\n<\/p>\n
Unless you\u2019re trying to invest in real estate<\/strong><\/a> using all cash, you\u2019ll need to know which investment loans work best<\/strong> for you. But what if you\u2019re a contractor, a business owner, or self-employed?<\/strong> What if you\u2019ve already used up all your financeability and your DTI (debt-to-income ratio<\/a>) is too high for lenders to take you seriously? What\u2019s your next step? Fortunately, even if you\u2019re feeling the crunch of difficult financing, you still have numerous ways to buy rental properties<\/strong>. You just need to know where to look!<\/p>\n We\u2019re back! Or more like David is back on another episode of Seeing Greene <\/strong>where he takes the most-pressing questions from our audience and answers them live for all investors to benefit. In this episode, we\u2019ll be talking about mid-term rentals<\/strong> and the threat they pose to \u201cregular\u201d rental property investing<\/strong>, why it\u2019s so challenging to find <\/strong>investor-friendly agents<\/strong><\/a>, how wholesaling real estate could get you into trouble, and house hacking in an expensive market <\/strong>(even with VERY little down).<\/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: Jessica: David: Jessica: David: Shaun: David: JD: David: 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 666. In basketball, we had this concept called a four point swing. So imagine that you\u2019re on a fast break, you got a wide open layup. You miss it. The other team gets the rebound, they throw the ball the other side, and then they get an open layup. It\u2019s not that they score two points. It\u2019s that you lost two points and they score two points equally, a four point swing. That\u2019s like the worst thing that can happen. The same is true if you don\u2019t house hack. Not only are you not raising rents on your tenants, but you are having them raised on you. That doubles the impact of the power of real estate, but it\u2019s working against you. When you own the asset, you\u2019re getting the four point swing in your favor. Hey, everyone, this is David Green, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Green episode.
If you haven\u2019t heard one of these before, on these episodes we take questions from you, the BiggerPockets community, and have me answer them with my experience with investing in real estate. I try to teach, I try to share, and I try to give advice to the people who are submitting questions so that they could grow their wealth in real estate, similar to how I was able to do for myself and get out of that job you hate and into a life you love. Today\u2019s show\u2019s pretty awesome. I bring some clarity to house hacking in an expensive market. This is a question that comes up all the time. People don\u2019t quite understand the right way to house hack or how it could be so powerful. I get to kind of expand on that point and give some really good advice to one of our listeners who is in Sacramento, California, and having a hard time finding a deal that works.
We talk about what to consider when you are an agent and you are also trying to wholesale or wholetail a deal, the right way to get into that. And then we talk about scaling using DSCR products. So DSCR products are loans that take into account the income from the property, very much like commercial property is evaluated, not the income of the borrower. And I come up with kind of an entire plan for a firefighter who\u2019s trying to scale their portfolio, but concerned about pre-payment penalties. All that and more on today\u2019s show.
Before we get into it, today\u2019s quick tip is we\u2019re nearing the end of September, which means right around the corner is October. And October, from a realtor\u2019s perspective, is when the market starts to slow. We find less buyers are active in the market during the winter months, especially during the holidays. Let\u2019s say you\u2019ve been sitting on the fence. Let\u2019s say you want to buy a primary residence, but you\u2019re tired of being outbid because every house gets so much attention. Now is the time that I would recommend you reach out to your agent and you put a search together and you start looking again.
There are going to be a lot less buyers for every existing house than there was before, which means you have less competition, which means if you\u2019re buying, that\u2019s good for you. If you\u2019re selling, you may want to wait until springtime when there\u2019s more buyers that are looking and you\u2019re more likely to get multiple offers, unless you need the equity now so you can go reinvest it into the slower market.
As an investor myself, I totally take advantages of seasonal fluctuations. I do not think that that\u2019s urban legend. I\u2019ve seen from my experience it\u2019s very true. I often tell the David Green Team clients, \u201cIf you want to get top dollar, let\u2019s wait till spring. If you want to get the best deal possible, let start looking for you in the wintertime.\u201d And I increase my own buying during the wintertime. And if I\u2019m going to sell, I try to wait till spring. So just wanted to pass that along to you so you could take advantage as well. Okay. Let\u2019s get to our first video.<\/p>\n
Hello. My name\u2019s Jessica and I live in Dayton, Ohio. I\u2019m a relatively new listener, but I love the Seeing Green episodes the most. So, David, I\u2019m really hoping you can help me with this question. We are looking to get into the real estate investment market. Both work full time. Our home has really appreciated, and so we took out a home equity fixed loan for about $53,000 in hopes that we could then have money to put down towards a rental property. We\u2019re finding that a lot of the homes that are within our price range, which we\u2019re trying to stay as close to $100,000 as possible, which in this market, in the Dayton area, isn\u2019t unheard of, but it\u2019s definitely difficult.
Our realtor mentioned that another client she\u2019s been working with recently started Airbnb their property as a long-term extended stay Airbnb. She said they had a lot of success renting it out to families who are looking to move, but who haven\u2019t secured a new home yet and need a place to live for a couple of months. Or, the other thing that is really, really popular around here, we have several large healthcare organizations in the area and they\u2019re growing. They\u2019re massively growing. So that\u2019s booming. My thought too is what stops us from using a long-term, turning it into an extended stay short-term rental? I haven\u2019t heard you guys talk a lot about that. I don\u2019t know what your guys\u2019 thoughts are. It seems that the profit is a lot easier to get a property to cash flow in today\u2019s market using that strategy. And so I just was curious what your thoughts were on that.<\/p>\n
All right. Thank you, Jessica, for that question. Also, please give your dog a high five or a high paw for me. We saw a little cameo there in the back, very cute. Wanted to get into show business, I see, and it worked. Also, thanks for saying the Seeing Green is your favorite of the BiggerPockets Podcast. I appreciate that. Mostly because I\u2019m hearing your Seeing Green.
