\n<\/p>\n
Where\u2019d all the <\/strong>cash flow<\/strong><\/a> go? <\/strong>More than ever, rental property owners are waking up to find less and less mailbox money <\/strong>coming in every month. This is doubly true for those who used low down payments to house hack and turned their properties into full-on rentals. So, what do you do if you have a rental property giving you low, no, or <\/strong>negative cash flow<\/strong><\/a>?<\/strong> Should you sell it and swap it for another investment or ride it out, betting on future appreciation gains? We\u2019re giving our thoughts in this Seeing Greene<\/strong>!<\/p>\n As always, David and Rob are here to answer your pressing real estate investing questions. But resident yacht tycoon James Dainard<\/strong> also brings his twenty years of investing experience<\/strong> to the show to help this week\u2019s rookie real estate investors. First, our very own Noah Bacon<\/strong> asks what he should do with a negative cash-flowing house hack<\/strong> that has six figures in tax-free equity<\/strong>. Then, we ask a question everyone wants an answer to, \u201cWTF is wrong with investors these days?<\/strong><\/a>\u201d If you want to turn your house into a rental property,<\/strong><\/a> stick around because two more investors ask whether it\u2019s worth it AND when you can start writing off those lucrative real estate tax deductions.<\/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: Noah: David: James: David: Noah: David: James: Noah: James: David: Noah: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Joe: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: Matt: Rob: Matt: Rob: Matt: Rob: David: Rob: David: Rob: 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 907. What\u2019s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the show where we argue with the information that you need to start building long-term wealth through real estate today. And today we have a Seeing Greene episode. If you\u2019re watching on YouTube, you see the green light behind me and you know that only means one thing, I\u2019m filming this in front of a traffic stop at an intersection. Just kidding. It means that we are doing Seeing Greene, and I brought some help. We start off the show with James Dainard who helps answer a question for me from one of the BiggerPockets staff members actually, which he does from his yacht. And then James realized in the middle of the interview that he did not want to be on the interview, he wanted to be yachting around, so I brought in Rob little yachty Abasolo to sort of support me with this and he\u2019s here to take over the second portion.
In today\u2019s show, we get into some really good stuff, such as why expensive markets tend to appreciate more than cheaper markets, what to do about turning your primary property into a rental if it doesn\u2019t cashflow, when your house hacking strategy doesn\u2019t go according to plan, when you can count expenses for a rental property and when you can\u2019t, and more importantly, what you have to do to make it eligible to count those expenses and more.
But first, we\u2019ve got a question from Noah Bacon in Colorado. So Rob, why don\u2019t you go check out the vacancy on our Scottsdale property and make sure we\u2019re getting that sucker filled and then be back lickety split?<\/p>\n
Okay, but before I do, if anyone here is listening and you want to submit a question, remember you can always go over to biggerpockets.com\/david to submit your questions for the next episode of Seeing Greene.<\/p>\n
Noah Bacon, the Bigger Pockets community manager, Noah representing BP, what you got for us today?<\/p>\n
Hey guys, thank you both for taking the time to answer some of my questions and it\u2019s really great to hang out with you guys here today. So I started a house hacking in 2021 in Colorado, Springs, and it performed really well when I was house hacking. Since I\u2019ve moved out, it hasn\u2019t really performed all that well. On paper, everything was great, was going to cashflow about 300, $400 when I moved out. Turns out, went through an eviction, rental rates dropped a little bit now that it\u2019s not in the summertime and insurance rates have really skyrocketed here in Colorado. My HOI fees went up 100% this year alone. So just immediately from 2021 on paper, everything looks great. Now we\u2019re here in 2024, I\u2019m breaking even.
So it\u2019s not like it\u2019s a terrible asset at this point, but it\u2019s breaking even and I\u2019m seeing the next two to three years on the horizon and I\u2019m like, \u201cDo I take the equity in the property and deploy it elsewhere or do I kind of go along this path and potentially be at a negative cashflow in two to three years and let the equity build since set a 3% rate?\u201d I know a lot of people are in this great problem to have with the 3% rate in equity building, but the cashflow monthly is going to start to go on the downside. So when is a time do you guys think to scale, to start to think about different things? Should I ride this out? I guess what have you guys been hearing about things like this?<\/p>\n
I\u2019m going to turn it over to James. Before I do, I\u2019m going to give you my 2 cents on why I think this is happening because more people than you think, Noah, are in the exact same position. I saw 2023 was like the year of this, right? My opinion of why I think this is happening is we have really bad inflation. We printed a whole bunch of money. Inflation doesn\u2019t come right away. It\u2019s like if you have an earthquake in the middle of the ocean, it takes a while for that wave to build and actually hit the shore. But we\u2019re seeing it continually go up and up and up.
