\n<\/p>\n
Everyone has housing market crash<\/strong><\/a> predictions<\/strong>. Some media outlets will tell you the sky is falling, real estate is on the edge of a cliff, and the whole world is turning upside down. Meanwhile, investors who made it out alive during the great recession<\/strong> see an oncoming housing correction as an opportunity, not a warning sign<\/strong>. Ever since we saw wild home appreciation in late 2020 and beyond, everyday investors have been asking: when is our time up?<\/p>\n David Greene, real estate investing expert (also agent, author, and podcast host), knows that people will get hurt if an economic crash<\/strong> does happen. But, he also knows that investors who have kept their expenses lean<\/strong>, saved when they could<\/strong>, and taken care of their assets<\/strong>, will probably ride the tide just fine. In this episode of Seeing Greene, David will answer one of the most asked questions: where do we go from here? <\/strong>He\u2019ll also touch on whether or not to give up earnest money in a bad deal<\/strong>, when to replace big systems like an HVAC<\/strong> that is on its last legs, how to calculate ARV<\/strong>, and why adjustable-rate mortgages<\/strong><\/a> could spell disaster in 2022.<\/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>and ask other investors their take, or follow David on Instagram<\/strong><\/a> to see when he\u2019s going live so you can hop on a live Q&A and get your question answered on the spot!<\/p>\n David: Cody: David: Kris: David: Ladi: David: Stacey: 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? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n
This is the BiggerPockets Podcast show 627. Recession and market crash are not synonymous. They\u2019re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment. This is the point I just want to keep hammering is stop thinking that just because we\u2019re having a recession, we\u2019re going to have a market crash. We can, but it often doesn\u2019t happen.
What\u2019s going on, everyone? I am David Greene, and I\u2019m your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene edition, as you can see from the green halo behind my head if you\u2019re watching on YouTube or Spotify or some way that you can actually see the podcast. We have a great show for you today where different BiggerPockets community members come and ask questions specific to their wealth-building opportunities, how they want to build out their business or where they are stuck, as well as overall strategy.
We get into ways that you can keep your costs down as a new wholesaler, who wants to grow a business. We talk about when to replace the major home systems in your properties, HVAC, roofs, things like that. We also talk about how to deal with a difficult agent or what to look for in an agent so that you don\u2019t end up in a bad spot. And then, we address when it\u2019s okay to lose your earnest money deposit to get out of a bad deal or when you should move forward and stick with it.
We also talk about the economy, different investment options in different economic environments, and my closest guess to what I think is going to go down, looking into the crystal ball that is my shiny head. And before we get to the show, today\u2019s quick dip, go to biggerpockets.com and check out the forums. These things are awesome. This is like being a fly on the wall and being able to listen to conversations between both newbies and very experienced investors, sharing information freely. My advice is go check it out.
And if you see a topic that you find is very interesting, but a part of it or a perspective of it that didn\u2019t get addressed, go to biggerpodcasts.com\/david and ask me to clarify whatever you didn\u2019t understand from reading the conversation. All right, let\u2019s get to today\u2019s first question.<\/p>\n
Hey, David, first off, thank you so much for taking my question. Always get super inspired by the BiggerPockets Podcast. Even some of the topics I don\u2019t even think that are going to pertain to me, I\u2019ll listen to it. And I always come out with a nugget of truth that always helps me and gives me super inspired on the other side. So, thanks for that. So, my first main question is this. I have a buddy, Ryan, he invests in stocks and bonds heavily. He\u2019s very successful with it, and him and I always have this debate on the real estate market and where it\u2019s heading.
I always send him just bits and pieces that I hear on your guys\u2019 podcast. And he\u2019s still not totally sold on the market continuing to go up. And I\u2019m just curious if you could dive further into depth why you feel like the market\u2019s going to continue to go up. I guess the biggest thing he\u2019s opened up my eyes to now is with looming recession. And if you look at the statistics, we\u2019re actually already in recession from my understanding and just where you feel like things are going to go once we continue to travel down that path because it\u2019s like one market goes typically and the other markets are going to go.
So, if you could just dive further into depth with that and really explain more fully why you feel it\u2019s going to go in the direction it\u2019s going to go, that would be amazing. My other question is this. So, right now our portfolio, we have one long-term rental. We\u2019ve done a couple of flips. We now own a short-term rental up north that we\u2019re getting going. And we\u2019re finishing a tiny house that we got.
And also, we\u2019re doing a buildup north with my in-laws. With so heavily involved in short-term rentals, I\u2019m just curious with recession looming and things going crazy with the market. I\u2019m just curious where you feel like the short-term rental, how it\u2019s going to look, how the short-term rental market\u2019s going to look if we go down that road. Thank you so much for taking my question. I really appreciate it, and take care.<\/p>\n
Hey there, Cody, thank you for the question. You are echoing the sentiment of just about every single real estate investor or a wealth builder in general in our country right now. So, if you go in the crypto space, they\u2019re asking the same question but from a crypto angle, what\u2019s going to happen with crypto? If you\u2019re talking to stock traders, if you\u2019re getting to any form of people that give financial advice or build wealth through different securities or assets, they\u2019re all trying to figure out the same thing, what\u2019s going to happen with the economy? And real estate investors are no different.