All right, let\u2019s get into your question. I like it. You\u2019re talking about I think what you call them more extended stay short-term rentals. There\u2019s all kinds of names. I typically refer to them as mid-term rentals. If you\u2019ve never heard of these before, basically mid-term rentals is something to have on your radar because I think that this is sort of the next wave, the next common trend. There\u2019s always a trend in real estate that people do really well with, this is the next one.
I\u2019ve got 13 units that I\u2019m working on rehabbing right now to bring online. And when that happens, I will have more information for you guys about how to run them efficiently, how to run them productively. I\u2019ll be able to bring all the education that I can. If I talked about it right now, the problem is I would be speculating. I\u2019d be telling you what I think works and what I\u2019m planning on happening, but I don\u2019t have the data yet to support it. I don\u2019t like to talk until I know for sure, it\u2019s just my personality, so keep an eye on that.
The reason mid-term rentals have sort of become popular and are becoming popular is because many areas are outlying short-term rentals. And when they say you can\u2019t do short-term rentals, they\u2019re typically putting a limit on how long someone can stay in the place as the minimum amount of time. They\u2019ll say they got to be there 30 days or more. You can\u2019t rent your unit out for less than 30 days. This is the case in many parts of Hawaii, where I own real estate, where Brandon lives. And then other municipalities are sort of adopting this because the neighbors don\u2019t like these people coming in for two days and throwing big parties and kind of bringing a bad name on short-term rentals.
Because there\u2019s moratoriums put in place and laws being changed that force someone to stay in a rental for 30 days or more, you\u2019re seeing a lot of people that are owning real estate are getting into catering to people that would stay somewhere for that long. And who is that going to be? Traveling professionals like nurses or corporate executives, people that are maybe moving near a hospital, because they have a sick family member that\u2019s going to be there for a long period of time and they want to be close by, somebody taking a temp job sometimes. Maybe someone who\u2019s moving to an area, but isn\u2019t sure if they want to buy or if they want to rent. Sometimes you take a job somewhere and you don\u2019t know if you want to buy a house. Well, you don\u2019t want to pay the expensive rate of a short-term rental, you don\u2019t want to live in a hotel.
So you\u2019ve got these medium-term rentals, which is what I\u2019m calling. I\u2019ve also heard them called long shorts, extended stay short-term rentals was the phrase that you came up with there. And that\u2019s what we\u2019re doing is they\u2019re furnished just like a short-term rental. They operate just like a short-term rental, but you don\u2019t charge as much because you\u2019re not renting them out nightly. And they\u2019re a little bit less work. On the spectrum of tons of work versus very little work, tons of work tends to have higher profit margins. Maybe I\u2019d look at short-term rentals are the very, very end where you get the most profit but the most work.
Long-term rentals or traditional rentals are on the other side, the least amount of work and the least profit. And mid-term are right there in the middle. I\u2019d like to be able to tell you more about it. I don\u2019t know for sure. I\u2019m anticipating it\u2019s going to be very good. I\u2019ve got three properties that are all in California that I currently bought. And two of them are BRRRRs and one of them is not. But I still had to do a rehab to basically get the houses ready to be in really good shape so that I can rent them out to traveling professionals.
I think in areas like California, that allow ADUs\u2026 We have a lot in California where you were not allowed to restrict homeowner\u2019s ability to have an ADU. Cities can\u2019t say you can\u2019t build an ADU. We\u2019re actually allowed to have up to three: a regular house, an ADU and a junior ADU. Of course there\u2019s permitting and code requirements you have to follow, but this is a great market for something like that because you can turn one property into three different units and rent them out to traveling professionals and get much more rent than traditional rentals.
Now, before I get into the details I can\u2019t share, because I don\u2019t know yet, I do want to bring this up as a point to be aware of. I would anticipate that you knew that short-term rentals weren\u2019t going to last because the neighbors complain. If you were paying attention, you would have anticipated, like I did, that medium term rentals would be the next phase. My guess here, and I don\u2019t know this, this is me trying to put on my crystal ball, which looks a lot like my head, is that you\u2019re going to start to see a lot of tenants that start complaining that there are no places left that are affordable to rent. Because all of the real estate investors that we\u2019re using existing inventory that they own to rent to traditional rentals, long-term, many of them have moved into short-term and now you\u2019re going to see them getting into medium term, which means of the rentals that were out there, there\u2019s less supply for long-term tenants and they\u2019re going to start complaining.
When that happens, you typically see politicians pass laws either at the federal state or local levels that restrict your ability to use rentals maybe as a medium-term or short-term. So again, there is no quick answer to real estate. You always have to be adapting. You need to be listening to podcasts like this and staying ahead of the information curve so you don\u2019t get stuck with an asset that you can\u2019t use the way you intended.
