David:
This is the BiggerPockets Podcast show 774. When we look at money as a store of energy, it really opens up a framework to understand this better. You’re looking at one way the property is making revenue or losing money, which is cash flow. That’s a form of energy because the house puts off this energy in the form of cash, which you put in a savings account, that’s energy that you’re saving. Well, the house is losing energy and that it’s bleeding equity every single year.
What’s going on everyone? This is David Greene, host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode for you. In this format of show, I take questions from you, our listener base, and I answer them directly for everybody else to hear so that they realize they’re not crazy, we’re all going through the same things, and we all get to learn from the experience of others.
Today is a fantastic show where we go deep, maybe deeper than we’ve ever gone on topics like what everyone forgets to think about when adding to a property. If you’re trying to add square footage, build an ADU, this is something you need to know. What to ask yourself on a property you own, but are unsure about? How to know if you’re in a situation that you don’t love the deal, should I sell it, should I keep it? Simplify that for you is something that you’ll probably never forget. What is scaring you about the economy right now and what is scaring me? This is something that I don’t think anybody else is talking about and I try to be the person to say the things that nobody else says.
In today’s show, you’re going to hear exactly what I think is going on with the economy that everybody else is avoiding talking about, as well as specific advice for what to do with $30,000, where to buy, what type of assets to add to a portfolio and more on today’s Seeing Greene. But most importantly, if you would like a chance to ask your question, please go to biggerpockets.com/david. The link is in the description. If you pause this, you can send your question and jump right back in. Listen to today’s show. We want more questions from all of you to make the show better.
Before we get to our first question, today’s quick tip. Look, we do have a full on library of content, tons of shows to listen to and many people will listen from the beginning shows all the way to the current ones. But why is the most recent content we’re making more beneficial than previous shows? Well, you get to hear what’s working right now. Conditions are changing faster than they ever have before. If you join us for the most recent releases, you can stay in touch with current conditions. My team is working to bring the guests, the questions and the topics to help you build wealth through real estate in today’s market, not yesterday’s.
If you’re new to the show, Tuesdays are our how-tos and bigger news type shows where we talk about the market and changes to the market. Thursdays are the OG guest type shows with people making moves, doing deals right now, telling their story of how they built wealth in real estate. And you know what Sundays bring, Seeing Greenes. Remember, there is still value and really great previous hosts on our past episodes, but that market conditions today may be different than when we first aired them. I would do two to three shows for every one older show because the store of value is much higher in the material being relevant. Remember, what works in 2015, 2018 may not be working right now. So if you have a choice between listening to new content or old, I always err towards the new. Hope that helped you, hope that brought some light into the decisions you had to make about what content you’re going to consume. Let’s get to our first question.
Rogelio:
Hi, David. This is Rogelio from Albuquerque, and I’m in a bit of a bind here. The scenario is I’m pursuing a fourplex at $475,000 under FHA loan, 3.5% down, and I was thinking that’s how much I would have to put down, but my lender tells me after I pay for the appraisal, they say it’s going to have to be more like 10% down, because apparently, the mortgage payment cannot be more than 75% of what the rental unit incomes would be. While it’s doable, it’s going to leave me strapped for cash and I’m going to have to pull a lie out of my 401k loan, which is going to pretty much lower the amount of my paychecks just to pay this loan back, and the cash flow from the house or the fourplex in the meantime, it’s going to take a few years to pay that back. I already have $5,000 in earnest money in there. I don’t want to lose anything. Any advice would help. Is this worth it?
David:
All right, Rogelio, thank you for your question. I can sense the dilemma you’re in. It’s not fun. I’m sorry, man. Let’s break this down. First off, my personal opinion, your loan officer should have explained this to you before you went in contract on this deal. I don’t know if you blew off a phone call with them, if they didn’t ask to. One of the problems in the lending industry, if we’re being frank, is that people shop from one lender to the next. It’s kind of like the dating industry, right? They’re on Tinder, they’re bouncing from person to person to person. And while it feels like freedom, when you get to be like, I’m going to date you, I’m going to date you, I’m going to date you, I have all these options, the reality with that situation is that now nobody invests in you because they don’t believe you’re going to stick around.
The lending industry has a similar dynamic where people get pre-approved with the lender, then they go to another one and another one and another one to say, who’s got the best rate? Who’s got the best closing costs? Who’s going to give me the most me, me, me, me, me? Then, because of that, the industry gets jaded just like the dating pool and people stop investing in their clients. Maybe your loan officer didn’t explain to you how the FHA Self-Sustainability Test works, and it sounds like that’s where you’re at. They also didn’t tell you that you can’t use 3.5% down payment options on multi-family property like a fourplex. It sounds like you got into this deal and didn’t realize until you were in contract with earnest money on the line that it doesn’t work that way.
So, a couple lessons. First off, you should find a person who’s good that will take care of you that’s honest and competent at their job and build a relationship with that person and not bounce around. Not saying you did that, I don’t know, but that is usually what leads to loan officers not taking the time to explain, because they don’t want to take time out of their day if you’re just going to go use another loan officer just like a person who you’re dating but doesn’t think you’re serious isn’t going to take time to really get to know you or invest in you, it’s just a relationship principle that I want to highlight here. What you are talking about is the FHA Self-Sustainability Test, at least, I believe that. When you have three to four units of triplex or a fourplex, 75% of the total market rent for all the units has to be more than the total monthly mortgage payment.
Basically, FHA wants to know if you can’t make that payment for some reason, that the property would sustain itself making its own debt service, which can blow up a lot of deals. This is a problem we have in Southern California, sometimes in Northern California, although it’s not as prevalent in Northern California on the David Greene team, where we have a person who finds the deal, they really want, it’s where they want to buy, it’s the location they want, but it’s more expensive than what the rents can support, and so they can’t use their FHA loan to buy the property. Don’t think you’re alone. This is a common problem. It’s just one of those things where you really want to talk to the loan officer and the agent have them on the same page before you get into this. That’s why I structured our business to work the way it does.
