\n<\/p>\n
It\u2019s not too late to retire with real estate<\/strong><\/a>, EVEN if you\u2019re just getting started<\/strong> in your late fifties or have NO experience investing<\/strong>. On this Seeing Greene<\/strong>, David gives his take on what someone with no rentals (or real estate at all) can do with their retirement accounts to successfully retire on real estate<\/strong>. But maybe you have a bit more experience or aren\u2019t such a late starter. Don\u2019t worry, we\u2019ve got plenty for you too.<\/p>\n We\u2019re back as David takes investing questions directly from listeners just like you. In this Seeing Greene episode, a house hacker asks whether he should take out a HELOC<\/strong><\/a> or hard money <\/strong>loan to get his next deal done. A late starter wonders what she can do to retire with real estate, even with zero experience<\/strong> investing. David shows YOU how to negotiate with your lender<\/strong> to get a better rate or term on your home loan and use \u201cportfolio architecture<\/strong>\u201d to put your \u201clazy\u201d equity to work so you build wealth<\/strong><\/a> faster!<\/strong><\/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: Justin: David: Tyler: David: Alex: David: \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 892. What\u2019s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode where we arm you with the information that you need to start building long-term wealth through real estate today. In today\u2019s show, I\u2019m going to be taking questions from you, the BiggerPockets community about the conundrums, the debacle, and the quintessential problems that you\u2019re having with your portfolio and doing my best to give my advice for how you can improve your situation, better spend your money, better manage the asset that you\u2019ve got and more.
Today, we\u2019ve got some pretty awesome topics, including how to understand financial energy when it\u2019s stored in your properties, seeing your properties as a piece of a portfolio, a concept that I call portfolio architecture and how to make that work for your wealth. What happens when you\u2019re divorced and starting late, but you want real estate assets in your portfolio, as well as negotiating more favorable terms on a commercial construction project and more from you all. But most importantly, if you want to be featured on the show, head over to biggerpockets.com\/david and submit your question to be featured on Seeing Greene and remember to let me know if you\u2019re watching this on YouTube, in the comments, what you thought of today\u2019s show.
Up first, we\u2019ve got Justin in Virginia Beach trying to figure out what to do with his house hack condo. Let\u2019s see what Justin needs some help with.<\/p>\n
Hey, David. My name\u2019s Justin from Virginia Beach. I have a money question for you. So I have about $40,000 cash on hand. I have a house that I bought two years ago. I\u2019ve been house hacking. I bought it for 225. It\u2019s worth around 310, 320, so I was wondering if it would be smart if I did a HELOC and combine the cash on hand to do a BRRRR or a flip or if I should get a hard money loan and just use the cash I have on hand to do either of those two. I am a real estate agent as well, so I do have MLS access. So please let me know what you think would be best.<\/p>\n
Justin. Awesome, my man. This is some good stuff. So I see in my notes that you bought a condo two years ago and you\u2019ve been house hacking ever since. Basically, you own the property and you only have to pay the HOA fee. So you\u2019re paying about 280 bucks a month and all the rest of it is being covered by the income coming in from the people living in your house hack. So well done eliminating your biggest expense in life, which is housing. And it sounds like you\u2019ve been saving that money that you used to spend on either rent or a mortgage and you got 40 grand of it put away and you\u2019re trying to figure out what to do with it and you\u2019re looking at BRRRR. So we\u2019re trying to figure out how are we going to come up with the money to do it.
I do like the idea of taking a HELOC on this property as opposed to taking out an additional hard money loan, and here\u2019s why. The rate\u2019s going to be a lot cheaper and it\u2019s also more flexible to pay back. So for anyone that\u2019s not aware of how HELOCs work, they\u2019re really cool products in the flexibility that you have. If you take out a hard money loan, there\u2019s usually prepayment penalties and there\u2019s more than just the interest that you\u2019re paying on that hard money loan. So everybody knows, hey, you\u2019re going to have a 12% rate or a 10% rate, probably closer to 13 or 14% with today\u2019s rates, but you\u2019re also going to have points that you pay upfront for the loan. You\u2019re also going to have to pay closing costs, title fees, escrow fees, making sure that all the stuff is recorded properly. There\u2019s always these little paper cuts that add up to be pretty significant expenses when you go forward with the hard money loan.
