Out-of-State Mistakes, “Low Risk” Real Estate

Out-of-State Mistakes, “Low Risk” Real Estate

Out-of-State Mistakes, “Low Risk” Real Estate


Real estate investing was never meant to be easy, but there are a few ways you can get started without putting a ton of your money or time at risk. Most real estate investors go gung-ho from the start, buying as many cheap rental properties as possible, only later to realize their mistake. But here’s the thing; you don’t need to invest in sketchy markets or buy dirt-cheap rentals to make money, you just need a bit of creativity if you want to get ahead.

On this episode of Seeing Greene, we’re taking you through a plethora of investing strategies. We talk about how to invest in real estate when at the tail end of your career, whether to convert your garage into a rental or buy an out-of-state investment, the true cost of holding onto a risky rental property, and why your “cash flow” numbers probably aren’t what they seem. And, if you’re a young investor thinking of skipping college to dive head-first into real estate, you may want to hear David’s advice before you make that move.

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets podcast show 765. We’re going to do this as low risk as possible. I want you to look for a short-term rental where people want to visit. I want you to rent the thing out as a short-term rental when you’re not using it and then when you are using it, like when you travel out there to stay at that property, which means you’re going to cash flow, you’ll probably end up with two cash flowing properties that will make more money than they both cost to own and you’ll be able to bounce back and forth between these two markets not only not having a housing expense, but actually making money from what you rent your houses out when you’re not using them. What’s going on, everyone? It’s the BiggerPockets podcast. I’m David Greene and we have a Seeing Greene episode for you. These are awesome. In today’s show, I’m going to be taking questions directly from you, our listenership, our audience, the people, and you’ll be connecting with me as I give my best efforts at answering your questions, teaching you more about real estate and helping you all to build wealth.

David:
Today’s show was a blast. Not only was it hilarious, but we also give a lot of good information. We talk about what age you should say yes to everything at and when you should start saying no, how to choose a career path, if you should continue to pour money into a home or when you should call it quits, how do you know when enough is enough, and how to short-term rental house hack and grow your portfolio. Yes, that’s right, how to short-term rental house hack. Haven’t come up with a catchy name for that, but it’s a really cool strategy and we talk about it today. All that and more in today’s Seeing Greene episode. But before we get to our first question, that’s right, you know what it is, the quick dip. Remember, if you’re having a hard time finding deals in your area, if nothing seems like they work out, it’s probably because they’re not going to work out the way you’re looking at it. There are strategies available to you that you can make real estate work and you also should remember that real estate is local.

David:
Your market may suck. Other markets may be strong or vice versa. Get in the BiggerPockets forums. Check out long distance real estate investing, which you can get at biggerpockets.com/store and ask other people questions about what markets they’re in and how those markets are working out. Don’t get discouraged because your market is tough. Look for a market where you can find what you need. All right, let’s get to our first question of the day.

Sinh:
Hi, David. My name is Sinh. I’m in California and I’m a first time investor/homebuyer and I’m stuck between the crossroads. My first option is to purchase a condo at 3% down in Covina, California and house hack a three-bedroom, four-bath condo. It’s in a desirable location and it’s very walkable and I believe it will appreciate just as well as the rest of California. My second option is to go for cash flow by going to an out-of-state market with 20% down. Why I’m stuck on this is because Covina is a great location and I love it and I love the condo, however, the 3% will still be a larger chunk of my savings and the mortgage payment will be a larger chunk, obviously, of my income than going out of state. So to me it seems riskier, especially if I can’t find anyone to house hack with. I would love your thoughts as to what you would do and any advice for choosing appreciation versus cash flow. Thanks, David.

David:
Well, thank you . All right, first off, a three-bedroom, four-bathroom condo, this might be the first time I’ve heard of one of those, so this would have to be a good location because it sounds like this property has a bathroom for every bedroom. They get their own private bathroom and a guest bathroom. That’s pretty ideal for house hacking, so I’m already liking that. That’s not like most condos that I’ve heard of and Covina is a great area. We sell houses in that location and I’m aware of it. I don’t know if you’re working with one of our agents, so I’ll have to look and see into that, but that sounds pretty good. Now, one of the struggles you were having, as you said, it’s more money to put 3% down in Covina than it would be to buy a property out of state for cash flow. I’m trying to wrap my head around how this could work. If this was a million dollar condo, 3% would be $30,000, but if you buy a $200,000 house somewhere, 20% of that is still going to be $40,000.