I would expect some backlash from the tenant pool that had been renters for a long time as they see their ability to find places to rent is diminishing and the rents are going up on those significantly, because the supply is restrained. So to sum up what I just said, I think the future is mid-term rentals. I think after that, you\u2019re going to see laws that are passed that force landlords to rent their places out as long-term rentals. And that if we don\u2019t build some more freaking houses in some of the busiest areas, this is going to constantly come back to make investors look bad. And it looks like you had a follow-up to your original question that I missed. So we\u2019re going to air it now, and I will reply.<\/p>\n
The other thought that I have, that I wanted to throw by you guys and see what you thought, we have several friends who are also interested in getting into the game. Accumulatively, we could probably put money down on a very nice or multi-home property and do a long-term rental that way. And we have friends who have a little bit more experience than we do, who are interested in partnering, but honestly\u2026 And it sounds great. We\u2019re very interested. We trust these guys. They have more experience, so we would love to learn from them. I don\u2019t know where to start with the partnership.
What kinds of things should a person be considering when partnering on a real estate investment? I guess I\u2019m just curious, is there a contract template or how have you guys done that in the past to make everybody feel secure in the plan? You guys talk a lot about partnering and so I know you have these answers. I think it\u2019s one of those things that when you\u2019re a newbie, you have no idea where to start. But when you\u2019ve done it a few times, you don\u2019t realize the little details that the newbies are wondering. I\u2019d love to know your thoughts. We can\u2019t wait to hear what you think about these things. Thank you so much.<\/p>\n
When it comes to partnerships, first off let me say everybody at BiggerPockets, all the different hosts and personalities and advisors, we all have a different perspective on this. And a lot of that comes down to different personalities, different business goals, different perspectives. There is no right or wrong answer. There is a right or wrong answer for you. Now this may come as a surprise, even though I do talk about partnerships, I tend to err towards not being in favor of them. In fact, I have people that reach out to me about partnerships and it just always seems to go wrong whenever I take that road. I recently did one with someone that I didn\u2019t know and something came up right after the partnership that caused me to question how much I can trust this person, but I\u2019ve already got the money and the deal. I don\u2019t really love that.
Other times I\u2019ve partnered with somebody and they\u2019ve wanted\u2026 They\u2019re fascinated by real estate. They have a million questions and I\u2019m more like, \u201cI want less time put. That deal\u2019s already done. Let it sit. Let\u2019s look at the next one.\u201d So we have different goals. If I do partner, there\u2019s a couple rules of thumb. The deal has to be big enough that it makes sense. I\u2019m typically only going to partner on very expensive residential real estate or multi-family real estate. I don\u2019t want to partner on a smaller deal because instead of the work getting cut in half, you just have to do all the work twice, as both sides want a say and some control over how things go down and it\u2019s not worth my time if it\u2019s not a big deal.
Or, the deal has to be something I\u2019m getting in and out of, I would definitely partner on a flip. I would definitely partner on if it was like a big deal and a BRRRR where I thought I could go in, get my money out and be okay. Those are some of the qualifications that I would say I have when I\u2019m going to partner with somebody else. The right reason to do it is because you have complimentary skill sets. Somebody\u2019s great at finding deals, someone\u2019s great at managing deals. Somebody has construction contacts, the other person has management experience.
The wrong reason is for emotional ones. You don\u2019t want to partner with someone just because you\u2019re afraid to do it on your own. I know what you asked for was tactical stuff to make sure you\u2019re doing in a partnership. What I\u2019m going to say is you\u2019re probably better off, if this isn\u2019t a very big deal, to do it on your own without the partner, because I haven\u2019t had the person yet who came back and said, \u201cThis deal I did with a partner went well.\u201d I\u2019ve always heard it didn\u2019t go well and then they\u2019re not partnering on future deals. The only exception is if you are going to partner in a company, and that company is going to own several properties, and this is someone you\u2019ve known for a long time and you trust.
In that case, the tactical advice I\u2019ll give you is spell out in the operating agreement exactly who will be responsibility for which parts of the managing it. Talk with that person about how long they\u2019re okay having their money and their equity in this partnership. Some people are letting it ride for 40 years, other people want to get that money in and out in six months or two years, and you will have conflict with your partner if you\u2019re not on the same page as far as the time horizon of the velocity of that money, how soon you want to see it returned to you.
Thank you for reaching out. This is also a really good question to put in the forums and see what different people on BiggerPockets have to say about partnerships that they\u2019ve had that went well or went poorly. Last pieces of advice that I will give you, take all the questions that you\u2019re asking me right now, put them in a Google document and sit down with your partner and say, \u201cHere\u2019s what my questions are. How do you think we should handle each of these things?\u201d And then see how many things you\u2019re on the same page with the partner. It\u2019s way better to ask more questions than less.
And then finally you can search BiggerPockets for partnerships. We\u2019ve done episodes with Rob and I talking about the house that we bought in Scottsdale together. Tony and Ashley on the Rookie Podcast have done several episodes on partnerships. There\u2019s much more available to you than I could possibly answer on an episode like this. If you go to BiggerPockets and search both the forums and the podcast for partnerships, let us know what you find.