With most HELOCs, you pay for an appraisal and that\u2019s it. You pull the money out and when you want to pay it back, you just pay it back. It\u2019s really an easy and convenient way to move equity from one location to another location, and that\u2019s what I love about your HELOC options. I\u2019d rather see you take a HELOC on that property and add it with the $40,000 that you have saved up and that can become the down payment for the next property that you buy. Now, you\u2019re going to have to get a loan for that next property. That might be a hard money loan because you\u2019re probably going to be putting 20% down, maybe 25% down on it, maybe even 30, and you\u2019re going to have to borrow the other 70 to 80%. So in that case, maybe a hard money loan. But what I\u2019d love to see you do Justin, is repeat what you did with this condo.
If you move out of the condo and you rent out the room that you\u2019re currently in, not only will you be saving that 280 bucks because now you\u2019re getting more rent, but you\u2019re probably going to be cash flowing a little bit. Now, you buy a live in flip. So you move into a property. Ooh, I like this idea even more the more that I talk about it. Because you don\u2019t have to put 20 or 30% down if you\u2019re going to do the live in flip. You can get away with 5% down on a conventional loan, which you might not even need to use the HELOC for because you got 40 grand saved up and you could take that HELOC and make that your emergency reserves in case something goes wrong and you have to pull that money out. But assuming nothing goes wrong, you\u2019re not even going to have to spend any interest to use that money.
So you take your 40 grand, that becomes a down payment for your next property. You get yourself a fixer upper, you move into it, you put some roommates in there, and then you start fixing it up on your timeline. Maybe you hire people to come in and do the work, maybe you do some of the work yourself, but you see where I\u2019m going here? You\u2019re eliminating a lot of your expenses that are involved with flips or BRRRRs when you buy the property and move into it because you could do it on your time. The holding costs aren\u2019t the same. You\u2019re also eliminating a lot of the stress and you\u2019re also eliminating the big down payment. These are all things that make flipping and BRRRRing tricky. You\u2019re getting rid of them by taking the live-in flip approach.
Now, like you said, as a realtor, you have MLS access, so you could just make this a part of your morning routine. You wake up, you stretch, you scratch your cat on the head, you pour yourself some coffee, you read the news, you do your affirmations, you check biggerpockets.com and you look on the MLS to see if any fixer uppers have hit the market. You can also set a filter on there to remind you when a property has sat for 60 days or 70 days without getting taken off and going pending. Those are properties that are usually in rough shape and you can get a better deal with, and then you just wait. You\u2019re in no rush. You got a great situation going right now, so you got the odds in your favor. It\u2019s kind of like being a poker player sitting on a big stack of money. You only have to play the best hands. You\u2019re not forced to play that 7-2 combination because you got to make some moves in life because you put yourself in a bad spot.
So use that to your advantage. Don\u2019t go after anything that\u2019s not a great deal. Don\u2019t make any big mistakes and spend money on dumb things. Don\u2019t get a hard money loan to buy a property if you don\u2019t have to. Get pre-approved to get a conventional loan to buy something that can be a live-in flip and eliminate a lot of the risk that other investors have to take on when they can\u2019t take the live-in flip approach. Thanks very much for the question. This was one that I enjoyed answering. Let us know how that goes.
All right, we got a great question coming up here about someone who\u2019s late to the game in real estate, coming out of divorce, isn\u2019t quite sure how the game should be played, but knows that they need to do something and they\u2019re concerned about risks, but they also have to make some moves. We\u2019re going to be getting into how to navigate that type of complex situation right after this quick break.
All right, welcome back. Let\u2019s dive into our next question coming from Shelly in Jackson Hole, Wyoming. Shelly says, \u201cI know I need to diversify my assets as none of them include real estate. I\u2019ve never bought a house by myself, but I have owned two with my ex who got everything when I divorced him three years ago. I walked away with about 1.5 million in retirement assets. I\u2019m interested in house flipping or short-term rentals, but I feel that a multifamily would give me a steadier return. However, I\u2019m nervous about spending any of my retirement money since I\u2019m 57 and slowing down. Also, I cannot touch it until I\u2019m 59 and a half, which is two years away. My question is, since I\u2019m older, have a health issue and I\u2019m late to the game, what kind of market and what type of building should I focus on? Can you give me any advice on how to proceed with financing?\u201d
All right, Shelly, this is some good stuff. Let\u2019s talk about what you do have going for you and how we can use this to your advantage. You mentioned you have 1.5 million in retirement assets and you did mention that some of this money you can\u2019t touch till you\u2019re 59 and a half, which is two years away, which would lead me to believe that this is retirement income. Here\u2019s what I\u2019d like to see with you. The pressure\u2019s going to be that you got to buy something, you\u2019re going to have to find some way to get some income coming in in retirement. You\u2019re not probably just going to be able to live on that 1.5 million assuming that you\u2019re going to have a longer lifespan, which we\u2019re all hoping for here.
