\n<\/p>\n
Got a HELOC? Don\u2019t pay it off\u2026yet! <\/strong>Thinking of house hacking <\/strong>but are discouraged by the low <\/strong>cash flow<\/strong><\/a> numbers you\u2019re getting back? Looking to invest in a high property tax state<\/strong> like Texas but are scared to swallow that big expense? All of these topics, and many more, are coming up on this episode of Seeing Greene<\/strong>!<\/p>\n David is back to answer YOUR real estate investing questions with his partner in crime, Rob Abasolo. Today, these two investing experts are going to tackle topics like whether or not to buy a house hack <\/strong>that DOESN\u2019T pay for itself, how to account for the HIGH <\/strong>property taxes<\/strong><\/a> in hot real estate markets, whether to keep a property you love or sell it for its huge home equity<\/strong>, how to NEVER work again<\/strong> and the fifteen vs. thirty-year mortgage <\/strong>debate, plus when you should NOT pay off your <\/strong>HELOC <\/strong>(home equity line of credit)<\/a> early.<\/p>\n Want to ask David a question? If so, <\/strong>submit your question here<\/strong><\/a> so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums<\/strong><\/a> and ask other investors their take, or follow David on Instagram<\/strong><\/a> to see when he\u2019s going live so you can jump on a live Q&A and get your question answered on the spot!<\/p>\n David: Rob: David: Rob: David: Gabriel: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Jeff: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Chase: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: \u00a0<\/p>\n<\/div>\n 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<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show.
What\u2019s going on, everyone? It\u2019s David Greene, your host of the BiggerPockets Real Estate Podcast, the number one real estate podcast where we arm you with the information that you need to start building long-term wealth through real estate today. As always, on Seeing Greene, we are answering questions from you, our listeners.<\/p>\n
Yeah, today we\u2019re going to get into questions like, when is house hacking no longer a smart strategy? How should property taxes factor into your market analysis? And how do you know to sell a property even if it\u2019s cash flowing? And even if you love it, David?<\/p>\n
And most importantly, if you want a chance to ask your question, please go to biggerpockets.com\/David. The link is in the description. And if you have a burning real estate question, pause this podcast, send me your question and then jump right back in.<\/p>\n
And before we jump into this episode, a quick tip. Are you doing something you haven\u2019t heard on this podcast before? Well, we want to hear your tips and tricks. Apply to be a guest on our show over at biggerpockets.com\/guest. People ask me this all the time, it\u2019s very easy to remember, biggerpockets.com\/guest. Fill out a form. And if you\u2019re a fit for the show, you will get to share the mic with me and David Greene.<\/p>\n
We hope to see you there. All right, let\u2019s get into this thing. Our first question comes from Gabriel in Greenville, South Carolina.<\/p>\n
Hey David, my name is Gabe. I\u2019m located in the Greenville, South Carolina market, and I\u2019m a beginner investor. I\u2019m looking for my first deal, really want to do a house hack, but I have a question about when you draw the line as to say house hacking is no longer a good strategy. I know you mentioned all the time that house hacking is mainly a savings strategy where you try to get your largest expense, your mortgage payment covered by rent from tenants. But in my area, it seems like most of the properties I look at, the rent from your tenant, while you\u2019re house hacking, would probably only cover about 50 to 60% of the mortgage payment. So in that situation, do you think it\u2019s still a good idea to invest in a house hack or do you think I should pursue a different option such as a live and flip? I\u2019m pretty bullish about it. I still want to do it, but just want to know what your thoughts are. Thanks.<\/p>\n
All right, good question. Gabriel speaking for the masses here. I think there\u2019s a lot of people that are thinking the same thing. I can answer this one somewhat succinctly. My thought would be is 50 to 60% of the mortgage less expensive than if you had to pay all the mortgage or all the rent. If so, you\u2019re winning and you own a home and you\u2019re getting tax benefits and you get future appreciation. And when the rents go up, that 50 to 60 slowly becomes 60 to 70, 70 to 80 and so forth. Rob, what say you?<\/p>\n