A lot of people measure inflation through the CPI, which I don\u2019t like because those things can be manipulated. But if you actually just look at your life, how much are you paying for steak at the grocery store? How much is milk cost? How much is gas costs? It\u2019s really high. And I\u2019m seeing homeowners insurance Skyrocketing and no one\u2019s talking about it. I mean it\u2019s not like it went up 20%. It\u2019s like it\u2019s doubling or tripling on some of these properties in one moment or another one, like you said, the HOA fees. It\u2019s like, oh, it was 150. Now they\u2019re coming back and saying $400, okay?
So rent can only go so high because rents are largely and loosely based on wage increases. Well as inflation is making everything more expensive. That doesn\u2019t mean that companies are just paying their employees more. They\u2019re actually kind of getting away with giving people pay cuts if you keep their wage the same, but everything becomes more expensive. So HOAs are going up because of inflation, insurance is going up because of inflation. I bet the next thing you\u2019re going to see is municipalities start increasing property taxes because of inflation having it there, yet rents are not going up because people are kind of already tapped out with what they can afford. And it\u2019s created this odd squeeze that I\u2019ve never seen in real estate where rents are not going up with the same degree as the cost of goods and services because people couldn\u2019t afford to pay them. You\u2019d have tenants to say, \u201cWell, I can\u2019t make my payment if you raise my rent because I\u2019m already not getting a raise at work and everything else is becoming more expensive.\u201d
So James, what do you think? Did you see something similar or you have a different take on it?<\/p>\n
No, I mean the rising costs are eroding cash flow. Insurance is a huge expense for us as landlords, also as a construction company. I mean, our builders risk policies, it\u2019s expensive and what we all have to do is our performance\u2026 The great thing about our performance last two years is we would blow them up with way more income coming in. We did a lot better than we thought. Now what\u2019s happening is the expenses are starting to catch up. And honestly, people are starting to feel the real cash flow of real estate and a lot of investors are feeling this right now because as you buy real estate in your newer and real estate, and I did the same thing, it\u2019s like you buy them, you get a couple hundred dollars a month in cash flow. And then the economy starts leveling out or something bad happens, you have to maybe pay for that asset because these are investments. Investments go up and down.
What I would do for any investor, Noah, especially you, is going what is your long-term goal that when you\u2019re thinking about what to do with that property, you really need to know what is your one year, what is your three year, what is your five-year goal. And by doing that and listing down where you want to be with your passive income and your cash flow, that\u2019s going to kind of tell you the direction you want to go. But personally for me, everything\u2019s tradeable and I can always increase my cash flow position. And the great thing is, you made a very smart investment and you\u2019ve made $100,000 in equity.
Now, you want to figure out what to do with that because equity is only good if you utilize it. It\u2019s just sitting there. It\u2019s not even a real thing. And at the end of the day, I still factor that into my return. So every year I run return on equity on every one of my properties. Is my return still meeting what my expectations should be? Or what can I do with that equity and trade it out? Because the great thing is you made that decision, you have $100,000 in gunpowder at that point, your issue is you don\u2019t want to pay for your property every month, which is understandable. No one really does. I would trade that for another property that has a whole lot higher cash flow. You have 100 grand. You don\u2019t need to add into any other property. That\u2019s your down payment. And you can take that three to $400 a month or even break even and you can 3 to 4X that by making the right trading, getting maybe some more doors, trading into a little bit cheaper market, but it has to be your goals. \u201cI want cash flow.\u201d
If you want growth, I would take that property, I would 1031 exchange it into a value add property so I can double my equity position. If I\u2019m buying it below market, improving with rehab, then all of a sudden my $100,000 in gunpowder might turn into 200,000. And then you\u2019re talking about trading that for some serious cash flow. But write down those goals. It\u2019s going to tell you your plan of action. But even if you have a 3% rate, who cares? It doesn\u2019t matter what your rate is if you\u2019re not making money. I would rather pay 10% and make money than 3% in breakeven. Capital is just a cost of the deal. And if the deal is worth it, pay whatever rate it is. And so I would just say write down your goals. Where do you want to be? Cash flow? Equity? Do you want to expedite the process? Go value add. If you want steady cash flow, trade into a lower market, get more doors. And then you can weather storms more because your cash flow is greater.<\/p>\n
Noah, we have to take a quick break, but I will give you a chance to react to James\u2019s advice right after we get back.