All right, our next question comes from Tommy C. in Georgia. Tommy says, \u201cI\u2019m a real estate broker in Georgia and an investor. My favorite people to represent our other investors. I\u2019ve grown my business like crazy over the last five years. I did 27 million last year and over 160 transactions. The first quarter, I\u2019m already at 63 transactions and 8 million in sales. My question is, how do I grow a team of agents that want to work with investors to help me serve more clients? What should I look for in those agents? Currently I\u2019m struggling to get to everyone. I don\u2019t want let anyone down, but there\u2019s not enough time in the day. Any thoughts? Thanks.\u201d
Well, Tommy, a very similar problem to what I have run into, is you have a whole bunch of people that want your help, because there\u2019s not very many people that understand how to help clients build wealth of real estate. There\u2019s tons of agents that will help you find a cute kitchen or be near the school district that you want. There\u2019s not many that understand the way that money is built within real estate. Once you get good at that, you start to find that there are more clients coming your way than you have time in the day, which is definitely the case because you look like you\u2019re doing awesome.
The problem is the reason all those clients are coming to you is because there\u2019s not many people that could do what you do, which is the irony in your inability to grow because you can\u2019t find agents that can help those people because there\u2019s not as many people they can do what you can do. I\u2019ve had several different ways I\u2019ve tried to approach this problem. They\u2019ve all been serviceable. None have been amazing. One way is I\u2019ve tried to train agents how to do what I do. The problem with that is you\u2019ll often spend a ton of your time and energy training the agents instead of helping the clients, and then those agents either won\u2019t get it figured out or they will get the information and leave. This happens all the time.
Another one is that they will understand the information, but they won\u2019t have the same work ethic or integrity that you do. They will know how to run the numbers, they\u2019ll know how to find the houses, but they treat the clients like a transaction. You\u2019re just a number I\u2019m here to get you in and out the clients don\u2019t like how that feels, you lose your future business. The reality is it is very difficult to grow real estate sales team. One of the hardest things that there is to grow, and that\u2019s because the people that you\u2019re hiring tend to have different motivations. They just want to get paid more. They want someone to teach them. They want someone to hold their hand. They want someone to help them grow. Then you have, which is you want them to treat your clients as if it\u2019s their own.
There is no easy way around this, and this is why most of the advice that I give to the investors and the buyers is quit expecting your agent to be able to do everything you need them to do. You almost have to train your agent. If the people that you work with know how to run numbers, know how to figure out the ARV and they can just tell the agent what they need and the agent could go and gets it, that\u2019s typically the best situation for all parties involved. I wish I had an easy answer to give you, but I\u2019m in the same boat. We constantly hire agents train them and then they leave. Or it was harder to make money than what they thought they were going to make.
Now I\u2019m in California where one, even if we have the information, people trying to buy the best houses that are getting tons of competition, get out bid. It\u2019s very frustrating. I think in Georgia, where your price-to-rent ratio is a little more solid, finding cash flowing deals is probably a little bit easier for you. In fact, I like your model so much I\u2019m actually going across the country, I just got back from traveling for 30 days, and meeting with different agents to try to find David Green Team expansion agents in the markets that cash flow strong, so when people come to me and want to buy investment property, I can say, \u201cBoom, I\u2019ve already got this person that I\u2019ve trained.\u201d It might be worth you and I having a talk at some point in the future.
But that\u2019s really the challenge that you\u2019re having, is that we have to figure out a way to serve our clients. That\u2019s the ultimate goal. And doing that is something you\u2019ve done well, that\u2019s why you\u2019ve grown the brokerage so big. Finding the people that are going to have the same level of care that you do is very challenging. So, my ultimate or my last response for you would be probably focus a little bit less on the knowledge they already have and focus on the integrity of the person that you\u2019re hiring. You can always teach them the knowledge, but you can\u2019t change their character. And focus on hiring agents that also own property.
It\u2019s part of why you work so well with investors, is you are an investor. You understand when you\u2019re looking at the deal what you would be doing for yourself, so you know how to help the clients. If you find agents that also own real estate, they are much more likely to be looking at that opportunity for the client from the lens that they would be looking at it themselves. And we always do better when we\u2019re thinking about what benefits us than when we\u2019re thinking about what benefits other people. If you can get those interests aligned, that will help. Thank you for your question. Let us know how that goes.
All right. We\u2019ve had some great questions so far and I want to thank everyone for submitting them. Please take a minute to make sure to like, comment and subscribe to the YouTube channel if you\u2019re listening to us on YouTube. I got all dressed up for you guys today. What do you think about the clothes that I\u2019m wearing on today\u2019s show? Here are some comments from our previous episodes I\u2019d like to share with you.
Matheus Chaves says, \u201cThank you, David Green. I listen every day to your podcast.\u201d Well, first off, thank you for thinking it\u2019s my podcast, but I\u2019m really just a humble servant of the podcast itself. \u201cI\u2019m finally going to get myself into real estate and this was the show that gave me the final push.\u201d Okay, that makes me feel good. I\u2019m very glad to hear that I helped you get over that hump. Have very low expectations for your first deal, slightly lower expectations on your second deal. By your third deal, you can expect to be doing pretty good. And by the fourth, fifth and sixth deal, you\u2019ll probably be good at it. That\u2019s the best piece of advice I could give you.
Next comment comes from Rea Vera. \u201cI love the long answers. Love David with and without the others, the entire show with all of his personalities is incredible.\u201d Well thank you for that. I\u2019ve often wondered if I need to keep my answers shorter or if I should go on the longer stream of consciousness so you guys can kind of understand the logic behind why I give the answer. Glad to hear that you like it when I take a little bit more time and effort to answer the questions.