Yeah, I guess there is this idea, this misconception that you have to pay all of your mortgage and you have to subsidize your entire mortgage with house hacking. That\u2019s just a really nice bonus on the top, right? The first house hack I ever did, I got 400 bucks a month for my buddy. My mortgage was 1,100 bucks, so that meant out of pocket I was paying $700 a month, which was still less than 1,100 bucks a month or whatever my mortgage was, right? So at the end of the day, look, as much as I want you to subsidize all of it, let\u2019s not get spoiled here. It is a gift to have a lower mortgage payment. And if it gets you into ownership a little bit faster and makes it cheaper to own than it would be to go out and rent to property, I think it\u2019s always fine to house hack.<\/p>\n
Yeah. And I would say if you\u2019re only seeing 50 to 60% of the mortgage covered, are you looking at the wrong houses? Are you just looking at a regular house that\u2019s not an investment property and you\u2019re saying, \u201cWell, a three-bedroom, two-bathroom, if I rent out two of the bedrooms, I\u2019ll make this much money,\u201d but you should be looking for a five-bedroom or you should be looking for a triplex or you should be looking for a house with a basement and the main house and an ADU? The property itself makes a very big difference when you\u2019re trying to generate income. The floor plan, the asset itself makes a difference. I mean, Rob, is this a mistake that you think people may be making where they\u2019re looking at the wrong house and saying house hacking doesn\u2019t work?<\/p>\n
Honestly, I really just think the mistake is in the mindset of how much you should subsidize. I think ultimately the way I look at it is if I were going to go out and rent a place and it\u2019s going to cost me 1,500 bucks, but I get the opportunity to go buy a place and it\u2019s going to cost me, let\u2019s say 17,00 or $1,800 a month, if house hacking gets that monthly price to be less than what I would be paying renting, then it\u2019s always a viable solution for me.<\/p>\n
The idea of house hacking is to cut into your housing expense. Now, if you can live for free, if you can make money, that\u2019s amazing. We would never say don\u2019t do it. But the better way to look at this is it better to keep paying rent and not own a home? Or is it better to save money on your housing allowance and own a home? And that\u2019s what we\u2019re talking about. And the advice that I often give is just when you\u2019re looking for the area that you\u2019re going to house hack in, look for a house itself that either has more bedrooms or more units. Look for ways you can bring in more income on the house instead of just saving the expense by buying a cheaper house.<\/p>\n
Good question, Gabriel.<\/p>\n
Thank you, Gabe.
All right, moving into Jeff from Austin. He says, \u201cWhat role should property tax play in determining where to invest?\u201d Oh, this is good. I\u2019m glad I got you here for this one, Rob. \u201cFor example, in Texas, they have a fairly high tax rate because there\u2019s no estate income tax. Does that make the investment bar higher in Texas than in another state that has a lower rate? Wouldn\u2019t it in theory change the equation when analyzing for cash flow?\u201d
Oh, I love this. Thank you, Jeff. This is a case of the clearly over-analyzing Alfred, which I think we\u2019ve all been there. I started off my career I think in the same kind of thought. So basically, because property taxes are higher in some states than other, should you have a higher expectation on the 1% rule or someone else when look at properties? What do you think, Rob?<\/p>\n
I wouldn\u2019t necessarily a higher expectation. It\u2019s just, yeah, does it fit the 1% rule if that\u2019s your metric, if that\u2019s your golden metric? And it just means it\u2019ll be harder in some of these areas, but I would imagine that when that\u2019s the case, if property taxes are higher, then my assumption here is that rents would probably be higher to match the landlord. Landlords will charge more because they pay more in property taxes and thus rents might stay abreast with that, with property taxes. What do you think?<\/p>\n
Never heard you say abreast on this podcast before. I\u2019m still-<\/p>\n
I was trying to work it in when I can.<\/p>\n
Yeah, I\u2019m still trying to acclimate to that. Yeah, this is not that complicated. When you\u2019re running numbers in Texas if you\u2019re going to invest there, you just use a higher number for the property taxes to see if the rental is going to work.
Here\u2019s something I\u2019ve learned about things like higher property taxes. Life is like this. It is very easy to focus on the negative and not think about the positive that comes with the negative, right? So for example, when it comes to investing in Hawaii, they have HOAs in most of the condos. I\u2019ve got a couple condos out here, that\u2019s where I am right now in Hawaii, and everyone says, \u201cOoh, I don\u2019t want to invest in somewhere where there\u2019s HOAs. That\u2019s an extra expense.\u201d But property taxes are insanely low in Hawaii, so it almost balances out. The condo fees are about the difference of what property taxes would be in most properties. So it kind of breaks even.
