How to Make Even MORE Cash Flow Off Your Rental Properties

David Greene:
This is the BiggerPockets Podcast. What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate podcast, coming to you from Kauai, and that’s one of the things I love about real estate is I get to bring you guys questions from our listener base from everywhere in the world. My hope is that more of you can get to the same position and we’re going to share some advice today that will help you do just that. Today’s Seeing Greene episode has a lot of good stuff, including what a home equity agreement is and if one should be used. The best ways to reinvest the cashflow that you’re making from your current portfolio today and how you should be thinking about it and a live call with one of our listeners where we go back and forth.
Helping them determine if they should take the money they’ve made in real estate and improve the properties they have or if they should buy new properties and if so, what to be thinking about when going back and forth with that decision. A lot of people in today’s market have equity and they’re trying to figure out how they should use it, and sometimes that means buying more real estate, but sometimes that means improving the real estate they have. I especially like this topic because a lot of people have equity and they’re tapping into it with HELOCs, but they’re not sure if they should use that HELOC money to scale into a bigger portfolio or improve what they’ve got. So we tackle that and more on today’s episode of Seeing Greene.
We’re going to bring in our first guest in a second, but before we do a quick tip for you all. You’re going to hear more about it in the next question, but I am a firm believer, especially if you’ve got a short-term rental that tapping into your equity and using that money to improve the property, improve the decor, add amenities to it, make it look nicer, get better pictures taken, is a quick way to get a return on your capital that can then be used to pay the equity line of credit back down. I don’t love in today’s market taking $200,000 out of a house at a pretty high interest rate and using that for the down payment on a property that you then have to get another loan for the other 80% and stacking up debt when rates are higher.
I’m a much bigger fan of a get in and get out strategy, kind of like using a jet ski instead of a battleship. Take out some equity, fix up your house, improve the revenue, and then pay the equity loan off with that revenue and then, ask yourself how you can do it again. How can you recycle that same 20 or $30,000 to improve the properties you’ve got and win in the short-term rental wars? All right, let’s get to our first guest today. Let’s welcome Stacie to the studio. Stacie, welcome to Seeing Greene. A little bit of background about you. You’ve got a single family property, a duplex, and a piece of property in the Austin area, in New Braunfels, Texas. So funny story here, I almost invested in New Braunfels myself about five years ago and wish I would have, because I would have done very well.
I fell prey to that same problem of, well, when I first heard about it was this much and now it’s $50,000 more. I don’t want to get in too late and made the same mistake that I tell everybody else not to make because I learned it in that example. So congratulations on doing the right do and having a New Braunfels property. So, tell us what’s on your mind today.

Stacie:
Thank you. Yes, so considering those properties we have and our long-term strategy of buy and hold, which we’re a 100% in on, so we have this property in New Braunfels. We actually bought it site unseen and it was a very good purchase for us. It’s zoned multifamily. It’s one block from the Guadalupe River, so it has a single family home on there where we have a long-term renter, but we have the opportunity to develop it because it’s already zoned for multifamily. It’s half an acre lot. Then, we have this plot, this quarter acre plot in Lago Vista near Lake Travis that was given to us from family that also has development opportunity.
So we have these two properties that we own, that have development opportunities, but also, we’re tempted to buy our next investment property. So we’re at the point of trying to decide do we stay the course, leave those properties as is because we have a long-term renter in New Braunfels, we’re cash flowing about $600 a month there, so it’s well paying for itself and then some. Then, we have this lot that’s just sitting there vacant that we’re trying to figure out what to do with. Our duplex in South Austin is cash flowing about $2,100 a month. So we have two long-term rentals there. We’re not looking to develop or do anything with that right now. So we’re at that kind of inflection point.
Do we buy our next investment property or is now the time that we actually do some forced equity and develop the New Braunfels property or build something in Lago Vista?

David Greene:
Alrighty.

Rob:
My first question here is what is the reason that you want to get into the next property? Is the reason you want to get into the next property simply for the sake of growth and you’re like, “Hey, I just want to add to the portfolio. I don’t really need the cash flow,” or do you want to get into another property because you want more cash flow because you need an extra couple of hundred bucks every month?

Stacie:
We don’t need the extra cash every month. We want to grow the portfolio and we also want to invest sort of, I know it’s not about timing the markets, time in market, but it still feels like now is a good time before everyone is back in the market, should rates come down. So we’re kind of feeling that, wanting to get the next property because we do want to grow the portfolio, but also, when is it time to actually develop these properties that we’re sitting on too? So we’re kind of don’t know which way to go necessarily.