And we\u2019re back with Noah Bacon, the investor and house hacker in Colorado who is struggling with increased costs and the handcuffs of a low interest rate. Should he sell to tap the equity or keep the deal? What do you think, Noah?<\/p>\n
Yeah, that\u2019s really well said. And I think I\u2019m at a point too where it\u2019s one property that I have, if it goes wrong, like we were just talking about James, it\u2019s like two months of paying, two mortgages now, how can I potentially mitigate that risk? And I think like you\u2019re saying, it\u2019s time to stop looking at that 3% in the equity build over the 30 years of the 3% rate. I\u2019ve been hanging onto that since the day I bought the property and it\u2019s like it\u2019s time to let that fantasy and reality go and start to scale. It\u2019s just now that the environment\u2019s different, I wasn\u2019t expecting expenses to go so much more rapidly than what income was. I\u2019m just like, \u201cOkay, new year. I really got to think about these things.\u201d So I really appreciate that because I really do think I need to start looking in potentially different market because I\u2019ve seen on the forums, places that I\u2019m in Colorado specifically with natural disasters are having massive increases on insurance. So I think I just really need to start looking more macroly instead of my own localized market now.<\/p>\n
And maybe get ahead of what the competition is going to be doing. So my guess would be in the next five years or so, more people are going to have a similar experience where their HOA jacked up rates a proportionally very high amount. Insurance went up because of natural disasters in that area at a disproportionate amount.
Some of the other costs that you can\u2019t control are going to go up more than what they did in the past. So it\u2019s not just HOA fees, but let\u2019s say you own a condo and it needs to have the roof replaced. Well, roofs are three times more expensive than they were five years ago or so because like James just said the cost of construction is super high and the wages that they\u2019re paying these employees are high. And so those special assessments used to be kind a mosquito bite and now they\u2019re a dragon flame. It\u2019s killing you, right? So you can avoid this by looking for properties that don\u2019t have the danger of having these costs go up. Single family homes instead of condos. Properties that are not in an HOA, but they\u2019re still in a decent area.
And even if they don\u2019t cash flow right away, if you pick the right location over the next five years, the rents are going to go up in those areas more than the others and the values are going to go up in those areas more than the others because as other investors and homeowners start to realize how bad it is to be in an HOA if you can\u2019t control the cost going up or an area where insurance is really high, they\u2019re going to move into the areas that I think you should be looking for right now.<\/p>\n
So Noah, you house hacked this house, correct? You lived in it for a certain amount of time. And if you lived in that property for two years and talk to your accountant, you can take the homeowner exemption and your $100,000 could be completely tax-free. Because if you live there for two years, you\u2019re going to qualify up for up to $250,000 of tax deferment at that point.
And actually after one year, your 100,000 might be totally tax-free. And if you look at that, your 3% rate, yeah, you\u2019re saving something right now because you\u2019re going to have to pay 6.5, 7% pretty solid, but you\u2019re going to make $100,000 with no tax on that. And then what you can do is you can take that portion of your taxes, go reinvest that into your new multi and you might be able to buy two properties and you only have to defer it. You have a clean tax basis, you\u2019re saving on 100 grand, you\u2019re going to save at least 20 grand in taxes, you\u2019re putting that back in your property and you can roll it into a new property to increase your portfolio. So utilize the tax credits to if you\u2019ve got to trade up your rate, at least you\u2019re getting a big benefit on the taxes.<\/p>\n
With my first property, I only lived there for a year and then I purchased my second house hack 12 months after. So I\u2019m coming up on two years on the house hack I\u2019m currently living in and it\u2019s also townhouse in an HOI and I\u2019m just expecting the same rainy day that I had on the rental property that I turned into. So I\u2019m like probably when it comes to two years at the property I\u2019m living in currently, I\u2019ll think about that, deploy the capital and take the tax exemption. But with the property that I lived in previously, I only had one year, so I\u2019m not going to be able to hit that tax exemption unfortunately.<\/p>\n
Yeah, but you can take a portion of it. I would talk to your accountant on it to see. And then that might tell you\u2026 So again, going back to your goals one year, three year, five year, you might be really comfortable in your house that you\u2019re in now and you want to stay there and that\u2019s perfectly normal, right? You got a low rate, you want to stay there for a long time that meets your goals or you don\u2019t really care. Like for me, I\u2019ll trade any house. I have no emotional attachments for housing anymore. Then I would utilize both.