So you\u2019re going to have to invest it, but you want to avoid risk. And with real estate, risk comes in several ways. One would be buying in rough areas, that\u2019s risky. Two would be buying an asset you don\u2019t understand, that\u2019s not having knowledge or not having experience. And a third would be the mortgage. The debt you have on the property constitute risk because it\u2019s basically just something that slows down your ability to make a profit. So if a property generates net income through rents, vacancy can kill that, maintenance issues can kill that, problems with the property themselves can kill that, but that mortgage shows up every single month and that slows you down. What if we were able to buy you some real estate that didn\u2019t have a mortgage? Now, you\u2019re going to be able to get into the game. You\u2019re going to be buying an asset that presumably is going to be going up in value over the long term, but if we can eliminate your risk by having you buy it with cash or very low money down if you had to, I\u2019m starting to feel a lot better about this deal.
Now, I understand that you\u2019re considering multifamily because you think it would give you a steadier return. My concern is that a lot of the income that comes from small multifamily properties like two, three and four unit stuff goes back into small multifamily properties like two, three and four unit stuff. Oftentimes, the tenants break things, the house itself wears down. You have to replace the roof, you have to replace one of the HVAC systems. Remember, when you have a fourplex, you\u2019ve got four air conditioning units, you\u2019ve got four kitchens, you\u2019ve got four water heaters, you\u2019ve got a lot more things that can go wrong, and I have one of these things and it seems like it\u2019s always popping up in my inbox that another thing broke on that property and I forget. It\u2019s because there\u2019s four times as many things. And since maintenance and things breaking are one of your biggest expenses in real estate, if you go that route and you buy small multifamily, even if it\u2019s paid off, it may feel safer, but it may not generate enough cashflow to actually support you in retirement.
That brings us into the short-term rental space, which can seem risky, but depending on the area that you buy into, there are going to be areas that have lot less risk than others. Buying into an area that is known for having vacation properties, the entire area is dependent on tourism and people visiting significantly reduce your risk of the city coming in and saying that you can\u2019t have a short-term rental. Almost eliminates it. And it also significantly reduces how bad of vacancy issues you\u2019re going to have because this is an area known for tourism. In other words, if you try to buy a short-term rental somewhere in Cincinnati, Ohio and you just hope that there\u2019s enough people visiting Cincinnati to rent your unit over somebody else\u2019s, you\u2019re rolling the dice a little bit. But if you go into a vacation destination area like Orlando where you have Disney World or the Smoky Mountains where I have a bunch of cabins, the odds of you not having someone that\u2019s going to rent your property at all are very, very low, and so it becomes less risky even though it\u2019s a short-term rental.
Now what happens if we put this all together? You get into a short-term rental instead of a small multifamily because it\u2019s going to produce enough income to make it worth your while. You buy it with cash so you don\u2019t have a mortgage so that your risk is significantly decreased and you buy it in an area that is known for having a steady stream of tourism to reduce your amount of vacancy. Now, you might not get the deal of the century, but the goal here, setting you up for retirement is to get you base hits. We\u2019re looking for singles, maybe doubles. We\u2019re not looking to hit home runs and possibly strike out.
So here\u2019s what I\u2019d like to see you do. Pick a market that is known for having vacation rentals with very reliable and consistent income. Find an asset that is kind of boring and very steady and dependable. That\u2019s something that I can help you with if it\u2019s a market that I know because I know some of those neighborhoods and then have somebody manage it for you, which you should have plenty of revenue to do because you are not going to be paying that mortgage. You might even be able to buy two properties with that 1.5 million. You might even be able to buy two properties with just 1 million of it, right? You\u2019ve got some options here. You should definitely talk to somebody who owns properties there and ask them who they\u2019re using and how you can get set up with them.