David:
$150,000 house out of state would still be 30 grand. You’re comparing a million dollar property to $150,000 out-of-state property for the same money down. I don’t see how buying out of state is going to keep more of your money for yourself. That’s just something I want you to think about. Maybe the purchase price of that condo has you thinking that you’re putting more money down than you are. If you’re only putting 3% down, that’s very, very low and I doubt it’s a million dollar condo. So right off the bat, you’re not saving money by buying out of state and a lot of people need to be aware of that.

David:
They see that the price of the property is cheaper out of state, and so they think, oh, that’s going to save me capital, but it doesn’t because you put 20%, 25% down versus 3% to 5% down on a house hack. You keep more capital yourself. The other one was appreciation versus cash flow. I don’t know that that’s actually the struggle you’re going to be having. I don’t think that it’s going to cash flow out of state as well as you think because if you’re buying $150,000 property or $200,000 property, you’re going to end up in a rough location. You’re going to end up with lots of tenant issues. You’re going to have vacancies. You’re going to have people that have to be evicted. You’re going to have constant repainting and re-carpeting of your units or cleaning the floors when they leave. There’s a lot of expenses associated with buying in these less desirable neighborhoods that no one calculates on their spreadsheet that don’t happen as often when you go into a nicer area.

David:
So if you’re renting out a room in an area like you’re saying here, you’re more likely to get a better tenant and it’s easier to get them out. It’s not like you’ve lost control of the entire property. They’re just renting the room from you. They’re not renting the entire home. If they try to trash the house, you’re there to see it. It doesn’t get out of hand to where you go in and you have one of those, oh, my goodness moments that I’ve had many times where you see what the tenant actually did to your property. So everything I’m hearing right now is leaning towards Covina, but not because of appreciation versus cash flow, because of cash flow versus cash flow. I think you’re going to cash flow much better with this Covina property.

David:
The last piece I want to bring in is don’t be lured and fooled by the year one cash flow illusion. It’s not true. It may look like something out of state will cash flow more, but an area like Covina is going to see rent increases that are significant. I remember maybe seven years ago, eight years ago, you could rent a room in some of the places in the Bay Area for $500, $600 a room that are now going for $1,100, $1,200, $1,300 a room. Over just a seven or eight-year period, they have doubled to tripled. That didn’t happen in these out-of-state Midwest areas. The rents back then were 900 and now they’re 950 or 975. It’s not the same. So you get much more cash flow when you buy in the right area because cash flow also appreciates, not just values. So based on what I’m hearing right now, I do think that the condo is better.

David:
Here’s a few things that I would look out for though. Does that condo have enough parking for the people you’re going to rent a room to? That’s one thing. They’re all going to get their own bathroom, so you could probably be a lot pickier about who you let in there and you can get more per unit because they’re not sharing a bathroom. That’s really, really big and helpful there. But make sure you have enough parking. I don’t think it’ll be hard to find tenants at all, especially for an area like that. That’s a really good opportunity. You might even be able to rent out a couch or a futon in the front room and get even more money. I’ve seen with high desirable areas where rent’s really high, people will be willing to do things you would be surprised to save on their rent, especially if they’re a hard worker and they’re not home a lot.

David:
Then make sure that the HOA allows for what you’re going to be doing. If it doesn’t, just look for the same opportunity not in a condo. Just look for a home in a great location and see if you can get approved for that. But , you’re in a great position. This sounds like a really good situation to be in. Based on what you’ve told me, I’m feeling pretty bullish about this condo house hack opportunity, so good luck with that. Let us know how it goes. All right, our next question comes from Vu Tran in Los Angeles, another Californian. Hey, David. I have a three bedroom, two bathroom house that my family and I are living in. We are in the process of getting our permit to convert the garage into a 400-square foot studio to rent out. Recently we visited Dallas and we think there’s a lot of opportunities for us there and we may be moving.

David:
My question is, should we rent out the main house, use the money we have for the garage as a down payment for Dallas and then take out a HELOC to convert the garage after we get the permit or should we stay in Los Angeles, wait until the garage conversion is done, then we rent both the main house and the garage out separately and use a HELOC to put a down payment for the house in Dallas? All right, Vu, good question here. The information I didn’t get that I would need is how much money is this garage conversion going to cost? Because if this is a $30,000 project, maybe $40,000, definitely move forward with getting that conversion done. You’re going to get a very good return on that money even if it’s more. If this is going to be $100,000, $120,000 conversion, the return might not be as good as if you put that money on a property in Dallas. So that’s something that I would need to give you some better advice here.