And then you can go maybe pick up a new primary on a value add, start creating that equity again for another tax-free gain, take the portion and go buy one or two more rentals and get better cash flow out of those. And you\u2019re going to really over a three-year period, you\u2019re going to 2X your return right now because you\u2019re going to pick up the value add on your property that will be tax-free over two years. And then if you\u2019re increasing your cash flow, it\u2019s helping with your monthly expenses. And if you buy on value add, you can increase that equity even further. And so it\u2019s that domino effect, right? Every time you make a trade, pick up another trade, I never trade like for like. I want to improve my equity position every time because the equity position and the equity is how we really get financial freedom.<\/p>\n
It doesn\u2019t have to be cash flow or equity, which is how the argument often gets phrased. I think it should be cash flow after equity. So if you think about how much control you have over cashflow, it\u2019s very little. You can\u2019t control what rents are. They\u2019re going to be what they are. You could try to control expenses, but there\u2019s only so much you could do. Your mortgage isn\u2019t going away, your taxes aren\u2019t going away. And when the insurance goes up or the HOA go up, you don\u2019t have a choice. The only expenses you really have any measure of influence over are vacancy, maybe how much you pay for maintenance if you can figure out how to get some kind of handyman to be good, and even CapEx you can\u2019t really control, right? So it\u2019s incredibly difficult to build cash flow because you don\u2019t have as much control over it.
But equity you have a lot of control over. You control how much you pay for the property. You control what area you buy in and where they\u2019re going to be going up. You control what value add you do to the property. You control the whole project if you pay attention to it and how cheap the expenses are kept for the rehab. So if you have more control over something, you are more likely to be successful in it. My advice for most real estate investors, especially when they\u2019re younger, is not to just race to cash flow and quit their job and then say, \u201cHey, I made it\u201d because those people end getting back into the same rat race that they claim they quit, unless they sell courses and they live off of that and pretend like they\u2019re living off of the rent.
My advice is just snowball equity like what James said. Every deal you pick up, you buy it under market value, you add value to it, you sell it, you go into another one and you build up this snowball. And then near the end, you convert all of that equity that you\u2019ve built into cash flowing property, which is going to give you a lot more cash flow than if you take the approach of, \u201cI\u2019m going to keep acquiring your properties at $200 a month.\u201d If we lived to be 900 years old like Methuselah, that would be a good strategy. Unfortunately, life is too short for that to work out.<\/p>\n
I\u2019m thinking about this with a small mind until today, and I think it\u2019s time to really start expanding the portfolio a little bit more and see what other options are out there. But I can\u2019t thank you guys enough for your time today and helping me think about where my portfolio heading into the next year.<\/p>\n
All right, Noah, thanks for coming on.
And I hope you\u2019re enjoying the shared conversation that we have so far and thank you for spending your time with me. Make sure that you like, comment, and subscribe to this video. Let us know in the comments what you think.
In this segment of the show. I like to take questions from the forums and answer those since it\u2019s an awesome forum on biggerpockets.com. We also read some of the YouTube comments or address any of the reviews that were left where you can leave a review where you listen to podcasts. So go leave us a review and let\u2019s talk about what y\u2019all have been saying.
