\n<\/p>\n
Should you borrow money from your family?<\/strong> It could hurt your relationship if the deal goes wrong, but strengthen an existing partnership if everything goes right. Maybe a better question\u2014how should you start <\/strong>raising private capital<\/strong><\/a> for your real estate deals? When it comes to the debt vs. equity<\/strong><\/a> debate, which makes more sense in your situation? Don\u2019t worry, we\u2019re bringing answers to all these questions and more!<\/p>\n Welcome back to another episode of Seeing Greene<\/strong>, where your host David Greene answers questions from both aspiring and established real estate investors. We\u2019re also joined by Alex Breshears<\/strong> and Beth Johnson, <\/strong>two expert private money lenders and authors of the newest BiggerPockets book, Lend to Live<\/em><\/strong><\/a>. They help tag-team some private money-specific questions as well as give context on who you should and shouldn\u2019t accept funding from<\/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: Tom: David: Jon: David: Alex: David: Beth: David: Beth: David: Beth: David: Beth: David: Beth: David: Rob: David: Beth: Rob: Beth: David: Alex: David: Beth: Alex: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast Show 645. The way I\u2019ve always approached life or any goal that I have, is that there\u2019s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I\u2019m going to have to change my eating habits and my workout habits. I\u2019m going to have to go to the gym and develop different muscles or stronger muscles to get what I\u2019m looking for. If you\u2019re looking to save money in taxes, you can use some strategies that work with your current W-2 situation that is much harder. It would be much easier for you if, you found ways to make income that were not beholden to the W-2 world.
What\u2019s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Here, today with a Seeing Greene addition of the podcast on these episodes, we take questions from you, our fan base and those that we are trying to help grow wealth. And I answer them in person, myself, giving the best advice that I possibly can. And then we let everybody else hear how the information was disseminated, what my advice was and most importantly, what I was thinking when I gave it. The goal with this is to help you overcome the obstacles that you\u2019re facing in your investing career, give you information to better, equip you to build wealth and make a connection with you, because I love you guys. And I know you love BiggerPockets, so we\u2019re happy to join.
In today\u2019s show, we get into some really cool stuff. One of the things is we bring in some private lenders and you get a special treat. You\u2019re going to get private lending advice from people who wrote the book on Private Lending for BiggerPockets, so you\u2019re definitely going to enjoy that. I also talk about how to get out of the fear box when you\u2019re scared in every step that you want to take in a different direction gives you something else and be scared about, and it bounces you back to write where you started. And then we get into when to sell, when to hold, when to bail and when to fold. So one of our questions is all about, should I keep my house? Should I sell my house? If I sell it, what should I do with it? What\u2019s happening in this crazy market? And I take my best stab at that. All this along with some tax advice and some other specialists joining me for backup on this episode, you don\u2019t want to miss it really glad you\u2019re here.
But before we get into the show, today\u2019s quick dip, go to biggerpockets.com\/podcast. You see all the different, BiggerPockets Podcasts have their own show pages where you can get cool free content. If you want to learn how to build a bigger brand for yourself, well, at biggerpodcast.com\/reshow, you can get a masterclass from Brandon Turner and how to do just that. We\u2019ve also got lots of freebees like Scott Trench, the author of Set for Life and the BiggerPocketS CEO has a free rookie checklist. Amy Missouri has information on a four second power pitch for raising money. Dave Meyer has data drops with relevant information that you need to make good decisions investing in this market and more, so visit biggerpockets.com\/podcast. Check out your favorite show and see what free goodies we have for you there. All right, let\u2019s bring in our first question.<\/p>\n
This is Tom Wheelwright. I\u2019m the best selling author of the Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make. And we have a question from Parshan, and the question is, \u201ccan we use unused depreciation against income from a salary job?\u201d So I\u2019d like to change the question to, how can we use unused depreciation against income from a salary job? The answer is yes, there are certain things that you do have to do. So either for example, you have to be active in the real estate and not have very much income from your salary job, or you could be a real estate professional, those are very specific tests. Or there are a few other things that you can do that are going to require frankly, some work with your tax advisor. The challenge is you can never use more than 500,000 of losses from real estate or business against your salary, that is a strict limitation.<\/p>\n
Hey, thank you for that reply, Tom. That is some very good advice and also very specific. So since Tom has handled the specifics of this, I will take a more general approach with my two cents. The way I\u2019ve always approached life or any goal that I have is that there\u2019s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I\u2019m going to have to change my eating habits and my workout habits. I mean, I have to go to the gym and develop different muscles or stronger muscles to get what I\u2019m looking for. If you\u2019re looking to save money in taxes, you can use some strategies that work with your current W-2 situation, but is much harder. It would be much easier for you if you found ways to make income that were not beholden to the W-2 world.