Now, here\u2019s what I can tell you. It\u2019s only going to do one of three things. The economy\u2019s going to get better and prices are going to keep going up. It\u2019s going to get worse and prices are going to keep going down or it\u2019s going to stay exactly the same. We never know at any time what\u2019s going to happen with the economy. Now, what it sounds like you\u2019re doing with your friend is a trap that many people fall into. What they do is they hear a perspective from someone like me or someone else. And they say, \u201cHey, what he said makes a lot of sense.\u201d That element, that perspective that he provided was really good.\u201d
And then, you go tell your friend, and then your friend says, \u201cYeah, but did you think about this?\u201d And then, that perspective wasn\u2019t offered when I was talking. So then, you come back and say, \u201cHey, what about this perspective?\u201d And then, I answer it. And then, you go back to him and say, \u201cHere\u2019s what he said.\u201d And then, they give you another one. And this goes on forever. It\u2019s like a game of ping-pong of Forest Gump versus a wall. It never actually ends.
So, I don\u2019t think it\u2019s healthy for you to keep going back to your friend and trying to say, \u201cThe economy\u2019s going to go up or the economy\u2019s going to go down,\u201d because we don\u2019t know. Now, let me broaden the perspective of everyone listening here. Economies will go up and economies will go down. It is going to go down. Okay? At some point, Cody, that\u2019s going to happen. I\u2019m not betting that the economy\u2019s not going down. I\u2019m not betting that the economy\u2019s never going to go down.
I\u2019m betting that when it goes down, it will go back up. I\u2019m betting that when it goes down, I can weather that storm because I didn\u2019t quit my job and go work on the beach. I kept working and I kept money in reserves and I lived a very frugal lifestyle so that I can afford to make some of these payments. I can actually lose money in real estate or on short-term rentals for a period of time. Now, do I want to? Absolutely not. But am I arrogant enough to think that it\u2019s never going to happen and I\u2019m entitled to making money every single month or every single year that I ever own real estate?
That\u2019s insane, but because we\u2019ve seen a run-up in prices for so long, there is a contingency of people that believes it is unacceptable to ever lose money for a period of time on a house. And it\u2019s just not realistic. There\u2019s no relationship that doesn\u2019t hit hard points where people aren\u2019t happy. There\u2019s no child you raise that acts perfect all the time. There\u2019s no investment that never loses money or goes bad. The key to successful real estate investing is to continue to survive when it gets bad, and that\u2019s the advice I continually give. Prepare for the worst, prepare for the worst, prepare for the worst.
I\u2019m not the person that says get four houses and quit your job. That\u2019s very risky to me. I want you to keep that bulletproof vest on in case bullets start flying again. I want you to put a fortress around yourself in case the White Walkers come, the White Walkers of inflation or a recession, and you\u2019re prepared because you\u2019re standing behind the north wall. That\u2019s a Game of Thrones reference. That\u2019s the way that I approach wealth building. All right. So, I don\u2019t know what\u2019s going to happen and I don\u2019t have a crystal ball, but I\u2019ll just tell you what I\u2019m preparing for.
We should have went through a recession when we shut down the country for COVID-19. We destroyed our GDP. We stopped being productive. It makes sense that a recession would happen. As you mentioned, many people show we\u2019re in a recession. And I agree. We are in a recession, but prices aren\u2019t dropping. And that\u2019s what people have to understand. Recession and market crash are not synonymous. They\u2019re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment.
This is the point I just want to keep hammering is stop thinking that just because we\u2019re having a recession, we\u2019re going to have a market crash. We can, but it often doesn\u2019t happen. And I believe the reason everyone assumes it will is that in the last recession we had a market crash, but here\u2019s why that happened. The last recession was a result of the market crashing. What I\u2019m saying is the market didn\u2019t crash because we had a recession. We had a recession because the market crashed.
The market crash caused the recession and that\u2019s not likely to be the case now. The reason we had the last crash was that loans were given that people couldn\u2019t repay and they all reset at roughly the same time, and you had way too much supply for the demand that was out there. Home builders were throwing up houses as fast as they can and people were buying them based on pure speculation. We had too much supply and not enough demand when all the houses hit the market at the same time. We are in the opposite environment in most markets that I\u2019m looking at right now.
We have too much demand and not enough supply. So, I don\u2019t know if a K-shaped recovery is the right way to explain this, but the way that my crystal ball is working, what I think is going to happen is you\u2019re going to have people at the lower end of the economy that are going to get squeezed very hard, people that don\u2019t have a lot of money. Their gas is going up. Their food is going up. Their rent is going up, but their wages are not going up and they\u2019re not able to make more money at work. Then you\u2019re going to have people at the top of the economy.
And I\u2019m going to describe those as people who own assets, people who have a portfolio and make their money through mostly investing. The people that have followed the cash flow quadrant as Robert Kiyosaki put together and make their money as investors, not employees and not self-employed, those people are going to continue to build wealth because their wealth is coming from assets, not from a W2 job. So, I don\u2019t know what\u2019s going to happen. But what I am guessing is going to happen is that the wealthy are going to grow their wealth through this recession and the poor are going to lose more of it. And it sucks.