I want my loan officers talking to my real estate agent so that they’re both on the same page and you don’t run into this problem when you’ve got earn money on the line. Couple options, you could switch away from an FHA loan. You could go a conventional loan and see if you can get away from the Self-Sustainability Test. When you say the cash flow from the fourplex is going to take a few years to pay that back, I think what you’re referring to is if you take a loan from your 401k to make up the down payment difference. That part is normal. In fact, if you’re investing in real estate, this is an unpopular opinion. People get mad at me when I say this, it’s me being a dream crusher, I’m sorry. I don’t mean to. Trying to keep it real and I’m the bearer of bad news.
Real estate is a very difficult way, in fact, a terrible method in most cases to build up enough passive income in a short period of time to quit your job. I know it’s been hyped that way. I know it’s been promoted that way. I know a lot of gurus have gone out there and said, “Screw work. You shouldn’t have to go clock in and work for someone else like you’re a slave. Go buy a bunch of real estate and then you can just tell the man to shove it.” And they’ve said, “If you just buy real estate using other people’s money and low down payment options or using the BRRRR method, you can quickly accumulate so many rentals that you never have to work again.”
And so many people get into our industry with those expectations and then get their butt kicked. They get hammered realizing, oh, it is actually not like that. There’s a ton of competition for these assets. They’re not cash flowing that way, and even when you think you get cash flow, things break, and it disappears or you get vacancy. There’s a lot of things that fight cash flow that make it very difficult to accumulate.
Let’s just talk about how you could adjust your expectations here. If the fourplex makes sense, if you’re getting a good deal on it, if it’s in a good area, if you think rents are going to increase and it is cash flowing, especially with a low down payment option like 10 or 15%, it’s okay to buy it and use the cash flow to pay back the 401k that you had to borrow from. It just means you’re not going to be able to quit your job as easy and you’re not going to enjoy that castle in your life.
But that’s really my overall point. The way the market has turned with how much demand we have fighting over limited supply, I think everyone should just give up the hope of enjoying cashflow right away. I think everyone needs to look at this as a retirement option. I’m going to buy this property and let the rents grow and pay it down and build equity and build cash flow so that when I retire, I have more money coming in, as opposed to quitting my job right now because I did a lot of hard work. Now, there probably was a time in real estate where that worked, 2010 through 2014, ’15. That was actually reasonable. People could pull that off and if you went gangbusters during that time, maybe you got lucky and you could retire.
But then, everyone in today’s market is listening to the people that did it back then and thinking there’s something wrong with them. I say this all the time on the Seeing Greenes, there’s nothing wrong with you. It is not you. It is this market. It’s incredibly difficult. Can you find deals? Yeah, you’ll always be able to find deals. Can you find cash flow? Yes, you’ll always be able to find it. Is the juice worth the squeeze? It’s a better question. Are you willing to make this a full-time job and do this for months and months and months and months and months of time to get that deal that you hear the gurus talk about? Or are you willing to employ 20 people to cold call all the time to find that deal that you heard the guru talk about? Because those amazing juicy deals that’s bringing everybody into this industry are not common. You usually, it’s a stroke of luck or an amazing amount of time that you might have made more money if you just worked your job at that same period of time.
People don’t talk about this, and Rogelio, I can see just the devastation in the tone of your voice. You’re so discouraged. You don’t want to lose and you feel like you did something wrong. You didn’t do anything wrong other than you didn’t have the right expectations when you started, and that’s not all your fault. A lot of it’s from bad information. Let’s sum this up. You can back out of the deal. You can lose five grand, not the end of the world, although that never feels good.
You can close on the deal. If you’re going to close on the deal, you need to broaden your expectations of how long it’s going to be before you get that cash flow. It’s okay to borrow from a 401k and pay it back with the money that comes from the deal, or you can see if you could get the seller to do something to make this deal better for you, assuming that there’s not a ton of other buyers backed up, you can renegotiate. You can ask for them to give you your deposit back or maybe just keep part of it to stay out of litigation. That’s something you can consider doing because if you contest and say, “I’m not releasing my deposit,” in most states, they can’t sell that asset until litigation is determined, so they’re going to lose much more than the five grand that you’re trying to get back by fighting you.
That’s usually what, as an agent, what the route we take. If we have non-refundable earnest money, I still tell the other side, “Fine, we’ll see you in court. We’re going to fight.” Even if they win, maybe it took four to six months for them to win, they’ve paid more mortgages during that same period of time, especially if they don’t have tenants. That’s one negotiating strategy you can use.
Last thing, talk to a CPA, Rogelio, about if there’s going to be any tax benefits to you owning this property. Many times you can write off the interest on the mortgage and that might save you some money on taxes and that benefit might swing the deal in your favor to move forward with it. I can’t give you advice on that specifically because I’m not your CPA, but you should find one and talk to one, and ask them, “If I buy this property, how much money would it save me in taxes?” If you add that to the cashflow that doesn’t look super exciting, that might make it look exciting. Something else to think about. Thanks for your question. Thanks for reaching out. Don’t stay discouraged. It’s going to get better.
All right, our next question comes from Alex Alba in Asheville, North Carolina. “Hey, David. I love the show. My question for you is about my next purchases I’ll be looking to make. I bought my grandma’s house in Dayton for $130,000 and it’s worth $180,000. It will cash flow, but not a lot. I know you preach about location and growth. Dayton, Ohio is not typically known for that compared to where I live in western North Carolina. However, I have a lot of family in Dayton and it’s a market I know pretty well. The cash flow is also better as you would expect. For example, there’s a nice area in Dayton where there are duplexes that cost around 250K each and will give $1,000 a month in pure cash flow with 20% down.”
“I’m wondering if I were to sell my house to Dayton along with my additional savings by two of those duplexes or look for a house hack in my area and maybe a duplex in Dayton, obviously as a newbie I want cashflow, but I’m also trying to be aware about delaying gratification and playing the long game. I also wanted to know more about your thoughts on buying in the Midwest as you seem to be a bit against it in a sense. I’m a bit bullish on Dayton as there are businesses moving in a lot and there is growth. However, I’m also trying to make the best decision I can at this early stage in my investment journey. I thank you and I appreciate your input.”