So I don\u2019t think you have to quit your job and just start a brand new venture. But can you look for ways to earn income that would be reported differently than W-2? That is much easier to shelter with the current tax rules that we have. This is why I\u2019m a big proponent of stop looking at it like, should I go W-2? Or should I go full-time investing? There\u2019s a whole spectrum in between. You could become a loan officer, you could become a real estate agent, you could become a title officer. You could start a construction company, you could get into pool service. You could be like Tom, and become a CPA. There are so many different ways that you can serve in the real estate field and earn income that are different than a W-2 job. And many of these will give you the flexibility to work that opportunity while still having a W-2 job and still investing in real estate.
So if you\u2019re passionate about real estate, find something within the scope of real estate that you really love, like what I\u2019ve done and work that. And if I can help you with that, Parshan, please let me know. I\u2019d be happy to connect you with someone from one of my companies. If you\u2019d like to do that within the world I\u2019m in, and maybe you can reach out to Tom and ask the same. All right, our next question comes from Darby in West Central Missouri, I will summarize Darby\u2019s question. He is currently in his mid \u201940s, owns 13 doors made up of single and multi-family properties. His question is rooted in the phrase seasons of life. When Darby started his real estate journey, he was a single man with no children and plenty of free time. Fast forwarding, 20 years, he\u2019s now happily married with three children and a full-time job in healthcare.
He now has an investment portfolio to manage and maintain and a hobby farm to look after needless to say, Darby is very busy, but he\u2019s still hungry and wants to continue scaling his investment portfolio. He loves a passive income stream that has provided, and the increase in equity he\u2019s seen during this inflationary time period that we\u2019re in. Darby has a very solid debt income ratio, still has some cash reserves and a lot of equity that he can deploy from what he\u2019s seen, particularly due to inflation in his portfolio. He doesn\u2019t need cash flow because he has several steady income streams who would like to focus on long term appreciation. Darby also mentions that he prefers investing locally because investing out-of-state appears daunting. He would like to invest in an extremely, but that in all caps \u201cpassive way where I can still balance my career in family while also scaling my portfolio, interested in your advice, David, and perspective on my investing future. And I would love to hear your thought on an upcoming podcast. Keep up the good work.\u201d
All right, Darby. So let\u2019s talk about a few things here. You did a very good job of laying out what your goals are. So I appreciate that, you also laid out the challenges. And the bad news in this is that, most of what you\u2019re describing here is you want to have your cake and eat it too. You want to have extremely passive income, you also want it to be something that\u2019s going to grow inflationary and you also don\u2019t need cash flow. And then you don\u2019t want to invest out-of-state, but you mentioned you\u2019re in West Central Missouri. Now I\u2019m not an expert on your area, but when I just think off the top of my head about West Central Missouri, I don\u2019t picture any rapid appreciation type of environment happening in that location.
If you\u2019re looking for appreciation, there\u2019s two ways that you get it. You have forced appreciation, that would be finding a property and adding value to it in the multifamily space. This would be increasing the NOI and you would do that by increasing rents and lowering expenses. That\u2019s going to take quite a bit of your time, which you\u2019ve also mentioned, you don\u2019t want to do. The other way outside of forced appreciation would be natural appreciation. And this would be investing in a market that is seeing increasing demand, but steady supply or restricted supply so that the scarcity of the resources that everybody wants, makes the prices go up. And that is an actual legit concrete method that you can use to put appreciation in your favor. Appreciation is not always the same as speculation, which is just hoping that prices go up. There\u2019s actually things that you can do and decisions that you can make that put the odds in your favor of that happening. That\u2019s one of the ways that I\u2019m investing. And it sounds like you want the same.
