September 2022

David:
This is the BiggerPockets podcast show 667.

Jonathan:
One of the things that I’m so intent on with new investors, which I’m sure you guys will agree is if you buy your first property and then you’re going to buy your second property before that first property is at max value, meaning like you fixed everything that’s going to be a high number later. You’re going to eventually get caught on all of them. And if you do that, when there’s a market downturn, you’re going to lose them all.
So, I like people to really fix up that first property. It doesn’t have to be perfect. If you know that HVAC is going to break, you know there’s a big cost coming and you can’t go buy another property, because you’re going to get caught on both of them and not be able to pay for repairs on either at that time.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, coming at you today from Scottsdale Arizona, where I’m hanging out at the property that Rob and I bought and getting ready for a retreat to cook some other investors. And I got to say it is gorgeous out here as I say every time I’m here and we brought you a gorgeous show. Today, we bring back Jonathan Greene, my long-lost cousin, who we had on episode 584. And we had such a good time that we brought him back for more.
Jonathan is a real estate agent and investor who buys houses for himself to flip, also invest in commercial property. And more importantly, helps other people like you build wealth through real estate. And in today’s show, we talk about the different ways Jonathan does that. A big portion of it is negotiating, how he negotiates for his clients, how you can negotiate for yourself, what is happening in a negotiation, behind the scenes, as well as how to find on-market properties with motivated sellers, how to approach each deal, how to look at a house and see the things that other people are missing and more.
I had a great time today. Rob, what were some of your favorite parts of the show?

Rob:
All of the things you just said. You took all my points, I had them already. And I was like, “Dang it, those were all my favorite points too.”

David:
Yeah. I basically say all the best parts. And then, I give you two seconds to think of what you’re going to say after I just said them.

Rob:
All right. Well, I have something. I also liked that this was a, I mean, I guess this is what you said, dang it, is a negotiation master class. We hear everybody’s point of view here where negotiations are a fickle, fickle beast, because if you’re really, really good at negotiating, then you got to know when to take and then when to give back. You don’t want to nick away at a negotiation so much so that the seller is going to try to get out of every deal that you think that won the battle on. Because you can always lose the war.
So, really fun to talk through all the different, I don’t know, processes and deals that we’ve all gone through. And honestly, it’s always nice to have Mr. Greene back and honestly, I think it’s just a beautiful thing to see too long-lost cousins, reunite and chat and chum it up and chop it out on the pod. Honestly, it brings joy to my heart.

David:
I just thought of an analogy that could fit for the negotiation tension that you’re describing. You don’t want to go too hard. You don’t want to go too soft. It’s to do with fishing. So, when I was a kid, my dad would take me fishing and I would always ask like, because I’m just always in a rush to do everything, “Why can’t I just overpower the fish and just reel it in when it’s on the line?” And he would say, “Because if the fish is swimming away and you are trying to reel in, the line will snap and you’ll lose the fish altogether. At the same time, if you don’t reel in and keep the line tense and there’s too much slack in the line, the hook can come out of the fish’s mouth.”
So, fishermen, when they get a fish on are playing this game where they’re trying to keep tension on the line so the hook doesn’t come out, but not so much the line breaks and negotiating is a lot like that. You want to get every single dollar out of that deal that you can, but you don’t want to push it so far that you actually lose the deal altogether and that fish gets away. What do you think, Rob? How did I do?

Rob:
That’s actually really quite masterful. I was like, “All right, it’s going to be a pretty good analogy.” But that is exactly… dude, you have coached me. You have helped me master this art more than you could ever know. I appreciate it. That’s a good analogy right there. I’m honestly surprised it wasn’t a jujitsu analogy, but fishing, that’s good. That’s left field for me.

David:
I was just thinking all of our hunter, fisherman audiences is screaming in their pickup truck right now. It’s about time. I don’t know about that jujitsu stuff, but I understood that.

Rob:
Oh, that’s good.

David:
Well, we are going to get to the show very quickly. Before we do, today’s quick tip. Consider using the BiggerPockets agent finder to find an agent for yourself, to help with negotiating. Now, when you’re doing this, I recommend looking for an agent that is also an investor, not just an investor-friendly agent, but an agent that owns property in that area that you’re trying to go. Even if they’re not the smoothest, they don’t have the nicest car, their headshot doesn’t look the best. If they own property in the area, they usually have a big advantage over an agent that only represents other clients. Part of the reason that you want to use a high-volume agent is they have a lot of experience. That’s what you’re really going for.
But if your agent has that experience through buying houses for themselves, they don’t have to sell 400 houses a year to get it, so BiggerPockets can help you with their agent finder feature. And the cool thing is the agent will probably be familiar with a lot of the same vernacular and vocabulary that you are using, because they’re in the BiggerPockets ecosystem as well.
Rob, BPCON is coming up. It is only a couple of weeks away. How excited are you for this big event?

Rob:
I’m really, really, really excited. I thought it was going to be like 1000 person conference. And then, I found out it was like a 2000 person conference. And then, I found out that I think we’re sold out. It’s going to be a packed house. So, please approach us. Take selfies with us. Give David a big hug. That’s his favorite thing. He just likes hugging everybody. And come say hi and let’s chat for a bit.

David:
Wow, Rob. Okay. You said a very nice thing about me in the show. So, I’m going to let that slide, but the people will do that. You’ll see me fighting my way through the crowds with people being dragged behind me as they got a leg. And they’re like, “Rob said to love you because no one else does, David, and I need you to know you are loved.”

Rob:
It’s going to be a perfect opportunity for you to finally put that Brazilian jujitsu to use.

David:
That’s hilarious. I’m going to be like John Snow fighting through incredible White Walkers using jujitsu. All right. Without any more ado, let’s bring in Jonathan, and let’s learn something. Jonathan Greene, previous guest on episode 584 of the BiggerPockets podcast, and you did such a good job we had you back on. Welcome and good morning to you.

Jonathan:
Good morning to you guys. Thanks for having me back. I’m excited to be here again.

David:
So, if you haven’t listened to our last show, please go back and check out episode 584, where we got into some really good nuanced conversation with Jonathan about investing over a long period of time, having a sustainable career and really doing real estate, what I would call “the right way”, looking at every property uniquely and trying to figure out what is the highest and best use of this property. What is the story, this property tells, what’s the vision for how you’ll execute it? And one of the concepts that we got into was this idea that real estate is part art and part science.
Now, we all understand the science part. That’s writing numbers using a spreadsheet, calculating things, analyzing, trying to project, but there’s a whole other part of real estate that is more art. And that was fascinating. And we’d like to expand on that with you today, if you don’t mind, Jonathan.

Jonathan:
Yeah. I’d love that. I definitely have a background in negotiation as a prosecutor, so it’ll be interesting to let everybody know what I do in terms of analysis and in terms of my hardline negotiation long term, which I know you guys are familiar with too. So, yeah. I’m excited to get into these topics as well.

David:
Why don’t we start with that? Can you explain how the negotiation element of real estate fits into the art side of the equation?

Jonathan:
Yeah. So, I was a prosecutor for eight years and a criminal defense attorney for two. And I was always doing real estate my whole life, but when I transitioned to real estate as both an agent and more of a full-time investor, I started to look back at my negotiation techniques as a prosecutor. And obviously, you’re familiar, David, with some of these from your background as a police officer and, Rob, obviously in investing, we use these all the time.
But one of the things I think that was most important for me is when I’m negotiating in a real estate deal, the first thing I think of is, well, nobody’s going to prison and there’s no victims, so why am I getting so worked up over this when I spent eight to 10 years, either sending people to prison or trying to make sure they didn’t go there. So, it takes the edge off of it a little bit for me.
And I’ve always had one deal to the next attitude. But I think that incorporating what I know and then using principles from someone like Chris Voss, it really helps me figure out where the pain points in the deal. And a lot of that to me is listening to what the other side’s saying so that I can use the leverage that I have to combat what they’re talking about.
And I think that’s what a lot of new investors miss. They’re just trying to do a dialogue, but they’re missing the points.

Rob:
Do you feel like you were somewhat of a master negotiator coming out of the gate, or do you think that this is a skill that even as someone that was really experienced in your field, it really is something that you have to develop over time? Obviously, some people are going to be more naturally gifted at it, but is art of negotiation, if you will, is that something that anyone can master?

Jonathan:
Yes, definitely. And it’s a great question. And I did come out thinking I would be better than others and I was wrong. My negotiating skills were great, but I was still negotiating like I did as a prosecutor when I started, which is hardline, hardline, and making sure I’m drawing lines in the sand and then pulling, which we’ll talk about later in terms of my offers. But I think I was a little bit, if I’m negotiating that way as if somebody’s life is at stake, they’re going to be really off put on the other side. It’s going to come off as too aggressive.
So, I did have to back down the way I did. And I do think by learning from other people, how they negotiate, and again, reading books, listening to podcasts is definitely a way you can figure out. But like I said, I think each deal is different. So, the way that you negotiate with each person is completely different based on what they’re telling you. And if you’re not listing, you’re going to lose the whole negotiation before you start.

Rob:
100%. I’ve always found that the more hard line you are on it, typically it does not go your way. It’s a game you have to play. And I think this is where egos and pride can get in the way a lot of the time, because you’ll want to drive the car here, but then your realtor who might have a little bit more experience or a little bit more know-how will try to guide you. And you’re like, “Well, hey, let me do it my way.” So, I think this is an equally important aspect of negotiation.
And I’m also wanting to know when you’re working with the realtor on your end, do you feel like that’s truly… is it a negotiation partnership that you should probably see eye to eye with your realtor? Or do you make it so that your realtor takes your lead?

Jonathan:
Yeah. David knows this well, because I’ve been licensed for almost eight, 10 years now, but the one thing I remember when I was not licensed and I was agent, I didn’t think they were being hard enough as I wanted to be because they were trying to protect their relationships. I didn’t really understand that then. Some people try to get me to lowball as an agent and that’s not my thing, so I’m not going to do it. But yeah, I do think that it’s a cooperative partnership. The most important thing I think is if you’re an investor and you’re working with an investor-friendly agent, that agent is there to do the negotiations the way that you want, not the way that they want.
And that was a hard lesson for me to learn. And I definitely a couple of times overstep because I was negotiating hard the way that I thought would work, but they weren’t comfortable with it. And look, most regular home buyers aren’t ready for that. Investors are usually more ready, but they’re not ready for the level that I would do on my own. And I have to recognize that. So, I do think it’s a full partnership and you have to be clear on how you want to get to the deal and then take advice or not.

David:
That is a great point, Jonathan. You can err on either side. You can have an agent that wants to make the client more money than the client wants. So, they’re out there, working the deal they would for themselves. We’re going to get every dollar and if they don’t want it, there’s another house. We’ll go find that one. And sometimes your clients are like, “No, I want that house. I don’t need the extra $1,200.” And then, on the other hand, you’ll get clients that don’t really understand and through no fault of their own, the leverage in deals where you sometimes get a deal at such a great price that the seller realizes halfway through the escrow. I’m giving this thing away, you’re not getting another dime.
And if you do push it, you try to put some leverage on them, the whole thing will snap. So then, sometimes as an agent, you’re trying to protect your client. You don’t want to just come out and say, “You’ve already gotten more than you are going to get.” You’d be very happy because now they feel like you’re not on their side. But sometimes that whole, it doesn’t hurt to ask thing, is not true. Sometimes it does hurt to ask.

Jonathan:
Yeah, I agree with that. I have issues with clients only if I haven’t fully educated them along the way, or if they’re just not going to be compliant to like what you said. I like things to be a good deal for everyone, which doesn’t mean I’m not adequately representing my client as an agent. But to me again, based on my background where it was extremely adversarial, someone’s going to prison or they’re not. Really the best deals we all know are ones where everybody gets along. Because if you don’t and it’s adversarial, you may get through a deal, but everyone’s just going to be trying to screw each other, the whole deal over $1000 or leaving stuff in the house.
So, it’s sometimes hard to get one side, whether it be seller or buyer, to understand that, look, if we don’t all work together, we’re never going to get through this deal. And I think that’s part of where my negotiation tactics changed, where I had to say, “Listen, I need to build my relationships with everybody on the other side. And that includes if I’m an investor, I can’t be too hard. But as an agent, I have to work with the buyer as well.”

Rob:
This is so true. There’s always that phrase. You may win the battle but you’ll lose the war. And this happens all the time when you’re actually negotiating the deal, you keep chipping away, keep chipping away. If I’m a buyer, I just keep chipping away and chipping away at that seller, hoping that they give into the negotiation tactics. And if I’m successful, then the first thing I want to do is like, “Oh my, God, I’m the greatest I did it. I negotiated the heck out of this,” but then they start getting other offers because we’re in this crazy, crazy market. And then, when they have four offers that are above asking, a couple of weeks after we’re in the process.
The moment I start making any more demands, then they start not giving in because they’ve already given everything that they can give. And the moment I try to get my way, then they’re just trying to get out of the deal because maybe I’ll lose my escrow money, but B, they might even just get a better offer than the one that I gave them. This has happened so many times.
So, I think that there really is a fine line to walk there and just making sure that both sides can win. Obviously, you want to win a little bit more, but you don’t want to take it all, I personally feel.

Jonathan:
Yeah. I think if you look at the way deals are structured, like if you’re in an attorney state, you’re going to go through attorney review, that’s going to be a little game of ping pong. But then, we go to where all deals go to die, home inspection. And if you get too hardball in home inspection, that’s where everything goes wrong because someone’s trying to get a credit for doorknobs when you should just be focused on major things. So, like I said, my job, I think as an agent and a counselor for investors is to get them fully prepared before they make an offer.
So, we make tons of videos, tons of content to just make sure that they understand we’re not going on a fishing expedition because the deals that die are because someone’s just asking for too much, or you already know that the seller’s going to be unreasonable. And if it’s fully as is, you need to make sure that your buyer investor knows as is means as is. And I don’t want to go in and make an offer with already the understanding, but I can get out of it if I don’t like it, because we’re saying we’re buying it as is.
And I think that’s where there’s just a lot of nuance in that. And we all have to understand it’s going to be a long-term negotiation. Like you said, it will come back to haunt you later if you press them too early.

David:
I can give you a story of how that just happened to me. I had a deal where we got it a ridiculously good price. And then, after that, I came back and I got even more credits and I knew the seller was getting tense, but I didn’t know how bad it was. And then, I hit a point where we couldn’t get an appraiser out there in time for the appraisal contingency. They were all backed up. So, we needed an extension of two or three days on the appraisal contingency. And they said no. And they had the right to blow up the entire deal, which they were incentivized to do because they had felt screwed at every single step and just thought I was taking advantage. And there is no taking advantage in real estate.
The contract is what the contract is. You get what you get, but their perception matters in the way they’re going to make decisions. And so, I had to pay $2500 to get a three-day extension on my appraisal because otherwise, I was going to lose the whole deal. Now, when you look at, I think I got that house for about $250,000 less than it appraised for, so the 2500 didn’t really matter. But it’s an example of how you can see.
Getting too much on one side and imbalancing the equation can absolutely cause the whole deal to topple and then everyone loses. The sellers got to go back on the market. I’d be out my inspection money, my appraisal money, and all the time that I put into it.

Jonathan:
Yeah. That’s a great example of you knowing when to stop pushing. And I think that’s what some investors don’t. They just want to keep, like, you’re up to 50, relax. I myself as an investor try to give something back. We just closed a property yesterday, my business partner and I Jenny, and we have to redo an entire septic. We put that in. We knew that was going to be part of it, but they didn’t want to even get the certificate of occupancy. And we said, “Well, we’ll pay for it and we’ll put up the smoke detectors, but you’re going to sit there when they come.”
And these are little negotiations that helped us as other little things. Like you said, David, you get into it. Something happens the day before, they couldn’t get a freeze authorization on a HELOC. And we have our demo crews set up and we said, “Well, can we still get in?” And we really, really massage that deal on our end. But I do think like you said, you can get to that point and you have to make a tough decision on when to stop.

Rob:
So, Jonathan, obviously, you are analyzing deals left and right all the time, all over the country, doing deals, galore over here, deal city. That’s what I’m going to nickname you right now. So, can you tell me a little bit about your buy box, if you have one, or is everything the buy box? Help us understand what your buying criteria is.