Here\u2019s my last piece of advice. Do not assume that all property managers are the same. I\u2019ve had many bad experiences hiring other people to manage my properties who then delegated the work to virtual assistants or people working in their company that were not doing a good job and my revenue has crashed. I recently took over a lot of these properties myself, gave them to somebody that I hired and that one move, taking them away from professional property management and bringing them in-house has increased my top line revenue by 25% and we\u2019re barely getting started.
The point here is don\u2019t just pick anyone and think that they\u2019re okay. Use someone you know who\u2019s managing one or two properties in that area and doing a great job that can take on yours or vet the company very, very carefully and have a contract written so you can get out of it if the property\u2019s not performing. The last thing that I want is for you to spend a lot of money buying properties in cash, handing them to property management and getting a disappointing statement every single month with some excuse that they\u2019re always going to give you. And because you don\u2019t have experience in real estate, you\u2019re assuming that what they\u2019re telling you is the truth. You\u2019re going to end up feeling hopeless and that\u2019s what we want to avoid.
Now, you also mentioned here any advice on how to proceed with financing. Let\u2019s say that you want to buy two cabins in the Smoky Mountains and they\u2019re about $700,000 each, but you don\u2019t want to put all of your money into buying them cash. So maybe you want to take out a loan on each cabin and you want to borrow 25% of the money for the property. So in this case, you would be buying the cabin for $700,000 and putting down right around $180,000, $200,000 on each cabin. You\u2019re still going to keep that mortgage really low, but there\u2019ll be some kind of financing. You can use what we call a DSCR loan. That stands for Debt-Service Coverage Ratio. These are 30-year loans with fixed rates that will qualify you for the loan based on the income that the cabin is going to be generating.
Now, if you buy in an area with a lot of other properties, high tourism area, this will be easier to get the loan because there\u2019s tons of comps for an appraiser to look at and feel comfortable that this cabin or this property is going to bring in the income that you need to pay for it. And most importantly, you are not going to have to worry about having your own debt to income looked at because they\u2019re not going to be using your debt to income ratio. They\u2019re going to be using what they think that the property is going to be producing.
All right, our next question is coming from Tyler Judd in Williams Lake, British Columbia.<\/p>\n
Hey David, Tyler Judd here in Williams Lake. We\u2019re a small town in Central British Columbia up on the West Coast of Canada. My wife and I have a number of small multifamily properties and a small apartment complex commercial building. We\u2019ve got a single family home that\u2019s an ongoing BRRRR, should be done in the next month or two, converting it into having a legalized basement suite, and I\u2019m looking for a little bit of guidance on how we might negotiate with the lenders. My wife and I are in healthcare, so we\u2019ve got strong personal incomes and I\u2019m wanting to maximize that cash on cash return, kind of restocking our cash reserves as we\u2019re continuing to look for opportunities in the market.
Details on the property. We purchased it in December for 280,000. Renovation and holding costs will be 120,000, all in for 400,000. ARV will be about 475. And so we\u2019ve been offered from our local credit union, 80% of the acquisition and construction costs for 320,000 and that\u2019ll be a commercial loan, 5.5% on a five-year term, amortized over 25 years, PITI is 2,650. Or through a mortgage broker, we\u2019ve been offered a residential loan from one of our big banks up here in Canada. They\u2019ll do 80% of the ARV at 6.25% over five-year term with 25-year amortization with the PITI at 3,150. It\u2019ll end up being a furnished midterm rental. We\u2019ve signed a one-year contract with a corporate tenant for 3,250 a month for that upper unit, and we\u2019ll get about 1,750 for the basement, consistent with the other units that we have in the area, bringing our income to about $5,000 a month.
We\u2019re confident in the property and the location for the next five or maybe 10 years. So I\u2019m wanting to ask your advice on how to approach the lender at that credit union to possibly improve the terms on that commercial\/construction loan. The credit union also has our commercial mortgage on that apartment building in a few of our small multi-families, so they\u2019re able to see how we do financially and they like how we do business in general. So thanks in advance, David. You and the rest of the BP team have been wildly influential, so we appreciate you and thanks again.<\/p>\n
All right, thank you Tyler. I appreciate that, especially that last part about the mindset stuff, helping your business. Though I do believe that real estate builds wealth better than anything else and we love educating real estate investors around here, I\u2019m also a businessman and I\u2019ve found that you can create significant wealth through running businesses like me, providing services to real estate investors. So I love hearing that your business is doing better based off of some of the content that you\u2019ve got from me and BiggerPockets. Thank you for sharing that. That made me feel good.