David:
I’m assuming that the garage conversion is going to be done at a good price, which means you’re probably going to get a better bang for your buck. Here’s how I would look at it. Let’s say that you pay 50 grand to convert the garage, but you can rent out the studio for $1,500 a month. That’s a 3% rule deal on that money that you’re putting into it. You’re putting in 50 grand. That’s $1,500 a month. Because there won’t be any additional mortgage on that, let’s run some quick numbers here. So $1,500 a month times 12 is $18,000 a year. You’re not taking on any additional property taxes or insurance it sounds like. So if you take just the 50 grand that you’d be putting into it and divide the 18,000 a year by that, that’s a 36% return on your money. You’ve also made the property worth more because you added 400 square feet. I’m seeing a lot of wins in that category. I don’t see you getting a 36% return investing 50 grand into something in Dallas. So I’m leaning towards you should do the conversion, get the permits.

David:
When you’re done, you should get the HELOC on the property. That should be worth more because it’s bigger, so you’re going to get a new appraisal and you’ll have that money to go towards buying something in the new market that you’re at. If I missed anything there, let me know and if I’m off on the numbers, because they definitely change if that conversion is costing $100,000, $120,000, $150,000 instead of the 50 that I budgeted for. Our next video comes from Luke O’Kane in Illinois.

Luke:
Hey there, David. First off, I want to give a big thanks to you for instilling this passion I now have for real estate. My name is Luke and I’m a 17-year old in Schaumburg, Illinois and I’m sort of at a crossroads in my life right now as I will be graduating high school in a little over a year and I’m unsure of my future. Had thoughts of going to college to pursue something in the field of engineering. Also had thoughts of just becoming an agent out of school to learn real estate as I start investing. Do you think a guaranteed decent salary of engineering, but I have college debt and less experience or the totally eat what you kill agent path with experience would help me scale quickest? Also, if I take the agent path, is it worth it to go to college in hopes I land at a more established brokerage? Lastly, I’ve had thoughts of becoming an acquisitions analyst, so between an agent and analyst, what would give me better experience for my future in hopes of owning larger multifamily? Thank you so much.

David:
Thank you, thank you, Luke. This is a good question. Because I am a real estate agent, a really real estate broker that runs a team, I can give you some insight here. First thing, I want you to start thinking like a millionaire. I’ve said this before, millionaires don’t ask, should I do A or B? Millionaires ask, how can I do A and B? So if you’re interested in engineering, I would say you should go forward with getting an engineering degree because you can make good money and that can also help you with real estate. There are literally engineers, I’m having to hire one right now in Florida, to come up with a plan to submit to the city so that I can finally get my project approved. There’s nothing that stops you if you’re doing that from also getting your real estate license and selling houses. All right, so first piece, I want to say. Second piece, the advice that I would give you on if you should become an agent is different than what I would give to someone else.

David:
So if you told me, “Hey, David, I’m a 32-year-old family man heavily involved in my church. I play basketball in a lot of different leagues. I hunt, I fish, I have tons of friends. Everybody likes me and respects me,” I would tell you, you need to go get your real estate license because you have a solid database of people that are going to bring you deals and you can be an entrepreneur. As a 17-year-old who doesn’t have any of those connections, I’m sure you are a hard worker, you are going to be fag an uphill climb getting the 32 to 35-year-olds that are going to be buying houses to trust you even when you’re 18 to represent them. Your friends are not ready to buy houses. Your peers are not ready to buy houses. I see you’ve got an Everlast punching bag in the background there. The other 18-year-olds that are going to be working out with you in the boxing gym are not ready to buy houses.

David:
It’s going to be years before you build up an actual database of people that are gainfully employed that you can represent as an agent, and then the hard work starts. It is incredibly difficult to make money as an agent. This is one of those things that everyone who’s not an agent looks at it and says, “I really want to do it,” and everyone that’s doing it says, “It’s freaking hard.” It’s not bad. It’s better than a job that you hate, especially if you like people. It’s a great career. It is nothing at all that could be considered easy. So if you want to do it, I would be like, hey, you’re 17. Do both. Go to school. Get your degree. Get your real estate license. Sell houses in between your classes. If you say, “I can’t do both,” well then you better have a family or a health condition or something that stops a young able-bodied guy like yourself from getting out there and working extra hard.

David:
When I was your age, I had several jobs at a time. I was working at restaurants every single day that I could. I was also going to school full-time, taking a lot of units. I ended up getting a degree and minoring in criminal justice while I majored in psychology, and I was still working out, going to church, doing all the things that I did. I didn’t have a family, so I could do all that stuff. This is the time in your life to take advantage of that. You’re not going to want to do it when you’re 40 years old, you have a lot of responsibilities, you have kids that are looking up to you, you have a spouse that’s going to be looking up to you, you have health that you’re going to have to be taken advantage of. It gets a lot harder, so take it all on right now.

