The “Energy of Money” and Why You’re Looking at Debt All Wrong

David:
This is the BiggerPockets Podcast show 684.

Parker:
The goal is to eventually use our business and then any other source of income that we can to invest in real estate. I’d like to get one to two properties each year for the next five years. Then, long-term goal is eventually to have a portfolio that pays for our lifestyle that we can go full time into.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode. If you haven’t seen one of these before or heard them, this is a show where we take questions from listeners just like you that want to know what they can do to be a better investor, improve their wealth, overcome obstacles, fears, concerns, questions, ignorance, whatever it may be. They bring the question, I bring the answers. You get to listen and you get to learn. We call it Seeing Greene because in these episodes, I’m explaining what I think they should do based on my perspective, and my last name is Greene and we’ve got this green light behind us. You know that’s what you’re getting into. Today’s show is a lot of fun. We talk about overcoming interest rate ego. If you’ve ever had that tendency to want to brag about the rate you got, that might be costing you more money than you realize, and we talk about that with one of our callers.
We deal with how to deal with the fear of good debt. Fear is real. It is a part of all of our investing journey. Debt can be scary and I tackle how to overcome that as well as different ways that you can look at debt to change your interaction with it and a different way to look at money. Our relationship with money will have a big impact on the success that we have with it or the lack of success that we have with it. Money is not just a thing, it is a concept, and your relationship with that concept is very important. Several times throughout today’s episode, I challenge conventional thinking and ask you guys to wake up, get out of the matrix and see money for what it really is. We also have a great conversation with a guest who has huge goals and we talk about what can be done to help them achieve it.
All that and more on today’s Seeing Greene episode. Before we start the show, today’s quick tip is we’re approaching the end of the year and I want to help everyone get clarity, focus, and attention. I ask, “What can you do to set yourself up for the new year? Do you have goals? Are you planning them? Do you have actionable steps you can take that are the keys to success as they build on each other?” We will commit to helping you in these areas to see the results you want and change your life trajectory if you commit to doing the work and taking the action to get there. Don’t wait until next year before you start planning for it. Start planning right now. Tell me what you want that year to look like in the comments below and what you’re going to do to make sure that happens. All right. We’re going to start today’s episode with a live call with someone who has questions and I’m going to dig into their scenario and see what I can do to help them. Let’s get into it. Mr. Parker?

Parker:
Yes, sir.

David:
Welcome to Seeing Greene. My man, how are you today?

Parker:
I am doing great, man. I’m excited to be here.

David:
We got a lot of green going on. I’m David Greene. I got a green shirt. We got a green light and we are going to dig into what we can do to making you more green. Tell me what’s your first question here?

Parker:
My wife and I got into real estate the beginning of 2022. We wanted to kind of change our lives and change our situation. We set a goal to get involved in real estate beginning of 2022, and then we found our first property and closed on that in May. That’s what we’re living in right now. We’re house hacking that. It’s actually a single family. We’re living in one bedroom and we’re renting out the other two bedrooms. It’s a play on house hack. It’s not a duplex, but…

David:
No. That’s a house hack. Just a variation.

Parker:
Yeah. Yeah. It’s working out. We’ve enjoyed the process. I guess my question is we’re looking at property number two, but we recently became self-employed after we got our first property.

David:
I’m hearing discouragement in your voice. Are you feeling discouraged?

Parker:
Yes.

David:
Okay. All right. Continue.

Parker:
Yes. I’ll get to that. I really underestimated the difficulty of financing compared from a W2 to being self-employed. I’d like to try Airbnb. I’m actually right now working on going under contract on one that I found. I have found private financing, I think. Private lending for the property. The 20% down payment though is where I get stuck and I’m wondering what strategies people have used or what tips people have used to be able to maybe possibly finance the down payment as well because it’s 20% from what I’m hearing pretty much around the board.

David:
All right. Let’s start with a few things here. Then, I’m going to throw it back to you with some more questions. First off, if you’re going to buy an investment property, it’s almost always going to be minimum of 20%. Now, the one brokerage did have some options of 15% down and those do come back sometimes depending on the appetite for lenders. In general, when there’s a lot of confidence in the economy, we get lenders to give us more favorable loan terms because they want to put their money out into play. They’ll give us 15% down. They’ll give you better interest rates. You’ll get fixed rates instead of adjustable. When there’s nervousness about the economy, lenders pull back and then the lending programs that we offer are worse. You should always assume 20%. A lot of it is 25% and sometimes even 30% because obviously, there’s fear about the economy.
Now, that is good for buying homes. There’s going to be less competition, but the terms you’re going to get are bad. The first lesson I want you to learn here is that you never get at all. There’s a give and a take. Okay? When the defense is giving you an opportunity to run, it’s very hard to pass. You’re not going to get both. You got to take what the market is giving you. The next piece I’m going to say has to do with your concerns with financing because you’re not working a W2 job. You’re self-employed. Right?

