. It’s not a bad deal for everybody, but it probably is a bad deal for you.
If you’re looking at house hack and you need it to cash flow and you only have 5% to put down, there’s only a handful of properties that are going to work because you got a lot of ands that are in there. There’s some other investor out there who doesn’t have all those ands. Maybe they’re in a 1031 and they need to find a way to park their money. Maybe they’re trying to take advantage of accelerated depreciation. Maybe there’s reasons why they would want to own that property because they don’t have the same situation as you. They’ve got more money to put down and they can make a cash flow.
Rather than trying to find a seller and convince them that their numbers don’t work when the markets probably telling them that their numbers do work, I think you should take those efforts and put them into finding a different seller. This is a mistake a lot of people make, is they try to change the mind of somebody who doesn’t have to change their mind. Just go look for somebody whose mind you don’t have to change. You’d be way better to take that same effort and put it into a different property.
All right, we have time for one more question.

Shiuan:
Hi, David. This is Shiuan. Thank you so much for your videos. I’m from [inaudible 00:29:18], and looking to purchase maybe in or out of state. My question is if I should use a HELOC to purchase or use my cash savings towards a down payment and just trying to understand about good debt. Is that always better to borrow off than to use my own name? And as a part of the question is the variable rate of HELOC. How do I make sure … How do I calculate the rental properties cash flow to make sure that it covers the HELOC well? Thank you so much. Your videos are super helpful.