David:
Now regarding your question about being an acquisitions analyst, if you said, “David, I’ve got an opportunity that someone’s going to hire me right now, teach me how to do this and pay me,” I’d say jump on it. That’s probably not how this is going to work. You are going to get good if you take some classes on the process of analyzing a property and your mind may even be wired to do that well, but having the opportunity to go do it, it’s going to be hard. You have to find a real estate developer or somebody big who has other people that have been doing this for a very long time that are already ahead of you. It’s not a thing you just learn and then you say, “Hey, I’m just going to go do it.” So if you’re interested in it, it’s no difference in being interested in jujitsu or fishing or painting or learning another language. Go learn it if you like it, absolutely, but you don’t, at the age of 17, have to know this is the path I’m going to take.

David:
In fact, I will tell you what people told me when I was 17 and I still didn’t want to hear it. Whatever you think you’re going to go do is not what you’re actually going to go do. You are going to try many different jobs, not like them and bounce into the new one. I love that you love real estate, so you’re probably going to bounce around within the world of real estate before you find your way. There’s nothing wrong with that, especially when you’re young. Brandon Turner and I both have the same philosophy. We believe when you are young, you should say yes to everything. You should do it all. Then as you learn what you’re good at, what you like and what your purpose is, you should start saying no to more and more things. Then as you become older, you should be saying no to almost everything and putting all your attention and energy towards the right things.

David:
So right now, say yes to everything, Luke. Get after it. See what you like. See what gives you energy. See what drains you of energy, and don’t think that the path you start on is the one you’re going to stay on. As long as you’re always moving upwards and forwards, it doesn’t matter if you’re on the same path the entire time. Love that you’re into real estate. Love that you’re listening to the podcast. Keep doing that and let me know how things go. All right, thank you everybody for submitting your video questions and your written questions. If you yourself would like to be featured on Seeing Greene, I’d love to have you. Head over to biggerpockets.com/david and submit your question there. Also, make sure that you like, comment, and subscribe on our YouTube channel so we have a lot of engagement that goes on to every single episode on YouTube in the comment section.

David:
So at this stage in the show, I’d like to read you guys what some of our previous comments were, question statements, things that people said. It could be funny, it could be insightful, something they like about the show or something that they don’t. I want to encourage you to go leave a comment and maybe I’ll feature you on a future episode of Seeing Greene. These comments all come from episode 747, so if you want to go back and listen to that one on YouTube, you’ll see what I’m talking about. Baron Artis says, “What books do you recommend to get started in multifamily investing?” I would check out The Multifamily Millionaire by Brandon Turner and Brian Murray, as well as Ken McElroy’s ABCs of Real Estate Investing. Paul Bloomfield says, “David, I love the macroeconomic stuff. Also, I love the way you explain and simplify real estate and break it down for us newbies. Thank you. We definitely appreciate it.” That’s a great example of you guys telling me what you like in the shows. Paul’s saying, “I like the macroeconomics.”

David:
Now, if you don’t know what macroeconomics means, it’s not a form of macaroni. It’s actually referring to the big picture of economic news, so how much money we’re printing, what laws are being put into place. All of that has a lot to do with how real estate investing works. There’s the art of running a sailboat, which is the art of investing, but then there’s art of catching the wind that will make your sailboat go faster. On the show, we talk about the details of real estate. We also talk about the big picture so you can put your money in the right place to help keep it the safest and keep it growing the fastest. From Mylan23, she says, “Macro resources, Barry Habib, Lyn Alden, Jim Richards, and Blockworks Macro.” Those are all places that Mylan likes to go to get her information. I’m also a fan of Barry Habib. If anybody knows him, I’d love to be put in touch with him because I like how he thinks and we agree on almost everything. So he is a good follow. I will second that.

David:
I also listen to Valuetainment to get a lot of the news that I’m getting and they get really good guests talking about things. If you guys were looking for an interesting listen, I would check out Michael Saylor on Valuetainment as well as Richard Werner talking about he’s really the father of quantitative easing, talking about how that affects inflation and what to expect in the future as well as inflation’s relationship with interest rates. Melissa Blair says, “And please don’t stop the swivel.” Here’s what’s funny. As I’m reading these, I’m actually swiveling the chair and I’m bobbing my head as I do this at the same time, having a little bit of a moment here. So as I was reading these, I was doing it and she says, “Don’t stop the swivel.” It’s like you’re watching me, Melissa. But that’s okay. I like the attention. Appreciate it. Tom Stout says, “One week he talks smack about wholesaling, but next week he suggests risking your main home’s equity.”