Parker:
Yeah.

David:
You probably weren’t anticipating how hard it would be to get financing when you’re self-employed. The reason is the lenders say, “Well, if you don’t have a W2 job, we’re not very confident that you’re going to continue to get paid. We’re not confident you’re going to continue to make your payment to us.” That’s where you’re running into that problem. What motivated you to leave the W2 and to get into the self-employed space?

Parker:
Really, really, really long story short, this same year that we decided to get into real estate investing, I also wanted to become a realtor, so I became a full-time realtor. The company that we were working for, my wife and I actually had the opportunity to work together for the same company. When I stepped away, another really, really important individual stepped away as well and the company actually closed up shop. They actually laid my wife off when that happened, and so we decided to then just open up a business doing the same thing we were doing. It’s dog training, so we’re dog trainers. When I left to become full-time into real estate, we were predicting that she would stay, have our W2 and we could get financed that way. When they laid her off, we opened up our own.

David:
Okay. You had the initial plan correct. One of us keep a W2, one of us venture out. You got one foot in security. You got one foot in adventure. That’s ideal. Then, the security foot fell out so your wife jumped in with you and now you guys are doing this thing together. Okay. First question before we get into real estate, we’re going to talk business. Does your wife’s presence in the company at least double the productivity of said company?

Parker:
100, yes.

David:
Okay. If you took either of you out of it, would there be less than a 50% reduction?

Parker:
No.

David:
Okay. Each of you are so valuable to this company that you both need to be in that position?

Parker:
Mm-hmm.

David:
That’s objectively speaking. There isn’t a level of comfort or fun that you like working together and that’s making your business decision here?

Parker:
Objectively speaking, I could leave. She would be swamped.

David:
Now, if you left and she became swamped and you hired an admin or a virtual assistant or somebody to help, could that business still run?

Parker:
Yes, I think so.

David:
Okay. Is this stuff she’d be swamped by revenue producing activity that she’d be losing leads of people that say, “I want you to train my dog?” Or would it be administrative stuff like making sure dog food is ordered and making sure the kennels are cleaned and… I don’t understand your business, so I’m just saying the stuff that could be leveraged out.

Parker:
She’s very much income producing activities. Yeah. That’s what…

David:
Okay. Who’s handling the majority of the operational stuff, like making sure that you can run the business but not necessarily generating revenue?

Parker:
I guess that’s what I’m doing. I’ll help train and then I’ll also help a lot at the accounting and the numbers and the administrative part of it backend.

David:
Can you do that and have another job?

Parker:
Oh, I think so.

David:
My guess would be you’re a smart dude. You got your license in real estate. You’ve taken action to buy a house. You had a W2 job. You jumped into starting this business. You recognize your wife is better at training and sales and you are better at operations. Those type of people are good at being efficient, meaning you get stuff done faster than the average person who’s doing your same type of work would and I’m that way. I’m very efficient. You give me a job to do. I find a way to get it done better and faster than other people because I just enjoy that. Right? You take your average W2 worker and you give them a job and they’re like, “Okay. How do I stretch this into my eight-hour day?” You give it to me and I’m like, “How do I get the whole thing done in two hours, so I have six hours to help other people at their work or do something else?”
If you’re that way, which it sounds like you are, there’s nothing that would say you can’t do both. Now, you might have to be picky about the type of W2 job you get. Okay? You can’t be driving a truck and doing accounting at the same time, but you could be working at a place where you’re not getting a ton of exposure to customers where your job is to keep the books for somebody else. I’m just making something up, so don’t take any of this direct, but something that you like doing that you could do quickly that will give you time to then also work on this stuff in the business. A lot of the stuff in the dog business can probably be done at night. Right? You don’t want to work 20 hours a day, but there’s certain tasks that have to be done the minute they come in.
There’s other tasks like bookkeeping’s a great one that can be done anytime, right? In my business, if I got to talk to a client, if I got to interview somebody, that has to be done at a certain time of the day. But if I’m writing a book, that’s flexible. I can work that around anything I’m doing. I use that to fill in the gaps. I bet you could approach your situation the same way because somebody needs to be the hero in the situation, Parker. I think it’s you. You need to be able to step up and get that W2 job, which will not only allow you to get loans again, you’re going to make more money. I don’t think your revenue’s going to drop from your business of training dogs and you’re going to start bringing in more revenue from a W2. I always look for the synergy. Okay? What one action can I take that gives me benefits in several ways?
That’s how I came up with this solution. It gets you into buying real estate again, which will make you money. It gets you into making more money for the household, which will make you money. It gives you the opportunity to get the down payments saved up quicker. Right? Everything that you’re trying to accomplish… This is a principle, The ONE Thing. If you’ve ever read that book, what one action could I take that would make everything else easier or unnecessary? If you find the right W2 job, I think that there’s a pretty big opportunity for you there. It’s got to be the right one. You don’t want to just jump into the first opportunity you get. You want to have it being paying well in an industry that has flexibility with you being left alone in a cubicle or something where you’re not being micromanaged and uses your skill set. I think that that’s a big win for you. Now, do you have any questions there before we move on to the actual real estate part of your question?