Jonathan:
Yeah. During the pandemic, I really sold off most everything on purpose to just hold and wait and stockpile the gunpowder as we say, waiting for maybe the next six months to 12 months to see what I think is going to be better leverage for me. And I had a bunch of old properties, but for me, I think the thing that I’ve transitioned to this year and the way that I describe it is I’m always looking for assets. So, I like a lot of different things. I’m interested in self-storage. I’m interested in main street commercial, which we talked about in 584. I like flipping, I buy and hold.
I like Airbnb, but I am always looking for markets where I think there’s appreciation. So, I’ve always been an appreciation investor. I don’t really care about flow. I like it, but I’m not banking my history on the cash flow because I don’t have to use as much leverage. So, I think locally, I know all the markets. So, I’m looking for what I think is a project that I’ll enjoy honestly first. And then, I’m hard running the metrics to see if they work for me. And then, when I’m looking at outward deals for myself in other areas, I’m looking for growing areas that can support that investment proposition.
So, if I’m doing Airbnb, which obviously you guys have great experience with, I’m going to go through areas where I think the regulations are either loosening or never coming so I don’t put myself at a disadvantage. And then, for metro areas, I’ve always said the same thing. I don’t like hot areas, because I feel like I’ve missed the big money. So, I take the hot areas, look three towns out and see if that’s a town that’s going to come up and if they’re starting to do flips in that area.
So, I think because I’ve had most every asset class, I’m never looking for something specific, but I do like some oddities. I love two-bedroom, single families. I think they’re really a good asset because you can buy them for much cheaper than a three-bedroom in a lot of markets, but they’re going to rent out at almost the same amount as a three-bedroom because of the tenancy. And I just think those are smart buys everywhere, during the pandemic that the prices went up a little too high, but that was a big mark.
And again, that’s not a viable opportunity for a lot because families aren’t going to mostly move into a two-bedroom. So, you have a unique house that becomes a very good rental in my opinion, as just like one oddity that I like.

Rob:
Sure. So, you mentioned something that would probably be very confusing to most new investors, but you said when you’re looking at properties and you’re analyzing them, you said, “Well, hey, if the cash flow is there, that’s great. I’m not as concerned with that.” Why is that? What does that mean? Because I know a lot of people, they’re getting into real estate for cash flow. They want monthly cash flow that they can use to supplement their mortgage or their W-2 income or whatever that means. So, why is that not something that’s a direct focus for you at this moment?

Jonathan:
I’m going to explain something that I know everybody needs to hear and they probably don’t want to hear. Cash flow can go away quicker than you’ve ever seen anything in your life. So, if you hear everybody banking on 10 houses and they’re all making $100 a month in cash flow, all you need is one furnace to break in one of your 10 units. And you’re not going to make cash flow for six months. The furnace going to be eight grand. So, to me, I just never focused on that as an entity, I like it but I always want appreciation because to me, appreciation is a present.
It’s like a windfall later that you didn’t expect. I like both, but I’m not greedy. So, I think that the lure for cash flow, if somebody says, “I want to build up a portfolio with X cash flow so I can scale out of my nine to five,” that’s highly dependent on the types of properties that you buy. And new investors are maybe buying C-minus houses to start off with. Those don’t cash flow. You may think they’re going to cash flow until everything starts breaking and then you’re in trouble.
So, one of the things that I’m so intent on with new investors, which I’m sure you guys will agree is if you buy your first property and then you’re going to buy your second property before that first property is at max value, meaning you fixed everything that’s going to be a high number later. You’re going to eventually get caught on all of them. And if you do that when there’s a market downturn, you’re going to lose them all.
So, I like people to really fix up that first property. Doesn’t have to be perfect. If you know that HVAC is going to break, you know there’s a big cost coming and you can’t go buy another property because you’re going to get caught on both of them and not be able to pay for repairs on either at that time.

Rob:
Agree, 100%. I think I have still to this day, not really paid myself from the cash flows of my property. I always just reinvest them. And I think you’re right. I think appreciation, that is the thing that I’ve realized, I’m like, “Oh, my gosh, this is really where the wealth is created.” I know you have a philosophy that’s like, you will either make money on a deal or you will make money on a deal. Do you think you could maybe walk us through what that means? Because obviously, that’s like, well, what do you mean by that?

Jonathan:
Yeah. It was funny. We were talking about it before. So, the way that I look at it, I’m never going to buy a bad deal. I don’t think I’ve ever in my life bought a bad deal. I’ve had losses on real estate. They were all my fault or the market conditions. But I buy really smart because I use analysis and what I would call asset hunting and what we were talking about, art more than science. I know based on my history, what the repair costs are in five minutes, barring a sewer inspection and stuff that’s underground. So, when I look at a deal, I’m much more relaxed because I think I’m either going to make some money, which is the make money or I’m going to make a lot of money.
And when I build my spreadsheet to start, I put it at the lowest possible ARV that if I did everything wrong, I’m still going to get this. And then, usually, I make 50 to 150 more than that. And I like not even adjusting the spreadsheet till we start seeing the comps later and we start seeing our repair costs. And that way, what I’ve always called the spread, my spread is either growing bigger for me because I’m cautious about that. So, I go into every deal knowing I’m going to make money. It’s just a matter of how much.
So, even when everything goes wrong like it has, okay, I break even. And then, I consider it like, well, now I get the deposit money back. So, there’s no loss in it for me. If I can get the deposit back money, even on a break-even, I wish I made more money, but at least I have the deposit money and then I just go get another property.

Rob:
Totally. And plus, if you’re a long-term holder of your property too, then eventually you will make that money. It is obviously very possible to lose money in real estate, but if you’re actually holding it for a long time and you’re investing consistently and you’re building up a portfolio, you may have a few stragglers that aren’t really crushing it for you, but overall your portfolio over time should be able to carry that slack. And I know you’ve been doing this for a bit.
I’m curious as someone who is not Greene in the industry, but really quite the seasoned pro, do you still get any level of analysis paralysis, or do you just feel like, you can really take on any deal that comes your way?

Jonathan:
Well, I don’t want to take on any deal, but I have absolutely zero analysis paralysis and I think it goes back to my history in working for the government. We have 300 cases on our table at a time. You have to make decisions on things right away. So, even with my team on market and off market, I’ve always been somebody who can make decisions and not really worry about it. If it turns out I was wrong, which all of us have the investments that we cherish that we didn’t get, I’m okay with admitting I was wrong.

David:
Jonathan, on that note, do you have a form of a buy box? I’m sure someone with your experience doesn’t hold to just one buy box. You can look at every deal and see something. But is there maybe like 60%, 70% of your deals overall have these things in common that you look for that you can share with us?

Jonathan:
Yeah. Right now, I like flipping, but I took a break during the pandemic because the deals just weren’t good enough. And I think the restraint is one of my strengths. I don’t have to buy something, I like to buy something. So, to me, when I’m looking at flips, which is my entity that I like, it’s always about what somebody else doesn’t see that I can see, which I know we did actually talk about in 584 as well. I think that you guys were talking about the property that you might be at now. I think that I understand the spread better because I’m looking for things like the property I just bought, there’s a septic issue.
So, I know that traditional home buyers aren’t going to buy that. They’re not going to pay 30 grand for septic. So, how am I going to leverage that? So, my buy box includes towns that I think have a big upswing. The price point is not a big part of the buy box. It’s more the spread and how much I can see. And what I found is, we used to be doing, we did a lot of formula deals like that were 300 buy-ins, 60 reno and then 60 profit, which was good. But now we want more profit. So, I did 465 buy-in, 180 reno, but I made 200 profit. So, as we scale into buying in the 400 to 500 range, if we do it the right way and we’re identifying the properties the same way our scale to profit is so much more. And then, we’ll move that even further. If you’re buying in my areas in the 600 range, you’re going to put in 2250 and get out in the 12, 14 range.
So, I think that’s part of the analysis too, but that’s really what I look for right now. And I’m always looking at that hybrid commercial properties because I just think commercial is where it’s at now. There’s so much available that the leverage is huge to buy commercial with commercial mortgages if you want.

David:
So, you’ve got a different buy box for the different assets that you look at. If this is a flip, you said, I want to be right around 400 to 500 with hopefully less than 200 in construction. I want to profit on 150 to 200. Those are gross numbers that someone else can look at and say, “Okay, I can try to find something that fits within that.” And it cuts down on the hesitation of what should I do and the overthinking. And then, like you said, in commercial, I want to be in commercial, I want to be buying it for less than what it’s worth right now because I think the market is soft and I can go in there and get a better deal. So, maybe 20% under market value, you’re going to be excited.
That still functions as a buy box. It doesn’t have to be this much price per square footage in this part of town with this is owning. Sometimes, it’s just the amount of meat on the bone is what you start with. And then, you figure it out from there. So, in your opinion, you work with a lot of new investors. You’re very active on the BiggerPockets forums, helping with people. Why do you think that just the generic standard newbie who stumbles upon this podcast is really excited, likes everything they’re hearing?
Their dreams are flying out of their head. You could see it happening of everything they want to do in life, but they’re stuck in analysis paralysis when it comes to getting started buying their first deal. What do you think is causing that in that demographic I just described?

Jonathan:
So, I’m 100% sure that this is the reason every single time. There may be other factors, but this is it. They haven’t seen enough homes. Most of them haven’t seen any homes when they’re in analysis paralysis or then it just becomes, I’ve seen one or two, and I’ll grant you that it is very hard as a new investor to get a realtor if you’re not licensed to just show you a bunch of homes when you’re barely qualified or using an FHA. A lot of realtors aren’t going to do it. But unless you’ve seen 15 or 20 homes, I don’t know how you’re making offers on homes.
You don’t know anything and you’re going to lose money because you can’t rely on just the realtor that you just met to make sure that they have your best interest at heart. They want to make a good commission so they’re going to tell you, and I’m telling you, I run a team of 40 agents. This is not all agents, but this is common. They want you to pay the most or they may want to tell you, you want to get a property. And if you’re desperate for a property, that agent’s going to become desperate for the commission.
So, desperation is what will kill you, but not seeing enough homes every single time, every time I’m in the forums. And somebody says, “Oh, analysis paralysis. I don’t know what mentor to use.” Or I’ve been researching and running the numbers on so many homes. I ran 100 deals this week and I said, “How many did you see?” And they always say zero. And that to me is everything because we’re talking art versus science and art is, I need to be in the house, I need to understand how a house is constructed.
I need to understand where to look, always in the basement, what I can see, everything else that’s cosmetic. You need to find the things that are going to cost you money or later, which are the hard things to find. And I think if you’re not looking at homes, you’re just not trying hard enough to be completely honest.

David:
What about when you’re looking at a home, starter, brand new, okay, I know I need to go look at homes. Give me a playbook of overall what you think they should be looking for. And then, Rob, I’m going to throw the same question to you.

Jonathan:
Yeah. Again, I look at this question as me being the agent as a guide for a new investor, a new home buyer. I’m going to take them through every single thing that I see in the house. I’m not going to say, this is the kitchen, this is the living room. They know that. I’m going to immediately start what I call future casting, which is helping them prepare for the future. So, if I see something in the ceiling, you guys know this, you see an evidence of a leak in the ceiling. The first thing I’m going to say is, “Hey, look, you see that discoloration on the ceiling, that looks like a leak. But most times, people repair the leak in the ceiling and then they just never paint over it because they’re lazy.
So, I know that looks like an issue, but later it may not be an issue so don’t get too worked up over that.” And I’ll do that through the whole house. But my biggest focus is away from cosmetic issues and onto all the serious issues. Like in New Jersey, a lot of 1900s, 1850-type homes. So, we see a lot of sloping. I can tell the sloping right away. And then, the first question is like, look, sometimes this is settling. And sometimes this is a foundation issue.
In five minutes, when we’re in the basement, we’re going to look at the beams and the structure and see if there really is an issue. And if not, it might not be a structural issue. Can these be repaired? Yes, but they’re not really for first-time novices. And then, we spend a majority of our time, honestly, in the basement where they’re bored because everybody likes to look at the cool cosmetic stuff, but I’m opening every door. I open the electric panel. I’m looking, showing them the hot water heater. If there’s a permit, how old is it? How old is this furnace? Is there any knob-and-tube in here?
And again, a lot of that will fly over their head at the beginning. But then, again, if you’re doing 15 showings before you make an offer, by the time you get to five and then 10 showings, you’re really going to start to understand the lingo. And then, that’s the exact reason why you don’t fall into analysis paralysis because you feel confidence.
Confident people don’t have analysis paralysis because they’re able to go through the data. We probably mind the same amount of data, but like you said, I just know what I want and I’m looking for assets. And if that asset is attractive to me, I’m going to try to buy it but only at the price that I want to buy it for.

David:
Rob, same question. What do you think people should look for when they’re walking a house?

Rob:
When they’re walking a house, oh, man. I guess it depends on the situation, of course, but for me, I think a lot of people tend to… especially in the Airbnb short-term rental space, people are walking it and seeing it for what it isn’t versus what it is. And so, I am always very understanding of what the house is for the price that I’m getting. And so, I understand a lot of the times if I’m buying a house that maybe is a little bit more on the affordable side, a little bit cheaper, and it’s not completely remodeled. What I’m trying to come in and see and analyze is, can I make this place sparkle?
Can I give it a little razzle-dazzle, if you will, with design, with furniture, with furnishings, with the staging? Obviously, what I like it to have, a remodeled bathroom and a remodeled kitchen, sure. But for me, I want to know, can I make a space shine in photographs? Can I really look at a lot of the characters and save a lot of it? Because a lot of people will come in and remodel the character out of homes. And for me, I’m always like, “Oh, that’s such a shame.” But I am doing a lot of long-distance relationships, not really. That’s not true.
I’m doing a lot of long-distance investing. My wife would probably be like, “Excuse me?” I’m doing a lot of long-distance investing. And so, for me, I’m always coaching my realtors to be very thorough with their videos that they’re sending back to me. And I always brief them. I’m like, “Hey, I need you to be very critical of every tiny little thing that you see in the house. I want it to be as if the seller was there in the room, watching you giving me this tour, they would be angry at how petty you were being about all the little things.” And it’s not because I’m using those things to make my decision.
I just really want to know and understand how a house feels. Is there a sag in the floor? Are there walls in a room that are inconsistent? Meaning, some have textured drywall and then another wall is completely smooth. Are there popcorn ceilings? Are the fans updated? Does it smell in there? And I’m really trying to understand the cosmetics because with short-term rentals specifically, I’m not trying to come in and renovate the place. I like to spend less than $15,000 on renovations.
Our Scottsdale place is an exception to this. But typically when I’m going out and buying houses, I like to stay between the $5000 to $10,000 range specifically when I’m buying a house. And so, I just want to make sure that, of all the things that I need to fix up there, it’s very easy cosmetic because I just don’t have six months to renovate a place and then carry out an entire burster, if you will, a burden into an STR.
Because I like to cash flow as quickly as I can on a short-term rental. So, it’s going to depend on the asset class and everything of course, but for me, for where I am in my portfolio, time is everything. And so, I just want to make sure that what I’m buying is not going to require a much heavier lift than maybe swapping out some floors or painting a house.

Jonathan:
Yeah. I just have one follow-up on that, Rob, because I think he made a great point that I know there’s a lot of wholesalers listing and this is really important. When Rob was saying what he wants his realtors to do in the other areas to really find all the things, you hit it perfectly. You want the things that the seller would be annoyed that you’re focusing on. And if you want to be a good wholesaler and you want to turn that into being an investor, you have to take photos of all of that stuff. The best wholesalers are ones that could present us a whole picture as out-of-state or in-state buyers and show us all the things that are wrong with it.
I know what the rest of it is, but if I take the time to drive 45 minutes to something I think is a good deal and then you didn’t show me the structure and there’s 100,000 in structural issues, you just wasted my time and I’m never going to look again. So, Rob’s coaching his realtors to be better, but I think what’s missing, and what we talked about a little bit, it’s more like transparency. If you want to be good at it, you’re never going to win hiding this stuff. Because all of us who are investors, just tell me exactly what it is.
If I know I can trust you, then I’m going to look for it. And I think you can train out-of-state realtors and boots on the ground to look better for you if they’re just looking in the right places.

David:
In your opinion, what are some of the data points that a new investor should know when looking at properties?