David:
Then Sig Fig Newton, that’s funny, replied with actual investment advice is to stay out of leverage in uncertain markets. Then Sig Fig Newton said, “Does he know that rents are dropping?” This is good. This is what I asked for. You guys are giving me the information. I don’t know where I’ve ever talked smack about wholesaling. That don’t make any sense to me at all. I’ve talked about the risks of wholesaling. I’ve talked about the fact that when someone buys from a wholesaler, they’re not getting the protection that they would. I’ve talked about how wholesaling is incredibly difficult. People tend to look at wholesaling like this is, oh, I don’t have any money. I’ll just go wholesale. It’s the hardest part of any of this. It’s the toughest way to make money of any of the real estate strategies that I’m aware of. I also don’t know where I said that you should risk your main home’s equity. I’ve given several people advice that this is a very rough environment to take out equity lines of credit to invest in, but for some people, that doesn’t make a lot of sense.

David:
If you have a great opportunity, it makes more sense to take equity out of your house to take advantage of it than to pay a higher rate to somebody else to go do it. I also don’t know if I see a huge difference between risking equity and your main home and risking equity and investment property. It’s all equity and it’s all risk. If you lose your main home and you have rental properties, you move into one of them or you move in with a family member. I don’t see a huge difference between saying, take a HELOC on investment property, but don’t take a HELOC on your primary residence. You shouldn’t be doing things if you can’t afford to make the payments in the first place. If you’re taking a HELOC and you lose something because of it, you made some really bad decisions that I think you would’ve made the same as if you didn’t take out the HELOC. You just borrowed the money from someone else and ended up in the same position there.

David:
Does he know rents are dropping? That’s market by market, Mr. Sig Fig Newton. They’re not dropping everywhere. In many places, they’re going up. I think this is an area where it would benefit you to take your eyes off of zooming in on your local market and look at the market as a whole. As you’re listening to this advice, you may hear me say something and say, “Well, that doesn’t sound anything like what I’m seeing.” It’s probably because you’re in a different location than me or you’re in a different location than the person that’s asking the question. We have someone that says, “Hey, I’m in Dallas, Texas and I want to go to LA” or vice versa, or “I’m thinking about moving from New York to Miami.” Those are very different markets with very different fundamentals that I’m making my comments on. If you’re living in Chicago, Illinois or Dayton, Ohio, you could be seeing a very different dynamic than what those people are. Doesn’t mean the information is wrong, it means you’re a little ignorant of what’s happening outside of your own market.

David:
All right, we love and we appreciate the engagement you’re giving us here. Please continue to do that. I want to hear from you what do you think about the show so far and what do you think about what I’ve said in the YouTube comments, because as you see, we do read them. We do comment on them. Mr. Tom Stout and Sig Fig Newton have now both been featured in a Seeing Greene episode, so congratulations you two. Please take a moment to give us an honest review wherever you listen to your podcast. If that’s Apple Podcast, if that’s Spotify, if that’s Stitcher, we would love it. Also, keep an out for polls in Spotify where they will ask you what you like about the content that we’ve made. All right, let’s get back and take another video question. This comes from Justin Schollard in Los Angeles.

Justin:
Hey, what’s going on, David? Justin here from Los Angeles, California. I have a question for you on how many accounts we should have for our rental properties. Historically, I’ve been told that you need to have a checking account for every property and that made sense when you have a couple of properties, but as my portfolio grows and I currently have 12 doors, it’s getting a little complicated to have a separate account for every single property. So I open up my Wells Fargo account and I have to keep scrolling to get all the way down to the bottom of my accounts. When does it get to the point to where you just roll all of your rentals into one income account, maybe one expense account or whatever. Do you continue to have a single checking account of your property, and if so, doesn’t it feel scalable if you have 200 rental properties, you have 200 checking accounts?

Justin:
Now with that being said, a few of my rental properties are more long-term and then a few of them are more short-term Airbnb. Is there some distinguishing factor with that as well? Anyways, any advice on this would be really helpful. Super confusing to try to figure it out my own and Google is not helping, so I’d love to know what you do. Thank you. Bye.