The problem with forced appreciation is it\u2019s going to take time and effort, which you\u2019ve said you don\u2019t want to do. The problem with natural appreciation is you\u2019re going to have to pick a market outside of Missouri. That\u2019s also something that you\u2019ve said you don\u2019t want to do. You\u2019re also in a position with golden handcuffs. So you\u2019ve got income coming in. You don\u2019t need to do this, but you\u2019d like to do this. So you are in a position that I often call the fear box. And it\u2019s not the perfect analogy because, I don\u2019t know if you\u2019re necessarily afraid, but it works the same way for people that are. So imagine that you\u2019re in the middle of a box or maybe a field and you don\u2019t like where you are in life.
So you want to go somewhere else and you\u2019re looking outside and you\u2019re like, Ooh, I could go there, anywhere\u2019s better than where I am. Which direction do I want to go? And you start walking in that direction, and then you hit something that scares you. It\u2019s like an electric fence in that field. Ooh, I don\u2019t want to go out of state. Okay, I\u2019m going to come right back to where I was. And then you start walking in a different direction. Ooh, that looks like it\u2019s too much work, I don\u2019t want to go there. And you start backing back to where you were. You start going in a different direction. Ooh, that looks like it\u2019s got a little bit too risk, I don\u2019t want to go there. And you bounce around from all the things that you find that you don\u2019t like. And you find yourself exactly where you started in the very middle of this field. And you\u2019re still not happy with where you\u2019re at.
And I understand that is why you reached out. And you submitted this question to us here at BiggerPockets on the Seeing Greene edition, and I appreciate that. But what I\u2019m getting at is, you\u2019re going to have to let go of something. You\u2019re not going to pull this off with all the restrictions that you\u2019re putting on yourself. If you want something super passive, you\u2019re probably not going to get a lot of appreciation, unless, you go into a market where you can get that. There\u2019s plenty of markets I could give you right now where I\u2019m saying, Hey, you could buy a property, it\u2019s not going to cash flow a ton. It\u2019s probably going to go up a lot in value. And in the future, it\u2019s going to cash flow ridiculously well. But that means investing out of state. Or I could say, Hey, you can create a ton of appreciation by buying a property and adding value to it, but that\u2019s not going to be extremely passive.
So I think rather than trying to find an investment that doesn\u2019t exist, you\u2019d be better off to say, off everything, I\u2019m worried about investing out-of-state, putting a lot of work into what I\u2019m going to be doing, needing appreciation, not wanting a whole bunch of effort to be spent. You\u2019re going to have to let go of something, you have to make peace with that. My advice would be, to let go of the fear of investing out-of-state. I think that\u2019s the easiest hurdle of everything you mentioned to get over. So I think you should find an area that a lot of either Californian or New Yorkers are moving to. This could be like the area of Texas, maybe Dallas or Frisco. You like to see a lot of appreciation there. Austin, I think, still has a lot of room to run.
South Florida is exploding right now, you\u2019ve got a ton of opportunity in that market. You\u2019ve got areas in suburbs around Nashville or around Atlanta, that we\u2019re going to likely continue to see a lot of really strong growth. I think Savannah, Georgia is prime to do really well as more people move there. And both South and North Carolina have a ton of opportunity that I would expect continued appreciation from businesses and people that are moving there. You would then find a property in one of the best neighborhoods that you could and hire a property manager to manage it. Maybe you get a short term rental and you pay somebody 25% of the revenue to manage it for you. And that 25% may have been your profit margin, so you\u2019re not going to cash flow a ton. But by buying in the best neighborhood that you possibly can and getting the best property that you possibly can and waiting the revenue will slowly grow every year. And the property will likely continue to appreciate if you buy in the right area.
That would be the simplest solution that I can recommend to you for how you can achieve the appreciation that you want without a ton of work. But you\u2019re going to have to accept that you\u2019re walking outside of investing in your state. Another option would be investing in someone else\u2019s fund. You could invest in a syndication. You can invest in a fund like Brandon\u2019s at ODC, and just give someone else your money and let them grow it. That\u2019s going to be very passive for you, but I don\u2019t think you could say you\u2019re getting appreciation. You\u2019re getting a return, this is now becoming more like cash flow. So as you can see, there isn\u2019t going to be the perfect investment vehicle for everything that you want. And that\u2019s probably why you\u2019re stuck in the middle of the fear box, because every single direction that you start walking in, there\u2019s something that you don\u2019t like about it.
