\n<\/p>\n
Cash flow<\/strong><\/a> is necessary when investing in rental properties.<\/strong> Cash flow grants you, the real estate investor, enough leeway to pay for your mortgage and taxes<\/strong>, and save up a healthy safety reserve for future renovations. For new real estate investors, cash flow is probably the single most important metric they look at, but it\u2019s not always a great predictor of a good investment<\/strong>. If you want to truly build wealth<\/strong>, generate passive income<\/strong>, and retire early<\/strong> (or rich), start looking at the metrics David Greene is talking about.<\/p>\n Welcome back to another episode of Seeing Greene<\/strong>. Our cash flow creator, expert agent, and investor with decades of experience, David Greene, is back to answer your most asked questions. In this episode, we\u2019re touching on topics like when to focus less on work<\/strong> and focus more on real estate investing, why low cash flow isn\u2019t always a bad thing<\/strong>, what happens when an appraisal misses the mark<\/strong>, creatively financing home renovations<\/strong>, and how much every investor should have in safety reserves<\/strong>.<\/p>\n Want to ask David a question? If so, <\/strong>submit your question here<\/strong><\/a> so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums <\/strong>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: Jennifer: David: Matthew: David: Logan: David: Tyler: David: \u00a0<\/p>\n \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 633. Look, if you love real estate and you don\u2019t like your job, you don\u2019t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate. And then you can be investing more often with better resources and more support. Take a job that supplements your investing and makes it easier for you to do. You don\u2019t just have to quit your job and go full time into real estate investing. I\u2019d love to see more people like you, your partner, and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time.
What\u2019s going on everyone. This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene edition. In today\u2019s show, you the audience of BiggerPockets will submit questions, and I will do my best to answer them for everybody to hear. Today\u2019s show we get into some really cool stuff, including questions about how much reserve should someone have for their first property, when they should focus on building a business versus investing in real estate to grow wealth.
And if low cash flow on a BRRRR deal is a good thing or a bad thing. All that and more in today\u2019s show. If you would like to be featured on the BiggerPockets Podcast, here\u2019s all you have to do. Go to biggerpockets.com\/david and submit your video question for me to answer on the show. I\u2019ve actually met people that I hired from this format. The girl that I have that is now my asset manager of my rental portfolio was found on this show. And I was so impressed with her that I reached out and ended up hiring her. And that can lead to today\u2019s quick tip. If you would like to work for BiggerPockets, you can, a lot of people don\u2019t realize this, go to biggerpockets.com\/careers, and you can actually apply to work there. Our show\u2019s producer got his job that way.
And the dude is a godsend. I wouldn\u2019t be able to make shows like this if he didn\u2019t make this whole thing happen. A lot of people think this is David Greene\u2019s show. Absolutely not. I\u2019m the face you see, and the voice you hear, but they\u2019re the ones that make everything happen. And you can get more involved in real estate, as we also talk about on today\u2019s podcast, one of the ways to ramp up your investing career is to make your money through something that is involved in real estate so you stay around it and develop a competitive advantage. I\u2019m also going to be hiring more people, specifically someone that can manage short term rentals from a remote location in the country. So I\u2019m buying them all across the country and I need someone with a lot of experience that can manage them for me, that is looking for a job that I can pay to run my portfolio.
If you\u2019d like to work for me in that capacity, join The David Greene Team, join The One Brokerage, just go to davidgreene24.com\/careers, and you can apply there as well. Look, we\u2019re living in a world where everything is shifting and changing very fast. It\u2019s very likely that jobs are going to be laying people off if we continue down the path we are into a recession. It\u2019s also very likely that more opportunities to build wealth are going to be making themselves known than we\u2019ve seen in a very long time. Don\u2019t let fear paralyze you and get worried about losing your job. Be proactive and start looking for the next thing where you can take your skills, help somebody else grow their business and make yourself more money, and get in the right environment where you can hit your investing goals. I hope that everybody strongly considers what I\u2019m saying here. Because if you\u2019re listening to this podcast, you probably love real estate and you\u2019d be much happier if you could be around it more. I know that\u2019s the way it is for me. All right. Without any more ado, let\u2019s get to today\u2019s show.<\/p>\n
Hi David. This is Jennifer Sokalski from New Jersey. My partner and I, he\u2019s walking around over here, we are both real estate agents and we have been for a little over three years now and we are just now really starting to up our game. We are building a huge business. We\u2019re growing very fast. We are currently obsessed with this More Money, Less Hustle by Jess Lenouvel. We actually have a whole bunch of them because I\u2019m giving them out to my mastermind group.
So my question is, our focus right now is very heavily on our real estate business and growing that, and making that so that it can really become a team, like a team that grows with us. And my question is, when do we really get into investing? Because we\u2019ve been looking at it and researching it for a couple of years now, but it never seems to be the right time because we have to build our business and we\u2019re afraid of splitting ourselves in two directions. So is there a time sometimes when people should not invest and maybe wait to get that started if they\u2019re working on something else that they\u2019re really into? Thank you.<\/p>\n
Thank you Jennifer. This is a great question. I\u2019m probably going to take a little bit longer to answer this one, because there\u2019s a lot to cover and it\u2019s good stuff. First off, to the question of, are there times where it\u2019s okay not to focus on investing and build your business? Well, of course the obvious answer is yes, nobody has to focus on investing. But I think what you\u2019re really getting at is, from a financial perspective, does it make sense to not focus on investing? And on this podcast, we talk mostly about how to build wealth through owning real estate. So from that perspective, I can understand the questionable, is there ever a time where that\u2019s not okay? Because I keep hearing all the experts say, you got to buy real estate to build wealth. So let me share with you a little bit of story in my own journey.