Our first question comes right out of the forums and it was a topic that was labeled, \u201cWTF. What\u2019s wrong with investors these days?\u201d Rob, this is some good stuff. So basically, this was from Angelo Romero and he has a turnkey company that also helps manage properties in Toledo, Ohio. He has people that reach out to him and say, \u201cHey, I don\u2019t want to buy any of your product, but I was hoping that you could help me to find a deal. Also, do you have any contractor, lender or agent referrals? Oh, and by the way, I\u2019d love to have you manage properties that I bought with somebody else but not from your company.\u201d And he was a little peeved about this and he says, \u201cIt seems to me that everyone wants something for nothing nowadays and nobody is willing to put in the work or pay the margin for the person who did put in the work.\u201d
Now I can relate to this a little bit because people come to me as an agent and they say, \u201cHey, can you help me get an off-market deal? Or do you have any off-market deals?\u201d And agents only get paid when the deal is indeed on the market. So it doesn\u2019t really make sense to ask a real estate agent to represent you, but then they don\u2019t get paid. So I am in this situation all the time. I just kind wanted to get your 2 cents before we dive into this, Rob.<\/p>\n
Well first of all, he caps this one when it says, \u201cFolks want to own a monkey, they want to play with the monkey but not carry the monkey or clean its S-word when it does one. Hi-hi.\u201d So that\u2019s pretty funny. Well first of all, let me ask you when you\u2019re getting it off-market deal, I assumed if you\u2019re brokering that deal, there\u2019s still some kind of finder\u2019s fee, right?<\/p>\n
You actually can\u2019t do that. So when you\u2019re a real estate agent and you\u2019re a licensed person, if somebody wants to help put something together that\u2019s off market like wholesale, almost every brokerage is going to tell you that you can\u2019t do that because when you\u2019re licensed, you have a fiduciary duty to the people you\u2019re working with and they expect that. And it\u2019s a massive liability to help somebody that when you\u2019re not covered by your license or the insurance that goes under your license.<\/p>\n
Yeah, so I guess the problem here is that people are asking for quite a bit. There\u2019s a little bit of entitlement in that they expect you to do a lot of things for them, but they\u2019re not providing the value upfront. So I probably try to go out of my way and see how I could provide value.<\/p>\n
We\u2019re not trying to sit here and be negative on the show, but I do think that there\u2019s a lot of people that are in the BP world that just don\u2019t understand that the podcast is free and the blogs are free and the forum is free and the books are cheap. There\u2019s so many things that are free, but the people that make their living from this that are on here sharing free advice, that doesn\u2019t mean that they\u2019re going to work for free.
One of the comments in the forums here said, \u201cI guess we\u2019ve gone from, \u2018How do I invest with no or low money down?\u2019 to, \u2018How do I get other people to do all the work for me and I benefit from the deal without paying them?\u2019.\u201d And we\u2019re only bringing this up because there\u2019s a very good chance that people don\u2019t realize that\u2019s how they\u2019re coming across. I don\u2019t think anyone is conscious of the fact that when you go to a turnkey provider who\u2019s basically digging in the streets trying to find that deal and putting blood and sweat and tears into getting it, and then you say, \u201cHey, can you just give me one of those so that I don\u2019t have to do the work?\u201d, that it\u2019s going to be offensive to them.<\/p>\n
Provide value in a way that\u2019s like a clear need that someone has and try to make a win-win out the gate. Instead of saying, \u201cHey, come in and teach me your ways and I\u2019ll work for you,\u201d that\u2019s really hard because then you have to kind of show someone how to do that thing and that\u2019s worked for us, it\u2019s very different to then come in and say, \u201cHey, the thing that I am a master at is communication. I\u2019ll come in and handle all of your communication with your vendors, with your guests, with your contractors, everything. That\u2019s what I\u2019m good at. In return, I\u2019d like for you to do X for me.\u201d And then there\u2019s an actual value exchange there that doesn\u2019t put so much pressure on the other person to, I don\u2019t know, teach and mentor and provide the value.
I want this to be an insightful question of just this guy is right, \u201cWhat\u2019s in it for me?\u201d And you have to understand that you have to try to answer what\u2019s in it for them. If there\u2019s no actual value or any kind of monetary compensation, then you really have to figure out how you can lead with value and make it a no-brainer or a win-win for them to actually help you. Otherwise, as nice as many, many people are, you\u2019ll just never get the time of day asking for something without offering something very clearly valuable in return.<\/p>\n
And then you\u2019ll be frustrated because you keep reaching out to people asking for help and they kind of blow you off or they just ignore you or they very politely misdirect what you just said and you\u2019re like, \u201cMan, how come no one\u2019s out here to help me?\u201d Well, that\u2019s what we\u2019re here to tell you. This is why they\u2019re not helping you.
I tend to look at real estate like you got a bone with a lot of meat on it, and that meat is equity. So there\u2019s some seller out there that has a property and everyone\u2019s trying to find how they can get it under contract for less than what it would sell for on the open market its after repair value. Well, if you go find that seller yourself, it\u2019s a lot of work, it\u2019s a lot of rejection, it\u2019s a lot of pain, it\u2019s a lot of risk, but you get all of that equity. Now, what people do in the real estate space is they slowly start to slice off chunks of that equity to pay themself to help you with that process.