Jonathan:
Yeah, the ARV is obviously the most important because you want to know what your biggest potential is if you’re a flip or even if you’re a long-term investor. So, it’s always repair costs really in the middle. And I think that the hardest thing is that almost nobody knows repair costs and it’s very, very hard to learn because you don’t know if people are even giving you the right prices. So, the truth is repair costs only come with experience. And the best way to do that is make friends who are flipping, find out what they paid for to remove a wall, find out what they paid for a full sewer redo. It’s just the really only understandable way to get it.
Obviously, you’re going to look at your taxes and if you’re buying multifamily, you’re going to look at what the insurance and the rent role is for sure. But again, I think that people focus a little too hard sometimes on the numbers and they miss the asset like Rob was saying before. You want to see what’s unique about this property. I love to buy properties that other people don’t understand how they can best use them. Like you said about the one that you bought in California, David, I think.
There’s oddities out there and people just don’t know what to do with them. But understanding the block values I think is really important. One thing I do is always send and look at all the homes’ values on the block. And I think that gives you an idea because you don’t want to be the most expensive house on the block. You want to be safely in the middle and then help them raise that upwards.

Rob:
So, the MLS is one of those places, obviously, we’re going to be going and looking for a deal that is the main place to get deals and there’s going to be houses on MLS popping up every single day. What advice do you have for people that are actually trying to hone in on a specific deal from the MLS? Is that, A, the only place to get a deal or is that where you’re sourcing most of your deals these days?

Jonathan:
Yeah. I buy a lot on the MLS. I’m licensed and run a big team, so I’m always on there. We buy most of our deals on the MLS just because the wholesalers in my area, their prices are too high and we’re not going to pay the spread on that. So, my best tip for MLS, if you’re licensed is this, and if you’re not, tell your agent to look for this, it’s called back on market or BOM. They’re absolutely the gold mine of all properties. People focus on expireds and FSBOs and I don’t really love those, especially now. But back on market means that a house was under contract. They had an agreement and it failed and there’s three different times when a back on market fails.
And it’s very important to identify how many days it was under. This is why. If the deal fails within the first three days, it’s always cold feet. Buyer got cold feet, something happened. They backed out. That’s not a big deal. You don’t know what’s wrong. If it’s about seven to 10 days, it’s always an inspection issue. So, if they say after seven or 10 days that, “Oh, the buyer got cold feet,” it’s probably not true. They did the home inspection. Something happened. One party didn’t agree. So, that raises my eye. But as an investor, I’m excited because I know that that’s going to turn off other first-time home buyers and will help investors.
And then, if you see 30 days or more, that’s always going to be a mortgage failure, commitment didn’t come in. They couldn’t get the mortgage. And those are exceptional deals for buyers, investors because the seller was right at the door, ready to close and ready to get a big pile of cash. And at the last second, the mortgage failed. So, a lot of times, if you just offer what they offered, you can pop right into the deal, everything, paperwork, all set, you can hop on the title and close those deals really quickly. So, back on market is definitely my jam for the MLS.

Rob:
Yeah. I can relate to this one. And honestly, we’re talking about negotiation. We’ll probably get into this here in a second, but David is really quite the negotiator. Most people probably assume this, but I got to see the masterclass in person, I guess, well, virtually on the phone when we bought our Scottsdale place, because the property that we bought out there was on the market for 90 days. And I think it probably fell out of escrow. And we came in with a very aggressive offer. I think it was initially offered at 3.4 and then I think we offered 3,000,050, something like that. So, it was a relatively large reduction.
Plus I think we asked for, I think it was like a $75,000 closing credit and they said, no. They told us to kick rocks. And so, David was like, “Hey, it’s been on the market for 90 days. They’ve fallen out of escrow.” He was like, “Let’s give it a week. Let’s not even respond to them for a week. And we’ll just say, okay, hey, we’ll walk away.” And we did. And we did what he called putting them on ice, if you will. And so, he was like, “Here’s exactly what’s going to happen.” They are going to be annoyed that we came in with this low offer and then they’re going to start perusing Zillow.
And they’re going to start seeing what they could buy with $3 million if they had that large pile of cash. And then, after about a week, they’re going to come back and they’re going to say, “We’re willing to do this deal.” And I was like, “Okay, sure, Mr. Greene, listen, let’s be realistic. They’re probably not going to go with that.” And then, literally, the week later, they were like, “All right, we’ll do it under these terms.” And it was like a slight markup from our initial deal. And I was like, jaw dropped. I was like, “Wow, that is crazy.”
And you’re right, I think this moment comes with the seller where they have this big pile of cash presented to them, and then it goes away. And then, now they start feeling a little bit desperate and that’s what happened here. They probably started looking at what they could buy, where they could retire. What could they do with $3 million? It’s a life-changing amount of money. And that way, when we actually came in with a more reasonable offer, they said, “Yeah, sure. We’ll do it.” And that to me, I was like, “Okay, David Greene is exactly who he says he is, a pro negotiator. It’s true.”

David:
Yeah. You want a Greene negotiating for you. Jonathan was a form of a negotiator in his previous career. Now, he’s negotiating now. And this is one of the reasons why you always hear people say, “You got to get off market. You get all this creative stuff,” And you do see incredible deals come off market. But they come from people with incredible skills that spend an incredible lot of money and time trying to get those deals.
You always forget to work that into the equation that that wholesaler that got that great deal might have spent $120,000 in six months of time to get that opportunity where those of us that are operating on the MLS, just find the soft spots. Man, we can just go in there, grab a fish and come right out with it.
So, since you’re Greene and you’re clearly a great negotiator, what are the skills that you think make someone a great negotiator and how can people start with honing their own skills?

Jonathan:
Good negotiation to me comes from confidence. We talked about it when we were talking about seeing houses and if you don’t have the confidence in your numbers or what you’ve looked at and what the ARV is, you’re going to be a poor negotiator. And the only way that you can attribute or move your confidence to the next level and get that same confidence on the other side with the person you’re trying to buy the house from is by building the relationships. So, I’ve found over the years that the more that I just build one-on-one relationships with sellers, especially when it’s only me in the game, I can soft play that for a year because I’m not in a hurry.
And that usually leads to windfall properties later. Traditionally, my agents, my investor friends always think it’s funny, because I’ll call people for a year and maybe only four or five times will I ever talk about the house. And they always say the same thing, the clients will always say, “Hey, you didn’t even ask me about the house. I’m not ready to sell it. I said, “I know. That’s why I didn’t ask. I figure you’d call me when you’re ready to sell and just tell me what your price is and what I’m doing in terms of negotiation,” as I always want them to lay the price on the table first and never me. Because if I lay the price on the table, what if it’s too high?
What if they were willing to accept less? So, you’ll never ever once in the history, have I ever made an offer first unless it’s in a traditional setting. If it’s off market, I’m always telling them, “Tell me what your number is. If I like your number, I’ll just pay it. I don’t want to negotiate back and forth. That’s boring. If you give me a reasonable number, I’ll buy your house.” And then, they give me a stupid number and I just leave. And I think to be a good negotiator, and I’m sure we’ll talk about this more is you have to be able to walk away.
And that’s the thing that I think the best, that I don’t want the deal, I’d like it, I don’t need the deal. And I like walking away because just like you were just talking about in David’s masterclass on negotiation, sometimes you put an offer down and their ego gets in the way. And they need a week to go lick their wounds and feel bad about themselves and come to the realization that they were never going to get what they thought. And you just don’t bother them during that week.
You just leave them alone and that you wait for them to call you back. And I did the same as you were saying, Rob, was going to happen with David. I won a contest with my best friend and partner in flipping, Jenny, because I did the same thing. I said, “I guarantee you what’s going to happen is they’re going to go take the second offer that’s not ours that’s going to be a market buyer. They’re going to do inspections. It’s going to fail. And then, they’re going to come crawling back. And they did.
But I told them when they came crawling back, that my offer was going to be 10,000 less and they came crawling back. And then, they said, “Well, we want the first offer.” I said, “That’s not how it works. I told you that if you went and used my offer to leverage another, it’s going to be less.” And so, then they walked away again with ego and then it took another three weeks. And then, they crawled back to say, “Okay, we’ll take it now.” And they still tried to ask for more, but we ended up buying that house. And that one, I think I made 200.

Rob:
So, if I’m understanding your route here, Jonathan, just to clarify for me, because you say, “Hey, give me your number. If I like it, I’m going to pay for it.” And then, if they give you a dumb number, you’re like, “Yeah, okay. It’s not even worth it.” If it’s in the wheelhouse, if it’s at least in the wheelhouse, will you negotiate it if it’s maybe a little high but it’s not stupid? You’ll be like, “All right, let’s work through this.” But if they’re so highly-priced and it’s a really dumb number, that’s not even worth nickel and diming them down to the price that you actually want. Is that about right?

Jonathan:
Yeah. I wouldn’t say that I’m mean, but I don’t like to have my time wasted. My time is pretty valuable. So, if I go out there and I have a good conversation and then they throw me a price, I know it’s worth 450 and they say they want 700. I just say, “This was a waste of my time, but thanks, please don’t call me again.” And I just leave. They will call obsessively over weeks and I’ll never answer and never contact them again. But yeah, if they’re in the ballpark, my first question always is how did you arrive at that number? And it’s always, “I just pulled it out of the air.”
So, I’m already prepared with all the comps and I know what’s sold in the neighborhood and what the repair value is. So then, when I say that, “That’s okay, but where did you come from?” And they say, “Nothing.” And I said, “Well, let me tell you where I got my number that I’m looking for.” And then, that’s when I use my number against them. I usually don’t go off my number much. I mean, look, if someone’s nice and they’re negotiating fairly and they want like $5,000, I don’t care at all. That $5,000 is not breaking my renovation.
But I’ll be very clear if I give you what you’re asking for, you’re going to sign right now. We’re going to go into attorney review. There’s no you get me to agree and then use it to leverage other offers. That makes me walk away every time. And again, the strength of negotiating is not letting people screw you around because you’re desperate for the property.

David:
You hit on another good point. And it’s that you need to make room for the emotions when you’re negotiating that when we as the investor come in and we say, “This is our number that works. It’s very logical, rationale. We’re operating out of our neocortex.” The seller is probably light years away from understanding the deal from our perspective at that point. They still have these pie-in-the-sky dreams. My neighbor’s house sold for this much. Well, I need this much because I have to go do whatever. And they think that their needs somehow equates to their asset that they own.
And time does a nice job of marinating emotions. The knee-jerk response, a lot of sellers will give you will change over three to four days of not sleeping so well, because they’re not sure what’s going to go down. So, I love your method that you have this number in your firm and that if they come back to you again later, it’s going to be a little worse. They come back to you again later, it’s going to be a little worse. It eliminates them feeling like they’re in a position to jerk you around. You’re actually the prize. You have the money, you can get them out of this problem that they have, and they’re going to need to play by your rules.
One of the things I’ve heard you mentioning is just urgency in the situation. Can you briefly describe how urgency in your offer makes you more effective?

Jonathan:
Yeah, it’s what you said. And I don’t use it every time. I use it when I think the other side is trying to play games. I’ll put a 24-hour window, but I love to tell people what the number is going down to so that they’re very clear on the terms. So, if I say my offer’s 480 today, if you don’t answer within 24 hours, the offer’s 470. If you ask me after that, the offer’s 460 and I won’t negotiate it. So, these are the terms, you don’t have to like them. You can never call me again. But if you call me after 24 hours, you’re not getting the same offer. There’s no excuses, I had to do this or that.
I don’t care about that because I’m just trying to buy at the right price. And the way that I always describe it to people is this. I’m pushing a pile of money on the table over to you. And most of my offers are cash. So, I’m really pushing a pile of money on… it’s sitting in front of you. If you want it, take it right now. If you don’t want it and you ask me to push the money back, I’m going to push a little bit less back next time because you’re wasting my time.
I’d like to come to a fair agreement, but also, this is just how it works. And again, they may be emotional and I am okay with understanding that, but I’m an investor. I’m not here to hurt your feelings but I’m also not here to waste my time.

Rob:
This reminds me of that iconic scene in the cinematic masterpiece Dodgeball when Ben Stiller is like, “Have you ever seen $50,000 in person?” And he opens a big briefcase and it’s just $100 bills that’s like an inch tall. You should try that. I hear that that actually works all the time too, actually bringing that to the table. It’s got to be in a silver briefcase though.

Jonathan:
I’m doing to work on that.

Rob:
Awesome. So, I got to say urgency for sure is one of those things that, oh, I love to use it and I hate when it’s used against me, because it works, in this market, especially. When you’re talking about looking at MLS deals and they’re like, “All offers due by Monday, end of day.” And it’s like Saturday morning and the house was just listed and I’m just like, “Oh, come on. I can’t even eat my breakfast. I got to go analyze a deal right now.” But it works. It really does work. When there’s a deadline, it causes you to mobilize. It causes you to put pressure on the realtor, it causes you to contact your loan officer and really get all that going.
I can definitely see how that’s a negotiation tactic that can work. That’s something that you do on a personal level, but even as someone who’s representing people as a real estate agent and with your team and everything like that, are there any other types of urgency tactics or strategies that you’re using on a grander level?

Jonathan:
Yeah. It’s really modified because in a seller’s market, you have to know who has the leverage. So, if I’m representing buyers in a seller’s market, I have to know that they have the leverage. And I can’t say, if my clients are like, “Well, I want them to respond by tomorrow.” You’re like, “Look, that doesn’t work right now. You don’t have the control.” So, what you want to do is find out everything that the seller needs and make sure you incorporate that into your offer, whether or not you’re the highest price is whatever you’re willing to do on price. But I always find out if there’s no guidelines, everything that the seller wants, closing date, what things are important, if they need a use and occupancy.
And so, my offers always have everything that’s a seller requested. So, even if it’s less, I’m using that as a tactic. So, on urgency, if they need to close earlier, I’m making sure my clients can close earlier. If they’re doing it on some other level, I’m just trying to match what they want. But I think we’ve been two years in a very, very hot seller’s market. So, it’s very hard as a buyer to use urgency. And I think people try to overuse it and not understand who really has the control, which is sellers. It’s changing now. And I think it’s going to be real nice for us who’ve been wanting to use it and now can use it again.
But you have to remember that, similar to what David said before about maybe they just are emotionally attached. Sellers are still thinking that the prices from three months ago are valid, we have to slowly show them that it’s not by letting them sit on the market a little. And like we said, nothing more than days on market to get a seller start to come around to your offer. And sometimes you can just be nice. And sometimes I use the reverse urgency, which is, look, if you want to use my offer to leverage other offers, go for it, but nobody’s going to close the deal quicker and easier than I am.
So, I’ll leave it out there for a week. But if I don’t hear from you in a week, I’m never going to offer it again.” So, that’s it. I use it modified and that’s to put pressure on, but also be like, “Hey, I’ll give you a week.” So, there’s different versions. Like I said, I’ve used it to hardline, in situations before and now I’m learning to really listen to who’s on the other side, including agent, seller, what they need and then leverage that as best as I can. And if I can use some type of urgency, I will, but it’s been tough when sellers are in control.

Rob:
Yeah. Awesome, man. Well, as we close out, I didn’t want to end the podcast without talking briefly about your 25 Malvern negotiation in Verona. Can you tell us a little bit about that story and all the juicy details there?

Jonathan:
That’s the one that I actually was talking about, but the dynamic was so interesting because it was between not just the agents. Agents had an ego. The sellers were a little bit crazy and they had an ego. So, it was listed for like 599. And it sat on the market for maybe 30 days. We went and saw it. I made an offer of 465 and they were appalled. I mean, just appalled. And this was a good offer or maybe it was. I might have offered higher. I think I offered maybe 475 at the time. And they said, “Oh, well we have other people interested.” And I said,” Who else is interested?” And they said, “Oh, regular first-time buyers.”
And I said, “Come on.” I said the house needs 40,000 in structural minimum. And remember, most real estate agents have no idea about anything renovations. It definitely needed 40,000 in structural. I said, “You’re going to get to inspection. It’s going to fall out.” And then just like you said with David, they said, “No, our client is offended by what you said.” And I said, “Well, I’ll leave it open for today. And then if not, I’m going down to 465.” And that’s when they got even more offended. They ended up taking the other offer. They did the inspections, it went exactly how I said.
And two weeks later again, they called back. And it’s what I was saying before, I said, “Look, it’s 465.” And they were then again, incensed that I wouldn’t give them the 475 that I originally did. So, I said, “Okay, well call me in three weeks when it doesn’t sell again.” And it didn’t sell for three weeks and there were co-agents on the transaction. So, the one that I was dealing with the whole time never called me back, but his wife called me back and said, “Can you please give us the 465?” And I said, “Sure.”
And I made about 180 or 200 on that. And it was a tough renovation, but I was right about the structural. And I was right because I did my due diligence and most people aren’t doing their due diligence.