Parker:
No, but I had not thought about that at all. There’s a lot of thinking I have to do on that because when we moved… Yeah, I could elaborate but for the sake of time, no. No more questions on that.

David:
I irritate people with this type of thinking. If you’re my partner, like my partner Christian and the one brokerage has to deal with this, Kyle Rankie with the David Greene team, I am frequently frustrating them because most humans look at a perspective of like this or that. It’s a binary. I can have a W2 or I can be a full-time investor or I can be a full-time entrepreneur. We hire the person for this reason or that and I will frequently look at it and say, “There is not 40 hours of work for this person to do this thing, but we still need it done.” Right? If we hire them to do this thing, they also have to be able to fill their time in doing other things. Do we have stuff for them to do? You see their brain just go on the fritz like, “Poof. What?” But that’s not their job.
We got to think differently. Their job is to work for the company and help the team win. If that means that you’re our offensive lineman, but you’re also on special teams or you also mentor the younger players, we got to get some value out of these people, so we can pay them what we want. I want to encourage everyone to think that way because this is how entrepreneurs think. This is how problem solvers think. You’re a freaking problem solver, Parker. I could tell right off the bat and I would bet you when we get into your real estate question that that binary kind of thinking, that screwed you up and discouraged you and I’m going to give you some solutions here to break out of that. You’re going to feel better. All right?

Parker:
Okay.

David:
The first thing I wrote down is you bought a house hack with three bedrooms. All right? Before I’ve asked you any other question, do you know what the first thing that went through my mind was when I heard that? It’s okay if you don’t. I’m just curious.

Parker:
No. No. I could guess, but I’ll say no.

David:
Yes. No. Take your guess.

Parker:
Well, why only three bedrooms?

David:
Yes, you’re right. You got it. That’s right off the bat. If you’re going to do rent by the room, then the value is in the rooms.

Parker:
Yeah.

David:
Okay? If you didn’t do it in rent by the room, either you didn’t know or weren’t smart enough to tell that’s the right way to go, which I don’t think is true because you’re intelligent, which means you made the decision based on emotion, meaning maybe your wife or you like this house or like this area or it had the yard that would work for the dog training or something about it that you liked other than the specific business purpose of making money. Am I right so far?

Parker:
Yeah. Yeah.

David:
Okay. I know this is true because when I asked you earlier, is there a way that one of you could leave the company? You’re like, “Absolutely not.” Then, I asked, “Was that objectively true or is that emotional?” You’re like, “No.” Okay. I suppose that I could leave. Right? Emotions factor into your decisions and that does not mean you’re weak. That does not mean you’re bad. It just means you’re being honest. That’s why I asked the question. I’m not shaming you for saying you made an emotional decision, but you are doomed to end up in that state of discouragement where you started if you can’t recognize an emotions weighed into my decision. Like I told you, I frustrate the people that work with me, Kyle, Christian, other people. It’s because I am frequently asking them to do things that are in the best interest of the company that push against emotional comfort.
I’m asking them to become uncomfortable, to look at things a different way, to make a sacrifice they don’t want to make and they don’t like that and our brain will fight us and they’re like, “Nope, I see where he’s going. I don’t want to give up this comfort thing.” Then, we start lying to ourselves and it’s not my bad if you start lying to yourself, it’s your bad if you’re doing that. Right? I just want it to get out of the open, so you realize it’s happening. Because the minute you’re honest about that, solutions will start to make themselves known. Sorry for my coughing, I got sick after BPCON from shaking 2,000 hands or whatever it was when we were there. Now, let’s move into your state of discouragement. That is very expensive. That’s a trait that we have as human beings that will hurt if you get discouraged. If you’d have bought a five-bedroom house instead of a three-bedroom house and you were making more money, you’d probably be a lot more excited about house hacking. Is that fair?

Parker:
Yeah. That’s fair.

David:
Outside of how many bedrooms you got, is there anything else about that deal that you think you screwed up on?

Parker:
It’s a little old. It was built in 1990. Depending on who you ask, it is a little older. There’s some pretty big CapEx expenditures that I’m anticipating in the next, however, so many years like the roof and the HVAC.

David:
That’s normal. Every house you buy is going to have that. Don’t beat yourself up about that either. Here’s what probably happened. After you bought this thing, you’re looking back and seeing what you could have done better. Is that fair?

Parker:
Yeah.