David:
Thank you for that, Shiuan. Your audio was a little hard to hear, so I’m going to repeat what I remember of what you just said. It sounds like what you’re saying is you’re looking to buy and you don’t know if you should take the money from a HELOC or from your cash savings. And you mentioned that you want to make sure that you’re using good debt, so it sounds like you’re trying to figure out does a HELOC count as good debt.
Now, I can tell your heart is in the right place because you’re asking a good question, but your head might need a little bit of clarity. First off, if you’re going to use a HELOC, I look at that like giving a loan to myself because HELOCs are temporary loans. You’re going to be paying a higher interest rate than normal if you use a HELOC. So what they’re really designed for is to go use the money for a short period of time and then pay it back. If you’re going to be buying a rental property with that money, unless this is a BRRRR or a flip, it’s very difficult to get the money back to pay off your HELOC.
Furthermore, the Fed has announced that they’re going to raise interest rates, I believe, seven more times before the year ends, which means that you should expect the interest rate on your HELOC to continue to rise, making that a less desirable financial vehicle for what you’re talking about.
Now, let’s look at using cash. At first glance, using your cash savings would be a better plan because there’s no interest tied to that money like on a HELOC. So, you don’t have to pay debt yourself to this HELOC. But you need to make sure that you have enough cash and reserves to weather a storm. This is a big way that investors lose money. They end up not keeping enough money in reserves and then they can’t make their debt payments. And if the value of their property has dropped too low or there’s no buyers in the market, that’s where they go to foreclosure.
So, I would say keep 6 to 12 months of reserves of cash flow for yourself and your property in your cash savings. More than you think you need, maybe even more than that. If you have enough cash after you put a lot of it in reserves, use that to buy the house. If you don’t have enough, use the remainder that you’re lacking from the HELOC. But you don’t want to take money from the HELOC unless you absolutely have to because we’re told rates are going to keep going up and HELOCs have adjustable rate mortgages.
And then once you buy the property, get right back in there, start working hard, start saving money again, start working on a side hustle, keep your expenses low, save those reserves back up after you buy the property. This is a great question. I’m glad you asked it, and thank you for doing so.
All right, this question comes from Jason in Atlanta, two-part question. Part number one, “My business partner and I own about 60 doors across a couple states in the Northeast, in the multifamily space. Right now, we’re working on a deal that would nearly double our portfolio. My first question, have you ever heard of a bank calling the note on a commercial loan using the loan-to-value clause? For example, if we’re a 75% loan-to-value and the market dips a bit after we close and the decrease in the property’s value turns into a 77% or 79% loan-to-value, have you ever heard of a bank calling loan do for that reason? I believe in most mortgage, there’s technically able to do that but I couldn’t find any examples of it happening on the BiggerPockets forum.”
All right, let me start with that question before I get to part two of yours. My understanding of the loan-to-value clause you’re talking about is a clause in a note that tells the lender if the properties loan-to-value starts to increase, which means the property is becoming worth less compared to the amount of debt you have on it, then the lender is able to call the note due. Now why would that be in there? Well, my understanding is if you’re a bank and you see that the loan-to-value on a property is going the wrong direction, you should be able to step in and fix the problem by taking title of the property before it gets worse.
Now in multifamily property, as you know, Jason, the value of the property is based on the NOI, which means if you start making less money, the value of the property is going to go down, which is going to increase the loan-to-value. So what they’re concerned about is if you’re mismanaging the property and it’s not profitable, they want to be able to step in before it goes into complete foreclosure.
But something else to think about, do they want to do that? If it’s not because you’re mismanaging it, if it’s just because the market turned around, maybe cap rate’s expanded, maybe the interest rate has changed the value of multifamily property. Your loan-to-value might go up a little bit, but I don’t see why they would want to step in and take it off your hands if it’s something like that.
I would ask the representative at the lender that you’re talking to, “Hey, what would happen if rates jumped up and therefore cap rates expand and the value of the property is going to go down? We could see the loan-to-value increase from 75% to 80%. What would you do?” And they would probably give you the answers similar to what I did, but I would check with them to find out. As far as have I ever heard of that happening, no. I also have never seen this happen.
“My second question, do you have any general tips on getting more comfortable with such a big transaction even if the numbers definitely work on a multi-year horizon? I remember in the olden days of the podcast that’s back when I had a halo over my head, the golden olden days. You and Brandon once said that to grow up business, you should really be doing something every year that’s a little bit uncomfortable for you, and this definitely fits that description. Any tips on getting comfortable with the risk and uncertainty of something that looks good on paper but is bigger than anything else you’ve ever done in real estate? By the way, really enjoying Seeing Greene format mixed in with the traditional deep dive shows.”
Yeah. It’s hard, man. Here’s my advice. You aren’t going to get comfortable with what you’re going to do. You are going to do it and it’s going to be uncomfortable. And in the process of doing it, you will become comfortable. This is something we all have to understand. I want you to look at comfort like strength. You can’t get strong and then go to the gym, right? Confidence often works this way. If you wait to feel confident, you’ll never start. If you wait to get strong, you’ll never work out.
The very fact that this feels uncomfortable is a way of knowing that you’re not yet the version of you that you need to be to do this right. What you have to do is put faith in the fact that going through the process is going to turn you into that person. So I did not wait until I was super good at jujitsu before I went to jujitsu. I go and I suck, and if it’s really hard and most of the time I feel bad about myself because I’m comparing myself to people that are way better. But I’m getting comfortable through doing it. I didn’t wait until I was comfortable and then do it.
The same goes with being in shape, and the same goes with business. When I first started doing this podcast with Brandon, I was not comfortable. It was actually terrifying. At the time we were getting 250,000 downloads per episode, and the entire time I was looking at the camera saying, “250,000 people are listening to every single word that I say.”
And I started worrying about not pronouncing something correctly or saying something dumb or saying something that God forbid, someone could pull up seven years later and say, “Haha, David said something and it wasn’t accurate.” It was really scary. But all I could do was keep doing the podcast more, keep thinking about how to get better, keep listening to the episodes that I did and noticing what I did that was good, what I did that wasn’t good and improving.
And this is what the process is. If the deal looks good and you believe in the fundamentals and you’ve got enough money in reserves, do it. You’re not going to be comfortable. You’re going to make mistakes. You’re going to do things and say, “Ooh, I should have done that different.” That’s literally how I learn in everything. Jujitsu is a great example. I’m constantly making mistakes.
You’re going to do the same thing. Don’t wait to be comfortable before you do this deal. And again, I’m going to highlight, make sure you have enough in reserve. See, the cool thing with jujitsu is when I make a mistake, I don’t actually get my arm broken because I can tap. I can say, “Okay, stop pulling on it. It’s going to break. We’re good.” And they’ll stop. So, even though it’s hard, it’s not necessarily risky. Reserves are your tap. If you’ve got reserves, that means you’re able to tap. You can make through the tough times, you’re going to be okay.
That is it for our show today. Thank you very much for listening. I understand you could be putting your attention everywhere. If you’re watching on YouTube, there are people screaming at you to watch their videos instead of mine. If you’re listening to this on a podcast, there’s tons of people who would like your attention listening to their podcast. So, I want to say thank you for joining me on the journey that we are on and know that I am doing my absolute best. And we here at BiggerPockets are doing our absolute best to give you the best content we possibly can, straight shooting, hard hitting, no BS, no drama. The realest of the real is why you’re here. It’s why we do this.
So please, consider going to BiggerPockets.com/david and leaving me a question. Make sure you like this YouTube channel as well as subscribe to it, and follow me on social media. I’m @davidgreene24, pretty much everywhere. On TikTok, I’m officialdavidgreene. There’s an E at the end of Greene.