David:
Justin, this is such a great question and this is exactly what Seeing Greene is here for because no one’s talking about this. There’s plenty of places where someone will teach you how to analyze a property or teach you how to find a property or give you a form to say to a seller, but what happens when you’re having a modicum of success like you are and you have this practical problem of, am I going to have 200 checking accounts for 200 properties? This is a struggle that I have as well. I’ve just recently hired a new CPA and a new bookkeeper and they are constantly trying to get me to do things that are cleaner for them, which is a pain in my butt. It is not fun having to do this.

David:
You can have a different account for every property and this is what I’d rather see, and I know every bookkeeper out there’s going to start screaming at me if I say this the wrong way, my understanding is that you’re better off to take a bunch of those properties, put them in one entity like an LLC, and then have a banking account associated with that LLC. That’s my understanding of your best bookkeeping principles because if you’re audited by the IRS and they say, “Okay, Justin Schollard, LLC owns these 10 properties and they’re all coming out. They have their income going in the same account and their expense is going out of the same account,” they can associate easily that all of that money is associated with the same business. It doesn’t need to be associated with the property. It needs to be associated with the ownership of the actual asset and you probably don’t want to have 200 properties that are all owned individually in your name. I don’t even know if you could be able to do. That’d be very difficult to do.

David:
As you move them into different entities, you’ll have a bank account for every entity. That’s probably the easiest way to do it and there might be an argument that could be made where several of those entities are owned by one bigger entity and that one entity has its own bank account. I think the reason that my bookkeepers and CPAs are trying to protect me here is if I was sued by someone that went after one of my LLCs, they could say, “Well, that LLC uses the same bank account as the one we’re suing. Therefore, they’re really the same thing, therefore, we’re owed to the equity in both of them in case there was a lawsuit.” That’s I think the protection that you’re going after, but here’s a very real and valid risk that sounds stupid, but it’s legit. When you move properties out of one checking account and into another, you can tell the bank, “I’m shutting down this account. I’m opening this one,” but the banks will often screw up that auto transfer. This has happened to me many times.

David:
It’s happened to me where a property that I own when I had a lot of them, the note was sold to another lender who then had their own servig system, sent me letters saying, “We bought your note and I just never saw them.” So the note wasn’t paid for three or four months and I had so many properties. I wouldn’t have known that one individual payment of $550 a month wasn’t coming out of my account. And they started the process of foreclosure on me and I’d done nothing wrong. I had the auto-pay set up. This has also happened where I’ve done exactly what you’re doing. I tried to transfer something out of one checking account and set it up to come out of a different one that was set up, and then the payment doesn’t get made because the auto transfer gets screwed up between the two institutions. And guess what? It goes on my credit as a mispayment and my credit gets trashed. This can happen so easily.

David:
So be very careful when you do this and keep that in mind that before you switch it over, this is a real problem that can happen. But what a great question, man. Thank you so much for asking this and letting everybody hear about some of the silly problems that real estate investors can face. All right, our next question comes from Scott Phillips, also in California.

Scott:
Hey, what’s up David and BP community? Well, it’s almost March Madness, so I’m repping my UCLA Bruins. My question is basically getting started in real estate investing. Little background, I’m in twilight of my W2 career making good money, so not interested in necessarily changing out the career necessarily right now, but basically supplementing income. I’ve looked at HELOCs and different things like that, partnerships. I’d like to do it myself, but I don’t want to clear out savings. We have lots of equity in the house, very good credit, relatively low debt and living here in Orange County, California. It’s a little difficult to make anything cash flow here. I’m looking also at South Carolina, Charleston area that’s maybe live by coastal eventually.

Scott:
My question is what would your recommendations be for someone like me? I’m sure there’s lots like me right now to get into this game without having to empty out savings and basically, it’d be a good strategy for riding this thing out for the next five or so years and then be able to start cash flowing. Appreciate your time. Appreciate all that you offer to the community and look forward to your wisdom and insight. Thanks.

David:
Thank you, Scott. Very cool. All right, so it sounds like redug and keeping risk low is your number one priority over just making more equity. You’re in a sound financial position, so you’ve got a lot of equity. You’ve got a strong savings account. You might have mentioned a retirement account, but I could tell you’re doing well financially, so we don’t need to shake things up. We don’t have to go out there and buy huge purchases, put you in a position of risk for what you’ve worked so hard. You also mentioned that you’re interested at possibly living in South Carolina, Charleston, which is a great market. Here’s what I’d like for you to do. This is the strategy I think will work for you. We’re going to do this as low risk as possible. I want you to look for a short-term rental in a area of Charleston where people want to visit.