Tim Kauflin says, \u201cWhat happened to the green background? How am I supposed to know that this is really Seeing Green?\u201d Funny you say that, Tim, sometimes I forget to change the light that\u2019s behind my head because I am so excited to start sharing information with all of our audience. Today\u2019s shows was one of those shows. And because I saw this comment, I went back and rerecorded everything with the green light instead of the blue. That\u2019s one of the telltale signs that it\u2019s a Seeing Green episode. A few other telltale signs you can know, it says Seeing Green in the title, there\u2019s no other podcast host with me, and it\u2019s me playing videos and listening to them and commenting on those videos. If you don\u2019t see the green light, or you\u2019re listening to this on iTunes or Spotify or Stitcher and you don\u2019t see the background, you can still feel assured that you\u2019re listening to the Seeing Green episode if it fits any of those qualifications. And lastly, if you\u2019re seeing me, you\u2019re already seeing Green, so it doesn\u2019t matter what color the light is.
Angelo comments, \u201cThank you for reading my question, Dave, very much appreciated. Even missing fine detail, like we all do, your points come across crystal clear, great skill that you have. I like the longer form answers, the creative ideas on how to approach all of the questions people have. You take time to answer, give examples and provide analogies.\u201d Well, thank you for that, Angelo. I\u2019m glad that you like it. Make sure you subscribe to this channel so you get notified when we put out future Seeing Green episodes.
And our last comment comes from Karl Hackman. \u201cI love your content and the way you break it down so anyone can understand. Would love if you would show your book collection, favorite book.\u201d So bit of an Easter egg there. I\u2019ve got my book collection right here. However, they\u2019re too blurry for you to actually read, because I\u2019m doing that cool thing that YouTubers do where we\u2019re in focus but what is behind us is not. So you can\u2019t really see what those books are. However, if you want to actually submit a question on Seeing Green and say, \u201cDavid, what are some of your favorite books that are behind you?\u201d Maybe I\u2019ll take a minute and make a segment where I pull those books out and show them to the camera so you can all see what some of my favorite books are.
All right, are these questions and are these comments resonating with you? Do you have situations that are similar and you\u2019d like me to answer? I need to know. Tell me in the comments. Tell me what type of stuff you\u2019d like us to cover, what we can change to make the show better, what you didn\u2019t like about or what your favorite parts are. Or, just say something really funny, because I read them and so does the staff at BiggerPockets, and we love to see what you guys are thinking. The comments section is the best way to get your point of view across, so please go there and leave comments and hopefully we read one of them in a future show.
All right, let\u2019s get to our next question from Shaun Nichols.<\/p>\n
Hey David, thank you so much for taking this question. Essentially, my question boils down to what tips tricks or pitfalls do I need to watch out for when wholetailing or essentially working as an iBuyer? I\u2019m a real estate agent and investor in the Columbia, South Carolina markets. And I actually work with an investor who runs an iBuyer program. And essentially what we do is I go in as his local rep and make an offer on a property, 100% of market value, no repairs, no showings, all that good stuff, for like a 12% fee plus the 6% realtor fee. Or, we give them the option, \u201cHey, you can either sell it to my investor, or I can put it on the market for you at just a 6% fee and he\u2019s willing to do it for any property under $1 million.\u201d
Essentially I\u2019m wanting to do the same thing. I\u2019m wanting to be able to go in and tell a client or a potential client, \u201cHey, I\u2019m willing to buy your house at 100% of market value, as is, for a 12% fee. Or, I\u2019ll list your property for a 6% fee,\u201d and give them both options to see whatever works for them. If they do decide to sell the property to me, I\u2019m just planning on putting it right back on the market for the exact same price that they sold it to me for.
What things do I need to be watching out for with this? Obviously it\u2019s going to take a lot of cash, a lot of capital, to be able to do something like this, especially if you\u2019re planning on buying the house in cash. But I\u2019d love your opinion on things I need to watch out for. Obviously, I don\u2019t want to be like Zillow and go in and offer what this estimate is and go broke. So any advice or feedback you can provide me, I\u2019d really appreciate it. Thanks. Talk to you soon.<\/p>\n
All right. Thank you, Sean. A few things that you are indeed going to need to look out for. The first is you\u2019re blurring the line pretty significantly here between the fiduciary duty of a licensed real estate agent and the non-fiduciary duty of buying a house for yourself. I would have a long and well thought out conversation with your broker to find out what forms they would need you to get signed, to where it was disclosed to the person when you\u2019re acting in the capacity of an agent and when you\u2019re buying it for yourself. One angry family member could get you in a lot of hot water with a lawsuit when you buy grandma\u2019s house for what ends up being a discount and they feel like you could have sold it for more on the open market. And even though you explained this to them, in your opinion, they thought that as a licensed real estate agent you were telling them that the iBuyer option was her best option.
This can happen. This is one of the reasons that wholesaling is, in some ways, considered to be illegal in a lot of different markets. It\u2019s especially troublesome the person\u2019s a licensed agent. Now, I understand how frustrating this is, because as a licensed agent, there\u2019s a bazillion hoops that they make you jump through. And then as a wholesaler, it\u2019s the Wild West, you could do whatever you want. Personally, I think that there needs to be some legislation passed to bring some clarity on this because it\u2019s not fair that people who play the game fairly and go get their real estate license have so much more restrictions, so much more regulation and so much more exposure to being sued than the person who doesn\u2019t have their license, isn\u2019t representing the client is just going there to buy the house for themselves.