So in order to create a path for yourself out of it, I\u2019ll summarize my advice here. Figure out what you are most okay with compromising on and go in that direction. My advice would be to invest in a growing market. Don\u2019t worry as much about cash flow because you\u2019ve already got a lot of cash flow, pick the best neighborhood, the best property in the best market that you can and let time do its thing.<\/p>\n
Hey Dave, Jon Barr from Orlando, Florida here, I\u2019ve been listening to BiggerPockets for roughly about three years now. And I have a question that probably a lot of people are asking, which is, do I sell? So some background, I bought this place just over a year ago. It\u2019s my one and sole property at the moment. However, I bought it for the equity growth and it has grown. I bought a 100K of equity in it at the moment and kind of want to get into a new living situation, cut my living expenses in half. And I want to move into some cash flowing units. However, the market\u2019s so crazy right now. One of the options I see is maybe selling this place, pulling on my liquid asset from keeping it aside and maybe 6 to 12 months when this place looks well. When the market looks a whole lot better, making some big deals on 3, 4, 5 places. My other option\u2019s to refinance, but the numbers aren\u2019t a 100% there. Give me your thoughts, how do I make this market work for me when I have a high equity property? Thank you.<\/p>\n
All right. Thank you for that, Jon. Let\u2019s break down some of what you have proposed. First off, if you sell and then rent or live with someone else and wait for the market to what you said, \u201cimprove,\u201d which I assume you mean prices are coming down, cashflow opportunities will arise. You\u2019re taking a pretty big gamble that, that\u2019s going to happen. So I know there\u2019s a lot of people out there saying a crash is coming, get out of real estate, wait. And it could happen, I\u2019m not here to say it can\u2019t happen or it won\u2019t happen. But I would ask a couple questions. What would make that happen? A lot of people say, well, interest rates continuing to rise is going to push home values down. Let\u2019s say that\u2019s true, because it very well could be. The reason that it\u2019s pushing home values down is because it\u2019s making it more expensive to own them.
So if that does happen and home values come down, you\u2019re still not going to achieve the cash flow you want because your mortgage payment is going to be that much higher. Like you don\u2019t really avoid the problem of cash flow by just having the market have home values drop. So I don\u2019t know that\u2019s the best strategy. Like even if you do get a house at a cheaper price, your mortgage will be higher, you\u2019re not going to cash flow. And then if it doesn\u2019t happen, well, now you just got out of your asset and now you\u2019ve got nothing and then, the market took off on you. I would probably be looking at hedging your bets. So if I was in your position, I would first ask if I moved out of the house I have now, would it cash flow? I\u2019m assuming the answer is no. And that\u2019s why you\u2019re not talking about that.
So the next question is, what would have to be different about this house so it would cash flow? And oftentimes, the answer to that question is, I would need more units. What if you had a single family home with a garage conversion and a separate unit in the back or a duplex with an ADU. Or a house with two levels with separate entrances that also has an ADU. Something where you could get more than one unit out of your property. In that situation, it probably will cash flow. So what if you sold the house you\u2019re in now, and you found a new property that was like that? Something that had more than one unit that would make more cash flow for you. You could then buy that property with the low down payment as a primary residence homeowner. This would allow you to get out of a house that doesn\u2019t cash flow, into a house that could cash flow if you didn\u2019t live in it and probably will still have a cheaper mortgage than what you have now.
If you are living in it and it would allow you to save that nest egg, that liquidity that you mentioned to the side in case the market does go down. I like that overall approach. Now, what if the market doesn\u2019t go down? Well, you could just look for other properties to buy. You could buy a property that does cash flow. You could buy yourself a short term rental and then you could have two properties instead of one. You\u2019ve basically eliminated all of the things that could go wrong. You don\u2019t have to worry about the market taking off on you. You don\u2019t have to worry about if the market crashes and not having enough capital, you\u2019ve improved your situation. So if you do move out of the new house that you buy, it will cash flow and it will become a rental property.
And you open doors to let yourself buy a new investment property, like a possible short term rental that could earn you more cash and get you more experience investing in real estate. So this is advice that I often give when people are in a either or situation, try to be creative and look for a way to get away from either or to give yourself multiple options. I always feel better having multiple options, especially if you\u2019ve got a lot of equity because you don\u2019t have to move all that equity from one house into a new house. You can often spread it out amongst a couple, like you mentioned. Hope that helps and let us know how that goes. All right, we\u2019ve had some great questions so far and I want to thank everybody for submitting. Please continue to submit your questions at biggerpockets.com\/david.