In Texas, yes, you have higher property taxes because they don\u2019t have a state income tax, so it\u2019s harder for an out-of-state investor to make that work. However, that means more people move to Texas. As more people move to Texas, rents go up. So in five years or 10 years later, your property value and your rents have increased substantially because it\u2019s such a desirable area that people want to move to because there\u2019s no state income tax. Now, the flip side is you have higher property taxes, so you just deal with it. I want to encourage everyone, don\u2019t throw something away the minute you hear something that makes it bad or hard without asking the question of, \u201cWell, how would that also benefit me?\u201d You really want to weigh the two together. Robbie, it looks like you\u2019re deep in thought over there. I like this.<\/p>\n
Well, yeah, it\u2019s all relative. In Florida, you would have higher insurance costs, so that wouldn\u2019t necessarily be a reason to not get into the Florida market. You would just have to underwrite four higher insurance costs, right?<\/p>\n
Yep.<\/p>\n
That might be not the best example because those can always increase, but I will say, man, those Texas property taxes do bite you in the booty, man. Houses in California, when I would underwrite them, always work better than in Texas because the property taxes here are crazy, man.<\/p>\n
Yeah. So then you say, \u201cShould I invest in California?\u201d Well, it\u2019s wildly competitive. There\u2019s 10 offers on every single house, so I don\u2019t want to deal with that. But what does that do? That drives the price of homes up all the time. So then you make a bunch of money if you own in California for a long time.
Every market is going to have these ups and downs. So Jeff, the idea is you find the strategy that works in that market. And because I\u2019ve been around long enough, I\u2019ve seen, if you\u2019re going to invest somewhere that does not have appreciation, you have to buy at a better price. You have to buy equity. Because you\u2019re not going to get what I call market appreciation equity. If you buy in California, you buy in Florida, you buy in Texas, 10 years later, it\u2019s most likely gone up quite a bit. If you buy in Indiana, if you buy in Kansas, it\u2019s probably going to more or less be the same so you got to make sure you get in for a better price when you go. There are strategies that work in all these markets. You just can\u2019t cross collateralize them. You can\u2019t take the, \u201cI want a huge discount\u201d strategy and apply it to an area that\u2019s also going to have massive growth. You\u2019re not going to walk into Miami right now and get it at 70% of ARV like you might if it\u2019s an area that doesn\u2019t have as many buyers.<\/p>\n
Great question, Jeff.<\/p>\n
All right, our next question is also from a Jeff in Flagstaff, Arizona.<\/p>\n
My name is Jeff Mileback. And thank you for taking my sell or hold question. I have 450K in equity on a great property. It\u2019s a low interest cash flow and I love it, but the equity sits there. I\u2019m also in contract on a property in a good location that costs 450. So, do I sell the great property and buy the new property? This will increase my cashflow about 1,000. It\u2019ll sell an asset I love and it\u2019ll trigger a 75K tax bill. Or do I sell the great property and 1031 exchange it into two new properties? This will increase my cashflow a little, but exchange a great property for two good unknowns. Or 3, keep the great property and buy just the one new property. This will decrease my cashflow by 800, yet it\u2019ll keep a property I love and add a new one I believe in? I think do 3, but I feel fear because it hits my cashflow. Any other ideas?<\/p>\n
That\u2019s a good question. Okay, so I guess scenario 1 is sell the great property, buy a new property and he\u2019s going to trigger a tax event there. 2, sell the great property, 1031 into two. So-so properties that are good but he doesn\u2019t really know. And then 3, just keep the great property that he has and just buy the one new property. I would say if you really love a property, you should hold onto it, right? It\u2019s always a bummer when you let go of a property that you really like. It\u2019s never a bummer to let go of properties that you don\u2019t like, right? You\u2019re usually pretty happy about that. But the pain is equal on both sides. And so if you have a lot of heart for a property and you really like it, then I would keep it because you probably will kick yourself for a long time that you sold something that you really liked, especially considering that selling it is not really going to increase your cashflow substantially. I really don\u2019t see a reason to do that.<\/p>\n
It\u2019s hard without knowing more of the goals here. Because if you\u2019re trying to go big, it usually makes sense to buy more properties. But the downside of going big is it could put you back. Sometimes it takes longer to get those properties up and running. Sometimes those properties don\u2019t do as well as the one that you had and you were like, \u201cMan, I wanted to increase my cashflow and increase my net worth, but I\u2019ve decreased my cashflow.\u201d And then you got to think about the economy that we\u2019re in, the market itself, right? If rates tomorrow went really low again, it would look really smart to buy more properties because the value of them would likely go up. If rates keep going up and we slip into a recession, because from what I\u2019ve been hearing, Americans are starting to run out of reserves and their debt is starting to go higher and higher and higher, this would look really bad.