But as the way it stands now, in many areas, you are able to do both. So talking to your broker to make sure you don\u2019t get in trouble with the state or the governing board over your license would be the first thing that you should do. Having disclosures to fill out would be another thing for you to consider. Now the third piece would just be your personal exposure. If you\u2019re going in and you\u2019re paying fair market value for houses, like what the iBuyer person you work for is doing, or if you\u2019re trying to get them at lower priced houses, but you don\u2019t have cash, you actually have to think about you\u2019re taking on some risk.
If you\u2019re going to borrow money from a hard money lender, if you are going to borrow private money, if you\u2019re going to take out a HELOC. Where\u2019s this cash going to come from? Because if you try to refinance out of these houses that you buy, you\u2019re only going to probably pull 75 to 80% of the value of the home out. That\u2019s about the LTV that you\u2019re going to get. If you use cash to buy the property for 100% of the appraise value, and then you go get a loan on it, you\u2019re still going to be stuck with 20 to 25% of the money you borrowed from the hard money lender that you can\u2019t get out when you go to refinance into conventional loan. Which means that you probably have to be buying them at 20 to 25% under market value to not run out of capital, which now puts you back in the tricky spot where you\u2019re offering them significantly less to buy it yourself versus if you go sell it and put it on the market.
I don\u2019t know for sure, and I can\u2019t give you legal advice, but here\u2019s what my gut is thinking if I was in your spot. I would find a different license person to refer business to when you find a person that wants to sell it and put it on the market and focus more on buying the houses that you want to buy yourself, than trying to do both and sort of remove yourself from that legal problem that you can run into when you\u2019re trying to act in two different capacities. Thank you for your question and let us know how that goes.
And our next question comes from Tony Spencer. Tony asks about scaling using DSCR loans. If you haven\u2019t heard of these DSCR, stands for Debt Service Coverage Ratio. And it\u2019s a fancy way of saying a loan that is based off income that the property makes, not income that the borrower makes themselves. \u201cHello, David, I wanted to ask you a question about scaling a portfolio, specifically investing in short-term rentals. My understanding is that a DSCR loan has a five year prepay penalty.\u201d I\u2019ll say most of them do, Tony. A five year prepay penalty means if you refinance or sell that loan or pay it off in any way within five years, you typically are going to receive a penalty and money that you have to pay back to the lender because they gave you that loan expecting to receive interest on it for at least five years.
\u201cRight now I\u2019m BRRRRing an investment property with about 400,000 in equity once it\u2019s done. My debt-to-income ratio is now maxed, so a DSCR loan for my first out-of-state short-term rental makes the most sense.\u201d Like I said earlier, DSCR loans take into consideration the income from the property, not the income from the borrower. So if Tony\u2019s debt-to-income ratio is maxed out and he can\u2019t get a loan with his own income, he still can with the property\u2019s income. \u201cBut then how do I buy the next few deals after that? I\u2019m sure I can just save up the cash for another down payment, but that could easily take two to three years. Is it possible to do a HELOC on a DSCR property or do I just bite the bullet and pay the penalty once I\u2019ve got the equity needed? I do have roughly 750,000 in equity in my primary residence, but my wife and I are really not comfortable pulling that out.\u201d
\u201cAnother possibility I\u2019ve considered is some type of partnership deal, but that is totally foreign to me. And that\u2019s definitely not my preference. Side note, I\u2019m basically working two jobs right now, a full-time 24-hour shifts as a firefighter, and remodeling an investment property on my days off. In addition to that, I\u2019ve got a one-year-old and a three-year-old at home, but I still make sure to schedule time to listen to this podcast and interact with the BP community. That\u2019s how much value represents me. It\u2019s such an amazing platform and source of information.\u201d Amazing. Well, Tony, thank you. And let me just give a shout out to your fire department. I don\u2019t know the name of it, but if you guys are working with Tony and you listen to this, thank you for the service that you do. I hope all you firefighters out there are eating healthy food and getting workouts with weights and getting to sleep at work like us police officers never got to.
All right, now let\u2019s get to your actual question here, how do you keep buying properties when there\u2019s a pre-payment penalty and you have to use the DSCR loans? Well, the first thing I would say here is you can usually avoid the pre-payment penalty if you pay more upfront for the loan. So if you increase your closing costs, usually a couple points, you can have that prepayment penalty waived. If not, yeah, you might just have to pay it. When you go to refinance. It\u2019s better than not getting a deal at all if your personal debt to income ratio is maxed out. Another thing you could do is use these DSCR loans while it paying down your own debt and increasing your income so that you can use your DTI to get a conventional loan when it\u2019s clear, and use DSCR loans for whatever periods of time it\u2019s not.
Is it possible to do a HELOC on a DSCR property? It\u2019s possible to do a HELOC on any property. It doesn\u2019t really matter what loan you get against the property, because the bank giving the HELOC is just concerned with the equity that you have in the property. They don\u2019t care what type of loan you have in first position. A HELOC is a second position loan basically, that\u2019s qualified based off of your ability to make the payment and the equity that is in the house, so they end up in second position to the first. In that case, your problem isn\u2019t going to be because it\u2019s a DSCR loan. Your problem is going to be because HELOCs are notoriously difficult to get on investment property. They are much easier to get on a primary residence, which is why it would make more sense for you to pull it out of your primary. But then you say that your wife and I are not really comfortable pulling it out.