David:
You were also right with how you foresaw it falling out of contract if they went with the other buyer. And it’s half satisfying and half frustrating when you can see exactly how it’s going to play out and you can’t just get the other side to skip ahead and do it. You have to wait for the painful dominoes to fall before it finally comes to where you knew it was going to come in the first place. But that’s why you want an agent like Jonathan representing you. Because when you’re thinking, “No, no, no, let’s give them the number they want.”
Nope, let’s hang on. Let’s do it this way. And if somehow it does get through inspection, there’s another house we’re going to find. And you just keep that steady pressure. And eventually, you will take these deals down.
Thank you very much, Jonathan. I really appreciate not just for being with us on the podcast today, but for the work you’re putting in on the BiggerPockets forums and helping fight the good fight of others building wealth through real estate every day. Did you have any last words before we let you get out of here?

Jonathan:
No, I always appreciate being on. It’s always a pleasure to talk to you guys. And I was just going to pub my new podcast when you’re ready.

David:
Yeah, yeah. Let’s hear about it. Where can people fight out about you?

Jonathan:
Yeah, spurred on by years of listening to BiggerPockets and loving this, I started my own podcast. It’s called Zen and the Art of Real Estate Investing. As of today, when we’re recording, the ninth episode came out this morning, but it’s about the mindful approach to real estate. And we’ve talked about a lot of that and that includes these type of negotiation techniques, because I think that investors can get so much overwhelm of information.
You can get like 50% say yes, 50% say no, but if you’re mindful about the way that you approach real estate, which is really all the three of us have talked about on this podcast. I think that you’ll just find it a lot easier to get through. If you approach mindful, you’re going to have less analysis paralysis, because you’re going to do the work to get to the right parts.
But again, thanks so much for having me on. I always appreciate being on BiggerPockets. I’ve been around the site for so long and I still enjoy being in the forums, answering questions and taking inbox messages, and returning them when I can.

David:
Well, thank you for what you do. And, Rob, thank you for being here with me today. This was a great show. I appreciate you sharing the wisdom that you did, Jonathan, and we hope to see you again. I’ll let you guys get out of here. This is David Greene for Rob, cool as cucumber, Abasolo. Signing off.

Mindy:
Welcome to the BiggerPockets Money podcast, show number 338, finance Friday edition, where we interview James and Bianca and talk about large student loan debts, early retirement and real estate investing like always.

James:
One thing is, I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my thoughtful co-host Scott Trench.

Scott:
Thank you, Mindy. Great to be here.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or pay off hundreds of thousands of dollars in student loan debt, we’ll help you reach your financial goals and get money out of the way. So you can launch yourself towards those dreams.

Mindy:
Okay, Scott, this is actually one of my favorite episodes ever, and it didn’t start off that way. We have a guest, we have two guests actually, who have quite a bit of student loan debt. When I was first reviewing their numbers, I thought this is a really big problem. As we started talking to them I realized that they have an income based repayment plan, but they make a lot of money. And at first I was like, this is interesting. And then we started talking to them and the whole situation changes, the direction we were going to go in actually gets changed quite a bit. I can hear people saying, I don’t want to listen to income based repayment programs. This is an awesome episode. We went in a completely different direction than what our guests were expecting and really opened their eyes to different opportunities.

Scott:
I think the elephant in the room when it comes to James and Bianca’s financial situation is Bianca’s student loan debt. Now, because she took on so much student loan debt and has a relatively modest income, relative to the size of that debt burden, they actually separate their finances, they feel trapped in their current location and they’re waiting 19 to 24 years for the repayment programs to come in. And they’re worried about an income based problem from a forgiveness perspective after 19 years, some of those loans may be forgiven and because they’re not federal programs, that repayment program may actually count as income for Bianca.
So major long term problems, I think we were able to avoid those entirely based on their financial situation. I hope that this is eye-opening for folks that are in similar situations or who may find themselves in similar situations in a few years.

Mindy:
Scott, I just love this episode, because very soon in the beginning of this show, we change tunes. It’s just a lot of fun. Now from my attorney, the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor bigger pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax financial implications of any financial decision you contemplate. All right. Let’s bring in Bianca and James. James and Bianca have a fairly good financial situation until you look at the debt.
Bianca was a human chiropractor and took some additional coursework to become an animal chiropractor. She’s sitting on about $278,000 in student loan debt, which has been in forbearance for the last few years, but will go back to about 6.8% interest once the repayment pause is lifted. But back to the good, they have 10 cash flowing rental units across four properties. They spend significantly less than they earn, and their only debt is mortgages and that pesky little student loan thing we talked about. Bianca and James, welcome to the BiggerPockets Money podcast.

Bianca:
Thank you. Thank you for having us.

James:
Thank you for having us.

Mindy:
I’m super excited to talk to you today. Before we jump into that, let’s look at your numbers. You make a whopping $17,310 a month, and this is across both salaries, bonuses, and rental property cash flow. That is a great.

James:
That’s after deductions. Yes.

Mindy:
That’s net income. Their expenses are $7,300. So approximately saving $10,000 a month, which is fabulous. I do see some room for improvement on those expenses. We have a car at 765 a month. That includes gas, insurance, maintenance, registration, all of those things, but it’s still 765 a month. And if we’re going to round up, that’s almost $1,000. Clothing at 250, dogs at $360. Entertainment at 825, gifts 500, groceries 845, healthcare 265, miscellaneous needs 300, personal care 570, travel 2415. I think I see a place we can cut. Utilities 260, for a grant total of $7,300, 7355. Again you’re making $17,000 a month, not a year, a month. So spending $7,000 isn’t such a big deal until we go back to the beginning where we have that $278,000 student loan. I’m not done. I’ve got more things to talk about.
We have that’s 9,955 leftover, which is not really leftover. I think that number can be a bit misleading because you’ve been using it lately to cash flow one of the rehabs on your properties. Investments, we have 401(k) for James at 120,000, HSA at 4,000 traditional IRA at 298,000 Roth IRA at 59,000 after tax brokerage at 368,000, cash savings at 105,000, which normally I would be like, wow, that’s a lot of money in cash, but you do have 10 units over four rental properties. I think that that’s maybe a smidge high instead of grossly high. Subtotal on that is $954,000, which I think is really great allocated, very, very diverse.
Four rental properties total 1.5 million. Hooray for you. Bianca has $7,000 in her Roth IRA, $14,000 in her brokerage account, $5,000 in cash, for a total of $26,000 in total investments. But you put those all together and you have $2.5 million. It seems like you’re doing fairly well. We go back over to the debt side and we have $847,000 in debts, for a grand total of 1.6 million in net worth. So again, it seems like you’re doing fairly well once we don’t look at those student loans. Why is healthcare so expensive? We have a shortage of healthcare and then it’s so expensive to become a healthcare provider. It seems like that’s a self-fulfilling prophecy. Hey, it’s so expensive. We’re not going to allow you to get in there and learn this.
So of course the challenges that I see are the student loans. Clearly if you are allocating so much to that travel fund, you probably like to travel. Bianca and James, what can we help you with today?

James:
Well, I think there’s a couple things and you hit the nail on the head. Obviously the student loans are a big part of what’s out there and and has been weighing on us and how to handle it. We’ve got some ideas based on the program that Bianca’s on for repayment, but also I think that we’re looking at three to four years to try to find a little more flexibility in what we’re doing. I don’t dislike my job, but it’s not something that lights me up every day. It’s not something that I go to work and I just can’t wait to do. And I know that if we look to do something else, it’s going to mean a big step back in salary, right?
Because I’d be leaving the industry that I’m in completely to look for something new, and to be able to do that I want to make sure that we’re in a solid position. I don’t think either of us has a dramatic urge to retire in the next couple years. I don’t think that’s what we’re looking for, but understanding that our income could potentially dramatically decrease if I were to explore something else, we want to make sure we’re in a good position going forward.

Mindy:
Sure. Okay. Let’s talk about this student loan repayment plan.

Bianca:
I’m on an income driven repayment plan. We spoke to some-

James:
Some consultants.

Bianca:
Some consultants, to kind of figure out the best path forward with that. Because obviously it’s quite a lot of debt. Currently on an income driven repayment plan. Started working with them during the pandemic. But basically my income driven repayment plan allows me to pay as little as possible. I’m paying after forbearance ends here, I’ll be paying close to $0 a month or very low. And then after 25 years my debt will be forgiven, but I’ll have to pay income tax on the amount that was forgiven. I’ve been saving for that, putting money away each month and just prepping for that giant tax bill at the end, but still there’s a lot of fear and anxiety around, is that plan going to work? Is this the best plan forward? What should we be doing?

Scott:
How far away is the 25 year forgiveness event?

James:
The loans are split technically between two loans. The first one is about 19 years away and that’s really going to be, I think that one’s the bigger, the bulk of it, it’s the most of it. It’s over 200. There’s about 70 with the interest left for the other one. And that one is additional five years. So looking at it like 24 years.

Scott:
Just to frame what I understand here, the goal here is for James to have flexibility with in a general sense specifically to pursue an entrepreneurial venture, it sounds like in the next couple of years. Is that really the high level goal here? And to deal with the student loans and the context of that?

James:
I think so. I think that that level of flexibility, while also hopefully not taking a huge hit to our lifestyle. We’re looking for whatever that path is to be at least semi location independent too. Because we have family and friends across the country, wouldn’t mind living by for bits of times. We’re also trying to keep that in mind with whatever path we go forward with.

Scott:
Great. And let’s call it some good here. If I were to frame your situation at a high level, let’s pretend that the student loans are just part of your rental property portfolio for a second, right? If you include them in that you’ve got 847 grand in debts against a 1.5 million rental portfolio, that’s not so bad. And your blended interest rate on that is usually 3% for the mortgages and on the 6.8% on the student loans, is that right?

James:
That’s right in exact terms, but there is some caveats to that percentage on the student loans. The program that she’s on, the government offers forgiveness, the negative that occurs each year. So the fact that she’s not paying really anything, and then we have the interest at the end of the year, they actually forgive 50% of that. So really it’s a 3.4% equivalent interest rate, which changes the picture as to what do we do, because we get start getting that interest at low. Is it worth aggressively paying versus possibly saving for the end?

Scott:
Well, even better then in that situation. Bianca, what do you want to do over the next couple of years? Do you have any specific goals around flexibility or outcomes for you?

Bianca:
I would also like some flexibility. I enjoy my work currently, but it is very location dependent and that’s the thing I don’t enjoy about it I guess, because James and I do like to travel a lot. My work does not allow me to just up and leave for extended periods of time unless I really want to impact my business.

Scott:
Awesome. And what happens if you do up and leave from that job, is there any impact on the student loan program?

Bianca:
Yes and no, I guess, because it’s income based. So my income would change drastically. It would drop to zero technically. I’m not sure what would happen if I were just unemployed, what that would do to my income driven repayment plan. But I don’t really want to be unemployed. I like working, even if I wasn’t doing this, I’m a busy body and would want to be doing something.

James:
I think it’d be a lot harder for us to certify that she does not have access to my income or my saved money if she is completely unemployed as well.

Bianca:
And that’s part of what allows my income based repayments to be as low as they are. Is that we’re keeping our finances so separate.

Scott:
That makes sense. I’m calling this out because I think that when I look at your position at a very high level, the student loans are really, they probably feel like a big, the big, I think the story here, but I don’t think are. The story is that you guys are worth 1.6 million, have a cash flowing rental portfolio and save $10,000 a month and have a very responsible debt to equity position across your overall portfolio in a general sense. I think what I’d hope to do at a first point is to free you from this mindset that the student loans are really this crutch that are holding back your financial position.
Here’s several ways to frame it. One is, yes, there are advantages you currently have with this. But in the worst case scenario you have a 6.8% student loan debt that you need to pay off. You can crush that in about two years with your current cash flow situation. So you have a two year debt here from that, and you could also cash out, refinance your rental properties, probably at a similar debt at this point, that level at this point, to pay that off at any point as well. I just want to call those things out because the trade off there of spending 19 years with this as a boogeyman in your financial profile may be fairly steep. Yes, that’s advantageous, but you may not need to do that and you may find that there’s freedom from just being rid of this thing in an earlier time period.
Not to say that’s what we’re going to end up on, I just want to paint that perspective because it’s really not that big of a deal in the context of your financial position. It would be a huge deal to someone else, but when we combine your finances for the purpose of this show, you got a really strong position. What’s your reaction to just that observation?

James:
It comes back, I think for me, the math versus the personal finance side of it, right? Because it’s a weight off your shoulders to think about having it paid off and having it gone, not having it sitting there and worrying about it for the next 19 years to see what happens. But then I sit down and do the math based on what the interest rate is and what we could do with that money and what the opportunity cost is, and I feel like, well, if I could just somehow ignore it and pretend it isn’t there, we may end up in a much better position down the line.

Mindy:
But down the line isn’t five miles down the line, it’s 19 years down the line. How much of your current job do you want to deal with so that you don’t have to pay this off? I was looking at this and I saw $278,000, as a first glance I’m like, that’s a lot of money. And then I’m like, wait a second, you have 10,000 extra dollars every month. And there’s no such thing as extra dollars, but you have 10,000 currently unallocated dollars every month. What is 200,000 divided by 10,000? Because I think that’s not that much. And I did the math on the calculator just to double check myself. That’s 20 months. That’s less than two years. Then you’ve got 17 years to build up the biggest pile of cash you can and you still come out so far ahead without the stress.
You don’t have to do it for 19 years if you don’t want to. Whereas if you go with the income driven repayment plan, you have to do it for 19 years and 24 years for the additional $50,000, which you could then just knock out whatever. But I really would encourage you to sit down with the spreadsheets and talk about your goals. This isn’t a decision you have to make in the next 27 minutes while we’re recording this show. It’s just something to think about. Why do you want to spend 19 years at a job very location dependent, and even though we’re not sharing publicly where you live, I know where you live and sometimes it’s not the most delightful to be outside where you live.
So you would have to be there for 19 years or take some time off, which will further, I think that’s something that’s really worth sitting down with a calculator and a spreadsheet and a lot of different scenarios and just look at it. How could we make this happen? Could we buy another house that solely pays off these loads? Could we buy another house that helps us figure this out a little bit more? I just think that that’s really worth pursuing.

Scott:
Another way to think about this is, let’s look it this way, you spend about 7,300 bucks a month, that’s a little over 80 grand a year. I’m probably doing that wrong. Someone will correct me. I’m going to do it real quick. That’s 87 grand a year. Right? You crush these student loans in the next two years and you just pay them off with your cash flow, you’re at $2 million in net worth because you’ve reduced your student loan balanced by that much. You’re now FI at the 4% rule. Right? So boom, there it is. That’s one way to think about it from a simplistic standpoint, to potentially reframe that. So yes, there’s optimization in the student loan program and we can definitely go there and talk with that.
But my instinctive read on your situation, if just a few minutes in, is that this is the boogeyman that we need to tackle. And if you had knocked this thing out, then all of a sudden you can combine finances. You can think, okay, in three years I could be sitting on a beach for six months out of the year in this beautiful location and the other six months fixing animal backs, those types of things, doing what I love in this area. And we’re done. That’s a freeing thing and that’s the power of personal finance and the privilege that you guys have built because of the incredibly strong financial situation that you have this item aside.
So with that, would you like to talk about that angle or do you want to talk about how to optimize this student loan debt paid off or both, next step here?

James:
I don’t know. You’ve thrown a little bit of a wrench in things in terms of, I guess I was coming the mindset of how are we going to do this most efficiently, but there’s something that I can’t quantify in the idea of it being gone.

Bianca:
Right. I agree.

James:
You can’t see it in a spreadsheet. You tell me to look at the spreadsheets, but I can’t see that in a spreadsheet, the feeling of just not having it there.

Mindy:
I wonder if there’s a way to set up some sort of, some spreadsheet genius that’ll do this in a minute. It’s not me. But you have your 250 and your interest payment. And I think it would be a lot like a mortgage calculator where it shows you, I’m paying 10,000 a month or 8,000, give yourself some buffer. I’m paying 8,000 or 5,000 a month towards this debt. Watch this debt just go away. It’s not 200,000 for a super long time. It’s 200,000 and then all of a sudden it’s only 185. And that is like, wow, I paid off a lot. And then it’s 175 and then it’s 150 and then it’s 100. And you’re like, holy cow, I just paid off so much debt. And my time horizon now isn’t 19 years, it’s another year and I can be debt free.