So there isn\u2019t a clear cut answer because we don\u2019t know about the environment that we\u2019re investing into, which makes me think we want to kind of play it right down the middle. I would probably be leaning towards keep the property you have, use the money you have to buy the next property. And that will cut into your cashflow, but it\u2019s the safest way that I can think about maintaining value without risking all the cash flow. If you sell, you buy two new ones, you don\u2019t know how those ones are going to work out. You might find yourself with nothing. Any flaws in that logic, Rob?<\/p>\n
Mm-mm. No, I agree with you.<\/p>\n
Yeah. And I think to factor into our decision-making here, it is work to get a property stabilized, right? You don\u2019t always think about it, especially if it\u2019s a short-term rental, or in this case if it\u2019s like several units over one property. You don\u2019t just buy it and the money comes in. You buy it, you got to make some repairs, you got to get to know the tenants, you put new management in place. It takes a while for things to settle out. So it\u2019s a shame once you\u2019ve got it sort of smooth rolling to just sell it to someone else who buys it and gets to enjoy all that work you put in and then have to start all the way over at scratch doing the same thing with new properties.<\/p>\n
Yeah. So one little question I have is, why would buying the new property, if he keeps this property, why would that affect his cash flow?<\/p>\n
Because I think the new property he buys, he\u2019s assuming isn\u2019t going to cash flow. It\u2019s going to take him a while to get it back up.<\/p>\n
Oh, I see. I see. So the plan is for it to cash flow. It\u2019s just the stabilization is unclear at the moment.<\/p>\n
Yeah. And I know what you\u2019re thinking Rob, is like, \u201cWhy would you buy anything that doesn\u2019t cash flow?\u201d? Which is, that should probably go into this conversation. Like, why would you buy a property if it\u2019s not going to cash flow? Unless he has a plan, there\u2019s like a ramp up period. So assuming that these are multifamily properties or these are properties that are like commercially operated, it can take a while to stabilize them and get them turned around.<\/p>\n
Yeah. So moral of the story, I think hold onto a great property that you really like. And I think scenario 3, keep the property, buy the new property and play the stabilization game.<\/p>\n
Yeah. And if you\u2019re worried about losing cash flow on the new property, just don\u2019t buy something that doesn\u2019t cash flow right off the bat. Just keep waiting. And if we continue down the road we\u2019re headed, you\u2019re going to see more and more people dumping their properties on the market when they realize that, \u201cHey, this didn\u2019t work out like I thought it would.\u201d All right, good question there. Thank you for that Jeff.
All right. If you have questions that you think that I could help answer, remember, you can submit your questions, and we sure hope you do, at biggerpockets.com\/david. We have more listener questions coming for you shortly about when to pay off your HELOC and recommendations for long distance investing from two long distance investors ourselves, Rob and I.
But before we get to that, a few comments and reviews from fellow BiggerPockets listeners. All right. The first one comes from Captain Christian, \u201cSuperb and relevant content.\u201d This is an Apple Podcast review. \u201cHuge fan of the podcast. I listened to it on double speed and it makes you guys sound like you are incredibly witty and quick.\u201d So that\u2019s an added bonus for you. Very nice.<\/p>\n
I think that\u2019s a nice thing.<\/p>\n
Yeah. I just need to figure out how to do that in real life.<\/p>\n
We\u2019ll just talk faster.<\/p>\n
Like the Micro machines guy? \u201cI love the content, the real life application of the demonstrate. You have to ask specific questions about the location, the prices, about that [inaudible 00:15:07] deals and how people are putting them together. This market requires tenacity and creativity and I\u2019m glad you\u2019re able to pivot and show your audience how this market is still absolutely wide open for serious investors.\u201d
Captain Christian, what a clutch review. Very well said, well-spoken. This seems like a brilliant person. What do you think, Rob?<\/p>\n
Yeah, nice guy. Nice guy. Can I read the second review here? It\u2019s also a five star review.<\/p>\n
Yeah.<\/p>\n
From our friend Boatguy545, and he says, \u201cToo good to be free. Excellent source of real estate knowledge. No period.\u201d Meaning there\u2019s more that he wants to say, but he\u2019s restrained. He\u2019s a man of few words and he just wants to give us a quick little compliment in and out. We appreciate you Boatguy545.<\/p>\n
Remember everyone, there\u2019s even more free content at biggerpockets.com, so go check it out. There\u2019s the best forums in the world of real estate investing. There are blogs, there\u2019s an agent finder tool, there\u2019s calculators you can use to analyze properties, all kinds of stuff to help you build that dream portfolio.