Here\u2019s my question to your wife and you, does it matter if you\u2019re pulling the equity out of your primary residents versus the investment property? Are you planning on not making the payment for either one? If you\u2019re a firefighter, I\u2019m assuming that means that you can work overtime if you end up in some kind of financial jam and you have to pay back the loan that you took out. So if you\u2019re going to take a HELOC on investment property, why wouldn\u2019t you just take a HELOC on your primary residence? You\u2019re going to get a better rate and it\u2019ll be easier. In my mind, it doesn\u2019t really make a difference which asset you take the HELOC out against, especially if you have so much equity in your primary.
Let\u2019s go worst case scenario. Let\u2019s say you take the HELOC on your primary and someone steals your money, you buy the worst deal ever, aliens come and take your house and fly away with it and you have no collateral. Something crazy happens. Well, you didn\u2019t borrow against the whole 750,000 that you had in your primary. You probably didn\u2019t need that much cash. So worst, worst, worst case scenario, you can\u2019t work overtime and pay back that money over a longer period of time, you can\u2019t afford the payment. You sell your house, because it still has a lot of equity. You pay off all the debt you have. You and your wife go house [inaudible 00:33:18], get a smaller house. Okay? That\u2019s not ideal, but that\u2019s not bad for a worse case scenario when you could be buying more real estate with the money that came from that, growing a portfolio that will pay your mortgage for you and your HELOC for you with the rental income that comes in.
I\u2019d probably have the conversation about why are we afraid about taking a HELOC on our primary? See if you can get to the bottom of where those fears come from, and maybe look at that differently. And then yeah, you\u2019re probably going to have to use DSCR loans until your DTI is changed. And that\u2019s okay. If you got to pay a prepayment penalty, that\u2019s okay. If you don\u2019t want to pay the prepayment penalty, get the loan in the beginning and pay to not have it. You\u2019re going to have to pay a little bit more upfront. Thanks for that question. And I hope work goes well and you stay safe out there, brother.
Next question comes from Chris Roberts in Chattanooga it\u2019s funny. I was just in Chattanooga not too long ago flying out of their airport. \u201cHi, David. BP has become sort of therapy hour for me lately and I appreciate it. I\u2019ve spent my life in the food industry and need to be doing something different. My wife and I bought a second home to fix up, got a HELOC on our primary residence to finance the rehab. And now I\u2019m trying to figure out if we should sell the primary when we\u2019re moved in, walk away after the HELOC is paid back with maybe 15,000, or keep it and rent it out. That\u2019ll give me about 450 a month in cash flow, considering the HELOC payment in this equation and then the journey could start. I\u2019m also a real estate agent here and love working on project homes. I\u2019m just feeling a little lost in the direction to take with my life, but feel like BP could be a part of it. Thanks for all you offer. And Rob is awesome to, Chris.\u201d
All right, Chris, I think I can actually make this question very simple for you. You took out of HELOC on your primary. You used that to buy the second house you\u2019re fixing up and now you\u2019re trying to figure out, should you pay off the HELOC or should you sell your home and use the proceeds to pay it off and walk away with about $15,000? The question that you got to ask yourself is would you rather have your house you have now, or would you rather have $15,000 in cash? Now when I say the house you have now, what I\u2019m referring to is the house with the HELOC against it. When you consider keeping the house, it looks like you\u2019re saying that you could rent it out for $450 a month extra, that\u2019s the cash flow you\u2019re going to make after your primary mortgage is paid and your HELOC is paid. So now the question becomes even more simple. Would I rather have $450 a month or would I rather have $15,000 in the bank?
Let\u2019s do a little calculation to see what kind of a return 450 is on 15,000. We\u2019re going to take 450 times 12, which is 5,400 divide that by 15,000 and that\u2019s a 36% return on that money. Do you think you can sell that house, take 15 grand and get more than a 36% return on the money? Probably not. Makes it pretty clear that you need to keep that house as a rental property, rent it out and go buy a different house to live in. I especially like that idea because now you get to use an FHA loan or a primary residence loan, somewhere between three and a half to 5% down, to get your next house, which means you don\u2019t need a ton of capital to do it. And that house could become your next rental property after you\u2019re done living there. You are in a great position. You shouldn\u2019t feel bad at all. Well done my friend, keep going.<\/p>\n
Hi David. My question is about the three or 5% down. You\u2019ve mentioned several times that your suggestion is to take great funding, put three or 5% down, house hack, and then just rinse and repeat that. My question lies in the fact that I live in California. I live in Sacramento and properties are quite expensive out here, like 400,000 easy. I hate where I live, so it doesn\u2019t do me any good to buy something super cheap just to end up in a crummy neighborhood like where I\u2019m currently living. I\u2019m looking to purchase something in a nicer neighborhood. You\u2019re 500,000, 600,000. If I want to house hack or create a situation where I can generate some income, then it\u2019s definitely going to be in the higher price point.
I don\u2019t understand how I can make this work according to your suggestion, because putting three or 5% down makes the mortgage unpayable. Can you give an example or give some specifics on how I can make this work in my California market? That would be awesome. Thank you.\u201d<\/p>\n
All right. Thank you, JD. Now I understand that you actually had a little bit of trouble getting acknowledgement for the video submission that you put in here. I can see that you are very eager to make some progress, so a few words of suggestion for you. One, if you ever have a question like this, that you feel is very urgent and you need answered, please consider in addition to spinning it to us here at biggerpockets.com\/David, go to the BiggerPockets forums and ask it there. Also, I have an agent on my team. He\u2019s been interviewed on the BiggerPockets, money show. He\u2019s been on the BiggerPockets YouTube general, Kyle Rankie, he and Brandon Turner are my two best friends. He works in the Sacramento market. You should reach out to him. He would be happy to help you with this question because we know that market very well.