So just think about, \u201cWhat are the things I don\u2019t want to do and how am I willing to pay someone and who do I want to pay for those things?\u201d as long as your expectation, \u201cI want all the meat and I don\u2019t want to have to pay somebody else for it and I don\u2019t want to do the work myself.\u201d Once you find your lane, that\u2019s where you\u2019ll get good at that lane. You\u2019ll build up some experience and you start building the momentum, acquiring the properties, and you\u2019ll get to be like Rob Abasolo here and show up wearing a G-Shock watch with a printed tee and a perfectly teased coif talking to the masses.<\/p>\n
And by the way, on top of the forum just being a really great place to get answers to your questions, it\u2019s also a very therapeutic place to go and find other people that might be able to relate to your personal situation. So definitely everyone, take advantage of the BiggerPockets forums. It\u2019s free and it\u2019s a very easy way to level up.<\/p>\n
And we\u2019ve got more in store for you. So stay tuned right after this quick break.<\/p>\n
Welcome back to the BiggerPockets Real Estate Podcast. Let\u2019s jump back in.<\/p>\n
All right, moving on. Our next review comes from Apple Podcast. This one is labeled inspirational. \u201cI\u2019ve been listening to BiggerPockets for years and they offer stories, different ideas on how to approach a journey to get to a real estate investment level. I would say that you get what you give as far as my personal investment on time and effort that you put into finding deals and resources. I\u2019ve found three and I found BiggerPockets played a role in that.\u201d From Dave Scruff on the Apple Podcast app. Well, thank you for the 5-star review, Dave. People like you keep this episode reaching the masses.
All right, we love your guys\u2019 engagement and we appreciate you listening to us. Please continue to comment and subscribe on our YouTube page, as well as leaving us your five star review wherever you listen to podcasts, Apple Podcasts, Spotify, Stitcher, whatever it is.
All right, let\u2019s get into our next question. This comes from Joe Ademic in Boston.<\/p>\n
Hi David. Thanks for all the great content you\u2019ve been producing. I found it really educational and I\u2019ve learned a ton. My name is Joe and I\u2019m located in the Boston area. I\u2019m just getting into real estate investing and looking for a house hack soon. So my question is really, a couple episodes ago you kind of mentioned that a higher priced area like San Francisco will appreciate more than a lower priced area. I was kind of curious in the logic behind that, because I feel like a higher priced area, the prices are so high that they won\u2019t be able to grow as much. I\u2019m just curious if you\u2019re suggesting that will the gap between a higher priced area and a lower priced area would just widen kind of thing in the future. And I guess any more tips on how to house hack your first property. And thank you.<\/p>\n
Solid question. Basically he wants to know what\u2019s the logic as to why we would say a higher priced area will appreciate more. What do you think?<\/p>\n
Yeah, that\u2019s a great question. I mean, I love this stuff. We get to talk about the fundamentals of real estate. And personally I think you and I, Rob, put the fun in fundamentals. Everybody else is boring, but we make it cool.<\/p>\n
I\u2019ll put the mental bruv.<\/p>\n
All right. So the reason that they are priced higher in the first place is because there is more demand than supply. So think about it like people have to be willing and able to pay the price of a home or rent for that matter. Same goes for short-term rentals. How much are they going to pay per night? They have to be willing and able.
Willingness is a function of supply and demand. Is there other options? Well, I\u2019m not willing to pay you 500 bucks a night If I could get something similar for 200 bucks a night. I\u2019m not willing to pay $500,000 for that house if someone else is selling one for 300,000. Pretty sensible.