This was the problem with printing ridiculous amounts of money is this seems to happen every single time that we do it. It\u2019s like giving a kid sugar. Yeah, they feel really good for a little bit of time. And then, they go crazy and then they crash. And that\u2019s what we\u2019re talking about here is a crash that\u2019s coming. I just don\u2019t know what\u2019s going to affect home prices. So, the best thing you can do, if you continue to buy real estate is to put more away in reserves than what you thought before. Now, the second part of your question had to do specifically with short-term rentals. Are people going to keep traveling?
And I got to say, this is a question that\u2019s at the top of my mind as well. I am worried about this. I think about that. Because I\u2019ve been buying short-term rentals. In fact, if you want to be in the best market, you have to be in the short-term rental game because of this supply and demand problem. It\u2019s the only way to make them cash flow in a lot of cases. What I\u2019m doing to prevent against this is I\u2019m only buying properties in areas where I think more wealthy people are likely to frequent. That\u2019s the way I\u2019m looking at it. If the wealthier people aren\u2019t as affected by the recession, they\u2019re still going to travel.
And that\u2019s why I\u2019m getting into the more luxury space, because that\u2019s where the people who are going to be traveling haven\u2019t been impacted by the economic well is where I think the bottom half is going to. Now to be clear, I\u2019m not some greedy landlord who\u2019s reveling in the fact that the people at the bottom of the economic spectrum are going to get hurt. I\u2019m actually heartbroken about that. It\u2019s very sad. I don\u2019t think this is good. When a lot of other people were saying, \u201cPrint the money, print the money, print the money,\u201d I was on this platform saying, \u201cThis is going to be worse if we actually do it.\u201d
And now, the worst is coming. Just like someone who runs up a credit card bill and then has to pay it back with interest, that\u2019s what\u2019s happening in the economy of our country because we made those financial decisions. We didn\u2019t want to save up the cash and pay for it upfront like Dave Ramsey. We wanted to run up our debt and now the bill\u2019s coming due. So, to wrap all this up, I would say, I don\u2019t know what\u2019s going to happen. I wouldn\u2019t try to argue with my friend and convince them that prices are going to keep going up.
But what I would say, if that inflation comes and we continue to print money, if we make more decisions to print more money, housing is going to keep getting more expensive. If we don\u2019t do that, or if they actually contract the money supply, if they pull money out of the economy, God, that would be amazing. I would love it. It would cause people like me to lose money in our net worth. My overall net worth would drop if they constricted the money supply because assets would become worth less, but it would be better for the country as a whole.
So, if you see that happening, that\u2019s where I\u2019d say, \u201cOkay, stop buying. It\u2019s time to wait for these prices to come down and a correction to happen before I jump in.\u201d But until I see that happening, pure interest rate increases is not enough to slow the demand that we have for real estate in the best markets where everybody\u2019s moving to. All right, next question comes from Jeff Row in Denver. I\u2019m from Denver, Colorado, and I\u2019m a new real estate investor focused on house hacking using rent by the room and Airbnb. Do you have any tips for what I should do after realizing a buyer\u2019s agent representing me on a deal doesn\u2019t have my best interest but it\u2019s too late to anything about it?
I missed a lot of the warning signs of a bad agent, but now that I\u2019m past the termination deadline and my earnest money will be lost if I walk away to become apparent that the buyer\u2019s agent I\u2019m working with just wants to throw me into a home without understanding my short and long-term goals, what I\u2019m trying to accomplish and why I\u2019m looking to invest in real estate, do you think it\u2019s worth losing out of the earnest money deposit, which is 16,000 to work with a better agent and get a better home for my goals? And do you have any tips for how to prevent a similar situation in the future?
Yeah, this sucks, man. Because as an agent, I understand what it\u2019s like to be an agent. As an investor, I understand what it\u2019s like to be an investor. I think there\u2019s an inherent flaw in the way that agents work or the regulatory environment I should say, the environment they work in. Agents on one hand work on pure commission, meaning you can use them for years and they don\u2019t make any money. They actually lose money to pay for all of their licensing requirements, their time, their gas to show you homes. Just by being an agent, they\u2019re losing money. So, they have to sell a home to make it worth doing it at all.
On the other hand, they\u2019re asked to be a fiduciary, meaning that they have to look out for your own best interest. And that\u2019s crazy. I don\u2019t know why we combine fiduciary with a commission job. A lawyer is a fiduciary, but you pay them by the hour. You have to pay your lawyer. So, it makes sense to ask them to be a fiduciary. I just think that the idea that buyers agents only get paid if you close on a house and they have to be a fiduciary is a massive conflict of interest. It makes no sense that things are set up that way, but that\u2019s the way it is.