All right, I heard all the details there, very thorough. I see that you\u2019re probably a doctor or in some form of medicine. Your main question was, how can you approach the credit union about improving the conditions and the terms of the loan that they\u2019re offering you? I don\u2019t know that my first option would be to try to get them to improve those. The first thing that I would do, Tyler, is I would look for someone else that had better ones. The easiest way to do that is from finding a mortgage broker. So there\u2019s basically two kinds of lenders. There\u2019s lenders who say, \u201cHey, I work for this company or this fund or this bank and I lend out their money, and these are the terms that we have to give you a loan.\u201d Or you can work for someone who says, \u201cI\u2019m a broker. I broker your deal to a lot of different banks. Tell me what you\u2019re looking to do and let me go to all the banks that I have a relationship with and see who\u2019s got the best deal for you.\u201d
I typically recommend people start with mortgage brokers going to these different lenders to shop for them so you don\u2019t have to do all the work. If you find a mortgage broker, they can shop it for you. See if you can get better terms there than with your credit union, and then you don\u2019t have to worry about any of this. You can just use them. For instance, at the one brokerage, we broker these types of loans all the time. We call them bridge products, and we find ways that you can borrow, just like you said, 80 to 85% of the down payment and the construction costs for the property, so you only have to put 15% down on the property and 15% down of the construction costs. You could borrow the rest of it. That might be better than the loan that your credit union\u2019s giving you or the rates might be way better at the credit union than what anybody else can give you, but how are you going to know that if you don\u2019t have something to compare it to?
Now, once you\u2019ve looked around, if you\u2019re finding that the credit union is still the best game in town, which sometimes they are, you might feel better about the terms they\u2019re offering you. Lastly, if you don\u2019t, I would just go in there and I would talk to loan officer and I\u2019d say, \u201cHey, I\u2019d like to use you because I have a relationship with your bank. I just think that the terms could be improved a little bit. How would you feel about lowering the interest rate or lowering the closing costs or having the points that I\u2019m paying up front? Where do you have the most flexibility with improving these terms so that we can sign this thing today?\u201d That\u2019s going to let you know how interested they are in your business because this is something people don\u2019t understand about banks and credit unions. They\u2019re not always in this situation where they\u2019re competing for your business. Sometimes they don\u2019t want it.
If they haven\u2019t had a lot of deposits or if they\u2019ve recently loaned out a large amount of the capital that they\u2019ve collected on deposit from all of their customers, they don\u2019t want to make loans to people like you because they don\u2019t have as much money to lend. In those situations, the head honchos at the bank say, \u201cHey, if you\u2019re going to make loans like this, you need to jack up the rate and jack up the points because we don\u2019t need that business.\u201d Now sometimes they\u2019re in the opposite position. Sometimes they\u2019ve got a bunch of deposits that have come in and they\u2019re paying out interest on all the people who have made those deposits and they\u2019re under pressure to get that money lent out at a higher spread so that they can make the delta. You\u2019re never going to know until you talk to the person at the credit union and find out what position they\u2019re in.
Now, they\u2019re probably not going to come forward and tell you if they\u2019re motivated or not, but if you make a proposal to them and say, what do we have to do to get this signed today and they don\u2019t seem interested in it, that\u2019s a good sign that they\u2019re not feeling the pressure. If you can tell the person you\u2019re talking to really, really, really wants to get that loan signed, he\u2019s probably going to give you some form of, \u201cLet me go talk to my manager,\u201d which is a great sign that you\u2019ve got leverage. There\u2019s a little negotiating tip for you, a courtesy of Seeing Greene.
One last thing to think about, Tyler, if you haven\u2019t considered this, you may not need to take a loan from the credit union or maybe you can borrow half the money since you don\u2019t love the terms by taking out a HELOC on one of your other properties. So you might be able to save some money by putting a HELOC on something else and using that for a portion of the construction costs instead of just going to the credit union to borrow the money from them.