All right. Thank you for that, Alex. Let me clarify a couple of the things that you mentioned here that are my beliefs. I do preach about location and growth for long-term real estate, and it is true that I’m not super huge on the Midwest. That does not mean I don’t like any markets in the Midwest. That does not mean the Midwest as a hole is bad. That’s always the shortcut people take. They jump to that conclusion and that’s not the case.
I think I am against people investing in the Midwest because they think that buying a $60,000 house is going to get them a whole lot of cash flow because it hits the 1% rule, and then they find out that wasn’t the case, that they actually lost a lot of money buying in these inferior locations. That’s why the three rules of real estate are location, location, location. As far as your specific situation, when I’m evaluating a property, I look at cash flow just like you do, just like everybody does, and then I weigh it against some of the other benefits. For instance, you’ll have markets on one end of the extreme like Malibu, California where you’re probably not going to cash flow at all, but you are probably going to get a ton of appreciation. Then, you’ve got markets like somewhere in the Midwest where you get no appreciation, but you get really solid cash flow when you start off, at least you hope you do.
Then, the rest of the world operates somewhere in the middle of that spectrum. All right? So when I’m evaluating an area or a unit or a property or a deal, I look at the cash flow. The stronger the cash flow is, the less I need it to be in an area that will appreciate and the less I need the deal itself to be really good. Meaning, if it cash flows incredibly strong, at market value or a little under is fine. If it’s not cash flowing strong, well there has to be some reason you’re going to buy it. She better be getting it way below market value, or it better be an area that you think is going to grow significantly. There has to be some other reason to make that deal appealing. It doesn’t mean I’m for or against cash flow or location, I weigh them on a scale and the more of one you have, the less of the other that you need to make it a good decision.
Now, for your particular situation here, I apply a concept I call portfolio architecture. This is the architecture of the portfolio that you are building, and this all depends on your goal. Let’s say you like your job, you don’t mind working, you’re not complaining about that and you want a better retirement. Well, you’re better off to invest in areas that are going to grow, in assets that are going to grow faster in equity than they would in cash flow. That just makes the most sense. You don’t need the cash flow right now. If you buy in a hot explosive market 10, 20, 30 years later, you’ve made way more money than the person that got the cash flow right off the front. It’s kind of like the tortoise beats the hare in that situation.
But let’s say you’re in a situation that you got kids coming and you’re a salesperson and you don’t think you can keep working a lot, or you want to start a business and it’s going to be 5 or 10 years before that business takes off, so you need something right now to help with bills. Well then, obviously cash flow makes more sense. I like to build a portfolio that’s sort of balanced, where I have safer cash flow-heavy assets that make up the base of a pyramid, and then as I scale upwards, I get more into equity and less cash flow, the sort of riskier assets you might say, in proportion to the stable foundation of safer cash flowing assets that I built.
You can build cash flowing assets by buying an area like Dayton where you get cash flow off the bat, or you could build cash flowing assets by buying houses and waiting five years, and then they all cash flow really strong and you can scale with riskier stuff on top of it without actually having risk or without having too much risk, I should say. The problem is if you buy only one type of asset, you buy a whole bunch of properties that feel like they’re going to cash flow strong and that’s all you ever buy, you do a ton of work and don’t really get any reward for it, or you buy only appreciating assets and then you come across hard times. You have no cash flow, your portfolio topples, you’re trying to avoid just getting all centers on your NBA team, or all point guards on your NBA team. You’re trying to put a balance of the different skills as that’s what the best teams do. That’s what the best portfolios do.
I like the idea of you taking some of the equity that you already have, selling it, and then like you said, house hacking. I will always be a fan of house hacking. I will always tell people that they should house hack in almost every situation that makes the most sense. You could buy in the best areas, the best properties, keep your biggest expenses low, which are rent, and you could do it for 3% down, 5% down. It’s every part of real estate, the best of it all comes together in house hacking except for convenience. It’s inconvenient and that’s why people don’t do it. But everything in life is inconvenient. Having a baby is inconvenient. Going to the gym is inconvenient. Meal prepping is inconvenient. Putting time into your relationship can be inconvenient, but if you want those things to be good, you’re going to be in convenience. No way around it guys, just shooting straight with you here.
Selling, buying a house hacking property, taking the rest of the equity and splitting it up. Buy something that cash flows in Dayton, maybe buy two, and then buy something in a more explosive growth area like what you were talking about, North Carolina. Balance it out, have some stuff that’s for the future. Equity have some stuff that’s for the now cash flow. Go right back to saving as much money as you can and buying one of each asset again. After you’ve done that enough times, you can maybe sell some of the equity stuff and convert it into cash flow or sell some of the cash flow stuff and buy in areas you think you’re going to grow more. You’ll have options. As long as you keep adding to that snowball with every transactions, real estate investing gets easier and easier and easier with time. Thank you for your question there. All right, Chad Kirkpatrick in Phoenix, Arizona.
Chad:
Hey, David. Chad Kirkpatrick in Phoenix, Arizona, and I have a question regarding ADU and how best to add units. I have a property where I have a, it’s two rental units that serves as a short-term rental. I have a two-bedroom in the house and then a one-bedroom, kind of a carriage house, which you see behind me. What I’m thinking of doing is I’ve got additional space right to the next of the carriage house where I can go and add a unit. I can either do a construction from the ground up and add 600, 650 square feet. It’d be a two-story, or I’ve been looking at manufactured homes and they’d be about 450 square feet. From a revenue perspective, little bit of a difference, probably about $20,000 if it’s a manufactured home at 450, maybe $27,000, $30,000 if I do the construction up.