And because that\u2019s the way it is, you often get a case where an agent is being trained and taught and motivated to get you into a property and sell something. And you\u2019re looking at it like they\u2019re going to look out for me. There\u2019s an inherent conflict of interest right off the bat. Now, you didn\u2019t mention anything specific that the agent did. And that part concerns me a little bit because I don\u2019t want you to get into the thought of, \u201cHey, something came up that I didn\u2019t know was going to come up. It\u2019s my agent\u2019s fault.\u201d
There might actually be some responsibility on your end in this case, Jeff, where you just didn\u2019t understand what you were doing or you didn\u2019t get clarity from the agent on what their job was. Now, if they\u2019re making big mistakes, they\u2019re making decisions without talking to you first, they\u2019re telling you, \u201cDon\u2019t worry about things that you should worry about.\u201d Yeah, you got a really good point here, but nothing\u2019s really been mentioned other than they just want to throw you into a home. Now, the specific question of should I lose my money and find a better home, that is oftentimes the right move. Okay. Nobody likes to lose money.
We don\u2019t like to lose earnest money deposit, but it\u2019s the cost of doing business in a way. Nobody likes to pay for a home inspection, right? Like I\u2019m looking at buying a house that is very big where the inspection\u2019s probably going to be $1,500 just to look at it. And the odds are, they\u2019re going to find too much stuff in the inspection to buy the house. So, should I not go after it because I\u2019m going to lose $1,500 or do I look at, \u201cWell, I might have to do this 10 times to get a house so I should set aside $15,000 for inspections?\u201d
And then, when I do get the one house that works, there\u2019s so much equity and it\u2019s such a good deal that it covers the $1,500 I had to spend to get there. You\u2019re in the same situation. So, looking backwards, being mad at the agent isn\u2019t going to help you. You got to ask yourself, \u201cIs this house worth buying or is it worth losing 16,000 to get a different house?\u201d Just look at right where you\u2019re at and say, \u201cThis is such a bad deal. I\u2019m going to lose money on it. It\u2019s going to be a headache. I\u2019d rather lose 16,000 than take on that problem.\u201d
And if it\u2019s not that bad, maybe you close on it and you just get a different agent for the next property. But my advice to you and everyone else is the same. When you meet your agent, be very, very clear of what your expectations are and ask them if they can help you. You\u2019ll often find that much of what we think is an agent\u2019s job isn\u2019t the agent\u2019s job or that agent doesn\u2019t believe it\u2019s their job.
And if you don\u2019t get this whole like premarital counseling session going on, it is very easy to end up in this situation, Jeff. I\u2019m very sorry that\u2019s the case. I hope it gets better.<\/p>\n
Howdy, David, I got my Florida ahead on, I\u2019m moving down to Florida next week down to Fort Walton Beach area. I believe you just bought Apartment Bella there or about to buy an Apartment Bella and something like that. I had a quick question. The question is when do I replace my air conditioning and heating unit or HVAC, whatever you want to call it, and water heater. So, the backstory is I have a place from 2005, which is the one I\u2019m in right now. It\u2019s going to be a rental in Milford, Delaware. It\u2019s from 2005, all the stuff\u2019s from 2005. It\u2019s a gas furnace and gas water heater.
And then, the place I bought in Florida last month, it\u2019s from 2002, just replaced the water heater because the insurance company wouldn\u2019t give me a policy because the water heater was too old. So, do you just replace the one from 2002 and then wait until the one from \u201905 cuts out or do you just wait until either of them cuts out? I know you\u2019re probably just going to say build up your reserves and be ready, but I\u2019m already there. I just didn\u2019t know, do you be proactive since it\u2019s a rental, you don\u2019t want it to go out while the tenants are in here? Yeah, basically, the question, when do you replace the HVAC? Thanks, David.<\/p>\n
You got to build up a lot of reserves so you can be ready no matter what happens. I\u2019m just kidding. You\u2019re asking really good questions here. And I like that you mentioned something, you said the insurance company, what you\u2019re referring to was the homeowner\u2019s insurance company. And here\u2019s a quick tip for everybody out there. When you\u2019re buying a house that has an older HVAC system or an older support system of any type, see if a home warranty will cover replacing it when it goes out. This is a trick I learned as an agent. So, what will happen is we\u2019ll get into negotiations with a seller and I\u2019m representing the buyer. Or no, sorry, let me rework that.
I\u2019m usually representing the seller and a buyer is saying, \u201cHey, your air conditioning unit shows that it only has a couple of years of useful life left. We want a credit for $15,000 for another one.\u201d Well, I don\u2019t want my seller to lose $15,000 to close the deal. So, instead we\u2019ll say is tell you what we\u2019ll do. We\u2019ll pay for two years of your home warranty so that if it goes out, it will be replaced by the home warranty. And then, I basically get my seller to have to pay $800 or $1000 instead of $15,000, and we save the deal. That\u2019s typically the cheapest way to solve this problem. So, if you know you have an HVAC system that could be going out, the first thing is, can I get a home warranty to cover it?
Now, you mentioned it\u2019s too old, that\u2019s not going to work. As far as when do you replace it? This is just my personal opinion. You let it go as long as you can before you replace it, assuming you can get another part and put it right back in. I\u2019ve seen stuff that I was told it\u2019s on its last legs that six years later is still running and it\u2019s running fine. That\u2019s one of the reasons I say don\u2019t replace it right away. You\u2019re also a younger guy. It sounds like you don\u2019t have a ton of capital. So, for someone like me, I would probably replace it right now because I just don\u2019t want the headache of a phone call coming in and I got to schedule it maybe when I\u2019m trying to do something else.