And in addition to doing that, please continue to comment on YouTube and this segment of the show. I like to read some of the comments that you all have left on, BiggerPockets YouTube page and see what you\u2019re thinking. Comment number one, comes from Stephanie Mokris. \u201cI am officially addicted to the BiggerPockets Podcast. I\u2019m a travel nurse with a one hour and 20 minute commute. And I love listening to you guys while driving. Thank you for all the value provided to your audience. I do have a question regarding the series. What is the strategy used to pay the private lenders back? I can see in a flip or a bur, but how about if the borrower used the private money for a turnkey property?\u201d Okay, that\u2019s not just a comment. It\u2019s a comment mixed with a question, that\u2019s pretty cool. We got a little hybrid here. Thank you for that, Stephanie.
All right, when I borrow private money, which I do pretty frequently, there\u2019s been a lot of people that have been sending me money and then I pay them a return. I kind of set it up like a bank. So instead of it, at the end of when I pay them money back, they get it with interest. While I have their money, I just deposit the interest into their account every single month. So they get access to that capital. It almost functions like passive income and it\u2019s as passive as possible because they don\u2019t do anything. They just get a check or actually not even get a check because they\u2019d have to deposit that, they get a direct deposit into their account. All they have to do is pull up the app on their phone and check to see that they made money. And I could pay that money back in several ways. Oftentimes, it could come from the refinance of a property. It could come from the refinance of a different property. And then I could use that money to pay back that person\u2019s loan.
It could also come from the good old fashioned way of me just earning more money, right? I borrow money because I make money in several different ways. And so I have it coming in at all different times and I could pay back loans just by saving up money and paying it back. It could come from money that I have in reserves that in a worst case scenario, I could just pull it out of reserves and I could pay somebody back their capital. It could come from selling a property or a couple other properties. At any given time, I have several properties that I own free and clear. And I could refinance those and reinvest the money, but I\u2019d rather borrow the money from other people, get them paid passively, develop a relationship with them and then keep the equity that I have in my properties as a safety net. So I could always refinance those and pay it back.
To your point, you said, \u201cwhat if someone borrows money to buy a turnkey property?\u201d That could be dangerous because turnkey properties are typically not coming with any equity. So a refinance is usually not an option. They\u2019re often in areas that don\u2019t appreciate as much, not every one of them, but turnkey companies tend to operate in mass, in low appreciation, but high cash flow markets. So if that\u2019s something that you do, you are going to have a plan for how you get that money back or else you\u2019re going to have to sell, to repay the person and you don\u2019t know where the market\u2019s going to be when you go to sell. Now, that\u2019s becoming risky. In general, if someone isn\u2019t making a lot of income, isn\u2019t saving money and doesn\u2019t have a plan to pay back their investor. They probably shouldn\u2019t be using private money and they definitely shouldn\u2019t be doing it to buy a turnkey property.
Next comment comes from Dakota Slaton. \u201cI love the content, I\u2019m 20 years old. These videos give me great pointers to get my foot in the door, greatest podcast all around.\u201d Ah, thank you for that Dakota, I appreciate your sweet words there. Hopefully we continue to impress you and do our job of holding your attention and giving you value. Last comment comes from PureUnwindASMR. This was related to the Amy Missouri podcast, we just did on raising private money. \u201cThis is so powerful and I\u2019m going to re-watch all four when they\u2019re available. Thank you so much for this.\u201d Well, that feels good to hear too. I\u2019m glad we are providing value and helping improve your lives because that\u2019s all that really matters in this entire world of beautiful chaos that we live in.
All right, we love it. And we appreciate your engagement. Please continue to do so, like, comment, subscribe on YouTube. And if you\u2019re listening to this podcast on an app, please give us an honest rating and review there. Whether it\u2019s iTune, Spotify, SoundCloud, Stitcher, let us know what you think about the podcast and give us a rating, it helps us reach more people. Thank you very much for that. I recently had the pleasure of meeting Alex Bashirs and Beth Johnson, BiggerPocket Publishings, newest authors who wrote a book, Invest to Live, about how to raise private capital or use private lenders to grow your portfolio. And I thought it would be a good idea to bring them in as some backup here, to help me answer questions particularly about raising capital, borrowing money to invest in real estate.