All right, moving into the YouTube comments from episode 840 from Travis Andres. \u201cThis is great, guys. I love how you both talk out the deal and possible scenarios. It really helps in seeing the thought process of how to come up with potential solutions.\u201d
Yeah, that\u2019s the harder part, right? Because we could give our advice, but then you have to remember to go back and say, \u201cell, here is what I was thinking when I gave that advice\u201d so that you can take our logic and apply it to the situations that you come across with your own investing because not everyone\u2019s going to have the exact same question. So thank you, Travis, for acknowledging that.
Remember everyone that we love and we appreciate all of your feedback, so please keep it coming. And remember to comment and subscribe to the BiggerPockets YouTube page. Also, if you\u2019re listening in your podcast app, take some time to give us an honest rating and review. Those help us a ton. Let\u2019s move on to the next question.<\/p>\n
Travis in Michigan writes, \u201cLate in 2021, I use a HELOC, a home equity line of credit, as the down payment on a duplex in Michigan. The duplex was turned key but has the potential to add a couple of bedrooms in the future. Currently, it is fully rented, so we\u2019ll probably add rooms at the next turnover. My question is, should I be working to repay the HELOC or should I wait? The HELOC is a ten-year interest-only draw period currently in year two. And after 10 years, the loan locks an interest rate and is amortized over 15 years with no future draws. The rate is variable and currently at 4.5%. The monthly payment on the $40,000 that I\u2019ve borrowed is $125. I have about $10,000 of cash reserves that I keep for all three of my properties for vacancy CapEx and repairs. The property cash flows even after the HELOC payment. So I\u2019ve been paying $500 a month to knock out the principal balance. But because it\u2019s a lower rate than I could refinance at today, I\u2019m not likely to do that.\u201d
\u201cShould I be putting that 8K in reserves against the HELOC? The HELOC is completely liquid. I can just borrow it back out if I needed a repair or even vacancy. For some reason, the cash in the account feels safer than the HELOC debit card. Should I even be paying the extra principle every month? Am I thinking about this wrong? Appreciate all the advice. Rob, you\u2019re my favorite guy in the world.\u201d
Oh, that was very nice, Travis. All right, that was a lot, but I think the gist of the question is he got a HELOC, it\u2019s at a variable interest rate, it\u2019s 4.5%. He\u2019s got eight years before that starts to change and fluctuate. Should he pay it off sooner than that?<\/p>\n
Well, the 4.5 rate surprised me. I thought it\u2019d be much higher than that. That\u2019s a very low rate.<\/p>\n
Yeah, but variable, wouldn\u2019t that imply that it jumps around? Or is he saying it\u2019s variable after the 10 years?<\/p>\n
No, it jumps around, but it\u2019s currently\u2026 Usually they only jump once a year and sometimes they can only jump by one point a year. So he probably got it at 3.5%. It\u2019s been bumped up to 4.5%. Next year it could be 5.5%. It could go up to usually a percent every year. A lot of these adjustable rates are not completely adjustable. There\u2019s limits of how much they can adjust up or down. And he says after 10 years of having the HELOC open, it basically turns into an amortized loan. That\u2019s a normal thing that a lot of HELOCs will do.<\/p>\n
Got it.<\/p>\n
They don\u2019t want make it a balloon payment that the whole thing is due. It just turns into a loan that\u2019s paid back over a 15-year period that\u2019s amortized. So he doesn\u2019t have a whole lot of pressure that this thing needs to be paid back. The loan balance isn\u2019t huge and it\u2019s at a low rate. In this case, I\u2019m probably okay to build up those reserves, because 10K really could be a little bit bigger.<\/p>\n
Yeah, I would say that. I mean, I think I agree, David. I mean really at the end of the day he\u2019s paying $125 a month on this HELOC. That\u2019s not a lot. If he told me that he was paying $2,000 a month and he only makes $25,000 a year and most of his money goes to this HELOC, I\u2019d be like, \u201cGet out of that if you can, if there\u2019s a way.\u201d But considering it seems to be really insignificant to his overall cash flow and return in my guess here, then I would say I\u2019d probably just ride that one for as long as you can have a low interest rate.<\/p>\n
Yeah. And I like the idea of adding the bedrooms after the turn when the current tenants are gone to be able to increase different ways you can rent it out.. Hopefully rent it out by the room because you\u2019ll probably make more money here. I think you\u2019re probably overthinking it a little bit, Travis, but that\u2019s okay. That\u2019s what we\u2019re here for. If something goes wrong, it\u2019s nice to have that money in the account that can get you through it. I\u2019d like to see you with 30,000 instead of 10,000, so maybe make that one of your goals for 2024, Travis, how to build up that savings account. Get after it, brother.