But for someone like you, you might want to get some more life out of that thing before you replace it. So, save up the money so you can replace it, but I wouldn\u2019t replace it if it\u2019s working. Now, in a scenario where you can\u2019t get a replacement, there\u2019s supply chain issues. Maybe it\u2019s smarter to just get it now when you\u2019re in control. You don\u2019t want to leave your tenant in Florida without air conditioning. That would be absolutely miserable. So, that\u2019s something that I would consider. I\u2019ll also give you this little piece. I\u2019ve had properties in Florida that when they went vacant, had the air conditioning stolen right out of the property.
So, depending on where you\u2019re buying, they make cages for air conditioning units that you can put in there that make them very difficult to steal. If it\u2019s not an area that you feel really good about, or it\u2019s not an area where there\u2019s neighbors that can see it, oftentimes there are more rural areas out there in Florida where people don\u2019t see what\u2019s going on. Very easy to grab those things, back a truck up into the yard, rip it out, throw in the back of the truck, drive off. They got your air conditioner. Consider getting a cage especially if you get a nice new shiny air conditioner that\u2019s going to be blinging for the entire neighborhood thieves to see. All right.
We\u2019ve had some great questions so far and I want to thank everybody for submitting them. Please make sure to like, comment, and subscribe on YouTube to what you\u2019re hearing. In this segment of the show, I like to go over comments we received from other listeners. I saw Nate Bargatze do this and his people often left very funny comments. And it was funny when he read them. So, if you\u2019ve got something funny to say, I want to hear about it. Go to the comments right now and leave a comment about this show. And I might read your comment on future episodes.
Comment number one from Real Estate Scroggs. I was listening to the podcast in my car as I do every day when David said, \u201cHey Siri.\u201d The little Siri globe came up on my phone. I thought she only stood your specific voice. I guess I was wrong. LOL. This comes from an episode where we interviewed somebody named Siri and I started the show off by saying, \u201cHey Siri.\u201d And then, I wondered how many people\u2019s phones just went off. Oh, my Siri is going off right now as we speak. That\u2019s funny. So, apparently, that is the case. I\u2019ve triggered Siris all over the world.
Next comment comes from Michael Batista. Hey, BiggerPockets, would love to see you talk more about flipping lease options. Michael, this was a very popular strategy in the past. Here\u2019s why it\u2019s not as popular right now. Lease options work best when the market isn\u2019t going up in price. When you\u2019re not seeing asset prices inflating, it\u2019s better for the landlord in that situation because they put more of the cost on the tenant. They have to take care of their own repairs. So, cash flow\u2019s higher. The downside is with the lease option, you get an option to buy the house at a certain price and the way that assets have been going up, they\u2019ve been greatly outpacing any lease option.
So, any landlord that did that put themselves in a situation where they were losing massive appreciation and equity, just so they could save on repairs. If we see the market slow down to reasonable levels or even go down a little bit, I think you will see the popularity of lease options return because they make a lot more sense when the asset isn\u2019t gaining value super quick. In that case, you may see people selling their homes directly to the tenants who can\u2019t save up a down payment and take a portion of their rent every month to go towards it. If that happens, I\u2019m sure we\u2019ll be bringing you more of that information.
Stephanie Clemens. LOLs, I\u2019ve been waiting for you to make that leap into your preferred version of the quick tip. Heard that quick conversion many episodes ago. So, Stephanie\u2019s referring to the fact that my previous cohost Brandon Turner used to love to do the quick tip with Josh Dorkin where they would say, \u201cQuick tip.\u201d And four years, Brandon forced me to do this high-pitched quick tip that I staunchly opposed. I tried to work it into my contract and I just couldn\u2019t get it signed. As soon as Brandon was gone, I went the opposite road and I now often do the quick tip in a Batman voice. Quick dip. Where\u2019s the trigger?
First off, it\u2019s good practice for my Batman voice. And second off, it just helps me restore balance of the force because for years, I was forced to do it in a falsetto that I absolutely hated. There is nothing as embarrassing as interviewing Joco Willink on your podcast and being forced to do a high-pitched quick tip with Brandon Turner like you\u2019re in a barbershop quartet. Next comment comes from Jonathan Hawthorne. When is Brandon going to come visit the podcast? I miss that guy.
All right. I wasn\u2019t going to say anything, but because you guys are leaving really good comments like I asked, I feel like you have to, especially because it\u2019s a Seeing Greene episode. Two episodes from now, you will see my best friend, the Bearded Wonder back joining us on episode 629. So, stay tuned. And if you\u2019re not already subscribed to the podcast, please subscribe to both the podcast and the YouTube so you get notified when we bring Brandon back. And from flies on a wall, I guess that comes from, I\u2019d like to be a fly on the wall during that conversation. This is a person that likes to listen in conversations.
How do I submit a voice call in question for the show? Well, we love those. We love it when you make a video of yourself asking the question that we can put it on the show. Just go to biggerpockets.com\/david. And if you\u2019re trying to remember, what\u2019s the URL, as long as you remember biggerpockets.com and my name, you\u2019ll be good. All right. Are these questions and replies resonating with you? Have you enjoyed hearing some of the advice that I\u2019ve given? Did you know that you could get a home warranty company to replace your older appliances as long as they approve it when you\u2019re in escrow?