David:
Okay. Have you ever taken a DISC profile assessment?

Parker:
I have. Yes.

David:
Are you a high C?

Parker:
No, I’m actually… I think it’s a D.

David:
D. What was your second trait?

Parker:
Oh, I don’t remember what my second one was.

David:
All right. Ds, I’m also a very high D. We tend to value and evaluate ourself based on where we are in the scoreboard. If you’re looking and saying, “I’m not making enough money on this deal, other people did better. I can’t get a loan.” You start feeling like you’re a failure, right?

Parker:
Yeah.

David:
You’re not a failure. On the first deal, you’re supposed to fail. The first time you try to ride a bike, you fall over. The first time you go snowboarding, it’s miserable. Your first anything, you suck. Okay? That’s the first piece I need you to recognize is you did not screw up. You did everything right. You had way too high of expectations for your first deal, which is why we house hack because you could pay three and a half percent down, which is like putting elbow pads on when you’re riding that bike. It cushions the fall because you’re going to fall. Going into your next deal, what are some things you do different if you bought a house next year?

Parker:
I was going to do the same thing if I was going to rent by the room.

David:
You’re going to house hack?

Parker:
Oh, I’m going to house hack.

David:
Well, would you rent by the room?

Parker:
No, probably not. I think I would try to actually find a multi-unit like a real duplex or triplex.

David:
You find a multi-unit, your numbers are probably going to work out better. You’re probably going to have more comfort. It’s probably not going to be as much stress having strangers in your house. Right off the bat, that’s a better investment than the first one you made. Fair?

Parker:
Yeah.

David:
Okay. If you were going to rent by the room, you’d probably look for something with five bedrooms plus a dining room that could be converted, so you get six bedrooms. You’d probably try to find one that has one bedroom separated from all the other ones, so you guys can be there. Maybe you even add a kitchenette into that part of the house, so you and your wife don’t have to share space. There’s things you could do to improve and that should be encouraging to you. You could only get better. You did not screw up. You just didn’t know as much when you got started. We’ve got a couple things you could take away from this. You need to house hack again.
The worst thing you could ever do is just stick with this one house that you’re not super happy with. The next one’s going to be better than the first one, so you got nowhere to go but up. You have an opportunity to go get a W2 job to make this happen. You don’t need 20% down, 25% down. You could do it again with 5% down or three and a half percent down depending which type of loan you use. If you used FHA in your first house, you could refinance an FHA again or my guess is you got a good rate, so keep that rate. Just put 5% down on the next house and get the W2 job. Okay?
Contact us. We could talk about what it would take to get you approved for this thing and the W2 job is also going to provide more money, which could be the difference in one year of work of the 5% you need to put down. All right? Now, you’ve got another house. Maybe you do this for another couple years, just building the dog business and work in the W2. You get more efficient and your systems get better in time. The next thing you know, you got four or five houses. You’ve got a solid foundation. Then, maybe you have enough income coming in. You can quit the W2. You could go back to work for the dog thing and that business now, training dogs has established enough revenue that you can claim that on your taxes to go get a house. You just have to have at least two years of that income. Is that what you’ve been being told?

Parker:
Yeah.

David:
All right. There is a path here to get out of your problem. All you have to do is take what you were hoping would happen in one shot, quit my job, go start this business and just stretch it out over a couple years, stretch it out over a couple properties. Don’t put so much pressure on you to do it all in one move and all of a sudden, you’re going to be in a good spot.

Parker:
Okay. Man, that is very good advice. I have a lot to think about. Thank you so much. Holy cow.

David:
You do and you should be walking out of here very encouraged, dude. There’s nothing about your situation that I think is discouraging at all. This is why I wanted to bring you back on to talk more.

Parker:
Yeah. No. Thank you for saying that. I needed to hear that. Thank you so much.