I just wanted to get your input and your advice regarding what are some of the consequences of a manufacturer versus a construction. What does it do to the value of the property and helping it appreciate it, especially when it comes time for another appraisal? Thank you for taking my question. Appreciate all the content you’re putting out there. It’s great. It’s really helping me and I’m sure a lot of other people achieve financial freedom and their goals, so thank you very much.
David:
Thank you, Chad. So much to dive into here. I’m hoping I don’t take too long to answer this question, because you gave me enough information to be dangerous, but not enough that I could give you a concise answer. What I was missing from your question here was how much it costs to build versus how much it costs to buy a manufactured home. This is something that when you’re in these situations of should I do A or B, you always want to collect as much data as you can. You hit it on the head when you said 20 grand in revenue a year versus 27 to 30 grand. That’s exactly what you want, apples to apples. You also did a pretty good job of saying which of these two things would add more equity to my home, would it be this or that? You’re trying to get apples to apples, but what I didn’t get was it would cost 200 grand to buy a manufactured home. It would cost 300 grand to build. That’s the piece I would’ve needed to give you a clear answer.
Because I don’t have that, I will give you the principles that I would use to make the decision, and I’ve sort of already done that by starting this thing off the way I did, getting this apples to apples idea. When considering adding to your property, use the same principles that you use when deciding to buy a property. There’s 10 ways that I believe people make money in real estate. I’ve been preaching about these, a couple of them apply to this situation. You make money in real estate when you buy. Buying below market value doesn’t apply to you. You’ve already bought it, but you also make money in real estate when you force equity. I call that building equity or creating equity. That is going on right now.
Which is going to give you more equity, building from the ground up 650 unit, or the manufactured home? Most appraisers are going to get more value to building from the ground up, but it’s how much value. We’re trying to get apples to apples to know exactly, or not exactly, but more concretely which one’s going to help you more. Another way is by forcing cash flow, which is what you’re doing right now. That’s the term that I use for adding units to a property to cause it to cash flow more. That’s different than just analyzing a property before you buy it. This is making a deal instead of looking for a deal. You’re forcing cash flow. You’re going to add 20 grand a year by the manufactured home, 30 grand a year by the unit that you’re considering building.
The other piece we haven’t talked about is the financing. Are you getting a loan to be able to buy this to do this work, or are you putting money into the property to do this? And here’s what everyone forgets to look at. If it’s going to cost you $150,000 to buy a manufactured home or build another unit on your property, that $150,000 could also be the down payment on a $600,000, $650,000 property. Would you be better off buying a property for $650,000 and putting 150 grand down on it, or maybe putting 110 grand down, 120 grand down, whatever it would be, and then adding a little bit more to fix it up? Could you buy equity? Could you build equity? Could you force cash flow? Could you buy cash flow? Could you buy it a better area and get market appreciation equity from picking the right location?
Is the best use of the money that you’re going to spend to improve your property as good as buying something somewhere else? Because you may spend 150 grand to add $60,000 to the value of the asset, meaning you kind of lost 90 grand, and if you couldn’t finance it, that’ll put you behind. These are the things that I want you to go through. It’s not simply which gives me the most cash flow. If it’s pretty cheap to build this, if you could build for 50 grand or something, it’s almost a sure fire bet that this makes sense. But if it’s going to be several hundred thousand dollars to do it, you might be better off putting that money into an asset that’s going to grow faster and just sticking with what you have.
The last piece of advice I’ll give. Anytime someone is considering adding to the square footage of a property, which is in a sense what we’re doing, we’re just adding square footage. It will also get cash flow, which is two birds with one stone. That’s what we want to do. The more expensive the land and valuable the land is, the higher return you get on the money you spend to improve it. In other words, if you did this in Dayton, Ohio like a previous question or a caller asked, and you spend $60,000 on a property you bought for $150,000, you’re not adding a ton of value. But if you spend $60,000 on a property that you bought for $1 million, you’re probably adding way more than the $60,000 that you spent.
Dumping more money into a property you already own makes more sense. If it’s a more expensive property, there’s not as much of it, it’s in a better location, et cetera, than it does if you’re in an inferior location. If your property’s not in an amazing area of Phoenix, it’s not worth a ton, it’s not worth more than others, it’s not rare in some way, or it’s not extra small, I’d rather see you put that money into a different property somewhere else and improve that one. Thank you very much for the question, Chad. This was great. Good luck on your journey and I love the steps you’re taking.
All right, everybody, thank you for submitting your questions. Please make sure to like, comment, and subscribe to this video as well as leave a comment letting me know what you think about the video that we’ve done. This is the segment of the show every Seeing Greene, where I read comments from previous videos. Today’s come from episode 759 that you, our listener base, left on the YouTube page, and I’m going to share those with you now. Our first comment comes from C-Mack and he says, “David Greene speaking, the only thing you can’t change about a house is where it is. Every building moving company in America ever saying, hold my beer,” which is pretty funny because I suppose if you have a moving company, you can move a house.
This is a funny thing about me. When my dad was young, he’s passed away now, but his best friend worked for a company that moved houses. My dad on the summers would go work for a company that would cut houses in half, put them on a huge truck and move them somewhere. That was a thing that there was businesses all over the place that would do that in the Central Valley of California. I can’t think of the last time I was on the freeway and I saw a house on a truck going down. I mean, I’m sure it happens sometimes, but the cost of moving a home becomes so expensive that nobody really ever does that anymore. Then, if you’re going to go buy a plot of land and stick a house on it, you still got to spend all the money for the permitting and the infrastructure, the plumbing, the electrical, the water, the drainage, all that stuff, so it doesn’t happen, but yes, thank you C-Mack for calling me out there.
From TJ-th9hw. “Hi, David. I love your answers to the great questions that were asked on today’s podcast. I always look forward to Seeing Greene episodes for the ride home. You never disappoint. Thanks for pouring out your knowledge and expertise to the BP community.” Well, thank you TJ. I appreciate that. I try hard to keep these as exciting as possible, mostly because I don’t have to share the mic with Brandon and Rob.