I have had several periods of my life where I bought a lot of rental properties and then other periods of time in my life where I didn\u2019t buy any rental properties. Now, when people hear this, they\u2019re always trying to figure out what the secret sauce is. Why has David stopped buying? Does he know something we don\u2019t know? Is the market going to crash? Is there something coming down the pipe that he\u2019s not telling us? It\u2019s not that at all. It\u2019s almost always because of what\u2019s going on in my personal life. So sometimes I will get so busy with businesses, particularly when you\u2019re trying to scale, you\u2019ve got a bunch of new hires. You\u2019re trying to teach them. You\u2019ve got a bunch of clients that came to you and say, we need to buy houses. This happened to me early in my career when I was starting The David Greene Team. I had just hired my first assistant Krista.
I had left being a cop. I went full time into real estate sales and my clients were flooding me. I had tons of people coming that wanted to buy houses and sell homes, and they were relying on me to get this done. So I was doing the BRRRR method at that time, I\u2019d been buying a lot of properties in Jacksonville, Florida. I was up to five a month at one point, but on a slow month I was still buying two properties. Then I got to manage the rehabs and I got to get all the utilities turned on, and all the work that goes into it. Well, I had to stop when I got more clients on The David Greene Team. So it made sense for me personally to stop investing so I could get the business going. Well, I started to do a lot of business. I became a top producing real estate agent.
I hired more agents. I grew the team. Then I had to train all those people. Years went by and I didn\u2019t buy real estate. And in fact, it was in some of the best time ever to buy it that I didn\u2019t buy real estate. This is when the market was climbing and climbing, and climbing. Now, do I look back and regret that I didn\u2019t buy more real estate? Of course. But if I\u2019m honest with myself, I don\u2019t think I could have bought real estate, at least not in a responsible way, and ran the business that was growing at an exponential rate. And when I look at the money that I made by helping clients buying and sell houses, and the residual income that now comes from the work I did before, it\u2019s much more than I would\u2019ve made simply from having equity growth and cash flow investing in real estate.
You see, business is one of the few things that I know of that you can make more money than in real estate. It just takes more time. Real estate is more passive than business is. So let\u2019s tie this all together to your question. If your business is going well, there are times where I would say, yes, it\u2019s okay not to focus on growing a real estate portfolio. And I\u2019ve actually thought about this a lot. So some people will come and they\u2019ll say, hey, I\u2019m a full-time investor. I\u2019m buying this many properties. And I\u2019ll sit down with them and I\u2019ll talk with them and I\u2019ll see, well, how much equity growth did they have that year? How much cash flow did they make that year? Adjust that for the tax benefits that come to the real estate. And I come up with a number that I see that they added to their net worth by being a full-time investor. In every scenario that I\u2019ve come across so far, that\u2019s less money than I made in the businesses that I\u2019m running.
Now, we\u2019re both full-time workers. So I\u2019m running full-time businesses, they\u2019re doing full-time real estate, but in those cases I still came out on top. So if you\u2019re in a situation like that, yes, building your business will usually be more profitable if it\u2019s going well than investing in real estate. But you don\u2019t want to miss out completely on the passive benefits of real estate ownership. So here\u2019s my advice to you. Under the assumption that your business is doing very well, that you are growing, you\u2019re making good money. There\u2019s good cash flow coming in and you are saving that money to invest in real estate at some point. You need to be buying a primary residence at least for yourself, at least once a year. That means that you should be putting a low down payment on a house, in a good neighborhood, that you think is a good deal, that has a value add opportunity.
Something that you can fix it up while you\u2019re living there. Something that has a garage that can be converted. Something that can be functioning in some way to benefit you, that you\u2019re not held to a timeline of getting it fixed up and ready to go right away, that you can work around your schedule. Now, you didn\u2019t say it in the video, but I did see in the notes here, you\u2019ve done this before. You just did a live and flip. Do a live and flip every year, but you don\u2019t necessarily have to sell it, buy it, move into it, fix it up while you\u2019re there. Get your next one, move into that one, fix it up while you\u2019re there. I call this the sneaky rental tactic. Because when you move out of the house you bought with a primary residence loan, you turn it into a rental property.
You ended up with a rental that you put 5% down or 10% down, or 3.5% Down. So if you work this method, you\u2019ll keep making money, but you won\u2019t miss out completely on real estate opportunities. The other piece of advice I\u2019ll give you, because you said specifically that you\u2019re a real estate agent. There\u2019s some agent on your team that can function as a form of a project manager or a property manager. So as you\u2019re training your team, you\u2019re selling your houses, you\u2019re hiring new agents. You\u2019re getting deals closed. You\u2019re keeping clients happy. You\u2019re putting out fires. Identify who you have on your team that if you put something in contract and gave them a list of what needs to be done, they could make sure the deal closed. They could make sure you knew when the money needed to be wired.