Did you know you can get the seller of a house to pay for your home warranty company to keep the deal alive? I\u2019ve sold a ton of houses on the David Greene team. I\u2019ve done a ton of loans with the One Brokerage and I want to bring you all the experience that I have to help you become a better investor. Also, if you\u2019re in my area, I want to help sell your house or help you buy a house. Please hit me up about me helping you with that and also hit us up at the One Brokerage to help you with the loan.<\/p>\n
Hey, everyone, thanks for the podcast. My name is Ladi Sonabari. I\u2019m from Brooklyn, New York, and I\u2019m trying to wholesale my way into my first investment property. Now, I\u2019m not really sure how to do this cost effectively. I\u2019m trying to figure out how best to estimate my after-repair value without having to pay a contractor or an appraiser with every new lead that I get, that doesn\u2019t seem very cost effective at all. And I would likely go broke before I get my first commission. So, thanks a lot for your help, and I\u2019m looking forward to hearing back from you. Thank you.<\/p>\n
All right. Thank you, Ladi. This is a good question. There\u2019s a few pieces I\u2019m going to have to pull together to give you a good answer. The first would be often your realtor can provide that for you. If you have a realtor that sells a lot of homes in the area that you\u2019re working with, they can say, \u201cHey, here\u2019s what your after-repair value would be because they sell a lot of houses.\u201d If you\u2019re going to be the realtor yourself, you got to learn how to run a comparative market analysis. This is where you take a list of homes that are actively for sale, homes that are currently under contract or pending and homes that have previously sold.
And you see what price for what condition and what size the home is in to put together what you think yours would sell for. Now, here\u2019s a caveat that\u2019s not often talked about that you will only hear if you\u2019re working with a realtor who does high volume. Certain markets are much easier to predict the ARV than others. Let me give you an example. When I was buying in Jacksonville, Florida, if I was in a specific zip code and I knew it was four bedrooms and two bathrooms, I could give you a pretty tight range, like 140,000 to 160,000 ARV, unless there was something incredibly unique about the property. In other markets like California, where I sell houses for clients, our ARVs are all over the place.
Big homes, small homes, homes with views, tract homes, custom homes. It\u2019s much harder to track down what the ARVs going to be. And we have a much bigger discrepancy with the appraisers when they actually come back with their appraise value. So, depending on the market you\u2019re in, it could be close to impossible to really nail it down, or it could be pretty simple. Most investors are buying in cash flow markets where there\u2019s not a huge discrepancy in the price of the asset class.
So, here\u2019s what I would do. I would talk to other investors or other real estate agents and I\u2019d say, \u201cHey, a neighborhood like this, standard three bedroom, two bathroom, not a lot of issues, but not upgraded. What does it sell for?\u201d And they\u2019re going to give you a range. I then go look on Zillow or a Realtor or whatever website you use. Look up standard three bedroom, two bathrooms, and verify if that range they\u2019re talking about makes sense. I would then do the same thing for what\u2019s your standard four bedroom, two bathroom or four bedroom, three bathroom.
And all you\u2019re trying to do is build a baseline understanding of the range that those houses are going for. So, you may say, \u201cHey, if it\u2019s 1600 square feet or less, it\u2019s going to be worth 180.\u201d If you\u2019re getting into 2000 square feet, they start to bump into 210 to 220 range. Something like that to just get a baseline to go by. Once you have the baseline, then you can actually put together what you think the ARV based on the detail of what you\u2019re going to put into the house. Question five comes from Brandon in Grand Rapids, Michigan. My portfolio is seven doors, single-family rentals, four doors, short-term rentals and eight doors rent-to-own mobile home contracts.
Hey, David, I have an interesting question. Or at least we are perplexed. We purchased a commercial property, a four-unit short-term rental in August of 2020 and a five-year adjustable-rate mortgage at 4%. The total loan was 344,000. Now that interest rates are on the rise, we are concerned about our position and then this loan balloons in a couple of years, but I ran all the scenarios and we decided to stand put with a five-year ARM but looked into refinancing recently at 4.5 for a 10-year ARM. In hindsight, we screwed up on the front end with not securing a 10-year ARM. However, here we are. What is your advice?
All right. So, adjustable rate mortgages are not the worst thing ever. I\u2019m not actually someone who says ARM, bad, but I would say if you\u2019re dealing with adjustable rate mortgages, you need to be in a position where you\u2019re not worried about the rate going up. Based on the tone of your question here, you are worried about the rate going up, which means you shouldn\u2019t have gotten adjustable rate in the first place. You\u2019re playing it fast and loose there, Iceman. So, here\u2019s my advice. You should refinance but not into a 10-year 4.5% rate. You should refinance into a fixed rate.
Now, if you can\u2019t do it because it doesn\u2019t cash flow, the 10-year rate is, or the 10-year period of time is okay, but you\u2019re going to have to be committed to saving the cash flow from that property and putting it aside and not living off of it. You could easily get yourself in a jam again because we don\u2019t know where rates are going to be when that 10-year period of time ends. Now, for anyone else, who\u2019s considering an adjustable rate mortgage or a HELOC, I\u2019m typically advising against that in general and saying you should do the cash-out refi.
