\n<\/p>\n
A rental property<\/strong> doesn\u2019t need to be brand new, have the best amenities, or offer 24\/7 property management to do well. An older home can out-cash-flow a new build with one specific factor<\/strong>. So, what is THE key to having a profitable rental property<\/strong>, and why do so many rookie real estate investors not pay attention to it? Tune in, and find out on this week\u2019s episode of Seeing Greene<\/strong>!<\/p>\n We\u2019re back with your \u201cI finally remembered to turn on the green light!\u201d host, David Greene. This time around, David is taking questions from all levels of real estate investors. Questions like what to do when your <\/strong>HELOC<\/strong> (home equity line of credit)<\/a> rate is about to skyrocket<\/strong>, how fast to scale your rental portfolio<\/strong>, whether new homes <\/strong>are worth it as rentals<\/strong>, and how to turn a couple of rental properties into a real estate retirement plan<\/strong>. We even get a quick cameo from tax expert Tom Wheelwright <\/strong>on how to avoid taxes <\/strong>the next time you\u2019re selling a rental!<\/p>\n Want to ask David a question? If so, <\/strong>submit your question here<\/strong><\/a> so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums<\/strong><\/a> and ask other investors their take, or follow David on Instagram<\/strong><\/a> to see when he\u2019s going live so you can hop on a live Q&A and get your question answered on the spot!<\/p>\n David: Clint: David: Kyle: David: Tom: David: Veronica: David: \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show 759. All things being equal. It is absolutely better to buy a new home than it is to buy a resale home. But all things are usually not equal. In any market, they typically build homes in the most desirable areas first. So, after they built on the best land, they then go to slowly inferior land as the construction develops. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is.
What\u2019s going on everyone? Glad that you\u2019re here. This is me, David Green, your host of the BiggerPockets Real Estate Podcast here today with a silky, smooth, Seeing Greene show. If you haven\u2019t heard one of these before, there are variation of the podcast where I take questions from you, our listener, and I answer them directly, so everybody else can hear giving financial advice, real estate help, guidance, encouragement, support, even a little bit of chastisement if you need it. Whatever it is, it get you over that hump and into building wealth through real estate.
In today\u2019s show, we talk about several wealth building strategies and ideas, including what to think through when a family member leaves your property, if you should buy a new home and make it a rental, if the numbers work or if you should stick with resales, and how to evaluate a bigger opportunity versus keeping the great interest rate that you have. All questions that are on people\u2019s minds everywhere with the shifting economy that we are going through all for your listening enjoyment.
Before we get to our first question, today\u2019s quick tip, brought to you by Batman. What is something hard that you can go do today? Can you disrupt your comfort zone? I just want you to start small and put big intention behind making a change towards tomorrow. Don\u2019t let your brain tell you you need to go do something huge. You got to build momentum to get to something huge. Can you take a short run? Can you eat a piece of broccoli? Can you do 10 pushups right now? Can you just do the littlest thing that before you check your phone, you do five calf raises just to get in the habit of doing something different than what you\u2019ve been doing, get new juices flowing to your brain and seeing new results?
And remember, if you want to be featured on an episode of Seeing Greene, just go to biggerpcokets.com\/david, submit your question there, and hopefully we can get you on the show. All right. Let\u2019s check out our first question.<\/p>\n
What\u2019s up, David? Love the podcast. Thanks for everything you do. My question is this. I purchased my first rental property in December for $220,000. I used a HELOC from my primary residence for the down payment, and I was planning to do a BRRRR after the six-month seasoning period is over, which is July, and the goal was basically just to recoup the down payment and move on to the next one. The house is in a great, great market, and I have almost 100,000 in equity after six months. My current interest rate is 3.5% which is fixed. The HELOC is adjustable interest rate, but it\u2019s at 4.5% over a 10-year period. The current cash flow is about $400 a month after all expenses, so it is cash flowing pretty good. The problem is the rates have skyrocketed in the last six months since December, and a cash-out refi would basically eliminate all of my cash flow, whereas the HELOC interest rate is not fixed, but worst case scenario could basically double to like 9% and I would still be cash flow positive.