Rob:
I think if you’re not pressed for the cash flow and you’ve got a lot and you’ve got a property that is zoned for more property, I’m a big fan of making as many streams of income off of one property as possible. So, if you have the steam and if you have sort of the dedication and I guess the open mind to just go through a new construction, then I think you should do it. A big fan, I actually think that new construction is just the best way to combat a lot of things that are happening right now because yes, you will be getting something at a higher interest if you buy a property. So for me, I’m like, I think if you can go and build something at your cost without the markup of someone … if you go and buy a new construction off of Redfin, you’re paying their cost and you’re paying a premium for it, right?
So if you can go and build something at your cost, it’s not really that same markup as getting it off the MLS and when you refi out and get your money out, you’ll have a higher interest rate on that of course, but it won’t hurt quite as bad as having gone and purchased a property straight off the MLS, if that makes sense. So if you have the ability to wait it out for let’s say 12 to 18 months, then I definitely think building from the ground up is a really smart thing to do right now.

David Greene:
All right. I will weigh in on this too. I love the question. It comes up a lot where I live in the Bay Area, you typically see this in more expensive areas, where the question is do I build an ADU or do I buy a new house? And the tricky thing is you can’t finance the build. If you could finance the build, it would almost always be an easy, “Yeah, just improve the property you’ve got.” The problem is you got to put a lot of capital down to do it. So I like to try to simplify this turning into apples to apples as much as I can. And I asked the question of, for the capital I’m going to put into this thing, how much cash flow am I going to receive?
What’s the ROI on that and how much equity am I going to build? What’s the return on investment on that? So if you were to add to the property that you already have, how much money would you have to put down to do this and do you think it would increase the equity

Stacie:
For the New Braunfels property, we probably would have to put down about 200,000 in capital to build an ADU, at least an ADU, right? A prefab ADU would probably be about 200,000, all in. For the Lago Vista property, we’re looking at probably 250 upwards to half a million of capital to put in to develop that property, because it is raw land, it’s going to require a lot more clearance and work to get that property ready for building. So I don’t think we would do both at the same time. I think we’re kind of anxious to really look at … I think the New Braunfels property has the most potential because it is such a growing area and the location of it is prime, being a block from the Guadalupe River. So I think there’s a lot of upside to developing New Braunfels from all that I can tell.

David Greene:
So if you put the $200,000 into New Braunfels, would you add equity to the property?

Stacie:
Yes, I believe we would add equity to the property.

David Greene:
How much do you think you’d be adding?

Stacie:
I think we probably would be adding … we bought it two years ago. We have probably about … I’m going to say about 40,000 in equity in just the past two years in the property. So if we add an ADU, we’d also have to configure the front house a bit too to put the ADU in. I don’t know, but I’m going to guess that we would probably add about … immediately about a hundred, 150,000 in equity in that property. Does that sound about right, the numbers I’ve shared?

David Greene:
I don’t know the area. Yeah, it could. It could work. What about the cash flow? If you build an ADU for $200,000, what will it rent for?

Stacie:
Yeah, because right now, we’re renting, all in P and I is like 1800. 18, 1900 we’re renting for 25 on the single family home, so we’ve got nice cash flow there. We can build up to 1,000 square foot ADU without it being considered a second principal structure on the property. So 1,000 square foot, we could probably rent that, I’m going to say around 18, 1900 in today’s market for 1,000 square feet.

David Greene:
Okay. Would this increase the property taxes on the property if you add to this work, make it worth more?

Stacie:
Most likely.

David Greene:
And then where are they at New Braunfels like two and a half percent or so?

Stacie:
No, it’s right around 2%. It’s like 1.97, something like that. Yeah.

David Greene:
So that is a pretty healthy return. I mean, you’re having additional property taxes and there’s going to be more insurance, but still, I believe you said it was 1800, you think that you’d rent it for?

Stacie:
Yes.

David Greene:
So let’s say you keep say, 1400 of that to invest 200,000. That’s not a bad deal there. You’re not too far off from the 1% rule. The downside would be you’re spending $200,000 to add $100,000 of equity, so you’re actually losing equity in a sense because you’re transferring that money from your bank account into the property. You’re going to lose $100,000 of value there, but you’re going to gain the extra cash flow of say, $1,400 a month or $1,300 a month. Now, here’s why I framed it that way. I think your job here, Stacie, is to ask yourself with this $200,000, if I put it into a different investment vehicle, could I get better than say 13 or $1,400 a month and avoid losing a $100,000 of equity? Could you put $200,000 into building a new home construction that you might gain $100,000 of equity at the end instead of losing it?
That’s a $200,000 swing, or maybe you get better cash flow, maybe the cash flow is not as good, but you don’t lose as much equity. Have you looked into opportunities like that?