David:
All right. If you haven’t already done so, please do me a favor and take a minute to like, share and subscribe this video. If you would be so kind, please head over to your favorite podcast listening app and leave us a review there as well. Those help us out a ton and I really appreciate it. Our first YouTube comment comes from Matthew Van Horn. “David, more analogies than Jim Carrey has faces green. Thank you so much for answering my question about better goal setting. I have listened to your response three times and I am so inspired. It’s exactly what I needed to hear and I will put it into action by becoming the quality of person that can handle the reward of pursuing excellence. I love your mindset and appreciate when you zoom out and have these bigger picture sorts of conversations. In my opinion, these conversations are more valuable than any deal deep dive that you might do because I suspect that you are more successful due to your mindset than because of your raw deal finding talent, though you’re amazing at that too. No doubt. I don’t actually know Dave Van Horn, but I should reach out to him because I’ve never actually met a Van Horn that I’m not related to. Plus, he just sounds like an awesome guy. I look forward to reading your future book that you referenced about goal setting.”
Thank you very much, Matthew. That’s some very kind words that you shared there. Dave Van Horn is an amazing guy and I think you’ll love him. In my opinion, I think you’re right. I think mindset has more to do with the success I’ve had than actual raw talent at any one thing. I tend to look at the world from a different lens than other people do. As a result, I’ve been rewarded from that, so I like to share it with you guys here on these Seeing Greene episodes and hope that you can see some of the same success that I’ve been blessed enough to enjoy.
Our next comment comes from Giselle Morales. “David, I’ve been watching your videos for over a year now. I’ve been investing in real estate for the past 15 years, and almost two years ago, I was able to leave my 9:00 to 5:00 and live off my investments while learning more with people like you who share all their experience. Not only have I found you super knowledgeable in real estate, but now I can see your growth as a person wanting and encouraging others to become better human beings. I loved this episode. We are investors looking for wealth and if we add the ingredients to become better people every single day, then we are successful already as we are now. Thanks for all you do. Really appreciate. I’m 100% with you.”
Wow. I appreciate that as well, Giselle. This is a better response than I was expecting to get from that episode. Thank you for that. I really appreciate the support. Next comment comes from Sylvia Barthel, “Excellent show. Would love to see more of these areas David is in, why you pick them, what drove you to these specific properties, et cetera. Thank you for the fantastic show and education.” Well, I am glad to hear that. It sounds like what you’re saying is you’d like to hear more about what I’m seeing when I look at stuff or how I analyze it, and I will make sure that as we go through the rest of today’s show and future shows, that I continue to make sure I share the why behind the what that I’m teaching.”
Our last comment comes from Charles Holder. “I’ve listened to you guys for years at 1.5 to 2x speed. Your last bit of advice was the single greatest thing I’ve heard. Be the greatest person you can be. I’ve ever played it twice on normal speed.” Well, hey, something tells me if we can get Charles to go from 2x speed to normal speed, we’re doing something right. Maybe that needs to become one of the goals that I have in my life in general is how can I get people to go from two time speed to regular speed without just talking too fast to understand it at 2x speed. Thank you for that, Charles. I hope that this helps you with the goals that you’re trying to set and I hope that everybody listening understands wealth and success is not a result of just following a blueprint. It is a result of pursuing excellence.
It’s being the best person you can be, being the best investor you can be, trying to do your best at everything you do. I talk about this a lot because the people that I see struggle with real estate investing have often taken the wrong approach. They don’t like their job. They don’t like their life. They don’t like the results they’re getting in certain areas of their life and so they look at real estate investing like it’s going to be the magic pill that will fix that like, “Well, if I quit working for someone else and I work for myself, everything’s going to get better.” But that’s not necessarily true because if you’re doing poor work for somebody else, you’re going to do poor work for yourself. That is even worse, because you were at least guaranteed a paycheck when you did poor work for someone else. You’re not guaranteed a paycheck when you do poor work for yourself.
Rather than getting frustrated, let the results you get be a form of a mirror that helps you look deeper into yourself and see things about yourself that maybe you weren’t seeing. When we show up to a W2 job and we don’t give our best, we phone it in, we just go through the motions. We’re not trying. It’s easy to be separated from the results of poor effort because your boss is the one paying the price, not you. But when you start working for yourself and you’re not getting results, you end up being the one that pays the price. Remember, you cannot escape the need to pursue excellence, to work hard to give your best, but it’s a whole lot more fun and rewarding to give your best in real estate investing and for yourself than it is for somebody else where you may not have a clear path to a better life.
Thank you guys for those comments. We love and appreciate this engagement. Please continue to like, comment and subscribe to our YouTube channel as well as leave comments on this episode. Did you like the live coaching call that we had with our first caller? Do you like the additional questions that I’m answering? What did you not like? What do you wish I’d gone into more or what do you want to hear more of? Let us know and we’ll do our best to incorporate that into future shows. All right. Our next question comes from Angela Haddorn in Pittsburgh, Pennsylvania.

Angela:
Hey, David. This is Angela from Pittsburgh, Pennsylvania and my question is how to get over the fear of taking on more good debt. I currently have three properties. I have two long-term rentals and one short-term rental in Utah, Tennessee and Texas. That’s right. I do not own a property in Pennsylvania because I’m currently living with my parents trying to get out of that situation. Anyway, I have a lot of equity in all these houses. The minimum amount I have, I think is probably about $40,000 and although I started investing in 2019, I just wish I was further along in my real estate career at this point. I know I have the equity. I’m just a little bit afraid to use it for the fear of potentially putting myself into more debt if I were to refinance or something like that. Any tips or advice would be greatly appreciated.