Ashley:
This is Real Estate Rookie, episode 184. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we give you the stories, the information, the inspiration you need to kickstart your real estate investing journey. So my wonderful co-host Ashley Kehr, what’s new? What’s going on?

Ashley:
Not much. We’re supposed to have great weather here in Buffalo this weekend, so that’s exciting. And then I think it’ll probably go back to another snowfall or something. But I had put an offer in on a campground last week and didn’t hear anything back from the people, they followed up, or I followed up with them, had my business partner follow up with them and then it ended up, they didn’t even see our offer. So they actually looked at it called us back a couple hours later, no, we’re not going to do it. So we went back, reran numbers and what, we submitted our second offer was, there was a lot of land with this property and we don’t need all of the land. So we actually submitted our next offer with less of the land where they can actually parcel off some of the land, sell that separately, or keep it for themselves. So hopefully that’s a big enough incentive for them to accept the offer. So we sent that second offer last night and hopefully…

Tony:
Fingers crossed.

Ashley:
It just gets accepted.

Tony:
Wait, so how many acres will it end up being if you, for what you submitted on this last offer?

Ashley:
So it was all together, total is 211 and we’d get about 107, I’d say.

Tony:
Oh, that’s awesome.

Ashley:
It’s kind of like a creek ravine that kind of makes a separation between where the campground is and the, some vacant land. And there’s still plenty of room to expand with that 100 acres too, if we ever wanted to.

Tony:
It’s so mind blowing to me, like how big these properties are that you’re looking at, because I always make fun, right? Because, in California where I live, it’s a new development. It was built in 2018 and literally every house that’s on an eighth of an acre, something stupid like that. So to hear 200 acres, it’s like my mind doesn’t, can’t compute.

Ashley:
Yeah.

Tony:
Well, fingers crossed, you guys get that one. That should be an exciting project for you.

Ashley:
Thank you very much, I’m excited for this one. So what’s new with you?

Tony:
Same, we’re chugging along on this resort and in Big Bear Lake. So me and the Alpha Geek Capital team, we’re doing all of our due diligence. So we had our first meeting with the attorneys yesterday to get the syndication paperwork kind of in place. And met with the CPA, who’s going to help us get that piece dialed in. So I’m hoping that by I like, or there’s some time travel happening now, but by second week of May, we should be able to actually open up the syndication and start doing the whole shebang. So it’ll be fun, it’ll be a really good learning experience for us. And, we’re excited and what’s even crazier Ashley, kind of funny, but kind of not. So, as we were kind of going through our due diligence and we were rerunning our financial model, we realized that there was a broken sale in the model.
So it was double charging, one of the expense line items. And it was a pretty big expense line item. And so when we caught that, we fixed it and the returns just went way up from what we originally expected. So it’s like, we did all this negotiating with this kind of broken financial model. Got it under contract at this price and now we fix it and the returns look even better. So it was, me and my partner were laughing about it, but it was, I guess, a lucky break for us.