James:
You mentioned in the intro that maybe we’re sitting at a little more cash than is necessary or that maybe we div. Part of the question comes to, is it worthwhile dipping into that a bit and running a little thinner on cash? Because that would make a big dent. We could make a pretty big dent right away if that’s the route we went.

Mindy:
Yeah, like a 50% dent. Look, now you’re one year away from combining finances and quitting your job and living on a beach. To go from 105 cash to zero cash might give you a little bit of heebie-jeebies, although you make $17,000 a month and you spend $7,000 a month, you actually only spend $5,000 a month unless you’re traveling all over the place. Look at what you could knock out. Gosh, I know that this is not where you were thinking this was going to go, but I like that a whole lot more. Is it awesome to pay $200,000 when you could just spend 19 short years of your prime life working in a place that isn’t always awesome weather-wise, when you could just have it for free? But no. What kind of stress is going to go through? What kind of life changes have happened in the last 19 years that you didn’t account for, that you didn’t plan for, that just kind of happened?
You can’t predict what’s going to happen in the next 19 years. Get it over with, pay it off and then go nuts. You look at your position.

Scott:
I’m becoming more and more convinced that this is the way I view the situation here, because it’s just like, this is your boss. This is your bad boss that you have to deal with on a regular basis, that’s just always there with this. I said, two and a half years earlier, we have $110,000 in cash. So 100%, that’s a great option right there. You also have 401(k)s and those types of things you can borrow against to do that, if you want to arbitrage the interest rates a little bit with that. That could free up a lot of this. And then all of a sudden now you’re combining. I think that a good exercise here for this would be, where do you like to travel? What’s your favorite place to travel to?

James:
I don’t know that we have favorites.

Bianca:
We haven’t picked a favorite yet.

James:
We try to do different things all the time.

Mindy:
How would you like to go to so many different places that you could finally pick a favorite?

Scott:
What’s one of your favorites, the beach, mountains, what’s your go to?

James:
I’m beach, she’s mountains.

Bianca:
I like the beach too though. We can say beach.

Scott:
Okay, great. I’ve now done this a few times, so I probably sound like a broken record on a couple of the recent shows. But go to the beach. When’s your next beach trip?

Bianca:
I guess we have to plan one because-

James:
We don’t have one planned right now.

Mindy:
Permission to plan one.

Scott:
Go plan a beach trip and spend a few grand, and go there and sit there and have your coffee in the morning or whatever. 10 o’clock you’re on the beach, someone’s bringing you a coffee, maybe your first drink of the day or whatever. And then write down where do I want to be in two years, three years from now? Right? Put three years. This is where we want to be. And just write a half page. If you want to use a planner, you can bring a draft, call it draft on there and encourage the other one to manage that and say, what do I want to be in three years? I think that that exercise will be really powerful here, because you’re thinking, where do I want to be in 19 years? Right? 19 years, life’s going to be a whole lot different. There’s going to be a whole different capability set that you’re going to have physically going to all these places.
I think if you think about it in a three year picture, a lot of this will become crystal clear and I’ll be pretty surprised if you don’t find a way to it. I don’t know if you pay off this student loan, but to free yourself from it as a constraint in your situation, it could be paying it off as the easiest way. But I think combined finances where we don’t have to do this, Bianca doesn’t have to work all year round for or most of the year in order to keep qualifying for that to be a factor in constraint. I think that without that without the student loan debt, you’ll have a position that’s two million and or two and a half million in equities between real estate and stocks and in cash and 500,000 in mortgage debt, super conservative position.
That’s a position that’s really strong from which to start a business for example, without student loans over hanging. One income is probably going to come pretty darn close to covering all of your expenses, from Bianca. And I think your rental properties will easily cover the remainder with that. I think that will be a really helpful exercise to come through and say three years from now, this is where I want to be. Maybe those are some starter thoughts, but only you guys can decide that. But I would not do it from where I want to be in 20 years. That’s way too far out. You’re going to be way wrong on that. No one knows what they want 20 years from now, right? Mindy’s laughing at me because I went too far again.

James:
One question I have though as we look at that, if that was a route we were to try to aggressively tackle these and pay them off, is then it comes back to allocating where the money is going right now. Right now I max out my 401(k) every year. There’s slight details on mine. I have a 3% dollar for dollar match. And then at the end of the year if I’m still employed, my company adds an additional 3%, regardless of my contribution. Given what our cashflow is, is it worth backing off on those contributions, if we were to go this route or do I still want to take those tax advantages to put that money away?

Scott:
I think math is math, but I don’t think we have a math problem here. I think we have a boogeyman problem with the student loan. Sorry I’m using that word, I think it’s funny. But I think that’s the real issue here, is that this student loan has too much power in your life from that. But I think that that’s a balancing act. Right? There’s an art to that. One school of thought is if you chose to pay off the student loan debt to just go all in and stop everything else and crush that, and that’s effective. For a lot of people that’s better than a math approach. For you guys it may be I like my match, I’m going to take the match. There’s a couple other things here.
If I have a great rental property deal, I’m going to pounce on it in the meantime, maybe one or whatever, because that’s our portfolio. We’re obviously very proficient at generating income and building wealth through real estate. Maybe there’s a balance there. That comes down to this exercise of just figuring out, where do I want to be in three years? Do I want that so badly that I’m willing to just accelerate it and forget math? Or am I willing to take a more balanced approach to get there, that’s right for us? I don’t think there’s a right answer to that, there will be a mathematically right answer to that. But again, I don’t think you have a math problem here.

Mindy:
James, how old are you?

James:
I’m 41.

Mindy:
And Bianca, how old are you?

Bianca:
35.

Mindy:
Okay. At that age you still have several years before traditional retirement. I would absolutely contribute as much to get the full match as possible. I think you’re in such a great position. Let’s look at, you’ve got the 110K, you throw that at your debt and now you’ve cut your debt essentially in half, I’m just looking at the 200. I should also consider the 50. So 250. Now you’ve got 140 left over. That is now 14 months of your super crazy payments. I’m sure that Bianca might be able to work more hours. Maybe you could pick up, only if it’s worth it, don’t do side hustles that are going to pay you an extra $5, that’s not worth it. But if you can find ways to generate more income to get this paid off, I think you could do it in 14 months. Now we’re talking one year of not making 401(k) contributions.
The market’s been all crazy. I don’t know how frequently you can change your contributions if you see that the market has just been going down, down, down, maybe you do want to jump in and buy when it’s on sale, maybe you want to stick with it and say, you know what, for this next year I’m just doing my 3% to get my total match from them. And that’s all I’m going to do. And every single dollar’s going to go to the debt. And then now in one year, at the end of 2023, you are debt free and you can do whatever you want. Instead of 19 years and 24 years for the 50,000, you now have to reevaluate what you’re going to do in one year. And that is just, I know that’s not the way you thought the show was going to go. It’s not the way I thought it was going to go either, but I’m so excited for the possibility of you being from $278,000 in debt to $0 in debt, because I don’t count mortgages, in one year.

Scott:
I think if you came in and you said we’re making $80,000 a year combined, and we’re saving $400 a month on that, we’d be like, okay, we need to cut the spending a little bit and move things forward there. And then we’re going to figure out how to optimize around this student loan situation. It’s not your reality. Your reality is that this is not 10 times multiple times your income, this is one and a half times your income, maybe two times your after tax.

James:
Framing it in terms of one year changes a lot in my mentality, in terms of every time we’ve talked about it, and every time we’ve looked at it, even the thought of aggressively paying it down, it’s always been, boy, it’s going to be five years. It’s going to be eight years. We’re going to have to skimp by and completely back off in any lifestyle inflation we’ve allowed to happen. That’s been something that’s been really difficult to swallow for me. Framing in terms of well in 12 to 16 months starts to change that picture.

Scott:
Great. That’s our job, right? Hopefully that’s helpful. I think that’s honestly how I feel here. Again, it’s probably going to cost you money in the sense that you could optimize your finances more by doing the plan you came in with, around how we’re going to keep our finances separate. But I think you’re going to miss out on the point of personal finance, which is flexibility with this hanging over you. Life is going to be much better without it.

Mindy:
You said it’s going to cost them money, it’s going to cost them so much less time. They’re going to get so much time back. Here, let’s place some more financial monkey business, just throwing it out there. Scott suggested you have a 401(k) you can take a loan from, I believe you can borrow up to $50,000. So now you have 110 plus 50, that’s $160,000. So now you’re left with, what? $120,000 in debt, 160,000. You pay off right now. And now you are, what is it? 220, 250, 160, now you’re $90,000. Now you are paying off your loan in nine months.

Bianca:
That’s wild.

Mindy:
What if you could do it before next June? What if you were debt free before next June? And is that something that you’re comfortable with? Maybe, maybe not. That’s a conversation that you guys have to have outside of this phone call. How huge is that? Next June you have no more student loan debt. And then of course you would have to replenish your cash reserve. There may be some things that come up, and like Scott said, if you made $80,000 a year, I wouldn’t be telling you all of this, but you make a lot more. Let’s say, let’s go nuclear and say, okay, all four properties, the HVAC system all blew and the roof’s all blew off and now you need to put stuff back on there. You have places you can go to borrow.
Maybe you don’t borrow from your 401(k), and now you’re back up to the end of 2023 and all of that happens, and now you can borrow from your 401(k) to cover that expense. Or you take 75 of this, 105, 110 that you have and put it towards that, and you keep a little bit more of a buffer.

Scott:
Is the reverse true here? Are there sources of income that could be bonuses, like an annual bonus, or these things that could come in above plan or is the cash flow in your rental properties conservatively calculated and could be better in the next year?

James:
The bonus is accounted for in those numbers that we provided. It’s paid pretty well the last couple years and maybe a little less next year based on how we’re trending, but it turns out it’s not going to be as significant less as I thought it was going to be. That’s already accounted for. I think that the properties it’s reasonably conservative on that cash flow. I think we have a little room for rank growth that we haven’t completely taken advantage of. We’ve jumped up because we’ve taken on some new properties in the last two years and we’ve been working on getting rents fully to market. I think we were a little too conservative on this rehab and where we came in on rents. It turns out we have one unit left and when that’s done, I think we’ll get more for it than we expected. There’s some opportunity there as well.

Scott:
I’m not surprised with that. When your financial position looks like this, it seems very likely that you’re conservatively estimating general things when you’ve built this much cash and have this much monthly cash flow and this much wealth. James, what do you for work?

James:
I am in an administrative role for healthcare. Operations role where I have a P&L responsibility for several locations that roll up to me. It’s healthcare as well as it’s been stressed for the last couple years, which is part of the reason where again, thinking about, is there something else that maybe is fun that I could do instead of dealing with healthcare? I don’t know, it’s tough to think about rotating out of that because it’s what I’ve done for so many years, but I think I’ve done my best here.

Scott:
What would you do instead? What’s your inkling?

James:
That’s the problem, is I feel like I invest so much of my time into this job that I haven’t even explored the possibilities or the hobbies to really know what that looks like, which is why we talk about the position I want to be in, and I want to be in a position where we have a lot of flexibility, knowing that likely there’ll be almost no income for me for a little while, till I figure out what that looks like.

Scott:
That sounds like a good exercise for your vacation that you’re going to schedule after this call. It’s to figure out what that looks like and start noodling on that. I think it’s a hard problem, right? Because your head is down, it sounds like you’re fairly successful at that role and it’s got a lot of responsibility and it’s heads down and that’s where your mind share goes. But you’re like, I don’t know if I want to do that for long term. Again, I think that coming back to beating a dead horse here and painting the picture, in two, three years, this debt is paid is off, you’ve rebuilt your cash position to 50 to $100,000. That’s super reasonable with a $2 million net worth. The greenfield from there is going to look pretty open to you at that point in time.

Mindy:
I have a comment, it’s more of a homework assignment for you, James. I was at Camp Moustache and somebody was giving a presentation and she said she was talking to a counselor and she wasn’t sure what she wanted to do. And they said, okay, write down the list of 100 ways to make money. I want to say that this came from the Sheryl Sandberg book, but I think I spaced out when she said that particular part. I don’t want to not give credit, but I don’t know where it came from. But anyway, so I want to give you the same assignment, 100 things that you want to do. And you’re not going to put down 100 things because you’ll put it down like five and you’re like, I can’t write fast enough. And then you get to number 14 and you’re like, I can’t think of anything else, but just what are things you like? Do you want to go teach horseback riding or you’re allergic to horses or do you want to go be an animal chiropractor with your wife? Or do you want to-

Bianca:
Don’t do it. You’ll be in a lot of debt.

Mindy:
Yeah. Don’t go to school.

Scott:
If you want to take off another 300 grand to do that. Yeah.

Mindy:
I’m definitely not recommending that, but you could go work for her. Maybe that would help generate a lot of income that you’re not paying somebody else. Maybe you want to learn how to knit or go skydiving, there’s all sorts of ways that you can generate income when you can think about it. Take a huge vacation, take a whole week. Not a huge vacation a whole week. But really think about this. What are some ways I can generate income or what are some ways that I want to spend my time when I no longer have this job? I don’t think you’ve even given yourself permission to think about that yet, because you’ve got 19 years to pay off this debt. But now we’re paying off your debt in nine months, now you can think about it a little bit more. I do think that nine months is super aggressive.
I don’t know that nine months is actually the right choice for you. Now you’ve got two things to start with. Here’s nine months and here’s 19 years. Now you can figure out where your comfortable repayment plan fits, because I like two years, three years, way more than 19 years. I love this so much. I’m so excited. I’m sending notes to our producer. I’m like, this is going to be the best show ever.

Scott:
We had the Lifeonaire guys on recently and that might be a good read for you as well. That’s a good book. It’s a short, quick read and it has a short little quick perspective changing of get rid of the math problem and start introduced to life problem with that. Go ahead. Mindy.

Mindy:
Do you own one property free and clear?

James:
Yes. Yes. We own one property free and clear.

Mindy:
Oh my goodness. Could you get a mortgage on that property?

James:
Yes. This has been part of the conversation where I thought we were going. Would’ve been something like that or realizing, we’re really conservative as far as our loan to value position in general, overall with real estate. I think we’d actually like to do is dump that property and leverage into something larger. But I understand where you’re going. We could leverage that and just use that to pay off and then have our tenants pay off that loan.

Mindy:
Have your tenants pay off your student loan debt. That’s another thing, what are the crazy things we can do to pay off this student loan debt? Because then your freedom is so tangible. It’s right there. We’re not celebrating enough the fact that you have a fantastic financial position, the fact that you are so conservative in your numbers, I really get the heebie-jeebies when people come on the show and they’re like, I’m going to make $1,000 a month in this property, even though everybody else is only renting theirs for 750. I’m like, you’re not going to make $1,000 a month on that property. I love that you’re conservative.

Scott:
Do you have any properties that you don’t like?

James:
I wouldn’t say that I don’t like, but the property that is fully paid off would be the property that we like the least.

Bianca:
It’s a nice property. It’s just [inaudible 00:40:48].

James:
Out of all the four properties, it’s probably in the least favorable area. Not that it’s in battery, it’s just in the least favorable area and we probably would dump that one before any of the others.

Scott:
That’s another angle, is you dump that one, buy another property that you’d like a lot and then use some of the proceeds for that down payment. Some of the proceeds for the student loan debt as well. Just repositioning some of your assets. It’s the same, is no different than the other things that we just discussed around using your cash flow for the next couple of years. Although it’s a lot harder to be comfortable with that concept intellectually or in practice with that, but that would be yet another angle here to be potentially arrive at that outcome soon.

James:
I think our original plan, not for student loans debt actually, but original plan was to refinance the units we’re currently working on once they are finished, but that was going to also be part of my questions to you. Is it worthwhile at this point, given where mortgage rates currently sit and knowing that one is, I forgot what it’s like, four foreign change right now, would it be worth pulling that equity out at the end?

Scott:
What do you think the mortgage rate would be when you pull it out?

James:
Probably mid to upper fives, 5.5, 7.5, somewhere in there.

Scott:
And so the interest rate and the student loan debt is 6.8, but effectively 3%, with the way you have that. So you’re arbitraging 200 basis points.

Mindy:
It’s only effectively 3% if you do the student loan repayment, right?

James:
Yes. As long as we stay on that program.

Mindy:
The student plan, the income based repayment plan.

Scott:
What would be the cash flow of the property after you do that?

James:
I have to do the math on that. I haven’t done that yet.