They could order your home inspection. They could represent you as the agent in the deal. And then once it closes, they could get it set up as a rental property. So you\u2019ve got some synergy here. You\u2019ve got your real estate team and then real estate investing. And these worlds can be combined pretty easy. That\u2019s kind of what I\u2019ve done. I\u2019ve taken the real estate agents and the loan officers, and the home insurers, and my own investing, and our clients, and I brought it all into the same ecosystem. So that 80% of the work is the same. It\u2019s only the last 20% that changes a little bit. And I think you can do the same thing. Now, what you\u2019re going to be focused on is 80\/90% business, 10\/20% investing, but you have some investing still going on. At a certain point, the business will start to take care of itself and you\u2019ll shift from 80% business, 20% real estate to 70\/30 to 60\/40, to 50\/50, and then 40\/60.
And that\u2019s the way that the business cycle tends to work out. So you don\u2019t want to ever stop buying real estate, but you just don\u2019t do it as often. And that principle is true for everybody listening to this. I don\u2019t think it\u2019s healthy to say, is this a market to buy or is this a market to sell? Because it\u2019s rarely ever that simple. I buy in every market and I would sell in any market. I just do more buying in some markets and more selling in other markets, or more holding in other markets. And that\u2019s kind of what we\u2019re entering into now. So I bought properties last year. I bought properties the year before, but I didn\u2019t buy a ton. Now that we\u2019re seeing the market softening, I\u2019ve put 11, no 12 properties now, because I just got a text right before I started recording that another one went into contract, in the last 30 days.
So in this market, I\u2019m seeing it as a great buying opportunity. Now, I\u2019m not paying asking price, of course. I\u2019m getting stuff under market value because I know that the market may continue to dip. But my point is, I ramp up my buying in certain seasons in life and I just sold a bunch of properties so that I could buy these ones. Same principle goes to you. So thank you for submitting this question. I love that you\u2019re asking it. I would love for more people listening to this podcast to start or join a real estate related business. Look, if you love real estate and you don\u2019t like your job, you don\u2019t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate and then you can be investing more often with better resources and more support.
Take a job that supplements your investing and makes it easier for you to do. You don\u2019t just have to quit your job and go full time into real estate investing. I\u2019d love to see more people like you, your partner and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time. The next question comes from Rob Foley in the Four Corners area. Rob says, I have successfully BRRRRd about 10 different single family homes. After the refi on several of my houses, using the BRRRR calculator, I\u2019m seeing that the cash flow is not that great. Maybe $100 to $200 a month max, but they were great deals where I pulled 30 to 40K of forced appreciation out at refinance. How should I view these properties now? As a very successful tool that grew my business or as a poor use of my capital that should be sold?
Portfolio snapshot. I have 12 single family homes, one mobile home park with seven pads and a duplex, five acres to be developed into mobile home park pads and I\u2019m in the middle of my first 1031. Okay Rob. If I understand you correctly, you\u2019re saying that after you pulled 30 to $50,000 out of the deal, more than you put in, it still cash flowed $100 to $200 a month. And you\u2019re asking me, was this bad. This is not just good. This is astronomically good. Would you buy a home if you put zero money down and it cash flowed $100 a month, and it was going to go up in value while you paid off the loan? Just about everybody would say yes. So if it makes sense at zero money down, why would it not make sense if someone was going to give you 30 to $50,000 to get cash flow?
Now, the only reason that I could think that this is even a question in your mind is because the cash flow seems small as it\u2019s only $100 to $200 a month. And I want to address that idea first. This is a symptom of what happens when people become cash flow obsessed. In 2010, a lot of homes went into foreclosure that were bought in 2001 through 2008. These homes went into foreclosure because the people buying them did not cash flow. That started this trend of saying, cash flow, cash flow, cash flow, because that was the right ingredient in the recipe to keep people healthy. This was the medicine that our market needed. Stop buying homes based on speculation and start buying homes based on numbers. And I agreed. I was one of those people that was constantly talking about cash flow and I still talk about cash flow.
I still buy properties that cash flow. I still run numbers to make sure they cash flow. But what I don\u2019t do is zoom in only on cash flow and ignore all the rest of real estate. And I think because this is going around in our industry, it\u2019s causing you to have second guesses about your decisions. The cash flow is only $100 to 200 a month. That\u2019s not a huge number. Pulling 30 to $50,000 more capital out of the deal that you put in, and this does not include the equity that stayed in the house. So on top of that 30 to 50K, let\u2019s call it 40K to make it average, you also have 20% to 25% equity in the house you didn\u2019t have before. Your net worth is probably going up on every deal by most people\u2019s salary that they make in a year.
And you\u2019re not being taxed on this. And then on top of that, to sprinkle a little bit of sugar on top, you\u2019re getting $100 to $200 a month. Rob, you are absolutely crushing it and there\u2019s no other adjective to describe how good these deals are. You should keep doing this over and over, and over. It\u2019s the cash flow thing that\u2019s throwing you off. Let me bring an outside perspective. Let\u2019s say you do this on four deals and you pull an average of 40 grand out per deal. That\u2019s $160,000 in cash that you\u2019ve taken out that you didn\u2019t have before. And we\u2019re not even talking about the equity in the properties. And you take that 160,000 in cash and you go buy another one of these homes in cash. Well, that one may cash flow $1200 to $1,400 a month. You let those first four homes that only made $100 to 200 a month buy you a home that cash flows $1,200 a month.