Ashley:
Right, that you found it too and didn’t…

Tony:
Right.

Ashley:
Give on the deal, cool. Well, that’s really exciting. And I can’t wait to kind of follow you along on this journey and it’s definitely going to be a great opportunity for anyone that invests in your syndication. I mean, you have more than enough experience and knowledge in the short term rental space, so.

Tony:
Oh, well, thank you, Ash. I appreciate that, and hopefully it all turns out well, so we’ll see. Well, cool. Well, we got a good question for today. This one came from the Real Estate Rookie Facebook Group. So if you guys are not in the Real Estate Rookie Facebook Group, it is literally one of the most active, the most engaging Facebook Groups out there for real estate investors, especially for the new ones. Every time I go in there and I try and answer a question I can’t, because someone’s already jumped in and answered it with probably just as good as I would’ve answered it. So if you’re looking for a community, the Real Estate Rookie Facebook Group is the place to be. But today’s question comes from Andrew Threatt. So I’m going to go ahead and read off Andrew’s question. And Andrew says, “how would you handle a prospective tenant that has a bankruptcy on their record?”
“I know it sounds obvious, but for context, I recently had a potential tenant reach out to me. He checks off all of the boxes so far based on his word”. And then he put in quotes, “I haven’t done the official background check yet, still in the pre-screening phase”. And Andrew goes on to say, “he’s a recent, divorcé and said, the bankruptcy is from his wife, taking out a couple of credit cards in his name without him knowing”. Any thoughts or input on how you would move forward with this? I plan to let him apply so I can conduct an official background check, but just want to see anyone else’s initial thoughts. So Ash, what are you thinking? Are you letting the recently divorced bankrupt tenant get the spot or how do you feel about that?

Ashley:
I don’t know. I mean, that’s so tricky because to have to say like, oh yeah, that’s not a big deal. I think the first thing is, do you think he’s being genuine and do you think that’s actually the reason? And that’s the hardest part is telling if, what somebody is saying is actually true. So, but also if you think about it, somebody who has gone through bankruptcy or foreclosure, their option is to rent. They’re not getting a bank loan, they’re not getting a mortgage on a new property to live. So going, they have to go and rent. So after, that they have no other option. So I would think that because they can, they have no other place to live. They don’t have an option to go buy a house or anything, that maybe as a rental, they’re going to be a renter and hopefully pay because they don’t have any other options at the point.
And then there’s also some, I think RentRedi, maybe does this. There are a couple property management software platforms that you can actually offer your tenants that when they pay rent, it reports it to their credit. So that way, they can establish better credit by making those rent payments on time. So maybe looking into something like that, and if the guy really is looking to rebuild his financial history, put a system like that in place so that if he does default, it’s just going to hurt his credit history even more.

Tony:
Yeah. And those are really good points, Ash. You’re right, if you almost have a guaranteed long term tenant, at least for a little while, right? While, that’s, this person’s kind of working up to rebuild their credit profile. So, really good points. I think the only thing I’d add to that is that Andrew, there are other things you can look out outside of just the bankruptcy to see if this person is potentially good tenant or not, right. So I think the first thing I would look at is their DTI. If they’re sitting like a 70% DTI, then maybe it’s not really the, those credit cards that were driving everything, right? If he filed this bankruptcy then went out and got a whole bunch of new debt, then it’s like, okay, maybe this person just isn’t great with their finances. But if they’ve got a really big salary and relatively no debt after this bankruptcy then maybe, what they’re saying is correct.
So other thing you can do, Andrew and I actually used to work as a leasing agent when I graduated from college. And this is what we would do at that company is we would charge different deposits based on that potential tenants risk profile. So if this guy recently had a bankruptcy, maybe instead of charging him, first and last, maybe it’s first and last plus something else. So that way, if there is some kind of issue where he’s not paying, at least you’ve got a bigger security deposit to hold onto. And the last thing I might look at is just his employment history. If he’s been bounced around from a different job, every 90 days, maybe he’s not the most stable person. But if he’s been at that same job for the last decade, I think that’s another just kind of thing to show that he’s a steady stable person. So even outside of this bankruptcy, I think there is some data points you can look at, to kind of assess whether or not there’s some risk with this guy maybe moving in and then not paying.