Mindy:
Homework assignment.

Scott:
I think it’s really hard because you technically have a 3% interest rate, but you really have a 6.8% interest rate just with the game that you’re playing around the finances there. I think from your life freedom perspective, I’m already mentally bucketing it as a 6.8% interest rate. So that’s positive arbitrage in my opinion, because you then immediately after doing that can merge your finances and do whatever the heck you want. Almost whatever the heck you want. You’re like almostfy once that’s completed. You still have probably another two to three years to finish the play with your current run rate on things. But I think that there’s advantages in that. I don’t know, I think you have a two or three year play to fully finish the game here with your current situation. I don’t know. That’s interesting.

Mindy:
Would that be an owner occupied?

James:
No, no. We are owner occupying one of the properties. That’s the one that’s sitting at the lowest rate that you see there.

Mindy:
Okay. I would say, I’m not sure that you can get a 5, 7.5 rate on a non-owner occupied property unless you’ve gotten a quote really recently, the quotes that I’m getting are high 6s, low 7s. I’m not in the same state, but they are preventing me from getting a loan on my property.

Scott:
I think that’s really hard right now. I think you’re going to get a better interest rate as a source of debt from your IRA. And I think you might have a better one from your personal residence.

Mindy:
Could he borrow from his IRA? He has a 401(k) and an IRA. But can he borrow from his IRA as well? Because then you’ve got your 110 now, 50 from your 401(k), 50 from your IRA, that’s 210. You’re practically debt free by September.

Scott:
Well, you still have the debt against the IRA.

Mindy:
But you’re paying that back to yourself. That’s a way different debt than paying student loan debt for 19 years or working for 19 years. Just more options to think about.

Scott:
What are your thoughts here? What’s are some other things that we can help you out with today?

Bianca:
I know before we went this direction, we were also talking a little bit about looking into bigger investment properties at some point. We don’t really have experience with anything larger than a four unit, but we would like to, and just any thoughts that you might have on that.

James:
One thing is I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

Scott:
Well, I think that property management is a great one to start. One of the issues here is, what was your financial position like when you bought your first property?

James:
I was not far out of school at that time, so it wasn’t great. It wasn’t bad by any means. I was fortunate enough to pretty much have no student loan debts myself. When I saved up the down payment, I bought the duplex that we currently live in. That was the first property, the only property that I owned for probably 15 years. And then we just happened in the other ones really in recent history.

Scott:
Here’s going on right now, you earn, I would imagine 25K a month before taxes.

James:
Might be a little aggressive, but close.

Scott:
Okay. Let’s call it 250.

James:
Little less, but yeah, close to that. Yeah. We can call it 250.

Scott:
Okay. Then we have another 100K at least in wealth accumulation from your portfolio on average, that’s going to completely depend on the market conditions and other things. But on average we can at least expect 100K. The value of your time, if you were emerging as an individual, that’s $350,000 per year in wealth accumulation, and you divide that by 2000 hours, what is that? That’s going to be $175 an hour. When you started your journey, you were not earning $175 an hour. You were earning substantially less than that, probably 20 or $25 an hour. And so it made perfect sense to do all of these things yourself, right? Property management, managing contractors, those types of things. But you have at some point in the last five, 10 years, clearly crossed a hurdle where you’re probably doing too much of the work yourself and negatively arbitraging the value of your time, at least as it’s currently valued for some of these activities.
And so I think that would be a really good exercise to say, what am I doing right now? Let’s cut you in half because you’re two people. But what are you doing right now that’s less than $100 an hour in terms of value of time? And how do you make sure that that gets outsourced? You start hiring that out. You can maybe take a tax discount and say it’s 80 bucks an hour. Okay, I’m going to hire all those items out. And when I have items that are above $100 an hour, I’m going to make sure I’m doing those personally. I think that will be a good mental model for you on that. And you should start underwriting your properties to that. Putting that management cost, for example, into the property analysis, especially when you underwrite the next larger property.
Otherwise, you’re right, you’re going to continue compounding this problem of more and more income and less and less time. Which again, I think is a solution that you can solve for with your nice vacation, coming up and saying, here’s exactly what I would like my life to look like on a day-to-day basis in two or three years. I think that framework will be helpful.

James:
I think so. I think that she has opportunity with her business too, on a dollar per hour average, we should probably be looking at that too.

Scott:
That’s true as well. Bianca, do you own this business or do you have control over the income generation?

Bianca:
Yeah, I own the business.

Scott:
Awesome. That’s perfect. Right? That’s a great framework for that, to think about how to do exactly that same activity set. I think it’s a common problem that entrepreneurs have, Bianca, where folks are continuing to do work that is not very high value when they could be outsourcing that and doing the things that are high value. Constant struggle that everybody faces when they go into business for themselves.

Bianca:
I struggle to give up that control too, which is, I think part of why you want to be an entrepreneur, but then it’s hard to give up control when the time comes to take advantage of that.

Scott:
And the first time you do it, or the first couple of times, you’re taking a big risk and you may very well have it be more expensive than if you’re doing it yourself, but over the long run it’ll be cheaper. What else can we help you with? Did that answer your question about real estate?

James:
I think so. I think that part of what we were struggling with is time management and trying to understand when is it appropriate for us to start allowing somebody else to do some of this, right? I think that we have an exercise look through and try to figure out when we could start, or maybe now we start hiring some of that out instead of doing it all ourselves.

Scott:
You’re in an interesting sweet spot. You’re not in an area where you can outsource everything, you’re in an area where you should outsource some things and do other things yourself. Still that hurdle where it’s obvious you should outsource everything, you’ve have not crossed that yet, but you’re not too far away.

James:
I realize this might not make the podcast, but can I take a minute to celebrate my wife and what she’s contributed? Because if you look at just the numbers, you’re looking at, she’s only got $20,000 at about $278,000 of debt that she’s brought into the relationship. I want to be very clear about how she’s also contributed in other ways. In two aspects really. For me personally, my job, I was at crossroads probably about three or four years ago, and I could have either stayed with the company I was at and advanced or jumped to a different company. And for me, level of comfort, I’m like I’m just going to stay at med, even though I know that that company was not long for this world. She encouraged me to leave, which led to multiple relationships and changes that led me to where I’m at now.
And probably in the last three years I’ve seen a 35% increase in my income based on those changes. That was a huge contribution alone. But also then somehow with real estate, she convinced me to buy duplex a couple years ago, that was well beyond my comfort level.

Bianca:
It was a real dump. It was a real dump.

James:
Well beyond my level of expertise to fix it up. And somehow she convinced me to buy it and with her help and with some very generous family members we did fix that one up. We ended up selling it last year, 1031 into the 40 unit that we just bought, which she also identified that property through a client. Through both of those things, I just want to make sure I give her props for everything she’s brought financially. Honestly we’ve probably turned about 200,000 in equity to about 400,000 in equity in those two moves of real estate.

Bianca:
Trying to make up for all the money that cost you. Thank you.

Scott:
I love it. And for what it’s worth, I don’t think Mindy or I, hopefully no one listening to this has had any doubt about the fact that this is a partnership that has contributed to the wonderful situation that you have right now and you are a great couple and great team on this journey. The only reason we’re looking at the finances separate is for the-

James:
Absolutely.

Scott:
… because of the boogeyman that we’ve identified, that we’re going to try to conquer soon, hopefully.

Mindy:
I knew the only reason you were successful is because of Bianca That’s absolutely going into the show. That’s awesome. That’s lovely. But yes, I think that it can sometimes seem a little impersonal with the show where, hey, we’re really only looking at the numbers. I could make this a 19 hour show and talk about lots of different things. I love that you celebrated her and I love that you shared this, that’s very, very important, and that says a lot about your relationship. It’s not just, wow, I think of her as this burden. She’s so great, here’s all the things she’s doing. I don’t think of this as a financial issue at all. So, yay. I love this. I am making notes all over the place. I love this show. I am so excited for this show.
It definitely went in a different direction and I’m so happy for the opportunities that you have. I think that it would be a lot of fun to just sit down. I am very visual, so I would want to sit down with the big opportunities, that, okay, we can pull 50,000 from this account and 100 from this account and 20 from this account, and we can mix and match and be out of debt tomorrow. Or we can do it a little bit slower and be out of debt in two years. All these different ways we can do it and just think, how would that free up all this time? How would that free up all this mental head space? I really think it would be fairly easy to be out of debt conservatively in two years without making a ton of changes, but you could be out of debt like tomorrow if you really wanted to pull the nuclear option, without really changing a whole lot of your future trajectory.
Because you’ve got $4,000 in monthly income from your rentals and you’ve got the almost, and that’s, let’s see, that’s more than half of what you would need for your spending. And then you’ve got the other half in your brokerage accounts.

Scott:
I completely agree with Mindy. And I would just say that the three year picture is probably the easiest one to start with, because it’s so believable to have it all paid off and have a strong cash position and have your 4,000 in rental income. And if Bianca wants to keep running her business, between the 4,000 in rental income and the income from her business, and easily a 50 to $100,000 cash position if you choose to maintain that or rebuild that. You have complete freedom from there to consider doing something entrepreneurial with an infinite runway and a nice cash reserve. And that could be in real estate, it could be whatever else your exploration of your passions takes you over the next couple of years.
I think that’s a really realistic position. And then you can just say, how do I accelerate that bit by bit? Is there acceleration that I’m comfortable with that I would be willing to make that happen faster? Because you just let the current run rate happen, and that will happen to you if you just allocate it towards those outcomes.

Mindy:
This was so much fun. I’m so excited for all of the options you have. Thank you so much for your time today. I really appreciate you taking the time to chat with us because this is a really, really fun show.

Bianca:
Thank you for having us. This was really eye opening and helpful, and it gave us both a lot of peace of mind I think, to look at it that way.

Mindy:
Awesome. Well, send us a postcard from your beach vacation, where you’re going to talk about all of these things.

Bianca:
We’ll do.

Mindy:
Okay. Well, talk to you soon. Scott, that was such an awesome episode. I loved how we started down one path and then we’re like, wait a second, you could just pay this off now, in the next couple of years, and then you get 17 years of your life back to do whatever you want. And yes, you only can spend a dollar once, so you are going to pay off the student loan instead of buying a house, but you’re only, they have potentially the ability to repay all of these loans in one year with all the financial monkey business that I suggested. And yes, that would put them in a slightly less than super, super secure position by using up all their current cash savings. But they make so much income, I don’t really have a problem with that.
There are other options I would’ve given people in different situations if they had three years left on their repayment plan, if they were making $80,000 a year or $50,000 a year, if they were in all sorts of other debt, but they’re not. For this particular situation I think aggressively paying off these loans is the best choice for them, so that they can get this huge amount of time back in their lives.

Scott:
I think that the ultimate goal here, and it probably comes after around two million plus in net worth. Mr. Money Mustache has a great analogy. He says, the way you feel about money should be like how you feel about tap water, right? You’re not going to turn on the faucet and waste it and all that kind of stuff, but it’s just the utility that you’re going to access here. And these guys, James and Bianca are so close or should be, they’re just on the cusp of being able to view money through that lens. They just need a little bit more work. They’re almost there with their current spending. In a couple more years they’re going to easily crest that threshold just by paying down the student loan, for example.
You get to that point, and instead coming into today’s show, they were thinking I’ve got this monkey on my back for 19 more years or 24 more years for the second part of the student loan debt. It’s like, no, we can so easily just zoom out, take your whole portfolio. Say, where do I want to get to? What’s holding me back? And reallocate, right? And think through, reallocate both your existing portfolio or reallocate where you’re sending the cash that you accumulate on a monthly basis.

Mindy:
Okay, Scott, that is great. I can’t argue with that at all. Should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 338 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying, take the money and run.

CNBC’s Robert Frank reports on America’s most expensive home listing and the luxury real-estate market.

David:
This is the BiggerPockets Podcast, show 666. In basketball, we had this concept called a four point swing. So imagine that you’re on a fast break, you got a wide open layup. You miss it. The other team gets the rebound, they throw the ball the other side, and then they get an open layup. It’s not that they score two points. It’s that you lost two points and they score two points equally, a four point swing. That’s like the worst thing that can happen. The same is true if you don’t house hack. Not only are you not raising rents on your tenants, but you are having them raised on you. That doubles the impact of the power of real estate, but it’s working against you. When you own the asset, you’re getting the four point swing in your favor. Hey, everyone, this is David Green, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Green episode.
If you haven’t heard one of these before, on these episodes we take questions from you, the BiggerPockets community, and have me answer them with my experience with investing in real estate. I try to teach, I try to share, and I try to give advice to the people who are submitting questions so that they could grow their wealth in real estate, similar to how I was able to do for myself and get out of that job you hate and into a life you love. Today’s show’s pretty awesome. I bring some clarity to house hacking in an expensive market. This is a question that comes up all the time. People don’t quite understand the right way to house hack or how it could be so powerful. I get to kind of expand on that point and give some really good advice to one of our listeners who is in Sacramento, California, and having a hard time finding a deal that works.
We talk about what to consider when you are an agent and you are also trying to wholesale or wholetail a deal, the right way to get into that. And then we talk about scaling using DSCR products. So DSCR products are loans that take into account the income from the property, very much like commercial property is evaluated, not the income of the borrower. And I come up with kind of an entire plan for a firefighter who’s trying to scale their portfolio, but concerned about pre-payment penalties. All that and more on today’s show.
Before we get into it, today’s quick tip is we’re nearing the end of September, which means right around the corner is October. And October, from a realtor’s perspective, is when the market starts to slow. We find less buyers are active in the market during the winter months, especially during the holidays. Let’s say you’ve been sitting on the fence. Let’s say you want to buy a primary residence, but you’re tired of being outbid because every house gets so much attention. Now is the time that I would recommend you reach out to your agent and you put a search together and you start looking again.
There are going to be a lot less buyers for every existing house than there was before, which means you have less competition, which means if you’re buying, that’s good for you. If you’re selling, you may want to wait until springtime when there’s more buyers that are looking and you’re more likely to get multiple offers, unless you need the equity now so you can go reinvest it into the slower market.
As an investor myself, I totally take advantages of seasonal fluctuations. I do not think that that’s urban legend. I’ve seen from my experience it’s very true. I often tell the David Green Team clients, “If you want to get top dollar, let’s wait till spring. If you want to get the best deal possible, let start looking for you in the wintertime.” And I increase my own buying during the wintertime. And if I’m going to sell, I try to wait till spring. So just wanted to pass that along to you so you could take advantage as well. Okay. Let’s get to our first video.

Jessica:
Hello. My name’s Jessica and I live in Dayton, Ohio. I’m a relatively new listener, but I love the Seeing Green episodes the most. So, David, I’m really hoping you can help me with this question. We are looking to get into the real estate investment market. Both work full time. Our home has really appreciated, and so we took out a home equity fixed loan for about $53,000 in hopes that we could then have money to put down towards a rental property. We’re finding that a lot of the homes that are within our price range, which we’re trying to stay as close to $100,000 as possible, which in this market, in the Dayton area, isn’t unheard of, but it’s definitely difficult.
Our realtor mentioned that another client she’s been working with recently started Airbnb their property as a long-term extended stay Airbnb. She said they had a lot of success renting it out to families who are looking to move, but who haven’t secured a new home yet and need a place to live for a couple of months. Or, the other thing that is really, really popular around here, we have several large healthcare organizations in the area and they’re growing. They’re massively growing. So that’s booming. My thought too is what stops us from using a long-term, turning it into an extended stay short-term rental? I haven’t heard you guys talk a lot about that. I don’t know what your guys’ thoughts are. It seems that the profit is a lot easier to get a property to cash flow in today’s market using that strategy. And so I just was curious what your thoughts were on that.