David:
Hey, Angela. Thank you. We really appreciate your vulnerability in sharing exactly what you’re worried about and it’s super relevant because many people listening have the exact same concerns, fears, struggles holding them back. You stepped up and you shared that. Not many people are going to benefit. First off, pat yourself on the back because we all benefit from you doing the hard thing. Nobody likes to admit what they’re scared of or what’s holding them back. Second off, the amount of equity you have when you just start investing in 2019 is very impressive. You should feel really good about yourself with what you’re doing. You seem to be a good investor, which means you should be doing more of it. Now, let’s get into the practical advice here. What I hear you saying is that taking on more debt is scary to you, but when you say scary, what I think you’re saying is, “I don’t want to lose everything I have because I got too greedy. I don’t want to refinance these properties, get rid of my equity and then invest into something else and lose the whole thing because I took a bite too big to chew.”
I’ll tell you how I overcome that and it’s because I look at debt differently than what you may be thinking. The first piece that I want to say is equity and capital are essentially the same thing. This is something I only recently started teaching about because it clicked in my head maybe like three months ago at a retreat that I put on in Scottsdale, Arizona. When we have energy in a property, we call it equity. When we have energy in a bank account, we call it capital, but it’s really the same thing. We just have a different name for it depending on where it’s being stored. Is it stored in a property? Is it stored in a bank account? Is it stored in money under my mattress? Money is a storage of energy and energy itself is what we’re talking about. Okay?
My personal philosophy is I would rather keep that energy in my bank account where I can access it and it has more flexibility. I can use money in my bank account for many things, then keep it in a property where it is more difficult to access and I can only use it for certain things. If you want to access the equity in your property, the energy in your property, that is called equity, you’ve got two options. The first is a HELOC, which is sort of like a door into that store of energy where you can go in and then take it out. Once you’ve taken it out, it can go in your bank account and then you pay interest on that money.
The other option is a cash out refinance where you go in and it’s not a door that lets you go back in and out. It’s one trip in where you grab it, you pull it out of the property, you then put it in your bank account and the amount of money that you pay per month to be able to get access to it goes up because your mortgage on your houses went up. Now, I know this might sound like I’m painting a very simplistic picture, but it makes it a lot easier to understand how money works if you can see it like this. The second part of how I’d like you to look at debt a little bit differently is to try and not think about it like a fixed number like I have 200,000 in debt. I have 300,000 in debt. That really isn’t important from the perspective of safety.
If what we’re talking about is wanting to keep your properties, the amount of debt you have, it’s insignificant. Now, it becomes significant for a different purpose if you’re tracking your net worth. If you’re trying to see how much energy do I have access to, the amount of debt you have versus the value of your properties, that is very significant. But right now, we’re only discussing how to make sure you don’t lose them. The amount of debt you have isn’t relevant. What’s relevant in this perspective is the monthly payment of that debt. Okay. When I’m going to borrow money… Now, we’re also assuming this is a fixed rate. For instance, a 30-year fixed rate form of debt is different than a three one arm or something. But if we’re talking about a fixed rate for a long period of time, you need to look at, “I have to pay this much to my lender every single month.”
Okay? It’s $2,000. It’s $3,000. “If I were to refi and access my equity, would it go from 3,000 to 3,500? Would it go to 3,700?” Right? Try to look at it in terms of what your payment’s going to be every month. Now, that is useful because you can’t control the equity of your property. It does what it does, but you can, in some form, control the revenue that it generates because you already know that. You know what your rents are. You know approximately how much you can get on these short term rentals. If you have a fixed number that you have a pretty solid understanding that that property’s going to generate for you every month and you can turn the debt into a fixed number of the same type, meaning they’re both monthly amounts, now you can make a decision if refinancing is risky or not. For instance, if your properties are bringing in $10,000 a month and you have a total of $5,000 a month of debt and you’re going to bump that up to $5,500 a month or $6,500 a month, it’s easy to see that’s not a super risky play.
But if you don’t know how much money you’re making every month, it doesn’t benefit you to convert the debt into a monthly amount. That’s one of the ways that I move forward by taking on larger amounts of debt is I don’t look at it like I just borrowed a million dollars. I look at it like, “I am now on the hook for the next 30 years to pay this much per month. Can the properties support that? Can my lifestyle support that? Can my other business endeavor support that? If for some reason the properties can’t pay that, can I get a job? Can my book royalties cover me there?” What can you do to make money in other ways to keep them afloat? My guess would be if you can turn the daunting idea of, “I am $500,000 in debt,” that sounds terrible into, “I owe four grand every single month,” or whatever the number would be, it won’t feel as scary and you can make an educated, confident decision based on empirical data like numbers that will help you understand if this is a good move or a bad move and only make good moves.