From destructortim9041. “I love how you talked about doing something new, getting into good habits early in the video, because as it would so happen, I just started a new daily routine. I am trying to be as productive as possible and it starts in the little places. I’m 20 years old and I’ve been listening to you guys for a while now, and I’ve realized that real estate can help make my dreams come true. My dreams of being able to support a family, retire someone who is very dear to me. I love hearing your shows.”
Well, thank you Destructor. It really is about habit. I had a talk with my real estate team today, actually The One Brokerage and David Greene Team Leadership was on that call, and I talked about how all that really good organizations, good basketball teams, good anything, what they do is they have a coach that raises the standard on everyone and holds them to it. If you look at Kobe Bryant, the mamba mentality was all about increasing the standard. Watch Save The Last Dance on Netflix, you see Michael Jordan increasing the standard. The best at what they do are just forming better habits and increasing expectations, and then they wait and see who rises with them. The people that don’t like increased standards, that don’t want to do better, they fall off, they go complain, they go find an easier team to play for and they don’t win.
The people that say, “Yeah, I want to raise my standard.” That’s the person that plays with Kobe or Michael, that’s the person that wins rings. In our world, winning rings is building passive income, getting a high net worth, and having a better life. You only do that by raising your standard, and I’m saying this because so many people get told the opposite message. Are you tired of making money the hard way? Real estate will do it easy, which is laughable for any of us that actually invest in real estate. We’re listening to these shows, because it is not easy and we need every advantage we can get. Glad to hear that. Continue to improve those habits, continue to raise those standards, and you will be rewarded my friend.
Our last comment comes from eq4253. “This video has been such an eyeopener. I can say that I’m feeling better about taking the plunge to buy a second home to rent out.” Very glad to hear that. Glad to encourage you. We need all that we can get with the way the market is right now, so thank you for that.
Guys, we love and appreciate your engagement. Please continue to do so. Like and comment and subscribe to the YouTube channel. Also, if you’re listening on your podcast app, take some time to give us a rating and an honest review. We want to get better and stay relevant, so drop us a line and take the Spotify poll. And this comes from Spotify actually, and we have a review online to leave you guys with. This is a review from Apple Podcast. The person says, “David, Rob, and the BiggerPockets team, thank you all for providing the realistic education I need to make my real estate investing dream a reality. It all seems so big at first, but you do a great job of explaining the next actionable steps to just keep moving forward. I’m taking your advice and I’m going to house hack my first investment property, a duplex in North Carolina while renting out my current town home in California. Thank you all for dedicating your lives to the real estate dreams of your listeners. You’re killing it. I’ll see you at the BPCON,” from Emmy Lou Invest via the Apple Podcast app.
That’s what I’m talking about. Thank you very much. Very glad to hear that. I also think you’re investing in a great area, so you should move forward with that house hack. I’ll share this before we get back into our next question. I heard Kirk Cameron, the guy from Growing Pains, a long time ago talking about expectations, and he said, “Imagine two people that are taking the very same trip to the same location.” One person is told, “This airline is incredible. They have the best food, they feed you as much of it as you can handle, you can lean back your seat and sleep the entire time. They don’t allow crying babies on the flight. There’s tons of legroom. The ambiance is perfect. The flight attendants are the nicest, most attractive people you could ever imagine, and they give you a pillow for your head. It’s the best experience you’re ever going to have.”
That person takes the flight and there’s a little bit of turbulence. The flight attendants are not quite as nice as they thought. There’s food, but it’s not that great, and you don’t actually have as much legroom as they thought. You have very little, and they don’t sleep on the plane. Another person is told, “this is going to be a very challenging flight. You’re going to probably hate it the whole time, but the journey is worth where you’re going. You’re going to have no legroom at all. You’re going to have to hold your legs off the ground. There’s tons of turbulence. You’re going to have flight and air sickness the whole time. There are no flight attendants to help you. You’re just going to be grinding it out for this whole time. There’s no food, so you’re going to be hungry. You’re going to arrive nauseous and sleepy and grumpy, but it’s worth it when you get there.”
Those two people could have the exact same flight, moderate turbulence, decent food. The first person’s journey that I described, what they had, let’s say both people have the same journey. One of them gets there and is thrilled because it was not nearly as bad as they were prepared for. The other one has a pretty good flight, but their expectations of how easy it was supposed to be didn’t get met and they’re pissed, they’re angry, their mood is bad the whole time. That’s life. If you get told that life is supposed to be easy, it’s supposed to be fun, it’s supposed to be a job that you love and a person that loves you and you don’t have to do anything for them and that hard work is for the foolish, whatever life gives you, you’re always going to think it’s not enough and you’re going to be bitter about life.
But if you’re told life is a grind, it’s a struggle, you’re competing with tons of other people for the same resources, people are not going to love you, but you’re going to be able to love them, that it’s going to be hard, but the journey is worth it at the end. Those are the happy people that go through life, and think about that. You know I’m right about it. When it comes to real estate investing, I’d just like for you to take the same approach. If you could get rid of the idea, it’s supposed to be easy, the journey becomes awesome. If you continue to think that you’re owed something and it’s supposed to be easy, you feel bitter the whole time. All right, our next question comes from Jim Piety in Austin, Texas.
Jim:
Hey, David. My name is Jim Piety. I live here in Austin, Texas, but I’m originally from the California Bay Area, and I’ve been a huge fan of BiggerPockets for many, many years, but finally decided to buy my first investment property in 2021. Well, last year, I bought it in San Antonio market because Austin is very, very expensive. I wanted to buy a cheap property I could flip. I found the wholesaler, bought a property for $89,000, and it turned out to need a lot more things to rehab it, remodel it than we initially expected. Primarily, the entire plumbing had to be completely redone underneath the house and there was no sewer, a 70-year-old home, no sewer whatsoever. That just wasn’t what we anticipated. Great learning experience, but obviously not great for our capital.