David:
Doesn’t have to be the best deal ever, but it does need to be in an area with a lot of demand. I want you to build relationships with property managers out there and find one that you like. I just want you to get a property, maybe using a second home loan. You can put 10% down on that so that you keep more of that savings as a side that you mentioned, and I want you to rent the thing out as a short-term rental when you’re not using it. Then when you are using it, when you travel out there to stay at that property, consider renting out your Orange County home as a short-term rental when you’re gone. Now, I’m guessing your mortgage is very low on that Orange County home if you’ve lived there for a while. You said you have a lot of equity, so you probably haven’t done a cash-out refinance, which is really good.

David:
I’m guessing you also probably have a pretty good rate, which means you’re going to cash flow when you leave it, and Orange County’s a very desirable area. You see where I’m going here? You’ll probably end up with two cash flowing properties that will make more money than they both cost to own and you’ll be able to bounce back and forth between these two markets not only not having a housing expense, but actually making money from what you rent your houses out when you’re not using them. Now, you are going to have to accept the fact that means strangers are going to be living in your house, but that’s the price that you’re going to pay to reduce your risk. This is probably the least risky thing that I could think of. Now, once this stabilizes and you get this going down pretty well, you can then make the decision, do I want to buy another property in South Carolina and maybe that’s the one you live in, and then you make a full-time short-term rental of the first one that you bought.

David:
You’re just going very slow and letting one thing stabilize before you do the next one. Maybe the second one you buy has an ADU that you rent out and you stay in the main house and so you get some additional income going that way. Maybe you decide that when you visit Orange County, you don’t need the big house that you’re living in right now and you can actually live in something smaller. So you go find another property in Southern California, we can help you do that, that has a smaller unit attached to it where you and your wife can stay when you’re in town and you can rent out the main house as an Airbnb. What you’re basically doing is slowly house hacking short-term rentals in very, very solid, consistent market so that you can bounce around from place to place living where you want and still collect income from these properties when you’re not using them.

David:
This is not a strategy that we’ve ever had available to us before the short term rental explosion. It used to be if you wanted to rent something out, you could never use it. And if you wanted to use it, you could never rent it out. But now between house hacking, short-term rentals, and acquiring multiple properties with new finang options, we can do something very cool like this where you bounce around to the best parts of the country and rent your units out when you’re not using them. It’s very similar to the strategy I’m setting myself up for. I want to have properties in Texas, in South Florida, in Tennessee, in the mountains, at the beach, in Denver, Colorado, in California, all the places that I think are cool and I’ll just bounce around from place to place depending on wherever the wind blows and when I’m not using it, I’ll rent them out as a short-term rental.

David:
So I’m setting myself up for a life like that. I think you might be able to join me on that pass, Scott. Let me know what you think about this plan. And we have a question from Jessie Prescott in Augusta, Georgia.

Jessie:
Hi, David. My name is Jessie Prescott, currently living in Augusta, Georgia. My question is, when do you know when to throw in the towel on a property you’ve spent a lot of money on? I have a four-unit property in Pittsfield, Mass. When I first bought it, it needed a lot of work, so I had to have the whole house rewired. I gutted three of the four units. I got through it and got to a point where it’s actually pretty nice now and can actually start cash flowing because I added a lot of value. My current mortgage versus the rents I’m getting actually looks pretty good. But now the porch is falling apart. I need to have an architect out and need to completely redo the porch. At what point do you say, “Enough is enough. Let’s just get rid of it and move on” versus, “Well, at this point, I might as well just keep it now that I’m cash flowing, now that I spent so much money on it. I might as well just stick with it”?

Jessie:
Or is it going to be a thing where it’s just like it’s going to be constant. It’s going to be one thing after the next and this going to be just a money sink? Thanks.

David:
Well, Jessie, we don’t know if it’s going to be one thing after the next, if it’s going to be a money sink. You have to get a home inspection to figure out what could be the case. What you’re talking about is a death spiral that people can get into with real estate that’s not talked about very often, so I hope you’re not beating yourself up because this happens to a lot of investors. I do retreats where I give personal consultations to the people that attend there where we go over their portfolio and we look at what we have. I answer questions like this on Seeing Greene. I meet with investors that come into my office that I’m going to help them buy or sell their homes in California. I’m constantly talking to people who own real estate and a trend that I see very frequently is buying in the Midwest or lower price properties can lead to this.