Ashley:
Tony, just to add on to the point, the second point that you made. I wouldn’t know this unless the law changed in New York state, but in some states in New York, including there is actually a limit on how much you can charge for a security deposit. Or if you can even charge the last month’s rent. So the security deposit has to equal the first month’s rent. So in New York, that’s not even an option anymore that you can actually charge an additional security deposit or more money down on the apartment. So really the only way I guess, to get around that is to increase the rent…

Tony:
The rent.

Ashley:
Or charge some fees for, a higher pet fee every month or something like that. But, so that’s just one thing to be careful for. And like we’ve talked about before is make sure if you are going to self-manage and be a landlord that you know, what your local and state laws are and what the fair housing compliancies too.

Tony:
That’s a good point. And I guess I should preface that by saying that neither Ash or I are attorneys, nor do we pretend to play one on podcast. So talk to your…

Ashley:
And neither of us are self-managing rental folks right now.

Tony:
Right.

Ashley:
Like a couple years ago when I was self-managing I could very confidently roll off what the list estate laws are for New York and what good has to do, but I don’t think they’ve changed since then. But there could be that chance that they have, or that I don’t remember them correctly, but I do know that you can’t charge more than the security person less. And a great resource to go and look for this information is to Google your local housing authority. So in New York, so I live in Buffalo, the closest one in the Buffalo area is Belmont Housing and homesnewyork.org or.gov. And they’re the two local housing authorities. Belmont gives out the section 8 vouchers and they do tons of free or low cost landlord classes.
And then the same with the homesny.gov or.org website too. And they even publish a book every couple years with tenant landlord laws that they give out to one that’s for tenants and one that’s for landlords too. So definitely a great resource, if you guys want to check that out. And I think Tony, touching on your point, how to look at different things, that’s so important because I remember when people would ask me, well, what, what’s the income I need to make to get this? Or my, the biggest one was my credit score. Is this, is that going to be okay? Am I going to be able to rent? And you’re right, it’s like a majority of factors. It’s not just one thing that you should be looking at, like this guy’s bankruptcy. For example, if somebody had medical bills that they didn’t pay, we never even took that into account.
We didn’t even factor that. But if they have an auto loan, they’re not paying, we definitely take a look at that. And the software out there today, too, that you can use. So whether it’s through a property management website or not, it will account for all of those factors and you can go in, you can set your criteria and then they will tell you yep, this person passes your criteria or no, it doesn’t, based on the factors. So I think kind of taking out that personal opinion can definitely help you stay in compliance with fair housing laws by using these softwares, by setting your criteria like, okay, this is the minimum credit score. This is the minimum DTI, they have to have, this is what their income has to be, two and a half times what the rent is, things like that.
And then kind of the decision is out of your hands. Once in a while, I remember the software would be like, it needs review. Like it’s not a pass or a fail, but so check out property management software or different credit screening and background screening software too, you guys can use. Okay. Anything else Tony, to add to that?

Tony:
No, I think we hit everything, Ash.

Ashley:
Okay. Well, thank you guys so much for joining us on this week’s Rookie reply. If you guys have a success story or this podcast has made an impact on your life, and maybe you just got your first deal or your next deal, we would love to hear about it. So please leave us a review on your favorite podcast platform and also send us a DM with any questions you have or leave us a voicemail at 1-888-5-ROOKIE. I’m Ashley at @wealthfromrentals, and he’s Tony @tonyjrobinson. Thank you guys, and we’ll be back on Wednesday with a guest.