Now the other part is able. If wages have not increased in the area, even if someone was willing to pay that price for the house, they\u2019re just not able to. The same goes for if they were willing to pay you that much for their Airbnb, but the economy\u2019s really bad or they don\u2019t make enough money, then they\u2019re just not able to. So people have to have both. The areas with the highest price homes, have people that are willing and able to pay that price. And then you just let the free market do what it does. So he was saying, \u201cWhy did those areas appreciate more?\u201d It\u2019s because the people that have the money that are willing to pay for the homes are always going to drive the prices up more than the people that do not have the money or are not willing to pay for it. Does that make sense?<\/p>\n
It does. Let me ask you this because just from a basic math fundamental question, if the average appreciation on a city is let\u2019s say 3%, well that\u2019s going to compound faster on an $800,000 median price point than let\u2019s say a $200,000 median price point. So just from the sheer value of a property, the more expensive it is, the greater that appreciation ends up being at an average appreciation rate of whatever the national average is, right?<\/p>\n
Yeah, that\u2019s a great point. If a $800,000 house goes up by 3%, that\u2019s 24,000. If a $2,000 house goes up by 3%, that\u2019s 6,000. And you compound that over five years, right? The cheap house went up by 30 grand, the other one was like $120,000 or so-so.<\/p>\n
Yeah, I think there\u2019s a lot more to all of this statement with the whole like, \u201cYeah, a more expensive house appreciates more.\u201d I think all the economic factors that you talked about before I said that all play into it as well. But yeah, typically the more expensive a home is, the greater that appreciation is just in the way that compounding appreciation works.<\/p>\n
All right. Thank you, Joe. Hope we helped you there. And you didn\u2019t ask this question, but I\u2019ll just throw this in for everybody listening here. When you\u2019re looking at rental properties that you want to cash flow, you will typically be looking at the $200,000 houses that Rob described. So the lower price points tend to make better rental properties because the price to rent ratio is more favorable on cheaper houses. Once you get into more expensive homes, they get further and further away from the 1% rule as they go up in price because there are less tenants that want to rent a million-dollar house than there are that want to rent $2,000 house.<\/p>\n
Yeah. Bonus answer here because he did ask for house hacking tip. I\u2019m just going to say this house hacking is great. I would say if you can expect your expectations to not necessarily have to be to offset your entire mortgage payment with the house hack, then you\u2019ll have way more options on the table. Too many times people are trying to make money on a house hack or have no mortgage at all as a result to all the money that they make from renting out rooms. It doesn\u2019t have to be that. I think paying half of your mortgage through a house hack is a perfectly beautiful way to enter that game.<\/p>\n
All right. And our next question comes from Joseph Chavier in North Carolina. \u201cHello, Coach Greene. My fiance and I are 23 years old and purchased our first primary residence about six months ago with an FHA loan. Our plan was to save money to purchase another primary residence in two years. We underestimated ourselves drastically and have saved more in the past six months than we thought we could in two years.\u201d Way to go, Joe. \u201cThe only problem with this is that the rental values of our current home has not gone up enough and we would be breaking even or even losing money if we include the vacancy rates and the maintenance. We have a long-term mindset and are thinking about retirement. While cash flow would be great, we\u2019re more concerned about setting ourselves up for success in 10, 20 or even 40 years from now. My question is, should we stay put and keep saving and wait for rents to go up, eat the $200 loss and purchase another primary residence, purchase another property as an investment property or something else that we aren\u2019t thinking of?\u201d<\/p>\n
Yeah, this one seems right in your wheelhouse. I mean, first of all, congrats on saving more in six months than you thought you could in two years. That\u2019s amazing. I\u2019ve never heard anyone say that before. So that\u2019s a really, really great thing.
As to whether you should lose money or not, we\u2019ve done episodes on this on if the appreciation will ultimately make up for it. My question back to them would be like, are there ways to increase rents? Is there forced appreciation or forced equity play? Could they convert a basement or a garage into an extra room? Is there something they can do to try to get their rents to catch up with market value? I would probably explore that route first and try to maximize the income on one property before going out and buying another investment property.<\/p>\n
Great point there. I think the problem is he was saying, \u201cHey, we plan to leave our house and get the next one, but rents didn\u2019t go up enough that it would cash flow if we left it. So is it okay to buy our second house if the first one isn\u2019t cash flowing like everybody talks about?\u201d So this is a good problem to have frankly, because you\u2019re going to have some equity there. If you don\u2019t want to lose that cash flow and you can\u2019t do what Rob said, which is bump the rents up somewhere else or add another unit to it or use it as a short-term rental or whatever options that you have there, you can just sell it. Sell it and take the equity out and put it into the next one. If you don\u2019t want to sell it because you think it\u2019s going to keep going up in value, well then hey, keep it and lose a little bit of money there because you\u2019re gaining more equity than what you\u2019re losing in the cash flow because that\u2019s why you wanted to keep it.