Now I\u2019m really glad you asked this question because it gives me each chance to clarify a few things for you. You said that it\u2019s very difficult to find a property that will generate income as a house hack when you\u2019re only putting three and a half to 5% down. That is right. It\u2019s notoriously difficult, almost impossible most of the time. Here\u2019s where I think you got confused. House hacking is not meant to generate income. House hacking is meant to save money that you were spending on rent. It\u2019s not something that you should be approaching thinking, \u201cHow much money am I going to make?\u201d It\u2019s something you should be approaching with the idea of how much money can I save.
So for instance, if rent in Sacramento where you\u2019re living is $2,500 a month and we can get you a house hack that after your tenant pays you rent, you\u2019re only paying 500 a month or a thousand a month, you\u2019re actually saving 1500 to $2000 a month. Now you\u2019re not making anything because you\u2019re still coming out of pocket somewhere between 500 to 1000, but that is significantly less than what your rent would be. Now you may say, \u201cWell, I\u2019m living in a house. I\u2019m not paying rent.\u201d That\u2019s true, but you have a mortgage still. If you\u2019re able to move out of the one you\u2019re in, if you own it, rent it to someone else, break even or make some cash flow on that and then drop the payment that you are making of maybe 2,500 a month or 3000 a month, down to the 500 to $1000 a month that you\u2019re coming out of pocket to house hack, you\u2019re saving money and you\u2019re adding an additional property to your portfolio.
Now I\u2019m really glad that you submitted this question and we selected it specifically because I need to highlight I\u2019m always telling people to house hack. But the assumption is I should be able to live in a property which takes up one of the units that would normally be rented, put very little money down, three and a half to 5% instead of 20%, and still have it cash flow. And this is why house hackers get so frustrated. In some markets that might work. If you\u2019re in the South, if you\u2019re in the Midwest, if you\u2019re in a place with very low price-to-rent ratios and it\u2019s a fourplex or a triplex, you might be able to house hack and still make a little bit of money. But if you\u2019re in expensive market like California, Sacramento, Northern California, the value is not that you\u2019re making money every month. The value is that you\u2019re owning real estate that\u2019s going to go up in value. The rents are going to be going up in value. The price of the asset\u2019s going to be going up in value. And most importantly, the rent that your landlord is charging you isn\u2019t happening anymore because when you\u2019re renting, your rents go up every year.
Just like when you own the home and you get to increase the rents every year, when you don\u2019t own the home, the rents get increased on you. In basketball, we had this concept called a four point swing. Imagine that you\u2019re on a fast break, you\u2019ve got a wide open layup. You miss it. The other team gets the rebound, the throw the ball the other side and then they get an open layup. It\u2019s not that they scored two points, it\u2019s that you lost four points and they scored two points, equaling a four point swing. That\u2019s like the worst thing that can happen.
The same is true of you don\u2019t house hack, not only are you not raising rents on your tenants, but you\u2019re having them raised on you. That doubles the impact of the power of real estate but it\u2019s working against you. When you own the asset, you\u2019re getting the four point swing in your favor. You\u2019re getting to increase the rents every year and you\u2019re not having them increased on you at the same time that the value of your asset is going up over time, and you\u2019re adding another home to your portfolio. What I\u2019m getting at here is house hacking is incredibly powerful, but it doesn\u2019t work if you\u2019re trying to force it to cash flow. Don\u2019t just think about making money every month, think about the money you\u2019re saving and doing this.
And the last piece of advice I\u2019ll give, if you go make $500 in cash flow investing out of state somewhere else, that\u2019s going to be taxed. Let\u2019s say you get to keep 350 out of that $500. Okay? If you save $500 in rent, it\u2019s not taxed. You\u2019re actually keeping the full 500. So you\u2019re only taxed on money you earn, you\u2019re not taxed on money you save. And this is why I constantly tell people that are trying to build wealth, \u201cStart with what you\u2019re spending. Start by spending less. Start by decreasing the amount of money you spend all the time, because you\u2019re not getting taxed on what you save. It has a bigger impact.\u201d Okay?
If you want to actually make 500 bucks, maybe you have to earn 700 because you are only going to keep a percentage of it. So saving 500 in rent is the equivalent of making $700 in an out-of-state market, which is very difficult to do. Hope that helps answer your question. Thank you for your patience and working with this and get on those BiggerPockets, forums and ask more questions there. All right. I am very glad we got another episode of Seeing Green on the books.
I went pretty quickly here, but that let me bring more value to you by answering more questions. Hope you guys enjoyed this. And I hope that if you\u2019d like to be considered to be on this show, please go to BiggerPockets.com\/David and submit your question. Also, if you\u2019re not following us on YouTube, please do that there where you can like, comment and subscribe and we can see what you have to say about the show.
If you\u2019d like to follow me on social media, I\u2019m @DavidGreen24. You can find me there. But your best chance of getting ahold of me is to submit a question here through BiggerPockets and hopefully be on the podcast yourself. Thanks again for giving me your attention and for coming here to get your information about wealth building through real estate. I appreciate that I am the one that gets to lead you through this journey. Thank you for your support and we\u2019ll catch you on the next episode.<\/p>\n<\/div>\n