Does this still seem like a bad deal? The reason it doesn\u2019t jump out is when we only look at one element of real estate investing. When you look at all the components put together, the appreciation, the forced equity, the market equity, the loan pay down, the money that you\u2019re pulling out, the capital that you\u2019re bringing in that you can now go buy new houses with, the cash flow, the tax benefits. That\u2019s where you can see clearly what the right moves to make in your portfolio are. And with the portfolio that you have, these mobile home park pads you have, the property to be developed, you have to start thinking big picture. So my advice to you Rob is to stop talking about your deals to newbies. This is where this comes from, because they\u2019re all going to ask the same question. What\u2019s the cash flow?
What\u2019s the cash flow? And that\u2019s normal. Most newbies ask that question because that\u2019s how they don\u2019t lose money in real estate. And it\u2019s also how you get out of the job you probably don\u2019t like, which is where most newbies start. They don\u2019t love working a job and they think real estate\u2019s going to be their savior to get them out of it. Start talking about these deals to more sophisticated investors, people that have a more balanced portfolio. And then you start to make the connections that I don\u2019t look at cash flow and they don\u2019t look at cash flow as being attached to a property.
It is the overall cash flow of your entire portfolio. It is the overall equity of the entire portfolio. And you can start seeing where you can move pieces around to maximize efficiency and minimize risk. I just want to tell you, Rob, you\u2019re absolutely crushing it. Don\u2019t stop. Keep doing this as much as you can. If you\u2019re getting cash flow and you\u2019re pulling that money out, keep a healthy amount in reserves to prepare for a downturn. But man, if you\u2019re pulling 40 grand out of every single property, that\u2019s reserves that\u2019s going to last you for a long time on every one of these deals. So congratulations.<\/p>\n
David, great deals aren\u2019t found, great deals are made green. I appreciate you taking my question. David, my question is, how can I prove to a hard money lender the ARV of a home that I\u2019m going to convert to a short term rental? I have it under contract for 257,000. It\u2019s only appraising at 220,000 because appraisers here of course don\u2019t give any value to my short term rental business. And they also haven\u2019t even caught up with normal market values. So they\u2019re only given 220 on the appraisal, even though I feel that this home is worth at least $350,000 as a short term rental. With furnishings, management, decoration, I projected that it will yield $4,500 a month in net operating income. And so I plan to buy it and hold it. The cash flows will be amazing, but I\u2019m having to bring a ton of cash to the closing table if I go with a conventional lender, because I need to bring 20% down plus cover the appraisal gap, and this is going to be before I furnish the home.
So I\u2019m looking to go with a hard money lender instead to improve my cash on cash. I\u2019ll pay extra interest, that\u2019s okay. I just would rather bring more like $14,000 to the closing table instead of 85,000. So I want to convince this hard money lender that the ARV of this home will be $350,000. Get them to fund 75% of that ARV. So I\u2019m bringing much, much, much less to the closing table. But back to the heart of the matter, how can ARVs for STRs be determined?<\/p>\n
All right. Matthew, thank you for your question. I see exactly what you\u2019re getting at. You\u2019re trying to get the appraiser to see it from your perspective and your perspective is based on the revenue that this property would produce as a short term rental. There\u2019s a few issues with the way you\u2019re going about it that are just going to make your job harder and I want to clarify those, because you\u2019re always going to be in an uphill battle in real estate if you take this approach. First off, when we\u2019re talking about what a property is worth, that is actually a subjective phrase. There\u2019s a lot of ways of evaluating what something is worth. What you\u2019re saying here is that it\u2019s worth $350,000 because it will bring in $4,500 a month when I use it as a short-term rental. To you, it is worth that. The appraiser is operating under a different objective set of circumstances.
The appraiser is looking at this thing saying, I don\u2019t really care what it brings in as a short-term rental. I\u2019m not allowed to care. What I want to know is, how does it compare to the other houses around it? And the comps I\u2019m seeing of previously sold properties are selling for 220,000. So that\u2019s the value he\u2019s going to give the property or she\u2019s going to give the property. The issue is that you\u2019re using a commercial standard to evaluate this property and they\u2019re using a residential standard to evaluate the property. But because they\u2019re the one working for the hard money lender, you actually have to go by their criteria. Now, if you can convince the hard money lender to understand that the property\u2019s going to bring in more cash so that you can make the debt service, you have a shot here, but that isn\u2019t going to help your down payment scenario.
They\u2019re still going to say the property\u2019s worth 220,000. Because to an appraiser, it\u2019s worth 220,000, to a person who\u2019s going to buy that house to live in, it\u2019s worth 220,000. To you, it\u2019s worth 350,000. Now, this is a problem investors often fall into because we always do our underwriting assuming that we\u2019re going to be taking a loan on a property. If you were paying cash for this thing, I would agree. It is worth 350,000 if that\u2019s what it can make and no one would stop you for paying cash for it for 350. But what would you say if a seller came to you and said, hey, the comp showed 220, but I want you to pay 350 because you could use it as a short term rental? You\u2019re probably going to turn around and say, well, it\u2019s worth that to me, but on the market, it\u2019s only worth 220.