David:
All right. Thank you, Jessica, for that question. Also, please give your dog a high five or a high paw for me. We saw a little cameo there in the back, very cute. Wanted to get into show business, I see, and it worked. Also, thanks for saying the Seeing Green is your favorite of the BiggerPockets Podcast. I appreciate that. Mostly because I’m hearing your Seeing Green.
All right, let’s get into your question. I like it. You’re talking about I think what you call them more extended stay short-term rentals. There’s all kinds of names. I typically refer to them as mid-term rentals. If you’ve never heard of these before, basically mid-term rentals is something to have on your radar because I think that this is sort of the next wave, the next common trend. There’s always a trend in real estate that people do really well with, this is the next one.
I’ve got 13 units that I’m working on rehabbing right now to bring online. And when that happens, I will have more information for you guys about how to run them efficiently, how to run them productively. I’ll be able to bring all the education that I can. If I talked about it right now, the problem is I would be speculating. I’d be telling you what I think works and what I’m planning on happening, but I don’t have the data yet to support it. I don’t like to talk until I know for sure, it’s just my personality, so keep an eye on that.
The reason mid-term rentals have sort of become popular and are becoming popular is because many areas are outlying short-term rentals. And when they say you can’t do short-term rentals, they’re typically putting a limit on how long someone can stay in the place as the minimum amount of time. They’ll say they got to be there 30 days or more. You can’t rent your unit out for less than 30 days. This is the case in many parts of Hawaii, where I own real estate, where Brandon lives. And then other municipalities are sort of adopting this because the neighbors don’t like these people coming in for two days and throwing big parties and kind of bringing a bad name on short-term rentals.
Because there’s moratoriums put in place and laws being changed that force someone to stay in a rental for 30 days or more, you’re seeing a lot of people that are owning real estate are getting into catering to people that would stay somewhere for that long. And who is that going to be? Traveling professionals like nurses or corporate executives, people that are maybe moving near a hospital, because they have a sick family member that’s going to be there for a long period of time and they want to be close by, somebody taking a temp job sometimes. Maybe someone who’s moving to an area, but isn’t sure if they want to buy or if they want to rent. Sometimes you take a job somewhere and you don’t know if you want to buy a house. Well, you don’t want to pay the expensive rate of a short-term rental, you don’t want to live in a hotel.
So you’ve got these medium-term rentals, which is what I’m calling. I’ve also heard them called long shorts, extended stay short-term rentals was the phrase that you came up with there. And that’s what we’re doing is they’re furnished just like a short-term rental. They operate just like a short-term rental, but you don’t charge as much because you’re not renting them out nightly. And they’re a little bit less work. On the spectrum of tons of work versus very little work, tons of work tends to have higher profit margins. Maybe I’d look at short-term rentals are the very, very end where you get the most profit but the most work.
Long-term rentals or traditional rentals are on the other side, the least amount of work and the least profit. And mid-term are right there in the middle. I’d like to be able to tell you more about it. I don’t know for sure. I’m anticipating it’s going to be very good. I’ve got three properties that are all in California that I currently bought. And two of them are BRRRRs and one of them is not. But I still had to do a rehab to basically get the houses ready to be in really good shape so that I can rent them out to traveling professionals.
I think in areas like California, that allow ADUs… We have a lot in California where you were not allowed to restrict homeowner’s ability to have an ADU. Cities can’t say you can’t build an ADU. We’re actually allowed to have up to three: a regular house, an ADU and a junior ADU. Of course there’s permitting and code requirements you have to follow, but this is a great market for something like that because you can turn one property into three different units and rent them out to traveling professionals and get much more rent than traditional rentals.
Now, before I get into the details I can’t share, because I don’t know yet, I do want to bring this up as a point to be aware of. I would anticipate that you knew that short-term rentals weren’t going to last because the neighbors complain. If you were paying attention, you would have anticipated, like I did, that medium term rentals would be the next phase. My guess here, and I don’t know this, this is me trying to put on my crystal ball, which looks a lot like my head, is that you’re going to start to see a lot of tenants that start complaining that there are no places left that are affordable to rent. Because all of the real estate investors that we’re using existing inventory that they own to rent to traditional rentals, long-term, many of them have moved into short-term and now you’re going to see them getting into medium term, which means of the rentals that were out there, there’s less supply for long-term tenants and they’re going to start complaining.
When that happens, you typically see politicians pass laws either at the federal state or local levels that restrict your ability to use rentals maybe as a medium-term or short-term. So again, there is no quick answer to real estate. You always have to be adapting. You need to be listening to podcasts like this and staying ahead of the information curve so you don’t get stuck with an asset that you can’t use the way you intended.
I would expect some backlash from the tenant pool that had been renters for a long time as they see their ability to find places to rent is diminishing and the rents are going up on those significantly, because the supply is restrained. So to sum up what I just said, I think the future is mid-term rentals. I think after that, you’re going to see laws that are passed that force landlords to rent their places out as long-term rentals. And that if we don’t build some more freaking houses in some of the busiest areas, this is going to constantly come back to make investors look bad. And it looks like you had a follow-up to your original question that I missed. So we’re going to air it now, and I will reply.

Jessica:
The other thought that I have, that I wanted to throw by you guys and see what you thought, we have several friends who are also interested in getting into the game. Accumulatively, we could probably put money down on a very nice or multi-home property and do a long-term rental that way. And we have friends who have a little bit more experience than we do, who are interested in partnering, but honestly… And it sounds great. We’re very interested. We trust these guys. They have more experience, so we would love to learn from them. I don’t know where to start with the partnership.
What kinds of things should a person be considering when partnering on a real estate investment? I guess I’m just curious, is there a contract template or how have you guys done that in the past to make everybody feel secure in the plan? You guys talk a lot about partnering and so I know you have these answers. I think it’s one of those things that when you’re a newbie, you have no idea where to start. But when you’ve done it a few times, you don’t realize the little details that the newbies are wondering. I’d love to know your thoughts. We can’t wait to hear what you think about these things. Thank you so much.

David:
When it comes to partnerships, first off let me say everybody at BiggerPockets, all the different hosts and personalities and advisors, we all have a different perspective on this. And a lot of that comes down to different personalities, different business goals, different perspectives. There is no right or wrong answer. There is a right or wrong answer for you. Now this may come as a surprise, even though I do talk about partnerships, I tend to err towards not being in favor of them. In fact, I have people that reach out to me about partnerships and it just always seems to go wrong whenever I take that road. I recently did one with someone that I didn’t know and something came up right after the partnership that caused me to question how much I can trust this person, but I’ve already got the money and the deal. I don’t really love that.
Other times I’ve partnered with somebody and they’ve wanted… They’re fascinated by real estate. They have a million questions and I’m more like, “I want less time put. That deal’s already done. Let it sit. Let’s look at the next one.” So we have different goals. If I do partner, there’s a couple rules of thumb. The deal has to be big enough that it makes sense. I’m typically only going to partner on very expensive residential real estate or multi-family real estate. I don’t want to partner on a smaller deal because instead of the work getting cut in half, you just have to do all the work twice, as both sides want a say and some control over how things go down and it’s not worth my time if it’s not a big deal.
Or, the deal has to be something I’m getting in and out of, I would definitely partner on a flip. I would definitely partner on if it was like a big deal and a BRRRR where I thought I could go in, get my money out and be okay. Those are some of the qualifications that I would say I have when I’m going to partner with somebody else. The right reason to do it is because you have complimentary skill sets. Somebody’s great at finding deals, someone’s great at managing deals. Somebody has construction contacts, the other person has management experience.
The wrong reason is for emotional ones. You don’t want to partner with someone just because you’re afraid to do it on your own. I know what you asked for was tactical stuff to make sure you’re doing in a partnership. What I’m going to say is you’re probably better off, if this isn’t a very big deal, to do it on your own without the partner, because I haven’t had the person yet who came back and said, “This deal I did with a partner went well.” I’ve always heard it didn’t go well and then they’re not partnering on future deals. The only exception is if you are going to partner in a company, and that company is going to own several properties, and this is someone you’ve known for a long time and you trust.
In that case, the tactical advice I’ll give you is spell out in the operating agreement exactly who will be responsibility for which parts of the managing it. Talk with that person about how long they’re okay having their money and their equity in this partnership. Some people are letting it ride for 40 years, other people want to get that money in and out in six months or two years, and you will have conflict with your partner if you’re not on the same page as far as the time horizon of the velocity of that money, how soon you want to see it returned to you.
Thank you for reaching out. This is also a really good question to put in the forums and see what different people on BiggerPockets have to say about partnerships that they’ve had that went well or went poorly. Last pieces of advice that I will give you, take all the questions that you’re asking me right now, put them in a Google document and sit down with your partner and say, “Here’s what my questions are. How do you think we should handle each of these things?” And then see how many things you’re on the same page with the partner. It’s way better to ask more questions than less.
And then finally you can search BiggerPockets for partnerships. We’ve done episodes with Rob and I talking about the house that we bought in Scottsdale together. Tony and Ashley on the Rookie Podcast have done several episodes on partnerships. There’s much more available to you than I could possibly answer on an episode like this. If you go to BiggerPockets and search both the forums and the podcast for partnerships, let us know what you find.
All right, our next question comes from Tommy C. in Georgia. Tommy says, “I’m a real estate broker in Georgia and an investor. My favorite people to represent our other investors. I’ve grown my business like crazy over the last five years. I did 27 million last year and over 160 transactions. The first quarter, I’m already at 63 transactions and 8 million in sales. My question is, how do I grow a team of agents that want to work with investors to help me serve more clients? What should I look for in those agents? Currently I’m struggling to get to everyone. I don’t want let anyone down, but there’s not enough time in the day. Any thoughts? Thanks.”
Well, Tommy, a very similar problem to what I have run into, is you have a whole bunch of people that want your help, because there’s not very many people that understand how to help clients build wealth of real estate. There’s tons of agents that will help you find a cute kitchen or be near the school district that you want. There’s not many that understand the way that money is built within real estate. Once you get good at that, you start to find that there are more clients coming your way than you have time in the day, which is definitely the case because you look like you’re doing awesome.
The problem is the reason all those clients are coming to you is because there’s not many people that could do what you do, which is the irony in your inability to grow because you can’t find agents that can help those people because there’s not as many people they can do what you can do. I’ve had several different ways I’ve tried to approach this problem. They’ve all been serviceable. None have been amazing. One way is I’ve tried to train agents how to do what I do. The problem with that is you’ll often spend a ton of your time and energy training the agents instead of helping the clients, and then those agents either won’t get it figured out or they will get the information and leave. This happens all the time.
Another one is that they will understand the information, but they won’t have the same work ethic or integrity that you do. They will know how to run the numbers, they’ll know how to find the houses, but they treat the clients like a transaction. You’re just a number I’m here to get you in and out the clients don’t like how that feels, you lose your future business. The reality is it is very difficult to grow real estate sales team. One of the hardest things that there is to grow, and that’s because the people that you’re hiring tend to have different motivations. They just want to get paid more. They want someone to teach them. They want someone to hold their hand. They want someone to help them grow. Then you have, which is you want them to treat your clients as if it’s their own.
There is no easy way around this, and this is why most of the advice that I give to the investors and the buyers is quit expecting your agent to be able to do everything you need them to do. You almost have to train your agent. If the people that you work with know how to run numbers, know how to figure out the ARV and they can just tell the agent what they need and the agent could go and gets it, that’s typically the best situation for all parties involved. I wish I had an easy answer to give you, but I’m in the same boat. We constantly hire agents train them and then they leave. Or it was harder to make money than what they thought they were going to make.
Now I’m in California where one, even if we have the information, people trying to buy the best houses that are getting tons of competition, get out bid. It’s very frustrating. I think in Georgia, where your price-to-rent ratio is a little more solid, finding cash flowing deals is probably a little bit easier for you. In fact, I like your model so much I’m actually going across the country, I just got back from traveling for 30 days, and meeting with different agents to try to find David Green Team expansion agents in the markets that cash flow strong, so when people come to me and want to buy investment property, I can say, “Boom, I’ve already got this person that I’ve trained.” It might be worth you and I having a talk at some point in the future.
But that’s really the challenge that you’re having, is that we have to figure out a way to serve our clients. That’s the ultimate goal. And doing that is something you’ve done well, that’s why you’ve grown the brokerage so big. Finding the people that are going to have the same level of care that you do is very challenging. So, my ultimate or my last response for you would be probably focus a little bit less on the knowledge they already have and focus on the integrity of the person that you’re hiring. You can always teach them the knowledge, but you can’t change their character. And focus on hiring agents that also own property.
It’s part of why you work so well with investors, is you are an investor. You understand when you’re looking at the deal what you would be doing for yourself, so you know how to help the clients. If you find agents that also own real estate, they are much more likely to be looking at that opportunity for the client from the lens that they would be looking at it themselves. And we always do better when we’re thinking about what benefits us than when we’re thinking about what benefits other people. If you can get those interests aligned, that will help. Thank you for your question. Let us know how that goes.
All right. We’ve had some great questions so far and I want to thank everyone for submitting them. Please take a minute to make sure to like, comment and subscribe to the YouTube channel if you’re listening to us on YouTube. I got all dressed up for you guys today. What do you think about the clothes that I’m wearing on today’s show? Here are some comments from our previous episodes I’d like to share with you.
Matheus Chaves says, “Thank you, David Green. I listen every day to your podcast.” Well, first off, thank you for thinking it’s my podcast, but I’m really just a humble servant of the podcast itself. “I’m finally going to get myself into real estate and this was the show that gave me the final push.” Okay, that makes me feel good. I’m very glad to hear that I helped you get over that hump. Have very low expectations for your first deal, slightly lower expectations on your second deal. By your third deal, you can expect to be doing pretty good. And by the fourth, fifth and sixth deal, you’ll probably be good at it. That’s the best piece of advice I could give you.
Next comment comes from Rea Vera. “I love the long answers. Love David with and without the others, the entire show with all of his personalities is incredible.” Well thank you for that. I’ve often wondered if I need to keep my answers shorter or if I should go on the longer stream of consciousness so you guys can kind of understand the logic behind why I give the answer. Glad to hear that you like it when I take a little bit more time and effort to answer the questions.
Tim Kauflin says, “What happened to the green background? How am I supposed to know that this is really Seeing Green?” Funny you say that, Tim, sometimes I forget to change the light that’s behind my head because I am so excited to start sharing information with all of our audience. Today’s shows was one of those shows. And because I saw this comment, I went back and rerecorded everything with the green light instead of the blue. That’s one of the telltale signs that it’s a Seeing Green episode. A few other telltale signs you can know, it says Seeing Green in the title, there’s no other podcast host with me, and it’s me playing videos and listening to them and commenting on those videos. If you don’t see the green light, or you’re listening to this on iTunes or Spotify or Stitcher and you don’t see the background, you can still feel assured that you’re listening to the Seeing Green episode if it fits any of those qualifications. And lastly, if you’re seeing me, you’re already seeing Green, so it doesn’t matter what color the light is.
Angelo comments, “Thank you for reading my question, Dave, very much appreciated. Even missing fine detail, like we all do, your points come across crystal clear, great skill that you have. I like the longer form answers, the creative ideas on how to approach all of the questions people have. You take time to answer, give examples and provide analogies.” Well, thank you for that, Angelo. I’m glad that you like it. Make sure you subscribe to this channel so you get notified when we put out future Seeing Green episodes.
And our last comment comes from Karl Hackman. “I love your content and the way you break it down so anyone can understand. Would love if you would show your book collection, favorite book.” So bit of an Easter egg there. I’ve got my book collection right here. However, they’re too blurry for you to actually read, because I’m doing that cool thing that YouTubers do where we’re in focus but what is behind us is not. So you can’t really see what those books are. However, if you want to actually submit a question on Seeing Green and say, “David, what are some of your favorite books that are behind you?” Maybe I’ll take a minute and make a segment where I pull those books out and show them to the camera so you can all see what some of my favorite books are.
All right, are these questions and are these comments resonating with you? Do you have situations that are similar and you’d like me to answer? I need to know. Tell me in the comments. Tell me what type of stuff you’d like us to cover, what we can change to make the show better, what you didn’t like about or what your favorite parts are. Or, just say something really funny, because I read them and so does the staff at BiggerPockets, and we love to see what you guys are thinking. The comments section is the best way to get your point of view across, so please go there and leave comments and hopefully we read one of them in a future show.
All right, let’s get to our next question from Shaun Nichols.

Shaun:
Hey David, thank you so much for taking this question. Essentially, my question boils down to what tips tricks or pitfalls do I need to watch out for when wholetailing or essentially working as an iBuyer? I’m a real estate agent and investor in the Columbia, South Carolina markets. And I actually work with an investor who runs an iBuyer program. And essentially what we do is I go in as his local rep and make an offer on a property, 100% of market value, no repairs, no showings, all that good stuff, for like a 12% fee plus the 6% realtor fee. Or, we give them the option, “Hey, you can either sell it to my investor, or I can put it on the market for you at just a 6% fee and he’s willing to do it for any property under $1 million.”
Essentially I’m wanting to do the same thing. I’m wanting to be able to go in and tell a client or a potential client, “Hey, I’m willing to buy your house at 100% of market value, as is, for a 12% fee. Or, I’ll list your property for a 6% fee,” and give them both options to see whatever works for them. If they do decide to sell the property to me, I’m just planning on putting it right back on the market for the exact same price that they sold it to me for.
What things do I need to be watching out for with this? Obviously it’s going to take a lot of cash, a lot of capital, to be able to do something like this, especially if you’re planning on buying the house in cash. But I’d love your opinion on things I need to watch out for. Obviously, I don’t want to be like Zillow and go in and offer what this estimate is and go broke. So any advice or feedback you can provide me, I’d really appreciate it. Thanks. Talk to you soon.