And if you don\u2019t like either of those options, you could just keep saving money and staying where you are and delaying finding the next property. But you\u2019re not in a rush to move. And that\u2019s what I love about this. You can really look for the best possible house hack to buy for your next deal. And if the next one is going to save you even more money a month than this one because it\u2019s so good, maybe it has a lot more bedrooms or the rents are a lot higher for different reasons, well then if you\u2019re losing a little bit when you move out of this one, that\u2019s covered by the savings that you\u2019re getting of the next one so it\u2019s still a net gain.<\/p>\n
Yeah, I\u2019m very anti-losing cash flow on a rental in general. And if we know that you\u2019re going to lose money on this, if you can\u2019t force appreciation, force equity, all that stuff and increase your rents, I think there\u2019s absolutely nothing wrong with selling it, taking the money that you make and putting it into a new primary and then just build your nest egg of equity. And one day, that equity will be great. You\u2019ll be able to retire on that equity if you keep it until you retire.<\/p>\n
All right. Our next question comes from Taylor White in Atlanta. \u201cWe\u2019re moving our primary residence to another primary residence and we will keep and rent out our previous home. At what point can we start counting expenses against the revenue that the rental will bring? Do we need to wait until closing in our new home before buying things for the rental? Do we have to wait until the rental is available for rent before we can expense? If so, when does it technically become available for rent? Thanks for all you do for the BP community.\u201d
My thought would be, the minute you move out of it, you call it a rental property. And it\u2019s available for rent, you just haven\u2019t advertised it yet because it\u2019s not pretty, but it\u2019s still a rental when you move out of it. But we\u2019ll just have to clarify that. They need to verify that with a CPA.<\/p>\n
So I basically want to know if they list their property on the first, but they don\u2019t actually get it rented as a long-term rental until the 15th, can they start marking expenses on the first of that month? Now that sounds like like a tax question and you should always talk to your CPA for these types of things, but I happen to be friends with the best CPA in the world, Matt Bontrager. So let me give him a call really fast.<\/p>\n
Yes, they will be able to take those expenses, but it\u2019ll just be capitalized either to the cost of the property or they will be able to just take those as expenses against the income. It\u2019s just you can\u2019t start to deduct those expenses at least in that year until that property is placed in service. So the fact that they\u2019re\u2026 We\u2019re really talking about a two-week lag, that\u2019s totally fine. But yes, they need to end up getting it placed into service, which is actually, if it\u2019s a long-term rental, just has to be available rent. If it\u2019s a short-term rental, they actually have to get it rented.<\/p>\n
So that\u2019s the question, when is it actually available for rent? Does it have to be advertised on websites like Craigslist?<\/p>\n
[inaudible 00:32:16] long term rental?<\/p>\n
Yeah, it\u2019s a long term rental.<\/p>\n
Exactly. Once they start to advertise it and seek tenants.<\/p>\n
All right. Thank you very much. You heard it here first, everybody sue Matt Bontrager. Thanks, man.
Okay, so we just talked to Matt Bontrager over at TrueBooks. He says that it just has to be available for rent. And that means that the moment you list it on a website like Craigslist or whatever, that would count as being available for rent. So there you have it.<\/p>\n
So there you go. Put your property up for rent as soon as possible. If you don\u2019t have pictures ready, well then just don\u2019t put those in the Craigslist ad and just describe the property. And then collect the emails of the people that are interested in it. And then when it is ready to be shown, that\u2019s when you can arrange for the showing. And then when you get the pictures and they\u2019re all nice and pretty, you can upload those to the Craigslist ad. And make sure you verify this with the CPA just to make sure this is all up and proper.<\/p>\n
Wait. One noteworthy thing here though. He did say that it\u2019s different between a long-term rental and a short-term rental. So if it\u2019s a long-term rental, it just has to be placed\u2026 It just has to be made available, so say on Craigslist. If it\u2019s a short-term rental, it actually has to be rented for that to start counting. So there is a small difference there depending on which route you<\/p>\n
Take. All right everybody. Thank you all for being here with us on Seeing Greene. We love doing these and we love being able to help you all. As a reminder, head to biggerpockets.com\/david and submit your question that we can answer on Seeing Greene. And thank you Rob for being here with me today.<\/p>\n
It\u2019s what I do best, my friend. Good to be here.<\/p>\n
If you\u2019re listening to this on YouTube, make sure you leave us a comment. Let us know what you thought about today\u2019s show and what you didn\u2019t get answered. And if you\u2019d like to know more information about Rob or I, our information and social medias are in the show notes. This is David Greene for Rob, putting the R in the BRRRR method, Abasolo, signing off.<\/p>\n