So let\u2019s see what they have to say. All right, ladies and gentlemen, thank you for joining me. We are going to jump right into this. So the first question is from Brock Dallas and Brock says, \u201cHey David, I know you were taking on exclusively debt investors to save yourself some time and effort in terms of getting everyone up to speed. I am curious, what would you consider to be favorable equity payouts on private lending, specifically for high end flipping 1.5 million plus?\u201d Alex, let\u2019s start with you. What do you think about that question?<\/p>\n
I think that really depends on having a conversation with the person that\u2019s going to be providing the capital because realistically, if you are trying to use someone else\u2019s capital, figuring out what their paying point is, do they want steady cash flow? Are they lending because they need that cash flow to live off of or are they trying to get a big payout lump sum, which it would be more like equity investing? So when you talk about that, really you want to talk with them about what their ultimate goal is and then you can structure the deal in favor of what their goal is.
Since Brock, specifically mentioned equity, the equity side would be something that\u2019s laid out in the operating agreement between you and whoever this other person is. So that can be fully negotiated as far as percentage of equity, you might want to outline and let them know if they are asking for equity that they could get some of the downside too. Equity\u2019s not always up. You know, we\u2019re kind of in a strange time right now. So making them aware that there is a downside to being on the equity side, well, it sounds great. You\u2019re going to get 20% of whatever the net profits are, but you might also be getting 20% of what the net losses are too. So that\u2019s why I say have a conversation with the person first.<\/p>\n
So important to acknowledge that. The assumption is how high of a return can I get, or if I can get equity in the deal, I can get it higher. You\u2019re also losing the floor when you lose the ceiling. And so that\u2019s very important to acknowledge. Beth, what say you?<\/p>\n
I generally like debt more than I like equity. I can see it in some circumstances where they want to offset the actual interest rate so that they can keep carrying costs low and then push that towards the equity side of things. But as an investor, I don\u2019t typically like that simply because, I feel like that leaves too many cooks in the kitchen. And even though there\u2019re supposed to be playing a silent role or a passive role, there\u2019s so much vested into it, that they can sort of metal that I\u2019ve seen in certain circumstances. And then as a lender, I truly like being in a passive role. That\u2019s why I choose being in a debt position as opposed to an equity position. I don\u2019t have to care quite as much. So, there\u2019s ways in which it works well for some people. It\u2019s just not something that I\u2019m a super fan of, just because it creates a little bit of conflict of interest.<\/p>\n
So, I think you mentioned saying that you prefer the equity side. Did you mean you prefer the debt side in the beginning?<\/p>\n
Oh, sorry. Yeah. So the debt side.<\/p>\n
I might have heard you wrong, but you\u2019re saying you do prefer to bring in people as debt, oh, sorry, as equity? No, I\u2019m getting myself confused. You prefer to work with people who are coming into your deals as debt investors versus equity, correct?<\/p>\n
Correct.<\/p>\n
Yeah. And you made a very good point that as soon as somebody has equity in the deal, now there\u2019s almost an entitlement, this is my deal too. I want to use this color of flooring or I want to price the house here or can we use my cousin as the real estate agent? Have you seen some problems like that pop up with your deals?<\/p>\n
I had. I mean, from having that silent partner to show up on the job site, you may not even be there as the active investor. And they\u2019re having conversations with the contractors. They\u2019re trying to make some decisions and insert themselves for calling and texting you from the location and wanting to know this and that. And it just becomes a little bit cumbersome to say the least, right. So I just choose to either be on the debt side or the equity side, just makes things a little cleaner to know what your roles and responsibilities are.<\/p>\n
That sounds like you\u2019ve got some good stories there for another time.<\/p>\n
I have a lot of war stories to share, some buy-in and some from my investors.<\/p>\n
Rob, what do you think about this?<\/p>\n
This is a tough one because I think it can go both ways and it\u2019s obviously going to depend on what kind of transaction we\u2019re talking about. Is it a flip, is it something that you\u2019re trying to buy long term? For example, I just bought a hotel, it\u2019s a 20 unit and we have an investor on that, but he\u2019s an equity partner on that. And that\u2019s a little bit of a different deal because he is incentivized strictly on the IRR and then the sale price that we\u2019ll have in three to five years, once everything is stabilized. And that was really enticing to him, right? The possible cap rate in the exit there. And he wants to be a long term partner too. But on the flip side of this, I guess if I were going to have it my way, debt is always cheaper than equity in the long run, I think, for most successful deals.