Well anyway, in order to break even, we had to sell it for about $150,000. I had it list for $155,000. It only appraised for $127,000. Not wanting to take that much of a loss, I decided instead to refinance the property and turn it into a rental. Fortunately, it refinanced for $155,000, and so I was able to pull out about half of my capital, but now it’s at a point where I still want the rest of my capital so I can continue to invest, and it’s not really cash flowing, it’s essentially breaking even. I did break the cardinal rule of real estate and I did not buy in a great location. It is in San Antonio, which arguably is a growing market, but this particular neighborhood is not a very great place to invest in.
And so, I’m at a crossroads where I’m tempted to sell it and then cut my losses and invest in a higher appreciating market, but I’m not sure about what the best way to do that or some of the considerations I should make. I could try and sell it to the tenant right now, or should I wait till September when the lease ends, not renew and then just put it back on the market and try and sell it at retail, or is there something else I should be concerned about? Maybe should I hold onto it even longer? Just trying to think of any other options that I might have. Really appreciate any advice, help that you can provide. I love the show. Love the new things that you and Robert are doing in 2022, the new format, everything has been really, really awesome. Keep doing what you guys are doing. I’m going to continue being a long fan. Thanks so much. Take care.
David:
Thank you, Jim. Nice to hear from you again. Guys, Jim is one of Rob Abasolo’s best friends. I actually got to spend some time in Cabo with him, and he told me about this deal, and he’s not exaggerating. He literally bought a house that had its drainage, sewage system not connected to the city. They traced the drainage to the backyard of the property where it was going, because it was on a big lot and it was just dumping into the ground. Jim had to go pay a ton of money after he bought this house from a wholesaler to get it to connect to the city sewage line, so he is not dumping sewage into the earth.
This is legit. One of the risks of dealing with wholesalers, I know we tell people all the time, “Go out there in wholesale deals, you don’t need need any money to do it, or buy from wholesalers,” and these stories don’t come out very often, but I hear them a lot. You got no one to sue, you don’t have any representation here. It’s buyer beware, not wholesaler beware. They don’t care. They got their wholesaling fee and they’re gone. There’s no licensing board to oversee them. There’s no resources that Jim has to go tell anyone he got ripped off and get made whole. Doesn’t exist when you buy from a wholesaler that way. It can be scary.
Also, you made a good point there. Buying in the wrong neighborhood in the right city is still the wrong location. San Antonio is a growing market, but not every neighborhood in San Antonio is a growing market. I’ll even say this, this is not a rule of thumb, it’s not always the case, but generally speaking, wholesalers have much more luck in areas where it’s hard to sell homes. Think about that. If you got a house in an incredibly good neighborhood or just a solid neighborhood, you want to put your house on the market with a realtor and get the most money possible.
If you have a house that you think you probably can’t sell or there’s not many people that want it, you go to a wholesaler, you let them sell it because they sell it to some unsuspecting buyer like Jim here, this is the first property he ever bought, and he’s just thinking cash flow, cash flow, cash flow. It’s in a cash flow market. This is going to be great. Then, you get ripped off. Happens a lot. When you’re buying from wholesalers, you do have to be aware, not every time, but many times, it’s properties that have a hard time selling on the open market, which is not a good thing. It’s properties in locations that are not as desirable, which is not a good thing, and it’s properties that the seller may not think that they can get top dollar for, which again is not a good thing. That’s not all the time, so please don’t go in the comments and say, “I know of a time that someone got a great deal in a great area from a wholesaler.” Yes, there are of course anecdotal examples of that.
But Jim, for your situation, we talked about this in Cabo, I’m going to give you the same advice, and I think this applies to everybody. When you own a property that you don’t love, I can make this a really simple way of knowing should I keep it or get rid of it? Don’t ask the question, “If I sell it, am I losing money?” If you’ve got 200 grand in a property and you’re going to sell it and lose 5 grand and your pride won’t let you take the loss, you’re just tying up $195,000 of equity that could be making you money somewhere else. You could take the 5 grand loss, the 10 grand loss, take the 190, buy another property, add value to it, add 50 grand, and you lost 10 grand to make 50 grand, so you’re up 40,000. You see how simple that is? We get too caught up on the wrong things.
The question I think people should ask if they own a property that’s not performing well is would I buy it at its value right now? This property is worth $155,000. It’s performing the way it is. Would you go buy it right now, Jim, paying 155, getting what you got? My guess is no, because you don’t want it anymore. That’s an easy decision that you should sell and put the money somewhere else, and you could look at the rest of your portfolio and you could say the same thing. I wouldn’t buy this thing right now for 1.2 million when it only cash flows $300 a month and there’s $600,000 of equity, or better put, I wouldn’t buy this $900,000 house and put $400,000 down on it to only make 200 bucks a month. You got 500 grand of equity there or 400,000 of equity and you’re sitting on it, which you wouldn’t have done if you bought it in the first place.
That means you should sell it and move that equity somewhere that it’s going to work harder. This is literally what I do. Hit me up if you have one of these situations and you’re trying to figure out where you should move your equity, but look at your whole portfolio and ask that question, “Would I buy this property right now at this price, at this interest rate for this cash flow with the amount of equity that I have in it as a down payment?” If the answer is no, you should move on.
Now, for the last part of your question there, Jim, should I wait until the tenant leaves and then put it on the open market or sell it to the tenant? I would get an idea of what it’s worth and if the tenant wants to buy it, sell it to them right now, better for you that way. If the tenant doesn’t want to buy it, if they won’t pay as much as you would get on the open market and it’s significantly more on the open market, yes, wait till they leave, wait till it’s vacant, get it painted, get it looking pretty, get it cleaned, put it on the market, you’re going to get more money that way, especially at the price point you’re at. There’s going to be another sucker that wants to come in, is going to buy into that same area that you are in.
But if you could get close to the same amount selling directly to the tenant, you’re probably going to be better to just wash your hands, get your note paid off, get some capital back, take the new knowledge that you have, the new experience that you have, the new resources that you have, and put that capital to place somewhere better. You will not regret dumping that problem and putting that money into a property you’re going to enjoy owning. Thank you. Nice to see you again and hope that little baby you just had is doing great.