All right, our next video is coming from Chase who\u2019s looking to buy in Alabama.<\/p>\n
Hey David, my name\u2019s Chase. Thank you for all that you do at the BiggerPockets podcast and BiggerPockets network. I\u2019ve been listening for the last couple months and learned a ton, so thanks for all that you do. So I have about $50,000 to work with and I\u2019m new to real estate investing. My goal is not to become a professional real estate investor, neither full-time. I currently live abroad, planning to stay here, but I would like to get a rental property or two. Now, I\u2019m looking at a suburb in Southeast Alabama. It\u2019s a growing place, but a very small market nonetheless.
My question for you is, with the numbers I\u2019m running, I could get a 30-year mortgage on one property that would generate about $250 a month in cash flow. The same property would be about -100, -$150 a month on a 15-year mortgage. Now, since I know my limits and I don\u2019t plan to be a professional real estate investor, would you all consider this 15-year option as an effort just to build equity in a home? Thanks.<\/p>\n
All right, Rob, interesting take here. What do you think?<\/p>\n
It is an interesting take. It is. I rarely endorse a 15-year mortgage to be honest, just because I do like people using leverage and getting into more properties, but that\u2019s not what he wants to do. And so if he\u2019s just looking to pick up a property to build equity and when he retires have a couple of paid-off houses, then I don\u2019t think I actually mind the 15-year mortgage because that means that in 15 years\u2026 He seemed like a young guy. When he is 40, 45, 50, if he has a couple of these that he\u2019s stacked up, they\u2019re all paid off, gives him options, gives him the option to retire early, right? If he can pay off a couple like six-figure houses, then he could effectively retire from his job a few years early and just live on that income. So I, for the first time ever, might be okay with this. What about you?<\/p>\n
I actually cover a strategy in the third pillar in Pillars of Wealth called the 15\/15. And it\u2019s really simple. You just buy a property, you put it on a 15-year mortgage. And even if you don\u2019t make money, you just break even, or let\u2019s say you lost a little bit, God forbid, in the very beginning, but you\u2019re paying off massive chunks of principle, in year two, you do the same thing. You buy another property, put it on a 15-year mortgage. Third year you do the same thing. Fourth year do the same thing. By the third or fourth year, that first one that might\u2019ve been losing money with rent increases should be breaking even or starting to make money, okay? And if you just repeat this for 15 years, the stuff you bought in years 1, 2, 3 by year, 6, 7, 8 should be cash flowing to make up for the properties that are losing money because the 15-year mortgage is higher. So overall the portfolio will eventually balance itself out.
Now here\u2019s the beauty of it. In year 15, the property you bought in year one is paid off. You do a cash-out refinance on that property on another 15-year note. You live on that money for the rest of the year tax-free. Remember, when you do a refinance, you don\u2019t get taxed because you didn\u2019t earn money. You just took on debt and were paid in money. So let\u2019s say you borrowed 150 grand, 200 grand against that house, that\u2019s the money that you live on for the year. Next year, the house you bought in year two is paid off. You do the same thing. Next year you do the same thing with the house you bought in year three. When you get all the way to 15 years of that, the house that you refinanced the first time is paid off.
So essentially, if you just can buy a house and put it on a 15-year note every year for 15 years, you\u2019ll never work again. You\u2019ll never pay taxes again. You\u2019ll just live off of the money that kept coming in. And it doesn\u2019t need to be something that you put a whole lot of thought into. You just have to be able to live beneath your means to pull it off.