So, I\u2019m struggling a little bit on an exit strategy to pay back the HELOC. Do you have any suggestions for a different strategy to recoup my down payment, pay off the HELOC? I\u2019m actually considering doing a flip in my area with the simple goal of just paying down the HELOC. Once I do, my cash flow will increase about $200, give or take, so I\u2019ll be at about $600 a month once I pay down the HELOC.
So, my question is really, do you have any other strategies for recouping costs when the BRRRR strategy doesn\u2019t necessarily make sense right now because of interest rates? Am I missing something altogether? I would love your feedback. Love to hear what you have to say about this particular scenario, and thanks in advance.<\/p>\n
All right. Thank you, Clint. Couple things to go over here. I don\u2019t know that it\u2019s that the BRRRR strategy doesn\u2019t work right now because of interest rates. It\u2019s more that when you got into the BRRRR\u2026 when we get into the BRRRRs, we\u2019re basing the end result off of today\u2019s interest rates, and when interest rates go up, that means the deal doesn\u2019t work out like we originally analyzed it too. So, what\u2019s happening is, we\u2019re paying more for the property upfront than we should if we knew what the interest rates were going to be at the end. So, I still think you made a good move. You still have a lot of equity in this deal, and you have two very good interest rates, one in the threes and one in the mid-fours. This is much better than I was thinking I was going to hear when I first started listen to your question, so let\u2019s tackle what your options would be here.
First of all, you mentioned paying off the HELOC to increase your cash flow by $200 a month. That would work, but that isn\u2019t the reason I would want you to pay off the HELOC. I would want you to pay off the HELOC because it\u2019s not going to be 4.4% when it adjusts. You\u2019re incredibly lucky you\u2019re there. Some of the HELOCs that I\u2019ve been seeing on investment properties have been quoted as high as 11.5%, so you need to pay that thing off for safety reasons, for defense, not for more offense, so to speak.
Now, that would move us into talking about, I guess, another question. Should you refinance, get your money back out, or should you keep these rates? I\u2019m leaning towards keeping the rates, but here\u2019s how I would make the decision if I was you. If you pull your money out, can you invest that money and get a $400 a month return on that money because that\u2019s what your cash flow is on this current deal? If you can invest that money and get $400 in another deal, it makes sense to keep the original one breaking even and just paying off the mortgage and getting rent increases every year that eventually become cash flow and acquire another asset that replaces the 400 you lost. So, if that\u2019s the decision that you make, you end up with two properties instead of one. You add equity to the second property just like you did to the first, which increases your net worth. You replace the cash flow that you lost with a new property, so you don\u2019t lose anything there, and your original property doesn\u2019t cash flow, but it will cash flow later because real estate will go up over time and so will the rents. If you\u2019re not able to reinvest that money in another property and get that same $400 a month, it might make sense to just keep the rates that you have and look to make money in a different way.
The real estate, which you kind of alluded to and you talked about house flipping, I think that\u2019s a great idea. If rates are going up faster than you can control to make the BRRRR work at the price you pay in the original amount, you probably want to move away from BRRRR, right? Like BRRRRs are very close to flips. You could flip a property instead of refinancing, and it\u2019s a very, very similar process. Maybe you plan on that. You go after the equity, you know what the cashflow will be if rates are at a certain point, but if rates go up more than that, you just sell it. You actually could probably sell the property you\u2019re at right now, and you could recoup some of your money that way. You don\u2019t have to refinance it to get the money out. You could sell it, turn that into a flip, and then go do it again.
So, this is why knowing different strategies helps because in certain markets like this one where you started with a BRRRR, it worked as a BRRRR. It just didn\u2019t work perfectly. You\u2019re not able to get your money back out of it. You ended up with a great traditional rental here. You could just flip the next house. Look for a property, has a lot of meat on the bone, add value to it, buy it right. Decide at the end, do I want to flip it and get some cash which I could use to pay off my HELOC, or do I want to keep it refinance and go on to the next one?