If you\u2019ve got paid off properties, you can look into cross collateralizing them, meaning, hey, put the loan on this property instead of on the one that I\u2019m going to buy. It\u2019s all collateral to the lender. It really shouldn\u2019t make a difference, but oftentimes if you\u2019re putting a loan on a property that\u2019s already stabilized, you get a much better rate than a hard money loan where you\u2019re going to be going into a construction process. So think about if you\u2019re going to be borrowing money on a property that is risky, meaning you\u2019re going to be going to improve it, they\u2019re going to charge you for that risk and give you a higher rate. But if you put the loan on a property that is stabilized and less risky for them, meaning if they had to foreclose on it, they could sell it easier, they\u2019re going to have less risk and therefore give you a better rate. But from your position, you just want to get the money. It probably doesn\u2019t make a big difference whether it\u2019s collateralized with something that\u2019s stabilized or something that\u2019s unstable like the fixture that you\u2019re talking about.
All right, the green light is shining and we are on a roll. We\u2019re actually going to skip the section where we normally read comments from the YouTube channel and the review, so sorry if that\u2019s your favorite part. It will be in the next episode of Seeing Greene, I promise. But because we\u2019re having such good content, I\u2019m going to keep rolling right through. Right after this break, we\u2019re going to be getting into a great question from Alex who bought a primary residence and did very well with it and is trying to figure out the best use of the asset. We\u2019ll get into that right after this quick break.
All right, welcome back. Let\u2019s take a look at this next video question from Alex in Seattle, Washington.<\/p>\n
Hi, David. My name is Alex from Seattle, Washington. My wife and I started as real estate investors and a part of other few properties, rental properties. We have this primary residence, which we converted into rental last year. We purchased it in 2018 and refinance it for 2.6%. Our return on equity currently is very low, about 4%, and we are trying to find a way on how to make it work better. Cash-out refinance won\u2019t work because of higher rates and it won\u2019t cash flow with that and at all, or even negative cashflow, and also I know we can sell it tax-free because we lived there for more than two years during previous five years. We can sell it, but it did not appreciate well, only to 765K versus 720 when we purchased it. And yeah, what do you think our best next options with this equity? Our goal is long-term investment and make sure our equity works well. Thank you.<\/p>\n
All right, thank you, Alex. In Pillars of Wealth, I talk a lot about the framework that I like to look at equity through. I see equity as energy. It\u2019s financial energy and it\u2019s the name for financial energy when it is stored in real estate. Now, you don\u2019t have as much flexibility with it when you have cash in the bank that you can pull out very easily or cash under your mattress that you can pull out very easily. There\u2019s more things that you can do with that energy. So one of the things that real estate investors should be looking at is seeing the architecture of their entire portfolio and asking themselves, where is my equity working hard and where is it being lazy? Now, in this case, it sounds like you\u2019ve got some lazy equity, which sounds bad, but it\u2019s actually a great problem to have because it means you can improve the performance of your finances.
Condos typically are not strong cash flowing vehicles. Now, a lot of people will hear that and say, \u201cWait a minute, my condo cash flows.\u201d I know. I believe that it does. However, it\u2019s probably not cash flowing as strong as if that same equity was in a duplex, a triplex, a fourplex, a single family home, a short-term rental, an apartment complex, a commercial building, something that is designed to generate more income. Condos are inefficient. They\u2019ve usually got high HOA fees. The rents on them don\u2019t go up as much as on single family houses or duplexes or triplexes. So they\u2019re great ways to get into the game because they\u2019re typically cheaper and they do appreciate, much like single family houses. So I look at these as sort of launching pads. If you buy a condo in the right area and you play the game the right way, you can get a lot of equity really quickly.
This happens when people buy a new development in an area like Miami, or if you bought a condo in Austin five or six years ago, you\u2019re probably feeling really good about it, but the return on your equity, my guess is not that great. So Alex, you\u2019re probably going to want to sell it, which is one of the ways that you get your equity out of one real estate vehicle and into a better one, and you already recognize that you get to avoid capital gains taxes because you lived in the property. So I don\u2019t even have to tell you about that, you already know. If you\u2019re married, which you are, you get to avoid about $500,000 in gain. If you\u2019re single, it\u2019s about $250,000. So you can probably sell this property, you\u2019re going to have some realtor fees, you\u2019re going to have some closing costs, you might have some seller credits, but you should sell the property and move it into a better vehicle.
Now, my advice would be to sell it in the spring because you typically get significantly more for your property if you get more offers and you have a lot more buyers that are shopping in the spring than in the winter, and then the question becomes, where are you going to live? Why you\u2019re looking for something else? So you may have to move in with some friends. You may have to rent a unit from somebody else. You may have to find a medium term rental to move into, or you may have to go lease another home. I typically tell the clients that come to the David Greene team, I don\u2019t want you to lease an entire house for a year and then have to break your lease when you go somewhere else. So look on Furnished Finder for something that you can move into for a couple of months to live in while you\u2019re looking for your next property.