All right, our next question comes from Alex in Edmonton, Alberta, Canada. How and when to get out of a bad real estate deal? Well, this sounds familiar. Here’s the details. Property has not appreciated for almost 10 years. In fact, it loses its value as a result of the current economic downturn. Ouch. Property provides low positive cash flow, $150 to $200 an average. Current equity based on the current fair market value of $25,000. The outstanding balance to the lender is $110,000. All right, so you could sell it for 135 and you owe 110. The current interest rate on the mortgage is 2%. You’ve got $25,000 invested, $10,000 down payment, $15,000 maintenance almost over 10 years. All right, purchase for 165, current fair market value, 135. Should I sell it or keep it? And, if sell, when? I’m concerned about the potential high interest rate in 2026 and losing positive cash flow. The only good thing about this property is a result of high monthly mortgage payments.
All right, Alex, we’re going to go back to the same thing we just told Jim, Jimmy Boy over here, would you buy this property today for what it is worth, 135, knowing it’s likely to continue going down? If it’s already lost value over 10 years, that’s incredible. We don’t see that very often in the States because we’ve inflated our currency so much. Would you buy it at 135 to get $200 of cash flow a month knowing it’s going to be worth 105, 10 years from now? I think the answer we all see here is no, you would not do that. It doesn’t make sense.
Getting your money out of a sinking asset, let me say this another way. When we look at money as a store of energy, it really opens up a framework to understand this better. You’re looking at one way the property is making revenue or losing money, which is cash flow. That’s a form of energy because the house puts off this energy in the form of cash, which you put in a savings account. That’s energy that you’re saving. Well, the house is losing energy and then it’s bleeding equity every single year, and eventually you’re going to be underwater on this thing and you won’t be able to sell it at all if things continue how they go. Does it make sense to make, if it’s $200 a month, that is $2,400 a year, positive energy to be losing right around the same amount of equity?
You think you’re making cash flow, but you’re not. You’re treading water. I guess paying off the loan might be something that’s helping you here, but this is really bad. I think you got to get out of this thing and you got to do it while you still have a chance that somebody else is going to buy it, and this is another reason I tell people you want to buy in the better locations. You want it to be a given that it goes up in value every single year. You don’t want to have to wonder if that’s going to be the case. Location, location, location. You will avoid buying properties like this if you stop looking at only cash flow. It’s the cash flow craze. When we get dollar signs in our eyes and we’re like, “I need it.” I need a hit of cash flow that you find yourself doing things you normally wouldn’t do like in the wrong neighborhood, looking to score some cash flow, or buying in the wrong location, trying to do the same thing.
I’m very sorry to hear how this has worked out. Don’t even let your interest rate play a role in making your decision. It does not matter. Who cares? You have a 2% rate on an asset that’s sinking. It’s like I got a great coat of paint on a ship that’s taking on water. Should I stay in the ship as it’s sinking because the paint is really great, or I really like the propeller that I just put on it? No, absolutely not. You’d rather get a good interest rate on a good asset or a bad interest rate on a good asset than have a good interest rate on a bad asset. Sorry to hear this is this situation. Get out of that sucker and get into a better one. All right. From Tyler in Phoenix, got another Arizona question coming in.
Tyler:
Hey, David. My name’s Tyler Brantley. I’m a medical traveler currently in the city of Phoenix and Arizona. My question’s more of one of personal finance, so I have about $30,000 in liquid asset, but I have a $21,000 loan at about 6.5% interest. Would it be a good idea to go ahead and pay that all fully or should I just continue to stack my cash and look for real estate opportunities? If that is the case, as a medical traveler, I switch locations every three months. What would be the best way to find opportunity?
David:
Man, Tyler, congrats on you for saving 30 grand for being a hardworking young man. First off, give you your flowers there, but your problem really just hits me in my soul. I hate hearing these situations, and it’s because when I was a younger man, having $30,000 saved up, well, if you adjust for inflation, is probably having $60,000 in today’s dollars saved up. But it was, how do I want to say this, it was more, I don’t want to say meaningful like it was better than I did it. It would take me further is what I’m trying to say. There were way more options, wealth building options available to somebody that had a good chunk of chains saved up when I was 20 years old, 25 years old than people have right now, and here’s why.
Again, I just talked with my leadership team about this today. This is what’s scaring me about the economy that we’re in right now. I want you to think about supply and demand, everybody listening to this. Everything makes sense when you look at it from this perspective and prism of supply and demand. The demand is how many people want something. The supply is how many of that thing there is available. In our example, supply is going to be real estate and demand is going to be people that want to buy it and are able to buy it, because you may want to buy it, but if you can’t get approved for a loan or you don’t have any money, it doesn’t matter. People with cash that can get loans or that don’t need loans that are going to buy real estate. This is your competition right now, we used to have a lot of options.
When I was 20 years old, I could have put my money in the stock market. Believe it or not, I could open a CD at a bank and I could get 6 to 7%, sometimes 8% on my money. I could just put it in a straight savings account. I used to do that and 6.5% in an online bank. I would literally take my money from the restaurant, put it in a brick and mortar bank, transfer it the next day into a different bank and I could earn over 6% on my money, which was pretty good. You could buy bonds, you could invest in ETFs, you could invest in individual companies, you could invest in real estate.
There were lots of different ways that you could take this money and grow it into something. You could buy REITs, lots of things like that. You could even buy equipment and start a business. You could buy a water truck and go out there to construction sites and spray down the area so that the dust doesn’t get all over the neighbors. People were doing stuff like this. You could buy a motorcycle and fix it up and sell it to somebody else or do that with cars.