Hope that helps you, Angela. I know that I gave you a long winded response because it had to do with changing the way that you’re looking at something, which takes more words to describe. Let me know what you think about that. Send us another video and let us know what you’ve decided. All right. Our next question comes from Steve Doteri in Fresno, California. “Hi, David. I have five single family homes and a commercial medical office building. My question is how do I determine how much I should have in reserves for repairs and capital expenses such as flooring, HVAC, roofs, et cetera? Is there a formula or a range I can use to gauge where I’m at? I want to ensure that I have enough reserves so I don’t get into a pinch, but not too much that I have excess cash not working for me.”
Steve, that is a very good question to be asking. As investors, we are always balancing this. We don’t want idle cash sitting around, but at the same time, we don’t want to overextend ourselves, so we don’t have cash if we need it. I don’t have a way that I budget this specifically because I just make sure I’m always working so there’s always new money flowing in case I do have something go wrong. But it sounds like that’s not the case with you, right? What I would do if I was in your situation is I would look at my commercial medical office building, for example, which is more than likely a triple net. In that case, you’re probably collecting money from the tenants every single month to repair a roof that needs to be done or an HVAC or if something goes out, maybe you go out and you do a cash call and you say, “Hey, everybody asks to pony up.” Look at your lease or talk to your property manager and have them review your lease to see if you are on the hook for repairs for that specific property or if you’re not, you’re probably not.
Now, these five single family homes. Just to simplify this, if I was in your position, I would look at all of them and I would look and see how long before the air conditioner goes out? How long before the roof goes out? Now, you’re in Fresno, California. Okay? If we’re just being honest with ourselves, it doesn’t rain a whole lot there. You’re probably not going to have to put completely new roofs on most of these houses if you don’t want to. Patches, repair work, you could probably get by with the roof you have for a very long time. Unless you had a situation with a roof that was significantly problematic, I wouldn’t worry too much about that. I would just keep a decent amount of money set aside, so that you could make repairs if were needed.
Another thing you could do is you could get a home warranty on these homes. It might cost you somewhere between four or $500 a year, but if the HVAC goes out, make sure it’s covered by the home warranty and boom, they will be replacing that instead of you. It’s another way that you can have less money set aside for capital expenditures. The last piece I’ll say is you need access to money. You don’t necessarily have to keep in your bank account. Like we just had with our last caller, Angela, you got to learn to look at money as a store of energy. If it’s stored in the property, it’s equity. If it’s stored in your bank account, we call it capital. You don’t have to store it in your bank account. You can put a HELOC on one of these properties, so that in a worst case scenario, if something goes terrible, you can pull money out of the HELOC to make the repair and then slowly pay it back down.
That HELOC is like a portal into the energy that’s stored in one of your properties that if you need, you can go walk that portal. Now, of course, it’s going to come with an interest rate. There’s a cost of travel in this instance or this picture that I’m painting here, but that’s okay. It’s better to do that than to keep the money sitting in your bank account not working for you whatsoever. That’s one thing to keep in mind. The other thing to keep in mind is that if you’re buying properties that you’re adding value to, you’re not being a lazy investor. You’re going after something that you can make worth more, that’s going to appreciate more over time. You’re always in a position where worst case scenario comes. You could sell something and have a lot of capital now that was converted from equity that you can use to cover for your portfolio.
I do expect that the market’s going to get tighter and tighter and tighter every month while we continue to increase interest rates, so it’s going to be harder to sell properties in the near future unless you bought them 10 years ago or 12 years ago or something where you’ve got a ton of equity, but I don’t think it’s going to stay that way forever. I think rates are going to come back down. The market’s going to take off again, and we’re going to look back and talk about this time as one of the great opportunities to buy real estate that we had and wish we’d taken advantage of buying more. Thank you very much for your question there, Steve, and good luck to you. All right. Our next question comes from Greg Seavert in Hawaii. Greg started short-term rental house hacking his primary residence with great success, then took out a HELOC down payment for a second vacation rental in Florida where he’s originally from. Now trying to figure out how to keep buying.
Greg says, “I have a successful vacation rental in Florida with $100,000 in equity and a good fixed rate at less than 3%. As interest rates rise, should I cash out, refi a down payment for the next property at the expense of a higher rate? That would hurt my pride, but do I need to shift my mindset to make the next investment?” All right. I love this. First off, Greg, kudos to you for admitting that it’s about your pride because interest rates always are. It’s like I make a joke that interest rates are the thing that everybody at the cocktail party when they’re sitting around swirling their drink is like, “Oh, what rate did you get? 3.2? That’s not bad, but I got a 2.95,” and it’s how they feel good about themselves, but no wealthy person that I know ever talks about the cost of their debt.