You\u2019re also going to want to get pre-approved to know what type of loan you get, what your interest rate is going to be, or a range that you could be in and what your budget\u2019s going to be when you buy the next house, because you\u2019re going to need to know the expenses in order to run the numbers on your next property. Remember, running the numbers is about knowing income and expenses. You need the expenses by starting with the lender, and then you can grab the income from looking at AirDNA, from looking at Furnished Finder, or from looking at the BiggerPockets rent estimator if it\u2019s going to be a single family house.
Once you\u2019re armed with this information, you can start asking yourself the question of, where do I want to put the money? Maybe you save some of it and put 5% down on a house hack for you and your wife and start over with another situation like the condo where you buy into a neighborhood that\u2019s going to appreciate and in five years you get to this whole thing again with the equity that you created. Maybe you take the rest of the cash and you buy yourself a couple short-term rentals. Maybe you buy a couple small multifamily properties. Maybe you get into the commercial space if that\u2019s what you want to do. But the idea here is to get the equity out of the condo where it\u2019s acting lazy and put it into the market where you\u2019re going to do better.
Now, here\u2019s something to think about that works in this market right now that we typically haven\u2019t preached at BiggerPockets, but I think it\u2019s a good strategy. Let\u2019s say you can\u2019t find anything that\u2019s a screaming deal that you love, but it\u2019s in a good neighborhood or a great neighborhood, a good location, it\u2019s not going to cause you any headaches and you know it\u2019s going to perform over time. It just doesn\u2019t cashflow right now. Well, remember, it just doesn\u2019t cashflow right now typically means it just doesn\u2019t cashflow at 20% down right now.
You mentioned in the notes here that you don\u2019t need the equity because you got some money saved up. So what if you sold the property and you took the equity and you just bought something all cash? Maybe you buy a short-term rental somewhere, all cash. Now, you have enough money that you can pay somebody else to manage that property, or you can learn how to manage it yourself and make some mistakes because your risk is significantly reduced when you don\u2019t have the mortgage payment. You\u2019re now making cashflow that nobody else can get because you don\u2019t have a mortgage on the property, but you\u2019ve got all the equity. Remember, equity is energy stored in the property. And later on, if you do find a good deal, you can go do a cash-out refinance on that property, pull the equity out, and put that into the next deal, which is another way of getting the energy out of the investment vehicle.
When we\u2019re having a hard time finding cashflow, that doesn\u2019t mean you can\u2019t buy real estate, it just means it\u2019s harder to buy real estate using leverage. So all you investors out there that have got this problem, a lot of equity, a lot of savings but nowhere to put it, break yourself out of the mindset of looking at everything at putting 20% down. Think about it, if you pay cash, if you put 50% down, if you put 80% down, would that asset operate making you a cashflow and making you money? And then you\u2019ve always got the option to pull that equity out later and go put it into the deal you find that makes more sense.
All right, in today\u2019s show, we covered quite a few topics and financial principles including what return on equity is and how to use it, understanding financial energy stored in properties and how to get it out, seeing properties as a piece of a portfolio as opposed to a standalone unit, being divorced and starting late, but wanting to get into real estate to build your wealth and negotiating more favorable terms on a commercial construction project, as well as how banks make decisions when it comes to lending out their money.
Where else are you going to get stuff like this? Seeing Greene is the only game in town that I know of, so thank you for being here. I appreciate you all. But we can\u2019t make the show without you, literally. So if you\u2019d like to see the show keep happening, I need your help. Go to biggerpockets.com\/david and submit your questions there. If you want to reach out to me to talk more about any of the things you heard in today\u2019s show, you can find my information in the show notes. Please do that. And if you want more BiggerPockets content, head over to the forums on the website where I promise you there is more information than you will ever be able to consume if you looked at it for probably the rest of your life.
I\u2019m David Greene, the host of the BiggerPockets Podcast. We are BiggerPockets and you are the people that we love the most. Thank you for being here, and if you\u2019ve got a minute, check out another episode of Seeing Greene, and if you\u2019re an extra awesome person and you just want to show off your awesomeness, please head over to wherever you listen to your podcast at and leave us a five star review. Those help tremendously. I\u2019ll see you on the next episode.<\/p>\n