So I\u2019m going to buy your house for 220 even though it\u2019s worth 350. The seller may want you to see it from their perspective, but when you\u2019re the buyer, you want to get it at the price that is better for you. The same is going on with the appraiser. The same is going on with the hard money lender. My advice would be, stop fighting this uphill battle. They\u2019re not going to see it the way that you\u2019re seeing it. That hard money lender is going to give it the lowest value possible because that\u2019s how they minimize their risk when they\u2019re giving the loan. The appraiser is going to give it the value that the comp show because that\u2019s how they minimize their risk when they\u2019re trying to keep their job and not get sued. And you\u2019re going to give it the highest value possible because that\u2019s how you\u2019re going to maximize your profit.
The problem here is that all of your interests are not aligned. So I would look for a different hard money lender, give them the pitch and see if they actually bite on it. And if you can\u2019t make that work, you\u2019re going to have to borrow the money from someone else. So someone that you can sway in this situation is a private money lender who will be open to hearing your logic that this property is worth $350,000 because of what it will cash flow. That private money lender is not an appraiser that\u2019s held to a certain code of ethics and not a hard money lender that\u2019s held to a certain set of criteria for approving loans. You can sway that person to see what you\u2019re trying to say. You can get the extra money for the house from them to buy it, and then you can refinance out.
Now, when you refinance out, you can use a loan like I\u2019m using. I get approved based on the income that the property is bringing in so I don\u2019t have to go through the headache of showing all the different businesses I have and all the different income for those businesses. So I\u2019m buying properties right now. I think I mentioned earlier in the show, I\u2019ve got 12 in a contract. All of those are getting approved based off of the short term rental they\u2019re going to bring in because my brokerage is able to do that. So when you get to that point that you\u2019re ready to refinance, that\u2019s what you want to look for, is a lender that will let you use the short-term rental income to approve you for the refinance loan. And then maybe you get approved for up to $350,000. All right. We\u2019ve had some great questions so far, and I want to thank everybody for submitting them.
Make sure to like, comment and subscribe on our YouTube channel because we love these comments and we read them daily. At this segment of the show, I like to pick out a couple of the comments from our YouTubers and see what they\u2019re saying and read them to you on the show. The first question comes from Jenny Lee. I love this new format of David\u2019s tax, marriage and legal advice brokerage. That\u2019s funny. In all seriousness, I love the long form in-depth explanations to these brilliant video questions. Keep up the great work. Well, thank you for saying that Jenny, but to be fair, I\u2019m only able to give a brilliant answer if I get a brilliant question. So I need all of you to continue submitting really good questions to me here for the show. You can do that by going to biggerpockets.com\/david and feel free to put in something funny, something quirky, something entertaining, not just the pure question, because that makes the, I think the pastor of my church once said that if you put a little bit of sugar on it, it makes the medicine go down easier.
That was also probably Mary Poppins\u2019 quote. Now, that I think about it, my pastor was quoting Mary Poppins. That\u2019s slightly less cool than I was thinking. Next comment is from Kyle Kotecha. David, this was excellent. In regards to a mentor, you\u2019re exactly correct. People ask me what I would do if everything was taken from me. I always say that I would find what industry I want to be in and have a business in. I would find the best person for that and go provide massive value to them. Thank you for that Kyle. This is in regards to one of the shows where someone was asking how to find a mentor and I gave some advice on the best way to go about doing that. Next question or comment is from Misha Henderson. I love these shows. David, thank you for the great and consistent information you provide on every show.
I\u2019ve learned so much over the last year since I started listening to your show. I\u2019m a pro member and I hope to gather the nerves to ask a video question one day soon. Misha, you\u2019re way overthinking this. Go ahead and submit your question. I will give you a little piece of advice though. If you all listening are thinking about submitting a question because I want you to. I got this comment on my Instagram from Watershed Property Services. They said, in all caps, please, on the Seeing Greene episodes, if the person cannot articulate a question in under three rambling minutes, don\u2019t include it on the show. It\u2019s so painful to listen to their stream of consciousness struggle session. But what if this, and also maybe that, but don\u2019t want to forget about the other \u2026 Thank you. First off, I said dot, dot, dot, and I believe the technical term is ellipsis.
I think that\u2019s what those three dots are called. Not positive on that. Maybe one of you can leave a comment in the question. So let me know if I\u2019m right. Second, I thought that comment was really funny because what they\u2019re getting at is when somebody submits a video that they didn\u2019t think through what they were going to say before they started recording. Look, I want you to send me your comments and your questions, and I like your videos, but if you make one and you stumble through it, just rerecord it again. Here\u2019s a little bit of advice. Whenever I\u2019m going to record something, I take bullet notes of what I want to say, then as I\u2019m recording it, I look down at those bullet notes if I get lost, and I say, oh yeah, this is what I wanted to get out. Little bit of advice to make a better video when you send it in.