Stacie:
I haven’t, no.

David Greene:
Okay. That’s how my mind goes to it. What if you paid cash for something that was $200,000, maybe a fixer upper, you fixed it up and then, you refinanced out of it, you could do it again, or you could buy a million dollar property, put $200,000 down, so you’ve got those. In my mind, you’ve got the three options. You put it as a down payment on something, you pay cash for something or you put it into the property you have. Rob, what are you thinking?

Rob:
Yeah, I guess I’d really want to … and we’re not going to be able to solve for this on this episode unfortunately, but I’d want to know what kind of equity we’d be adding because I think it’s, I’m not going to say rare, but I feel like if you’re building something on your property such as an ADU or a secondary unit, I feel like the equity that you’re building should be pretty commensurate with the amount of money that you’re investing, right? So it’s like I think if you were going to spend 200 but you’re only getting a $100,000 in equity, then yeah, I would agree with David. I probably wouldn’t do that.
I’d go find somewhere where I’d get the one for one ratio on that, but I do wonder if you would get that full equity out of adding an addition to the property. If the answer is yes, I would go that route and then build it and then, do a cash-out refi and try to get as much of that money back, because if you do that and you get a pretty significant portion of your money back, then your ROI skyrockets in that point. I’m a big fan of this strategy solely because you get to stack income streams on one property and it really makes a huge difference. I had a property in LA. When I bought it, it was $400 mortgage. I’ve since refinanced, it’s like 4,200 now, but I now rent out the main home, which goes for … anywhere from 3,500 to $5,000 a month.
I’ve got an ADU in the backyard that goes for anywhere from 2300 to $3,000 a month, and I even have a third unit that I don’t rent out, but I used to, and that was another $2,000 for that unit. So when you added it all up, it was like $8,000 on one property and your profit margins on that are just so healthy. Your landscaping bills are all consolidated to that one property. All of your bills are just consolidated into this one business, and that’s why I’m a big fan of building up basically as many income streams on one property as possible, assuming that your equity that you put in is one for one on the investment that you put in.

David Greene:
That’s the key there, Stacie. I don’t love the deal if you’re putting in more money than you’re gaining in equity. Hearing that, what’s going through your mind.

Stacie:
Yeah. No, that makes a ton of sense. I’m not 100% on all the numbers. This is as far as I’ve been able to get, but I will dig deeper in terms of the actual equity we’d be able to get out of that property. Yeah, and just to throw a curveball here, right? Our house in Los Angeles, we’re in the San Fernando Valley, we’re in Encino up in the hills. That’s why my internet is a little spotty. I mean, we were originally going to keep this house and sell it or not sell it, but use that as sort of our investment property here, rent it out. Our latest thinking was to sell this house to buy more properties in Texas.
So we’re trying to treat all of our homes as sort of part of the portfolio and how do we leverage them to the maximum, and I know David, you’re up in Northern California, but I don’t know, we were sort of starting to think that we just wanted to get out of California.

David Greene:
Shocking. I’ve never heard anybody say this.

Stacie:
Yeah, never, right?

David Greene:
Yeah. It’s something to think about because you probably have a lot of equity there. I don’t think it would benefit you to sell it and put the money into Texas, unless you know where you’re going to put the money, and it sounds like you got to figure that problem out first. Where are we going to deploy our capital and how are we going to deploy it? I don’t think it’s going to be as simple as let’s just build onto what we already have. There may be something where I would want to take some of that cash and look for a way to buy something that was maybe distressed that I could fix up and add value to it, although it’s not bad building an ADU in that area where you know you’re going to have tenants, you know the values are going to be going up.
It’s not going to hurt you. I just hate those high Texas property taxes, right? If the property value does go up, those taxes hurt out of the cash flow you’d be getting.

Stacie:
They do, and insurance is going up too, so that’s every year, steadily insurance is going up.

David Greene:
That’s right. Well, thank you Stacie. This was a good question. I think more and more people are asking this question because rates are high, so it’s not an automatic, yes, I should go buy another property. Now, the rates are getting really high. It’s hard to make them cash flow. So we’re starting to ask questions like this, so thank you for bringing this up.

Stacie:
Thank you guys.

David Greene:
Thank you, Stacie.

Rob:
Thank you.