So for someone like Chase here, if you\u2019re going to be focusing on making good money at work, saving that money and putting it as down payments, you\u2019re going to be living beneath your means so that you have some cash in case something goes wrong, I don\u2019t think this is a bad strategy at all. What do you think hearing that, Rob?<\/p>\n
No, no. I think it\u2019s a perfectly viable strategy. The only thing I would say because I am kind of teeter-tottering on this one is when you get a 30-year fixed mortgage, your overall payment\u2019s going to be less. I think you could still aggressively pay down your principal as if it were on a 15-year amortization schedule.<\/p>\n
Totally that. Yeah.<\/p>\n
But it gives you options in case he\u2019s ever in a time where, I don\u2019t know, maybe he loses his job or he just needs extra cash flow, he could pull from that at that point because he\u2019s making more absolutely from a 30-year. So I would consider that as just like a, \u201cHey, when times are tough, you may want the lower mortgage payment,\u201d right? And then also if you ever lose your job and you got to ever cover the mortgage on a 15-year mortgage, you\u2019ll be a little bummed that it\u2019s higher than it could be, right? So something to consider. But all in all, I would say, yeah, that seems like a good strategy to me, David. And yeah, 15-year, I think it actually makes sense for Chase.<\/p>\n
The only real upside with getting a 15-year mortgage instead of a 30 is your interest rate\u2019s a little better.<\/p>\n
It\u2019s lower, right?<\/p>\n
Yeah. Yeah. But it comes with risk. So I like your idea there. Put it on a 30-year mortgage and just make extra principal payments so that it\u2019s paid off in 15 years. Or maybe in times when you\u2019re doing really well financially, you make even bigger principal reduction payments and you get it paid off in 10 years and you speed up that process. Now, we never talked about this. If you\u2019re wondering why, \u201cDavid, why have you never said this in any of the years on the podcast?\u201d It\u2019s because interest rates were like 3% and it didn\u2019t really make a whole lot of sense to pay that debt off when they were so low. But now that we\u2019re getting up into 7, 8, 9, 10% interest rates, this strategy can start to make sense because that extra principle you\u2019re paying off is giving you a much higher return than when rates were at 3 or 4%.<\/p>\n
Lurve. All right, well great question, Chase. That\u2019s a good one. Makes me rethink\u2026 Yeah, I guess I never really thought I\u2019d flip for my original stance on that.<\/p>\n
Well, it is. And not everybody has to be like you or me. You and me are knee-deep in this stuff. We love real estate. We talk about real estate. We have businesses surrounded by real estate. We give advice on real estate. You can like it but not love it. You can date it but not marry it. You don\u2019t have to jump in with both feet completely obsessed with real estate investing.<\/p>\n
That\u2019s right.<\/p>\n
All right, that is our last question for today. Rob, thank you for joining me here on Seeing Greene.<\/p>\n
Hey, of course.<\/p>\n
What were some of your favorite parts of today\u2019s show?<\/p>\n
I honestly really like answering the HELOC question, for example. I mean a lot of these questions, it\u2019s kind of funny because they just have different answers in 2023 than they had in 2021. You know what I mean? And so it\u2019s always nice to kind of go back and take a look at some of these not basic concepts, but fundamental concepts such as 15-year versus 30-year, home equity lines of credit, and kind of analyze them kind of in the landscape of 2023 with the way interest rates are. So it\u2019s an interesting way to figure out if and how my perspective has changed. And I feel like pretty much every time I do the show with you, I\u2019m like, \u201cOh yeah, I guess that\u2019s different than what I thought a year ago,\u201d which is how real estate works.<\/p>\n
All right. In today\u2019s show, we covered a wide range of topics including how property taxes should factor into your market analysis and property analysis, when to sell a property even if it\u2019s cash flowing and what to do with the capital, and when a 15-year mortgage might make sense. We even painted a picture for everybody of how you can work hard for 15 years and then really never work again, especially with the advent of DSCR loans that you can use to qualify for future refinances if you just make smart financial decisions and put that money into a growing asset like real estate.
If you\u2019d like to connect with us, check out the show notes for this episode where you can get the contact information for both Rob and I. And if you\u2019re not already doing so, please make sure that you subscribe to the BiggerPockets YouTube channel as well as the podcast app. We are on major podcast platforms all across the country. Please subscribe there and leave us a review. Hopefully, we can read your review on a future show. This is David Greene for Rob, putting the Rob in Robin to my Batman, signing off.<\/p>\n
Nice.<\/p>\n