And then for those of you that still end up with a lengthier video, we do have a new video editor who\u2019s going to be editing these down. I just thought that that comment was funny and I appreciate you guys submitting that. Our last comment comes from Phil. Phil says, I really do like this format. It could be even better if you can find experts in different areas of the country or different facets of real estate to tag team with every couple of weeks. Phil, listen, next week, I think I\u2019m going to take you up on that idea. So stay tuned and make sure you subscribe to this podcast so you get notified when it comes out.
If you\u2019re listening on your podcast app, take a little bit of time to give us a rating and an honest review in the Apple Podcast. Those help a ton. We\u2019re action oriented, and we want your constructive feedback. We want to get better and stay relevant. So drop us a line and let us know what you think, what we could do to improve the show, just like Phil said, or what you love. Please continue to comment and subscribe on YouTube also, and then leave us your rating or review wherever you\u2019re listening. All right, let\u2019s take another video question.<\/p>\n
Hey David, my name\u2019s Logan. I live here in Columbus, Ohio area. The house that we are in currently, my wife and I, we owe about $60,000 in the mortgage. And the house is probably worth right now as is 110,000. But I\u2019m pretty confident, I have a little bit of construction background so I\u2019m pretty confident that if we put $30,000 into the house to fix it up, comparable homes in the area are selling for around 200,000 on the low end. So I guess my question is, should we try to take the aggressive route and get hard money or private money, or whatever we can to fix up the house now to get that $200,000 appraisal for what it\u2019s worth? Or should we take the conservative route, which is what we\u2019re doing right now and just trying to save up money slowly until we can use our own money to do it?
If we used our own money it would probably take us another year to get that $30,000 that we\u2019re going to need. So I\u2019m just a little bit worried that with inflation and I\u2019ve heard you talk about the price of things, everything going up, that by the time it would take us to raise that $30,000, maybe a contractor is then trying to charge more because materials are going up and stuff like that. And then we\u2019d be kind of out of luck. Our long term goal is to fix up this house that we\u2019re living in, refinance out of it once it\u2019s all fixed up. And then move into a house hack, maybe a duplex, or maybe a house where we can turn into a duplex or something like that, and then rent out the current house that we\u2019re in, because it\u2019s in a great area. It\u2019s a three bedroom, two baths, very desirable town. So thank you so much.<\/p>\n
All right. Thank you for that question Logan. I\u2019m going to go into real estate agent mode and treat you as if you are my client. And I\u2019m going to tell you exactly what I think you should do. First off, you said you owe 60, you think it\u2019s worth 110. It might be worth a little bit more than that. Get a HELOC on that property. You could reach out to me. I can have my brokerage do it for you. Or you could find a local bank credit union or a mortgage broker in your area. But get a HELOC, you have more than enough equity to pull out the $30,000 you\u2019re saying that you need. Tell them that the purpose of the HELOC is to do a home improvement and they\u2019re more likely to approve you. Take that $30,000 and do the work yourself since you have a construction background or get your buddies to do it for you at a possibly discounted rate.
If you have advantages that you can take advantage of, do it. Get your house fixed up. Now it\u2019s worth $200,000. You can refinance it into a new loan or you can pay the HELOC off slowly over time. Depending on where rates are, we should cross that bridge when we come to it. I don\u2019t want to see you do a cash out refi to pay off your HELOC if you\u2019re going to lose the great rate you have on the first 60,000 to get a much higher rate. But if rates are only a little bit more, it\u2019ll be cheaper for you to refinance it and pay off that HELOC. Then you mentioned that your goal is to move out and house hack. Well, the good news is you can then get preapproved for another loan and go buy your next property. Do a duplex, do a triplex, do a fourplex, do a house with a floor plan that could be functioning that way.
Do a house that you can add an ADU, maybe convert the garage. You\u2019ve got a construction background, so you\u2019ve got to a edge over your competitors in making that happen. Move into the new house, putting a very low down payment on that house. If you can get an FHA loan or a five or 10% down loan, if we can help you with that, that\u2019s what I\u2019d have you do. Rent out the one that you just left. Also consider making a conversion out of your garage if you live in an area where people want to live. If it doesn\u2019t have a high rental demand, don\u2019t do that. But if it does, you can sort of make your first house that we\u2019re talking about here, function as a duplex, because you can convert the garage into an ADU or maybe another part of the property into an ADU. Now, with the new house, do the same thing with that one that you did on the first one. Buy something that needs some work, buy something that you could add value to. Buy something that you can live in and rent out the other parts of it.
Move out of that house once you do it, doing exactly the same thing that you did on the first one and do this again. Look, real estate investing does not need to be complicated. I know we get to talk about these cool, fancy, shiny bells and whistles, subject to mortgages and wrap around mortgages, and wholesaling, and off market opportunities. It doesn\u2019t have to work that way. Use the skills that you\u2019ve got. I was pretty good at numbers and I was pretty good at seeing opportunities. So I was able to build houses and help people as a real estate agent. You\u2019re good at construction. Use that to your advantage. Buy a house every year doing what we\u2019re talking about. In 10 years, you will have 10 homes. And this first house that we were talking about will probably be significantly paid down on the loan side.