And when you have someone in, from an equity standpoint, that investor has a vested interest in the performance of that property. And thus there\u2019s a little bit more emotion that I think can get mixed into that. Which leads to too many cooks in the kitchen, too much micromanaging. Whereas, from a debt standpoint, obviously there\u2019s the vested interest that they want you to pay them back and be successful, but it\u2019s very black and white. You get paid this, this is a guaranteed return from a debt standpoint, you\u2019ll get a 10% on your cash, whatever it is, whatever you agree on. And it\u2019s just a lot simpler and cleaner. I think that you can really keep the emotion out of that, because it\u2019s just a much easier calculation to make and model for, personally.<\/p>\n
Okay. Next question from Nadia Chase. \u201cHello David, I have a family member in Switzerland that is willing to partner with us. She\u2019s about to retire and is able to ask for a lump sum of money in advance. She said, she\u2019s thinking about asking a $100, 000 and either lend us that money as a private lender for us, or be a silent partner in one of our investments. We have some experience with private lending, we are not sure how to structure the silent partner option. And if there are other things we would need to research when working with money that would come from outside the country. Finally, which of these two options would you recommend? Thank you a lot.\u201d Beth, what do you think?<\/p>\n
Well, I think we already discover that, debt is probably going to be cheaper and easier than having an equity position. That said, I think that there\u2019s some concerns on the legal and the tax side of things that they would need to shore up first, before they entered into some sort of arrangement together legally. And first off, I want to retire and get access to a $100,000 a lump sum. I\u2019m not sure how that works in Switzerland, but I should just call that out there because that\u2019s kind of fun. And so generally speaking, for us, when it comes to creating joint venture agreements, we like to come up with at least an MOU or a memo of understanding that helps outline the implications financially, rules and responsibilities, exit strategies, disillusion, and some sort of structured legal arrangement. But again, I think that there\u2019s some concerns just having them based in Switzerland and the folks being based in America that could have some challenges legally and tax wise.<\/p>\n
Yeah. I actually want to dive into that a little bit, because I don\u2019t think I\u2019ve really run across an MOU very intriguing. How is that really differing from a joint venture or from like an operating agreement? Because I feel a lot of that stuff is typically in those agreements, but what\u2019s different from that? What differentiates them?<\/p>\n
Well, I\u2019m not an attorney and we\u2019ve had attorneys draft them up for us before. But I feel like there\u2019s a little bit more of a looser construct in terms of just outlining rules and responsibilities. What the capital inclusion might be. It\u2019s a little looser framework, but it still has some legal parameters around it. I find oftentimes, especially with my borrowers that we lend to, when we see their operating agreements, a lot of the times they\u2019re just canned, their boiler plate templates.
There can be from online or from an attorney, but they don\u2019t really bake into the agreement, what the specific scenario might be in terms of who\u2019s providing what capital, who does the project management? How are you going to get your money back out? Is your capital going to be placed in as debt as opposed to being just your personal part of the project? So MOUs are just how we\u2019ve started the conversation and drafted them up in a legal framework. We\u2019ve either notarized and signed those with the help of an attorney or they\u2019ve been translated into an operating agreement so that, it\u2019s baked into something that\u2019s a little more specific to this particular venture.<\/p>\n
Alex, what\u2019s your thoughts on this? And I realize, I read that question a little while ago. So if you need a refresher, let me know.<\/p>\n
Oh no, I\u2019m good. I think Beth, pretty much handled the kind of the legal aspect. So the way I\u2019m going to look at it, actually is from a relationship standpoint. So anybody, I get questions like this a lot, my best friend\u2019s cousin wants to start a real estate investing business. What do I do? And I always tell people the fastest way to lose friends and family is to lend each other money. So this is someone who\u2019s, in the family and it\u2019s retirement money. So a lot of people take that relationship for granted and be like, \u201coh, I trust them. Don\u2019t worry about it. You know, this is my aunt, we\u2019re good. We don\u2019t need anything because we inherently trust each other, because we\u2019re a family.\u201d But in reality, that\u2019s probably the situations you need at the most.