David:
All right. Thank you, Sean. A few things that you are indeed going to need to look out for. The first is you’re blurring the line pretty significantly here between the fiduciary duty of a licensed real estate agent and the non-fiduciary duty of buying a house for yourself. I would have a long and well thought out conversation with your broker to find out what forms they would need you to get signed, to where it was disclosed to the person when you’re acting in the capacity of an agent and when you’re buying it for yourself. One angry family member could get you in a lot of hot water with a lawsuit when you buy grandma’s house for what ends up being a discount and they feel like you could have sold it for more on the open market. And even though you explained this to them, in your opinion, they thought that as a licensed real estate agent you were telling them that the iBuyer option was her best option.
This can happen. This is one of the reasons that wholesaling is, in some ways, considered to be illegal in a lot of different markets. It’s especially troublesome the person’s a licensed agent. Now, I understand how frustrating this is, because as a licensed agent, there’s a bazillion hoops that they make you jump through. And then as a wholesaler, it’s the Wild West, you could do whatever you want. Personally, I think that there needs to be some legislation passed to bring some clarity on this because it’s not fair that people who play the game fairly and go get their real estate license have so much more restrictions, so much more regulation and so much more exposure to being sued than the person who doesn’t have their license, isn’t representing the client is just going there to buy the house for themselves.
But as the way it stands now, in many areas, you are able to do both. So talking to your broker to make sure you don’t get in trouble with the state or the governing board over your license would be the first thing that you should do. Having disclosures to fill out would be another thing for you to consider. Now the third piece would just be your personal exposure. If you’re going in and you’re paying fair market value for houses, like what the iBuyer person you work for is doing, or if you’re trying to get them at lower priced houses, but you don’t have cash, you actually have to think about you’re taking on some risk.
If you’re going to borrow money from a hard money lender, if you are going to borrow private money, if you’re going to take out a HELOC. Where’s this cash going to come from? Because if you try to refinance out of these houses that you buy, you’re only going to probably pull 75 to 80% of the value of the home out. That’s about the LTV that you’re going to get. If you use cash to buy the property for 100% of the appraise value, and then you go get a loan on it, you’re still going to be stuck with 20 to 25% of the money you borrowed from the hard money lender that you can’t get out when you go to refinance into conventional loan. Which means that you probably have to be buying them at 20 to 25% under market value to not run out of capital, which now puts you back in the tricky spot where you’re offering them significantly less to buy it yourself versus if you go sell it and put it on the market.
I don’t know for sure, and I can’t give you legal advice, but here’s what my gut is thinking if I was in your spot. I would find a different license person to refer business to when you find a person that wants to sell it and put it on the market and focus more on buying the houses that you want to buy yourself, than trying to do both and sort of remove yourself from that legal problem that you can run into when you’re trying to act in two different capacities. Thank you for your question and let us know how that goes.
And our next question comes from Tony Spencer. Tony asks about scaling using DSCR loans. If you haven’t heard of these DSCR, stands for Debt Service Coverage Ratio. And it’s a fancy way of saying a loan that is based off income that the property makes, not income that the borrower makes themselves. “Hello, David, I wanted to ask you a question about scaling a portfolio, specifically investing in short-term rentals. My understanding is that a DSCR loan has a five year prepay penalty.” I’ll say most of them do, Tony. A five year prepay penalty means if you refinance or sell that loan or pay it off in any way within five years, you typically are going to receive a penalty and money that you have to pay back to the lender because they gave you that loan expecting to receive interest on it for at least five years.
“Right now I’m BRRRRing an investment property with about 400,000 in equity once it’s done. My debt-to-income ratio is now maxed, so a DSCR loan for my first out-of-state short-term rental makes the most sense.” Like I said earlier, DSCR loans take into consideration the income from the property, not the income from the borrower. So if Tony’s debt-to-income ratio is maxed out and he can’t get a loan with his own income, he still can with the property’s income. “But then how do I buy the next few deals after that? I’m sure I can just save up the cash for another down payment, but that could easily take two to three years. Is it possible to do a HELOC on a DSCR property or do I just bite the bullet and pay the penalty once I’ve got the equity needed? I do have roughly 750,000 in equity in my primary residence, but my wife and I are really not comfortable pulling that out.”
“Another possibility I’ve considered is some type of partnership deal, but that is totally foreign to me. And that’s definitely not my preference. Side note, I’m basically working two jobs right now, a full-time 24-hour shifts as a firefighter, and remodeling an investment property on my days off. In addition to that, I’ve got a one-year-old and a three-year-old at home, but I still make sure to schedule time to listen to this podcast and interact with the BP community. That’s how much value represents me. It’s such an amazing platform and source of information.” Amazing. Well, Tony, thank you. And let me just give a shout out to your fire department. I don’t know the name of it, but if you guys are working with Tony and you listen to this, thank you for the service that you do. I hope all you firefighters out there are eating healthy food and getting workouts with weights and getting to sleep at work like us police officers never got to.
All right, now let’s get to your actual question here, how do you keep buying properties when there’s a pre-payment penalty and you have to use the DSCR loans? Well, the first thing I would say here is you can usually avoid the pre-payment penalty if you pay more upfront for the loan. So if you increase your closing costs, usually a couple points, you can have that prepayment penalty waived. If not, yeah, you might just have to pay it. When you go to refinance. It’s better than not getting a deal at all if your personal debt to income ratio is maxed out. Another thing you could do is use these DSCR loans while it paying down your own debt and increasing your income so that you can use your DTI to get a conventional loan when it’s clear, and use DSCR loans for whatever periods of time it’s not.
Is it possible to do a HELOC on a DSCR property? It’s possible to do a HELOC on any property. It doesn’t really matter what loan you get against the property, because the bank giving the HELOC is just concerned with the equity that you have in the property. They don’t care what type of loan you have in first position. A HELOC is a second position loan basically, that’s qualified based off of your ability to make the payment and the equity that is in the house, so they end up in second position to the first. In that case, your problem isn’t going to be because it’s a DSCR loan. Your problem is going to be because HELOCs are notoriously difficult to get on investment property. They are much easier to get on a primary residence, which is why it would make more sense for you to pull it out of your primary. But then you say that your wife and I are not really comfortable pulling it out.
Here’s my question to your wife and you, does it matter if you’re pulling the equity out of your primary residents versus the investment property? Are you planning on not making the payment for either one? If you’re a firefighter, I’m assuming that means that you can work overtime if you end up in some kind of financial jam and you have to pay back the loan that you took out. So if you’re going to take a HELOC on investment property, why wouldn’t you just take a HELOC on your primary residence? You’re going to get a better rate and it’ll be easier. In my mind, it doesn’t really make a difference which asset you take the HELOC out against, especially if you have so much equity in your primary.
Let’s go worst case scenario. Let’s say you take the HELOC on your primary and someone steals your money, you buy the worst deal ever, aliens come and take your house and fly away with it and you have no collateral. Something crazy happens. Well, you didn’t borrow against the whole 750,000 that you had in your primary. You probably didn’t need that much cash. So worst, worst, worst case scenario, you can’t work overtime and pay back that money over a longer period of time, you can’t afford the payment. You sell your house, because it still has a lot of equity. You pay off all the debt you have. You and your wife go house [inaudible 00:33:18], get a smaller house. Okay? That’s not ideal, but that’s not bad for a worse case scenario when you could be buying more real estate with the money that came from that, growing a portfolio that will pay your mortgage for you and your HELOC for you with the rental income that comes in.
I’d probably have the conversation about why are we afraid about taking a HELOC on our primary? See if you can get to the bottom of where those fears come from, and maybe look at that differently. And then yeah, you’re probably going to have to use DSCR loans until your DTI is changed. And that’s okay. If you got to pay a prepayment penalty, that’s okay. If you don’t want to pay the prepayment penalty, get the loan in the beginning and pay to not have it. You’re going to have to pay a little bit more upfront. Thanks for that question. And I hope work goes well and you stay safe out there, brother.
Next question comes from Chris Roberts in Chattanooga it’s funny. I was just in Chattanooga not too long ago flying out of their airport. “Hi, David. BP has become sort of therapy hour for me lately and I appreciate it. I’ve spent my life in the food industry and need to be doing something different. My wife and I bought a second home to fix up, got a HELOC on our primary residence to finance the rehab. And now I’m trying to figure out if we should sell the primary when we’re moved in, walk away after the HELOC is paid back with maybe 15,000, or keep it and rent it out. That’ll give me about 450 a month in cash flow, considering the HELOC payment in this equation and then the journey could start. I’m also a real estate agent here and love working on project homes. I’m just feeling a little lost in the direction to take with my life, but feel like BP could be a part of it. Thanks for all you offer. And Rob is awesome to, Chris.”
All right, Chris, I think I can actually make this question very simple for you. You took out of HELOC on your primary. You used that to buy the second house you’re fixing up and now you’re trying to figure out, should you pay off the HELOC or should you sell your home and use the proceeds to pay it off and walk away with about $15,000? The question that you got to ask yourself is would you rather have your house you have now, or would you rather have $15,000 in cash? Now when I say the house you have now, what I’m referring to is the house with the HELOC against it. When you consider keeping the house, it looks like you’re saying that you could rent it out for $450 a month extra, that’s the cash flow you’re going to make after your primary mortgage is paid and your HELOC is paid. So now the question becomes even more simple. Would I rather have $450 a month or would I rather have $15,000 in the bank?
Let’s do a little calculation to see what kind of a return 450 is on 15,000. We’re going to take 450 times 12, which is 5,400 divide that by 15,000 and that’s a 36% return on that money. Do you think you can sell that house, take 15 grand and get more than a 36% return on the money? Probably not. Makes it pretty clear that you need to keep that house as a rental property, rent it out and go buy a different house to live in. I especially like that idea because now you get to use an FHA loan or a primary residence loan, somewhere between three and a half to 5% down, to get your next house, which means you don’t need a ton of capital to do it. And that house could become your next rental property after you’re done living there. You are in a great position. You shouldn’t feel bad at all. Well done my friend, keep going.

JD:
Hi David. My question is about the three or 5% down. You’ve mentioned several times that your suggestion is to take great funding, put three or 5% down, house hack, and then just rinse and repeat that. My question lies in the fact that I live in California. I live in Sacramento and properties are quite expensive out here, like 400,000 easy. I hate where I live, so it doesn’t do me any good to buy something super cheap just to end up in a crummy neighborhood like where I’m currently living. I’m looking to purchase something in a nicer neighborhood. You’re 500,000, 600,000. If I want to house hack or create a situation where I can generate some income, then it’s definitely going to be in the higher price point.
I don’t understand how I can make this work according to your suggestion, because putting three or 5% down makes the mortgage unpayable. Can you give an example or give some specifics on how I can make this work in my California market? That would be awesome. Thank you.”

David:
All right. Thank you, JD. Now I understand that you actually had a little bit of trouble getting acknowledgement for the video submission that you put in here. I can see that you are very eager to make some progress, so a few words of suggestion for you. One, if you ever have a question like this, that you feel is very urgent and you need answered, please consider in addition to spinning it to us here at biggerpockets.com/David, go to the BiggerPockets forums and ask it there. Also, I have an agent on my team. He’s been interviewed on the BiggerPockets, money show. He’s been on the BiggerPockets YouTube general, Kyle Rankie, he and Brandon Turner are my two best friends. He works in the Sacramento market. You should reach out to him. He would be happy to help you with this question because we know that market very well.
Now I’m really glad you asked this question because it gives me each chance to clarify a few things for you. You said that it’s very difficult to find a property that will generate income as a house hack when you’re only putting three and a half to 5% down. That is right. It’s notoriously difficult, almost impossible most of the time. Here’s where I think you got confused. House hacking is not meant to generate income. House hacking is meant to save money that you were spending on rent. It’s not something that you should be approaching thinking, “How much money am I going to make?” It’s something you should be approaching with the idea of how much money can I save.
So for instance, if rent in Sacramento where you’re living is $2,500 a month and we can get you a house hack that after your tenant pays you rent, you’re only paying 500 a month or a thousand a month, you’re actually saving 1500 to $2000 a month. Now you’re not making anything because you’re still coming out of pocket somewhere between 500 to 1000, but that is significantly less than what your rent would be. Now you may say, “Well, I’m living in a house. I’m not paying rent.” That’s true, but you have a mortgage still. If you’re able to move out of the one you’re in, if you own it, rent it to someone else, break even or make some cash flow on that and then drop the payment that you are making of maybe 2,500 a month or 3000 a month, down to the 500 to $1000 a month that you’re coming out of pocket to house hack, you’re saving money and you’re adding an additional property to your portfolio.
Now I’m really glad that you submitted this question and we selected it specifically because I need to highlight I’m always telling people to house hack. But the assumption is I should be able to live in a property which takes up one of the units that would normally be rented, put very little money down, three and a half to 5% instead of 20%, and still have it cash flow. And this is why house hackers get so frustrated. In some markets that might work. If you’re in the South, if you’re in the Midwest, if you’re in a place with very low price-to-rent ratios and it’s a fourplex or a triplex, you might be able to house hack and still make a little bit of money. But if you’re in expensive market like California, Sacramento, Northern California, the value is not that you’re making money every month. The value is that you’re owning real estate that’s going to go up in value. The rents are going to be going up in value. The price of the asset’s going to be going up in value. And most importantly, the rent that your landlord is charging you isn’t happening anymore because when you’re renting, your rents go up every year.
Just like when you own the home and you get to increase the rents every year, when you don’t own the home, the rents get increased on you. In basketball, we had this concept called a four point swing. Imagine that you’re on a fast break, you’ve got a wide open layup. You miss it. The other team gets the rebound, the throw the ball the other side and then they get an open layup. It’s not that they scored two points, it’s that you lost four points and they scored two points, equaling a four point swing. That’s like the worst thing that can happen.
The same is true of you don’t house hack, not only are you not raising rents on your tenants, but you’re having them raised on you. That doubles the impact of the power of real estate but it’s working against you. When you own the asset, you’re getting the four point swing in your favor. You’re getting to increase the rents every year and you’re not having them increased on you at the same time that the value of your asset is going up over time, and you’re adding another home to your portfolio. What I’m getting at here is house hacking is incredibly powerful, but it doesn’t work if you’re trying to force it to cash flow. Don’t just think about making money every month, think about the money you’re saving and doing this.
And the last piece of advice I’ll give, if you go make $500 in cash flow investing out of state somewhere else, that’s going to be taxed. Let’s say you get to keep 350 out of that $500. Okay? If you save $500 in rent, it’s not taxed. You’re actually keeping the full 500. So you’re only taxed on money you earn, you’re not taxed on money you save. And this is why I constantly tell people that are trying to build wealth, “Start with what you’re spending. Start by spending less. Start by decreasing the amount of money you spend all the time, because you’re not getting taxed on what you save. It has a bigger impact.” Okay?
If you want to actually make 500 bucks, maybe you have to earn 700 because you are only going to keep a percentage of it. So saving 500 in rent is the equivalent of making $700 in an out-of-state market, which is very difficult to do. Hope that helps answer your question. Thank you for your patience and working with this and get on those BiggerPockets, forums and ask more questions there. All right. I am very glad we got another episode of Seeing Green on the books.
I went pretty quickly here, but that let me bring more value to you by answering more questions. Hope you guys enjoyed this. And I hope that if you’d like to be considered to be on this show, please go to BiggerPockets.com/David and submit your question. Also, if you’re not following us on YouTube, please do that there where you can like, comment and subscribe and we can see what you have to say about the show.
If you’d like to follow me on social media, I’m @DavidGreen24. You can find me there. But your best chance of getting ahold of me is to submit a question here through BiggerPockets and hopefully be on the podcast yourself. Thanks again for giving me your attention and for coming here to get your information about wealth building through real estate. I appreciate that I am the one that gets to lead you through this journey. Thank you for your support and we’ll catch you on the next episode.