Odds are, after year three, four or five, you\u2019re not just going to buy one house every year. You\u2019re going to have more cash than what you had before. You\u2019re going to have equity in these properties that you can access and you\u2019ll be able to do one house every year to live in and one or two investment properties. So at the end of the 10 years, you probably have more like 18 to 20 homes. If you take this long term turtle versus the hare, slow and steady approach, it\u2019s almost impossible to lose with real estate. The people that lose money in it are the ones that come shooting out of the gate, like the rabbit, and try to do too much too fast before their experience. It\u2019s like giving the keys to a Ferrari to a 16 year old that hasn\u2019t learned how to drive. They\u2019re going to run it off the cliff.
What you want to do is start very slow until you get comfortable with the car, the mechanics, the principles, how things work and then progressively increase your speed. You\u2019re in a great position Logan. I really appreciate the question that you\u2019re asking. I\u2019m excited for you. I hope that you are excited and I hope that getting this featured on the BiggerPockets Podcast made your day. All right. The next question comes from Kaya in Atlanta, the ATL. First, I want to thank you for all the knowledge that you share. I\u2019ve recently upgraded to the BiggerPockets pro membership, and I\u2019ve purchased a couple of your books to continue to expand my knowledge in real estate investment. Side note Kaya, I would recommend reading them before bed because I\u2019m told they\u2019re super boring and will help you go to sleep. I have two questions for you today that I\u2019d love your advice on and or next steps.
Number one, I recently purchased a single family home in East Point, Georgia that has a detached garage that was never fully finished on the inside. The structure is in place. It even looks like at one point it had electricity and was potentially used as a workshop and it has a new roof with wood beams. I wanted to convert it into an ADU and then rent that out as a short term rental because the structure\u2019s already in place and I\u2019d rather use it to generate income and hopefully add to my property value than to park my car there. I was given a quote from my contractor of around 20K to convert it into a 600 square foot studio apartment. Wow. I\u2019m just going to interrupt here. That seems like an incredibly low quote. Either this contractor is really helping you out or this studio that you\u2019re talking about, the garage, is more converted than what you think and they only have some finishing touches.
I don\u2019t currently have any savings. However, my mom agreed to invest 10K and the rest I plan to fund using my business credit cards. My question is, is this a good move? It seems like a lowish cost for the conversion. I would agree. And was told by an Airbnb expert that it could probably bring in over 3K because it\u2019s 10 minutes from the airport, close to a lot of movie production studios, et cetera. Is there anything I should keep in mind throughout this process? All right. Let\u2019s start with part one and then we\u2019ll get to part two. I really like the idea of converting it if you can do so for only 20K. I don\u2019t love the idea of you using $10,000 of credit card money to make this happen as a newer investor that\u2019s not that experienced.
You got to find some other way to fund this deal than just that. Do you have equity in your current home that you could take out and use as cash to pay this contractor? Could you sell a piece of your equity to another investor and get their cash to use for the garage conversion and then pay them back? Could you borrow money from an experienced investor that could step in if you make mistakes and fix you, pay them interest on that money and let them act as a sort of project manager to make sure everything gets done well? I say this because that 20 grand to convert a garage, it almost feels too good to be true and I want to make sure you\u2019re not being taken advantage of. And if you don\u2019t have any cash, that means you don\u2019t have any reserves. You\u2019re already in a bad spot.
I want to see you saving money Kaya. I don\u2019t want to see you making it worse by taking on debt through high interest rate means like a credit card to then go put this thing together with the hopes that you\u2019re going to make $3,000 a month when you\u2019re inexperience and haven\u2019t done this before. You need to get another person who\u2019s in that space that is familiar with rehabs, that understands short term rentals to work with you on this. But if you\u2019ve got a potential $3,000 a month and you could get a mentor to come in and you split that with them and they get $1,500 a month for a couple years to walk you through how to do this, or they can earn some interest on their money to help you. I don\u2019t think it\u2019s going to be too hard to find somebody.
All right. In the second part of her question, Kaya here explains that she originally wanted to live in a condo or a town home for safety reasons, because she wanted to be around other people, but she bought this house because she felt it was a stronger investment. While it is a stronger investment and has some really good upside, Kaya doesn\u2019t feel as comfortable living in the house as her primary residence.
So she\u2019s curious if she can move out of this house because she hasn\u2019t lived there for a year and the best way to go about doing it. All right, Kaya. Here\u2019s my understanding. No one can force you to stay in the property. If you don\u2019t feel safe there and you want to move out, you can absolutely rent it out to somebody else. You could also buy another home that you intend to live in as your primary residence with the low down payment loan options, because you don\u2019t have a lot of money. So if you can figure out a way to get enough cash for a 3.5% down payment and you don\u2019t already have an FHA loan, you can go buy another property that you live safe in. Move into that, put a renter in the house you have now.
Assuming is going to cash flow. Start saving money and maybe use some of that money to do the garage conversion. You\u2019ve got some options here. It sounds like you\u2019re a little afraid and kind of tied down and very nervous. I don\u2019t think you need to be. You can move out of the house you\u2019re in. You can buy another house with a low down payment option. You might have to wait the year before they\u2019re going to be eligible for that. So that\u2019s something to talk to your mortgage broker about. Can I get another primary residence loan? Can I get an exception to get another one because I don\u2019t feel safe in my house? You can use it as a rental. So make sure you run the numbers to know that\u2019s going to cash flow if you move out.