Inflation is so bad at this point that there’s almost no investment opportunities that will beat inflation. If I go earn 6% on the bank, which is laughable, I’m going to get 1% on a bank like maybe 2, that is so much lower than inflation, I’m losing money if I do that. If I go put my money into a CD, if I go put it into a bond, if I go buy treasuries with it, even most stocks, they’re not outperforming inflation and I realize there will be a contingency of people that say the CPI is only 8% or 7%. You could beat that with stocks by 1%. First off, you take a lot of risk to get a 1% return if you do that. And, second off, the CPI is not an accurate measure of inflation. It is a controlled basket of goods that the government can make look the way that they want it to look, which is always going to be not as bad as it really is.
If you include the price of hard assets like real estate in there, inflation is a lot higher. If you include the price of food, it’s a lot higher than what we’re seeing in the CPI. Now what you have is a strong demand for a huge return, not just cash flow, any return, appreciation, loan paydown, tax savings, some cash flow, everybody has to put their money in real estate right now. I’m going to say that again. If you want to beat inflation, you have to put your money in real estate. Crypto isn’t going to get it done. NFTs are not going to get it done. The stock market’s not going to… All of the ways that money used to spread itself out and there was all this different supply that the demand could find its way around has conglomerated all on the single asset class of real estate investing, and now that’s where everyone is fighting to get to, like a food shortage where everyone’s fighting to go buy all the food that they can.
Remember during COVID, there was a large demand for toilet paper, not likely to go away anytime soon, but a limited amount of supply. We see the same thing with real estate. It’s one of the reasons that cap rates compress with commercial properties for so long is all this money needed to find a place to go and that’s where it went. Now, we take your situation, Tyler, you got 30 grand saved up. You did everything you’re supposed to do. You’re working hard, you’re saving money, you’re asking the right question. How do I invest it? You’re not saying, should I buy a Charger or a Challenger? You’re not saying, should I go to Mexico with my friends and blow all my money? You’re making the right decisions and you’re being punished, because of the decisions that we made to ruin our currency and the free for all that has had everybody rushing into the real estate space.
If you’re trying to figure out why rates keep going up, but prices aren’t coming down everyone, this is why. This is what I’m shouting from the rooftop so everyone will hear, it is not going to get easier unless they give us another alternative to put our money into, because owning real estate is not really fun. It’s more work than buying a stock or a push button investment, when I call you, push a button on a screen and boom, you own Bitcoin. That’s way more fun. It’s what people like to do. Just isn’t working. It’s not outperforming inflation.
All of the people have rushed into real estate, because it’s the only place to get a return and now you’re competing with them, my man, which makes your situation very hard. With $30,000, you’re basically at a point where all that you can really do is buy a primary residence because you only have, say, 5% to put down and it’s not going to cash flow, and you’re moving from place to place. Realistically, the best situation for you is to buy a place with a lot of rooms, rent them out to other traveling medical professionals like you, and make a cash flow that way. It’s going to be more labor-intensive, but you can still get good dirt, or buy a medium term rental that you can rent out to other nurses, and it’s going to be a job on top of your job.
I’m sorry, I know no one wants to hear that. I know we’re like, but I wanted to quit my job. I don’t want a new job. Me too, but that’s not what we got. Real estate is so in demand right now. You’re going to have to give something up if you want to own it, and that’s going to be convenience. Tyler, I don’t think you’re going to out-save the market. There’s nowhere you can put that 30 grand that I can tell you right off the bat that is going to make it grow, it’s going to get worn out by inflation. You actually have to save even more than what you’re already saving if you want to try to catch up so you could buy better real estate, you’re going to have to work even harder.
It’s kind of like running up a down treadmill. It’s one of the things I talk about in Pillars, the book that’s going to be coming out that I’m writing for an overall wealth building strategy that will work for anybody. When you’re working against inflation, it’s like running up the down escalator. You can get to the top, but you got to spend way more energy, you got to be way more focused. That’s the bad news.
The good news is you’re still making the right move, you’re building the right principles, you’re young, you have time. Focus on more than just real estate. Focus on getting raises at work. Focus on getting new certifications so that you’re eligible to make more income. Focus on working more hours, focus on saving more money, defense and offense. You can control that a whole lot more than you can control what’s going on in the real estate market. Continue to look to build your wealth in those areas and then buy the best location you can, the best asset that you can and hold it for the long term. Thank you for your question, Tyler. Let us know how that goes.
All right, that was our show for today. This might be the realest I’ve ever had to keep it. Did you like that? Did you guys like it when I just pull back the blanket and show you what’s going on underneath the surface of real estate like I’m seeing every day helping clients, selling houses, helping clients getting loans, investing in my own deals, advising people. This is what I’m seeing and I’d rather that you heard it from us giving you the truth than we sugar-coated it, and you go out there expecting a perfect flight and then you get some turbulence and you’re angry. I don’t want that from any of you.
Let me know in the comments what you thought. If you’d like to follow me, get more of my perspective, reach out to me. You can do so on social media. I am davidgreene24. DM me there. Let me know what you’re thinking. Could also check out my website, davidgreene24.com, and see what I have going on. Don’t forget, if you like these shows, to like, comment, and subscribe, and then check out biggerpockets.com. We have tons of resources there that are about more than just a podcast. You can read blog articles, you can read forums. My guess is if you go look at the forums and you see the questions that are being asked, people are echoing my sentiments from this show.
People across the country are having the same problem you are. There’s nowhere to put my money. There isn’t cash flow. Why are these prices not coming down when there’s no cash flow? Rates went up, shouldn’t prices be coming down? Guys, this is an indication that there is so much demand for these assets right now. There’s not enough supply. I don’t have a crystal ball. I don’t know for sure, but people keep telling me the market’s going to crash. People keep arguing, telling, the market’s going to crash and it’s not happening.
This is why I believe it’s not happening. If houses dropped from $600,000 to $300,000, Blackstone will just buy them all. They push the price right back up to $600,000 again. There’s such a demand and competition for you. You got to know that you’re in a fight so that you can win. Thank you. Please check out another BiggerPockets episode if you have some time. If not, I will see you next week for another Seeing Greene. Submit your questions at biggerpockets.com/david, and let me know in the YouTube comments what you think of my take on the market.
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