David Greene:
All right, thank you Stacie for joining us today. I just dropped Rob off at a Chipotle, so I’ll be flying solo for the rest of today’s episode, but big thank you to Rob for joining. I was so appreciative that I actually left him with a dollar so he could get some extra guac on that burrito that he loves so much. His tip for getting the most out of one property is a great takeaway and I appreciate him sharing that. If you would like to have Rob and I, or me or anyone else in the BP universe answer your specific questions, head over to biggerpockets.com/david where you can submit them and that will make me like you. If you’ve submitted a question to Seeing Greene, you can consider yourself my friend, and when we see each other at BP Con, I will take a picture with you, hug you and say something nice.
I hope you’re getting some value out of today’s conversation and our listener questions so far, but we’ve got more coming up after this section. I like to take a minute in the middle of our shows to share comments that you all have left on YouTube or when you review the podcast. Our first review comes from 1981 South Bay. “Love the Seeing Greene episodes. I love these episodes and it’s a great addition to have Rob on the series. My wife and I have been listening to Bigger Pockets for two years. We finally just bought our first two duplexes and are planning to acquire more properties. We could not have done it without this podcast and the community. Thank you, David, Rob, and the entire BP community.”
Well, thank you South Bay for a five-star review. That’s freaking awesome. I hope some of our listeners go and follow your lead and also, if you’re in the South Bay of the Northern California Bay Area, we’re basically neighbors. I live about an hour away from you, so make sure that you reach out on Instagram. Let me know you are the one who left that comment and let’s see, if we can get you coming up to some of the meetups that I do in Northern California. We’ve got some comments here from the Seeing Greene episode 840 that came directly off of the YouTube channel. The first one comes from Dan Cohan. “Thanks for sharing this awesome video. I really relate to the struggles of estimating renovation costs, especially when you’re investing in real estate from far away.” And then Laura Peffer added, “Yes, please do an entire show on To Cash Flow or Not to Cash flow.”
Well, you’ve spoken and we’ve listened. We actually did record a show on when it’s okay or maybe not okay to buy non-cash flowing properties and I will talk to our production staff about putting a show together that says, is cash flow the only reason to invest in real estate or is it okay to not invest in it? Maybe we’ll have a back and forth where we have the cash flow defenders and the appreciation avengers or however we’re going to call that. In case you missed it, go back and listen to episode 853, which was released on December 6th where we break down three negative cashflow deals. All right, let’s get into the next question. All right, our next question comes from Roy Gottsteiner. He is a foreign national living abroad, so he’s having a difficult time getting financing.
He can only get 60 to 65% loan to value ratios and no access to products like FHA or HELOC. Roy started four years ago investing in North Carolina and Ohio and currently has a portfolio of 10 single-family housing rentals. He does mainly BRRR and long-term traditional rentals and recently started doing some medium terms. Roy says, “Hi David. These episodes are extremely helpful and are helping me to constantly adjust my thinking based on the current market dynamics as well as my own position in the investing journey, so thanks for everything. I built a portfolio of 10 units, which cashflow two to $3,000 a month. I’m 35 and I have a great job, so I don’t need this income and intend to reinvest all of it.”
“I’m trying to think of the best way to use that money to further enhance my progress towards financial independence. Here’s some options I had in mind, but happy to hear your thoughts. If there’s anything else I need to be thinking of. Investing it regularly into a stock index and dollar cost averaging for a long-term hold. Dollar cost averaging basically means you just keep buying stock even if the price is dropping. It’s funny that we came up with this phrase, dollar cost averaging to say, well just keep buying even if the price is going lower because eventually it’s going to go up and you will have bought it at a lower average than the prices when they were high. Number two, paying off mortgages on my investment properties to reduce leverage and increase cashflow.”
“Number three, save the money and try finding a creative finance deal with a 30,000 dollar entry each year. My last purchase was a sub two with a 42,000 dollar entry, and it was a great one. Looking forward to your sage advice.” All right, thank you for that question. I appreciate that. I can answer this one pretty quick. I don’t love the idea of paying off your mortgages, especially because if you bought them and you have 10 of them, they probably have pretty low rates right now, so you’re not saving a ton of money doing that. You also have to pay a ton of mortgage off before you actually don’t have to make the payment when it’s owned free and clear, so you don’t really see the return on that money for years.
It might be 10, 15, 20 years of trying to pay these things off before you actually get rid of that interest on your mortgage. So what will happen is you’ll build the equity in it faster, but you won’t put money in your bank faster. So I don’t love that idea and I don’t love investing into the stock index, because I don’t want to give advice about something that I don’t really understand and I don’t know that there’s any solid advice I can give anybody when it comes to investing in stocks. I also just think you’ll do better with real estate long term. So your third option, saving the money and trying to find a creative finance deal like the one you did last time is pretty good.
And here’s why I like that. If you don’t find the creative finance deal, you just have more reserves and you’re never going to find me upset about someone who has a lot of reserves, especially considering the economy that we are going into. In the past, success was all about scaling and acquiring. How many doors can you get? That was the cocktail party brag, I have this many doors. In the future, I believe, it’s going to be, what can you keep? How can you hold on to the real estate you’ve already bought? And reserves can be a huge factor in saving you there. All right, moving into our next question. This comes from Chris Lloyd in Hampton Roads, Virginia.