You can move out and then you could convert the garage into an ADU later. You may convert the garage into an ADU and move into that one where you live and then rent out the main house for even more money on Airbnb. Or we could go back to what we said before, where you buy another property, you house hack it, you save on your mortgage and then you use the money you save to convert the garage. Either way, you\u2019ve got a lot of options. The cool thing is, you bought a house close to the airport where there\u2019s a lot of rental demand. You just have to figure out how you\u2019re going to get access to capital. All right. We have time for one more question. This comes from Tyler.<\/p>\n
Hey David. My name is Tyler and I live in Broomfield, Colorado. I\u2019m looking to purchase my first house hack and I\u2019ve reached a point where I can afford to get into a property and use half of it as an Airbnb. But if I do, I would be starting off with less than three months of reserves for the house, plus three months of reserves for personal expenses, assuming the house is pretty turnkey. My question for you is this. What is a healthy target for reserves for a first time house hacker? If I don\u2019t purchase a property soon, my alternative is to resign my lease at my apartment until I can save up enough cash to launch with more reserves. Thank you.<\/p>\n
All right, Tyler, keeping it short and sweet. There is no right answer for how much reserves you need. As I\u2019ve said before in different shows, it depends how much money\u2019s coming in. So if you\u2019re someone who makes a lot of money and saves a lot of money, you can dip down to lower reserves relatively safely, because you\u2019ll replenish your money. If you\u2019re someone on a fixed income who doesn\u2019t make a lot of money or has a hard time saving, you need to keep more in reserves to be safe. The general number that we start with is six months of reserves to make your mortgage payment as well as enough to make payments for yourself in case you ever lose your job or ran out of income. From there, adjust up or down, depending on how much disposable income that you have every single month. But I would also consider if you want to buy a house and you know you don\u2019t have as much reserves as you like.
Can you talk to a family member and say, if I ran into a jam and needed 10 or 20 grand, do you have that money in savings I could access and pay you back? It doesn\u2019t necessarily have to be reserves you\u2019re holding in your bank. If your mom, your dad, your aunt, your uncle, someone that you trust, a grandparent, does have the money, and you said, look, in the case of a perfect storm, if something terrible happened, would I be able to borrow money from you? If that\u2019s a yes, it\u2019s not as important that you have the money in reserves for yourself. Now, you don\u2019t want to make that sort of the rule that you go to every time. You want to use this sparingly and you want to be able to build up your own reserve. So you seem like a young guy, I would highly encourage you to start working overtime, start working a second job, start doing something else to work hard to build up those reserves.
That\u2019s what I did and that\u2019s what gave me the confidence to be investing in real estate when everybody told me not to. I knew that I had enough money saved up and I could go make more money if I needed. That in the worst case scenario, I would be okay. It\u2019s one of the reasons that I still work today. I want to keep buying real estate and I don\u2019t want to worry about what if something goes wrong. So I still have money coming in from the work I do and the businesses that I run. There\u2019s also not a ton of urgency for you to buy a house right now, because at the time of this recording, the market is softening a little bit. We\u2019re not seeing a market crash, but we are seeing that home prices are coming down. Their homes are not selling as fast. Sellers are finally getting some concessions.
They\u2019re getting some closing cost credits, they\u2019re able to buy down their rate. They\u2019re able to keep more money in the bank and they\u2019re offering at less than asking on many, many homes. This is something that The David Greene Team is doing really well. We\u2019re getting under asking price and concessions for a lot of our clients that we haven\u2019t been able to do in years. And on the homes that I\u2019m buying, I\u2019m buying them far below market value because sellers don\u2019t really have an option when buyers aren\u2019t buying as much. So instead of signing a year long lease at the current place you\u2019re at, which is going to sort of lock you in there, talk to your landlord and ask them, hey, can I sign a three month lease, a six month lease? Can I go month to month? Even if you got to pay 100 bucks a month more, something like that, you\u2019re better off to have flexibility.
So when the right deal comes across you, you can move on it rather than thinking, I\u2019m stuck here for the next 12 months because I just signed a lease. If for some reason your landlord won\u2019t work with you at all, see if there\u2019s someone else you can move in with. Can you put your stuff in storage and stay with someone else while you take your time to see what the market does? I\u2019d hate to see you miss out on a really good time to buy that could be getting even better as more time passes because you locked yourself into a lease that shuts you down and makes you think you can\u2019t buy more real estate. Thank you for your question Tyler. Really appreciate it and good luck. Let me know how it turns out. All right. That was our show for today. Thanks again for taking the time to send me your questions.
I love it. If you would like to send me your question, maybe you were inspired by what you heard. Please go to biggerpockets.com\/david and you could submit it there. We have had a great response from our audience and I encourage you to keep sending me these questions. I love doing this. So please submit more. If you enjoyed this episode, please be sure to like and subscribe to our YouTube channel so we can get this video in front of more eyes to help out our community.
And if you haven\u2019t already done so, go to biggerpockets.com, which is actually a website where this podcast comes from, where we have tons of tools, resources, and people that will help you on your investing journey. If for some reason you were too shy to ask me a question on the show, you could find me on social media @davidgreene24, or you can message me through the biggerpockets.com messaging system and I will get to that whenever I can. Thank you guys for your time, for your attention and for your love. I love you right back and watch another one of these videos if you\u2019ve got a second.<\/p>\n