So like what Beth mentioned, where the framework\u2019s already in place, it\u2019s on paper, it\u2019s black and white. If this happens, then this other thing happens and you\u2019re taking the emotion of the relationship out. So I would definitely say, anybody that\u2019s thinking about investing with friends and family, even if they\u2019re outside of the country or inside of the country, take that into consideration, how valuable is this relationship to you? So if this goes bad, is that going to make Christmas dinner really awkward for the rest of your life? Because that might not be worth it, it might be cheap capital, but what is it costing you in human capital?<\/p>\n
That is a great point. I\u2019ve found the quality of relationship is always based on the expectations of the parties. And when you\u2019re working with someone close to you, in my experience, whether you\u2019re representing them, selling their house, or you\u2019re doing some form of business with them, they tend to look at it like you\u2019re going to give them something extra more than what everybody else gets. And the person who\u2019s using the money is like, \u201cno, we have an agreement in places is a professional relationship.\u201d You\u2019re used to it from people that are expecting it to be professional. And I rarely have ever seen those expectations lower with family. You think it\u2019s going to be easier? It\u2019s quite easier to get into it, but it is much harder once you\u2019re there.
So I like that advice, maybe don\u2019t go with friends and family, unless that\u2019s your only option. It would be better to find someone that you don\u2019t know that has more reasonable expectations. So last question, \u201chi David and team, my husband and I have contacted several banks regarding lending parameters and have been unable to identify any lender who would provide a multifamily loan for house hacking with less than 20% down. Do you have a product that allows for less than 20% down towards a multifamily that would be our primary residents? Or do you have any advice about how we could go about acquiring one?\u201d Ladies, how do you feel about that?<\/p>\n
Well, I was going to pun back to David just simply because, I mean, I think that FHA loans can allow, but it\u2019s for one to three units. But it\u2019s not something that you can technically do most often in a hard money or private money role because it has to be non owner occupied.<\/p>\n
Yeah. I mean, I\u2019m going to say the primary residence part is going to be the sticking point, because that falls underneath federal regulations as opposed to non-owner occupied investment, property falls under state regulations. And it\u2019s very different licensing requirements, very different limits. You know, there\u2019s a lot of consumer protection laws in place for primary residences. So that\u2019s, the difference we are running into.<\/p>\n
So, at The One Brokerage, we can do 15% down on a duplex, but three or four units, it\u2019s going to be 20% down, even on a primary residence. That\u2019s a new change that was just made for conventional loans. And then you can still go FHA though. So, or FHA or VA, you can get those terms on multi-family housing. So one thing that people will do is, they\u2019ll use an FHA loan to get in and then they\u2019ll refinance into conventional. Even if the rate isn\u2019t better and then they have another FHA loan that they can use for future properties. So if you\u2019re willing to play that game, you can\u2019t do it, but it is a little trickier because multifamily housing is what everybody wants to do for house hacking. It\u2019s the easiest way to get into that. And then these regulations were just changed, but it didn\u2019t necessarily drop the demand for multifamily housing down because there\u2019s so many people that are trying to park their money somewhere.
They just did a 1031 exchange, they\u2019ve got 400 grand. They have to put somewhere, they\u2019re not going to go buy a single family house. They\u2019re going to buy a triplex, they\u2019re going to buy a fourplex. And so these things, at least in the areas that I invested and work in are just getting sucked off the market so fast, there\u2019s so much demand for those. So it\u2019s tricky for the person that was trying to get into the market, which is what most people that are listening to our podcast are looking to do. So what we recommend people do is instead of just going for multi-family housing, find a house with an ADU, find a house you can convert the garage, find a house that is sort of structured to where it can already be rented out as to units or three units. And many times those are in areas that are zoned for multi-family housing as well.
Very good answers though, I\u2019m impressed with everybody so far. Thank you guys for helping me there. All right, that was our show, I hope you liked it. I know it\u2019s been a while since we\u2019ve had a Seeing Greene. So I just wanted to say we\u2019re back and I appreciate you guys being here. Please, again, let us know on YouTube in the comment section, what you think, what you\u2019d like to see more of, what you enjoyed and maybe what you didn\u2019t enjoy. So we can avoid doing that in the future. You could follow me online, I\u2019m @davidGreene24, check out my Instagram, that\u2019s what I am on Facebook. It\u2019s what I am on Twitter, LinkedIn, pretty much everywhere or I\u2019m on YouTube at David Greene Real Estate, so youtube.com\/davidgreenerealestate. And then please like, and share and subscribe to the BiggerPockets YouTube channel. Share this with everyone you know, so that we can reach more people. Appreciate you guys. If you have any questions, you can message me through BiggerPockets or on my social media. And I will see you on the next.<\/p>\n