Chris Lloyd:
Hey David. My name is Chris Lloyd from Newport News, Virginia. And here’s my question. I currently have a property I was looking to renovate and I plan to fund this renovation using a HELOC. I’ve got two properties with some good equity in it and I found out recently that I can’t qualify for a HELOC because I’ve been self-employed for less than two years. Took my business full-time a little over a year ago. So I’ve been looking in other ways to finance this project and came across home equity agreements. This isn’t something I’ve really heard talked about on the podcast and I was wondering if there was a reason why. If this is a newer product, if it’s just getting traction or if this product is absolute junk, I don’t know. So I’m asking what instances would this make sense for someone to use and when and would it not make sense?

David Greene:
All right, Chris, thank you for that question. Appreciate it. My advice would be, no, I don’t think you should take on a home equity agreement unless you’re in dire financial straits. And even if you are, I’d probably prefer that you sold the house, took your equity and moved on to something else. All right, our last question is going to come from Nick Lynch and it’s a video question.

Nick Lynch:
Hey David, this is Nick Lynch from Sacramento, California. Thank you for everything that you and BiggerPockets do. I love you guy’s content. I’m hoping to buy my first home in the greater Sacramento area of California when my current lease ends April 30th of 2024. My question for you is what would be the best method to get in to my first home and into investing at the same time, given how high the prices are in California. I’m considering house hacking, house hopping, or simply buying a primary residence I’m comfortable living in long-term and using the remainder of the fund that would have after a down payment to maybe invest in out-of-state property that could capital more easily.
My biggest concern with house hacking or house hopping in California, that the property is so expensive, it would take a very large down payment to get those properties to cash flow even after living in them for a couple of years. Thanks, David. Appreciate the help.

David Greene:
All right, Nick, glad you reached out. We actually do a lot of business in the David Greene team in the Sacramento area, and we help people with stuff like this all the time. The key to house hacking is not about paying the mortgage down or buying a cheap home. The key to house hacking successfully, and by that I mean moving out of it and having it cash for later. What I often call the sneaky rental tactic because you can get a rental property for 5% down or three point a half percent down instead of 20% down if you live in it first, is finding an actual property with a floor plan that would work. We’ve helped clients do this by buying properties with a high bedroom and bathroom count because that’s more units that they can create to generate revenue.
We’ve also had people that we’ve helped doing this when they rent out part of the home as a short-term rental or a floor plan that can be moved around where walls are added to create more than one unit in the property itself. The key is not to focus on the expenses and keeping them low, but to focus on the income and getting it high. So when you’re looking for the property, what you really want to do is look for a floor plan that either has a lot of bedrooms and bathrooms and has sufficient parking and is also in an area that people want to rent from, or you want to look for a floor plan where the basement that you could live in and you rent out maybe two units above or two units above and it has an ADU.
Something where you can get much more revenue coming in on the property which you have more control over. I call that forced cashflow than a property that you just bought at a lower price because that’s not realistic. If you’re trying to buy in a high appreciation market like Northern California where wages are high and the market is strong, you are less likely to find a cheap house. Reach out to me directly and I’ll see if we can help you with that and start looking at properties with the most square footage and then, asking yourself, how could I manipulate and maneuver the square footage to where this would be a good house hack. Great question though, and I wish you the best in your endeavors.
All right, everyone that is Seeing Greene for today, I so appreciate you being here with me and giving me your attention and allowing me to help educate you on real estate investing and growing wealth through real estate because I’m passionate about it and I love you guys. I really hope I was able to help some of you brave souls who took the action and ask me the questions that I was able to answer for everyone else. And I look forward to answering more of your questions. Go to biggerpockets.com/david and submit your question to be on Seeing Greene. Hope you guys enjoyed today’s show and I will see you on the next episode of Seeing Greene.