It’s just not a metric that they look at. They don’t sit there and say, “I’ve got this many properties, but this is my interest rate on everyone.” Right? We measure cash flow. We measure equity because that has to do with net worth, but no one talks about rate, so I gave that up a long time ago. When you’re going to get the interest rate, you get the best one you can get, but you don’t let it actually factor into whether it’s a good idea to buy. I’ve told this story before. I will tell it again. I had properties in California, I believe four of them that all had rates below 4%. Right? It ranged between three and a half and 3.75 for these four different properties. I refinanced out of them until like a 5.65. This was several months ago, and it did not feel good.
I did not enjoy it, not one bit. I felt the same thing as everybody else. It felt stupid to go out of a lower rate and into a higher rate. Well, what I did was I pulled over seven figures out of those four properties, and then I reinvested that money. Now, here’s the kicker. I went from say a average of a 3.65 to a 5.65, just to simplify this, about 2%. If I can make more than 2% interest on these houses that I bought, I’ve already improved my cash flow. Furthermore, if those properties go up in value or go up in the return I’m getting, so if I just get a 2% and next year it becomes a three, I win even more. If the houses themselves become worth more, I win even more.
As I pay down this new debt that I took out with my tenant’s money, I continue to win. As I build new resources in new markets, new agents, new contractors, new people that will help me with future deals, I continue to win. If I bought these new properties at less than market value, I continue to win. What’s funny is that I went through a 1031 where I sold properties and I bought new ones, and I added over a million dollars in equity just from the difference in value from what I paid versus what they appraised for on that. Now, I didn’t buy those with the money that came from my refinance, but let’s say that I did. In that scenario, I went to a worse rate, got a million bucks, and then added over a million dollars in equity to my portfolio. I pulled the energy out of the four California houses. I had to pay the price of a higher interest rate.
I put that energy into new properties and doubled it in just right off the bat. Okay? That’s not exactly how it worked out in practical terms, but it does highlight the point of why it’s okay to refinance out of a 2.95. It doesn’t matter. It does not matter. In fact, the higher rates that we’re seeing now are what is leading to the better price of the homes. The cool thing with the interest rates is they function like a ratchet. They only go one direction if you have a fixed rate. If you get a 30-year fixed rate and you have to go out of your 2.95 and you have to get into a 7% or something like that, 7% is the worst case scenario of what you will pay until it’s paid off. There is a high likelihood that over the next 30 years, rates are going to go less than that 7%.
What if they got all the way back down to 3.2 or 3.3 or even 2.95 again? Well, now you took out all the equity. You bought a bunch more real estate. You paid the 7% for a couple years, and then it dropped back down and you refinanced into something close to what you had, but you’ve got five times as much real estate. I think that’s the better way to look at it. Now, don’t go buy dumb stuff. Don’t go buy stuff that costs you money. Make sure you’re buying good solid cashing assets in good areas, getting it at the best price you can, and then let the market dictate what you do. If the market has rates drop, refinance. If rates continue to go up, buy more real estate at better prices. If it hovers, buy better real estate. You’ve got so many options and ways you can build wealth if you can get access to that energy that is currently stored as equity at this 2.95 number.
Don’t let your ego get in the way. Make sure you’re making wise, good long term decisions, and don’t worry about your rate, because at a certain point, they come back down and you can get it back again. All right. Thank you as always to those who submitted questions for us all to learn from. We really appreciate it. We couldn’t do a show like this without you, and I genuinely appreciate you sharing your fears, your questions, and your concerns as well as those of you that are listening, I understand attention is expensive and you could be giving yours to other people in other places, and you’re bringing it here, and I really appreciate that. Please continue to do so. If you’d like to follow me, see more about my mindset, more of what I got going on. I’m online on social media, @davidgreene24. I’m on YouTube at David Greene Real Estate, and I have a free text letter that you can sign up for called Behind the Shine shining on my head, which you can go to davidgreene24.com/textletter and sign up there and check out my website. Let me know what you think of it.
I just had it made and now I’m having another one made, so let me know what you guys think should be in that new one. The last thing I want to leave you with is I strongly urge you to reconsider the way you look at money. Okay? Your relationship with money will have so big of an impact on the decisions you make for things surrounding it. You’re going to work every day. You’re probably working a minimum of eight hours, plus a commute. Money already takes up a huge part of your life and you can’t avoid it. We don’t want to become a slave to money. We don’t want to worship money, but we also don’t want to ignore the impact that it has in the quality of our lives. If you’re spending this much time at work, understand what you’re working for and how to make it work for you because if you can improve the situation of your money life, you can improve the situation of the quality of your life.
I’m going to be talking more about how money is a store of energy and how looking at it differently will change the way that we interact with it. Please consider some of the stuff I said on this show and let me know in the comments what you think, or if it doesn’t make sense to you, tell me what questions you have regarding this concept that money is a store of energy and I will do a good job, as good as I can to explain it in more depth. Thanks a lot, everybody. Check out biggerpockets.com. Forums, books, blogs, everything that you need, we’ve got it to help you build your wealth. I’ll see you on the next one.