David:
There’s a couple of principles for why that happens. One, the electrical, the roof are being replaced, all the issues that you had to do are more or less the same, whether it’s a million dollar property that’s appreciating or it’s a $50,000 property that’s not. So your biggest expenses, the labor, the materials, the rehab work, they’re fixed. When you put all that money into a house that’s not worth very much, it’s incredibly difficult to get money out of it, especially if you’re only relying on cash flow. Now, if you had bought a property in a nicer location that had gone up in value and you made it worth more by fixing it up, say you did the same thing in Dallas, Texas, you bought a junk property and you put all this money into it and it’s worth a lot more, but it’s not cash flowing, you have the exit strategy of getting out of it and starting over and getting something with more cash flow.

David:
When you buy into these cheaper markets, you lose that exit strategy. You get stuck where you can’t get out of it. You dumped a bunch of money into it and it’s going to be 75 years before a cash flow is enough to get the cash out of it that you put into it. This is one of the reasons that I tell people, don’t look only at cash flow. You have to look at creating equity, creating value when you’re buying real estate or buying in areas where the market itself will add value, not just cash flow. Now, as far as what do you do when you’re in this situation, if it’s not a good area and that’s why you’re having these problems, sell and don’t necessarily worry about if it’s a loss as much as can you put the money into something better that’s going to make you more than the money that you’re losing.

David:
If it’s going to cash flow, that’s fine, but that only works if you have other equity set aside you can keep investing with or other money. If this is all your capital and it’s stuck in one deal, I’d be inclined to say, take the loss, sell it, get out of that bad market and get into a better one. If it’s you’ve dumped money into that deal, but you still have money that you can invest, you still have capital available to you, you can hold onto it and wait and see if it becomes more of a money pit or if it becomes profitable and you can use the other additional capital you have to keep investing and making money somewhere else. So it’s not just the individual property, it’s the architecture of your whole portfolio. Do you have a lot of cash set aside that you can use to continue investing or is all of your cash wrapped up in this one deal? How that is set up would make a difference whether you cut your losses or you can write it out.

David:
If I didn’t give you enough detail there, let me know. Go to YouTube and leave a comment when you hear this or submit another question and let me know if I missed something there and tell me what you’re thinking after hearing this. We have a question from Jason Weaver in Kansas.

Jason:
Hey, David. My name is Jason Weber from Topeka, Kansas. My question was in regards to 1031 exchanges. I haven’t done one yet. I have a duplex in Lawrence, Kansas that I’m looking to possibly 1031 exchange into a new construction. I know there’s some time limits with 1031 exchanges. Is that even an option to 1031 exchange into a new construction build? If you have some advice on the rules and regulations, ins and outs, any pitfalls or things to look out for while trying to accomplish this, I’d much appreciate getting some expert knowledge from you. Appreciate all you do for the BiggerPockets community. Thank you.

David:
All right, Jason, this is a good question. As you can clearly see if you’re watching on YouTube, you and I have a lot in common. You’re pulling me right back into one of those situations where I have to talk about 1031 exchanges even though I’m not the expert on it, but I’m going to do my best. So here’s a couple of things that I do know about 1031s that I think could help you. You got 45 days to identify the property, which is already identified if it’s a new construction home. Then you got 180 days from the point of closing on what you have to close on it. So if they can build that thing in less than the 180 days and you can close, I think you’re going to be okay. Let’s say they can’t. Well, you also have the reverse 1031 option where you put the new construction under contract and you close it in with another company’s help.

David:
I couldn’t explain exactly how it works, but it basically involves another company creating some form of a trust. They close on the property for you so you don’t own it yet. Then when you close on your 1031, the funds go into the trust and it gets transferred into your name. It’s something kind of a form of hot potato that could help you. So you could do a reverse 1031. The other thing would be to wait until the new home, like you put a deposit down on it. You wait till it’s close to being built, then you sell the property that you have right now and close on it or you take an offer from a buyer contingent on you finding a replacement property and you just give yourself the right to extend the escrow for as long as it takes.

David:
Now, buyers aren’t going to love that because their rates could be changing and they’re going to want some kind of stability, but if you find the right buyer for your home, you could just delay your closing until the construction is done. Thank you for your question. Appreciate it. I’ll see you in the gym. All right, everybody, that was our Seeing Greene for today. Thank you guys for being here with us. I hope you laughed. I hope you cried. I hope you learned. When I say cried, of course, I mean tears of joy. Love doing these shows. If you’d like to be featured on one, just head over to biggerpockets.com/david and submit your question there. Remember to like, comment, or subscribe to this video, and if you have a second, watch another BiggerPockets video. If not, I will see you next episode. You could find me online @davidgreene24, all the social media, or davidgreene24.com. Check out the website and tell me what you think.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.





Source link