And that\u2019s because the fed has come out and said, \u201cWe\u2019re going to keep raising rates.\u201d They\u2019ve let it be known rates are going to go up unless something changes. That\u2019s the default. So, getting an adjustable rate mortgage is not very wise if you know rates are supposed to go up and HELOCs are adjustable rate mortgages. So, in general, if there\u2019s no reason to think rates are going to keep going up, I may lean more towards going that road. I\u2019m going to do my first one probably ever myself, but again, it\u2019s like an 8\/1 ARM.
So, I have eight years where I can lock in a better interest rate or I can save the money or I can sell the house and I\u2019m having a ton of equity walking into it. Plus I have eight years of time for equity to grow. The odds of that going bad for me are going to be very small, but if rates are low and you can, lock them in on a 30-year fix and just be done with it.<\/p>\n
Hi, my name is Stacey, and I\u2019m really excited to submit this question today. David, really appreciate everything that you produce and put out in the world for real estate investors, including the podcast. And I\u2019ve been thinking about this question for a while. And then, I saw that you were going to have Henry on answering questions with you and I knew it was time to submit my question. Henry, really appreciate your approach to real estate investing. And it definitely feels similar to what my husband and I are creating.
Call us a little bit unorthodox real estate investors. And the reason for that is we\u2019ve got five doors in addition to our primary residents, which we have paid off in full. And we tend to look at properties a little bit different than most real estate investors. In other words, it\u2019s not always a hardcore number crunch for us, but we do that because it works for us and our style. And as a result of that, we\u2019re always strategizing about plan B. What happens if, and giving ourselves an escape path.
And so, as a recent example, we dipped our toe into the short-term rental space about five months ago. And we did that and we bought a property that was not in a vacation destination, but we felt comfortable with it for two reasons. One, we actually acquired this property that is zoned residential office. It had previously been an office for a counseling office. So, we knew that if something changed with short-term rental regulations, we could quickly and easily convert that back to an office rental.
The other thing we did is rather than go out and spend tens of thousands of dollars in purchasing new furniture and linens and all of that, we went and bought\u2026 Actually, correction, we didn\u2019t buy used linens. That\u2019s the one thing we did splurge on and mattresses, but we went out and bought used furniture, high-quality stuff that we found on Facebook Marketplace or Craigslist because we wanted to not spend a ton of money if we found out that this didn\u2019t work for us.
The good news is it seems to be doing all right. And we\u2019ve been steadily increasing our bookings, especially now that we\u2019re hitting into the summer months. So, my question for both of you today is what are some really creative ways to look at plan B with real estate investors, especially because the market\u2019s changing on us a lot, whether that\u2019s short-term rental regulations or whether that\u2019s the rising cost of rents.
How can a real estate investor incorporate some of these very creative plan B strategies into how they think about real estate investing? Thanks so much for taking the question, hope to hear it on the podcast. And again, thanks to both of you for all you do.<\/p>\n
Hey, thank you for this, Stacy. I actually really like this question because it\u2019s on the front of my mind all the time. So, what we\u2019re getting at here, folks, is if plan A is to buy a property, to use it for a specific purpose, but something changes in the economy, in the market, in the laws. Is it okay to have a plan B or a plan C and then a plan D? So, what a lot of people are doing is they\u2019re looking at properties and saying, \u201cOoh, this one would work really good for this thing. Oh, but what if something happens? Yeah, I can\u2019t buy it.\u201d And they\u2019re skipping onto the next one.
And that\u2019s, I think what Stacy\u2019s getting at when she says pure number crunchers. They\u2019re just looking for what\u2019s the highest ROI that I can get. But Stacy, it sounds like is looking at how do I play defense a little bit here. It may not be the best return ever, but how do I cover my downside in case something goes wrong, where I get a much smaller return but I don\u2019t lose the property, that I think is actually wise. I think that most investors I come across that say, \u201cDavid, teach me how to invest in real estate.\u201d They\u2019re taking a property. They\u2019re plugging numbers in a spreadsheet, usually that somebody else made.
And they\u2019re trying to just do this over and over and over until they get the highest ROI they possibly can to pop out on the spreadsheet and they go, \u201cThat\u2019s the one I\u2019m going to buy.\u201d They\u2019re not asking questions like how much time is this going to take? How risky is this? How likely am I to hit that number? What could go wrong? At this stage in my career, I tend to almost look at defense first. So, rather than saying, \u201cWhere\u2019s the most cash flow I can get,\u201d I say, \u201cWhere\u2019s the best market I can buy in. Where am I likely to be safe?\u201d
And then, from there, how do I find the best opportunity that I can to cash flow? A couple plan B strategies that I\u2019ve put together for myself. I was actually teaching my mastermind about this not too long ago. And we got into this very topic. The first would be if it doesn\u2019t work for its highest and best use, which in many cases is a short-term rental at least if people vacation there, can you turn it into a long-term rental? So, I want the floor plan of the property to be one where I have separate entrances for upstairs and downstairs. If they have a deck that goes around the upstairs and I can build stairs there, that\u2019s awesome.
If it\u2019s a tract home and there\u2019s no way to get into the upstairs, unless you enter the house and go up the actual stairs that are inside, I probably don\u2019t like that floor plan. Second, I want to buy them in areas that are in general, more business friendly. They\u2019re going to be places that are sometimes conservative minded but really what you want is business minded. They like tourism. They like business. They want short-term rentals in their area because it brings in money.
That is a situation I enjoy because the politicians of the area are less likely to outlaw short-term rentals, leaving me in a bad spot or outlaw rental property in general. Another thing is can you combine them? Can you buy a triplex and rent it out as a short-term rental rather than just as a long-term rental? So, if something goes wrong with your short-term rental, the backup plan is to make it a long-term rental. Another one is all else fails. Can you rent it out by the room? Is it close enough to businesses that people are going to rent a room to live there?
If you buy it in the middle of nowhere, thinking it\u2019s less risky because the price is lower, but there\u2019s no demand for anyone to rent your space. You\u2019re actually taking more risk. So, I like the bigger properties with more bedrooms and more bathrooms because I know, \u201cOh man, what happens if everyone stops traveling and I can\u2019t book this thing on Airbnb or Vrbo, well, I\u2019ll rent out the bedrooms and I\u2019ll make the best of it. And I\u2019ll weather the storm.\u201d I\u2019m always looking for that. Different zoning options like you mentioned, that can be a good idea too.
But I think something that people severely underestimate and it\u2019s something that on the David Greene team I\u2019m constantly preaching to our clients is the floor plan of the property, not just the price, not just the area. Does the floor plan work for tenants? If you\u2019re trying to get several people in a property that has 1.5 bathrooms and every tenant has to share the same shower, that\u2019s not going to work. If you didn\u2019t make sure that there\u2019s enough parking to have a lot of people in that house at one time, that\u2019s not going to work. You have to actually look at floor plans that are conducive to what you want to do.
Stacy, thank you for bringing up this whole plan B idea, which I think is becoming much more important with the looming questions that are growing in everyone\u2019s mind about what direction the economy\u2019s going. Next questions from Chad Prather. First and foremost, thank you to David, the other BP host and the guests for growing my knowledge in real estate investing. I\u2019ve been looking for that niche that will be my medium to success. David frequently says to turn your learning to action. He also says not to make the jump without reserves.
I respect there is not a definitive line or amount because every circumstance is different, but what advice or goal can be offered to how much of a reserve should be put into a business plan before I get into a deal? I\u2019m ready to get my white belt. Thank you again. All right, Chad. So, here\u2019s what I would say. In general, six months of mortgage payments, utility payments, everything you\u2019re going to have to have to run that house is a good amount to keep in reserves to be safe.
Now, I am okay with it becoming less than six months if you\u2019re a person that lives beneath your means. Now here\u2019s what that means. If you\u2019re saving zero money every month, six months is the minimum that I would say somebody should keep in reserves for a property. But what if you\u2019re saving 5,000 a month and six months of reserves is $40,000? Well, if your reserves drop down to 25,000 or 30,000, but you can save 5,000 a month from money that\u2019s coming in from work, you\u2019re okay to let those reserves come a little bit less than somebody who is living paycheck to paycheck and doesn\u2019t have the ability to earn more income.
Case in point, when I started investing, I was a police officer and one of the ways that I was able to get over my fear of not having enough money to make the payment was that I knew overtime was basically unlimited. Nobody wanted to work as a police officer. So, we were always understaffed. And I knew if I had vacancies, a big repair I wasn\u2019t expecting, some CapEx event, I could just go work overtime for the next several weeks and save up as much money as I needed. So, I was very confident.
Now, I have a friend of mine, Justin, he\u2019s the one that got me in a jujitsu. Well, he\u2019s the one that connected me with my jujitsu academy. And Justin is going to be getting a position as a firefighting captain. And though he\u2019s getting a raise, I\u2019m getting ready to sell his house for him and help him move somewhere else. Though he\u2019s getting a raise, his overtime opportunities are going to be shrinking, which means his ability to generate more money if he needs it is going down. So, we\u2019re actually going more conservative on the house he goes to buy because he doesn\u2019t have the backup plan of earning more income if something goes wrong.
So, also Chad take that into consideration. Six months is a baseline, but if you can make money and save money, you can go below that. If you can\u2019t, you want to be there or more. All right. That is our show for today. I want to thank you all for being here with me and sharing this time, as well as getting your real estate investing education from us at BiggerPockets and me in particular. This is a blast to do. If you would be so kind, please submit me your questions to biggerpockets.com\/david. We can\u2019t make these shows if we don\u2019t have you guys asking questions.
Also, if you\u2019re following a cool thread on the forums and you want to take that conversation and bring it here, I think that\u2019s a great idea. So, if you see something on the forums that catches your attention, bring it to biggerpodcasts.com\/david and ask the question there. You can follow me online on social media @davidgreene24 if you have to ask question that you\u2019re embarrassed to ask on the show. That\u2019s all we have for today. Please check out one of our other videos and I\u2019ll see you next time.<\/p>\n