But that\u2019s the advice I\u2019d give to everybody that\u2019s in your position where they\u2019ve got BRRRRs that are having a harder time working out. Just ask yourself if selling it makes more sense or if holding it makes more sense. As long as there\u2019s new deals that are coming into your funnel here, you\u2019re fine to sell real estate and buy new ones. The problem becomes when you don\u2019t have new deals coming into your funnel. If you sell the property and flip it, you end up with nothing, you have nowhere to reinvest that money again, and you have no long-term cash flow. So, what you want to avoid is having no deal flow. As long as you\u2019ve got deal flow, whether it\u2019s a hold, as a BRRRR, or whether it\u2019s a sell as a flip, you\u2019ll make money in one of those directions and keep snowballing it into new deals.
Thank you very much. Let me know how that turns out.
All right. Our next video clip comes from Kyle Wilkin in Asheville, North Carolina.<\/p>\n
Hey, David. My name is Kyle Wilkin. I live in Asheville, North Carolina. We bought our first home in 2020, so we got a really good interest rate. We currently rent out our basement and are able to pay our mortgage each month with that money. So, we\u2019re trying to figure out what\u2019s next. And my question for you today is how much is too much when we\u2019re making this first step in our investment careers? There\u2019s a farm that\u2019s 22 acres, has four buildings on it. We would rent out three of those and live in one of them because we would have to sell this home to put the down payment down on that farm.
So, I\u2019m not asking if it\u2019s a good deal because I think it\u2019s a good deal, but my question is just if you were in the beginning stages of investing, would you recommend us making a leap for something bigger like this farm where we can store my landscaping equipment because I have my own business and rent out three of the homes and potentially have some more land to sell off later, or create other business stuff like wedding venues or stuff like that, or would you recommend us sticking with what we have in our home and the income from our basement until we can get another single family home? And that would allow us obviously to have more cash flow at the beginning stages.
So, I\u2019m just curious what you would advise people like us who are just getting into the game. Thanks, man.<\/p>\n
Kyle, this is a great question. I love this. All right. Thank you first off for saying you\u2019re not asking if it\u2019s a good deal. You already know it\u2019s a good deal because now I can give you advice based on the assumption that this property\u2019s a good deal that has three houses that could be rented out as well as a barn to store things.
I\u2019m assuming when you say good deal, you\u2019re meaning that it will cash flow and that the return will be something that you\u2019re happy with. Now, the part where your question gets tricky is that you\u2019re saying you have to sell the home you\u2019re in to put the down payment on the farm. I don\u2019t love to put the down payment on this next opportunity. I don\u2019t love that. You\u2019re living for free right now. The tenant is literally making your entire mortgage payment renting out the basement. That is a big win for you. I don\u2019t know what rent would be. I\u2019m assuming it\u2019s somewhere around $2,000 a month, so you\u2019re cash flowing positive whatever that mortgage is that you\u2019d normally be paying. Let\u2019s assume it\u2019s $2,000. Is this next deal so good that it makes it worth losing that $2,000 a month of cash flow? Because in your head you\u2019re probably thinking of it like this property is a net even. It\u2019s just breaking even. It\u2019s saving you a lot of money, a lot of money. And by the way, you\u2019re not taxed on money that you save. You\u2019re only taxed on money you make. So, a $2,000 savings of not having to pay mortgage is probably more like making $2,500 a month. It\u2019s even better if you sell this property to buy those ones, can you say that it will be the same, right?
I would rather see you take a HELOC on this property you have that\u2019s already awesome for you. Use that as the down payment money for the next one assuming that you have the equity. If you don\u2019t have the equity, can you borrow money from somebody else to buy the next deal? Because as long as you\u2019re paying less than $2,000 a month for the money that you borrow, it\u2019s still better than selling your house and having to take on a mortgage somewhere else.
Now, I think you mentioned that you could move into one of the three houses, so you\u2019d be renting out the other two and getting the storage for your equipment. Run the numbers that way. Can you buy this property with three homes on one lot, live in one of them, also, not have a mortgage, and be a net benefit to where you are right now?
So, let\u2019s just assume it\u2019s apples to apples, right? Right now, you\u2019re living for free. If you buy that one live in one of the units, you\u2019ll be living for free again. Is that real estate worth more than the one you have? Because that could be a win, right? Let\u2019s say you go from a $300,000 of property to $700,000 of property, but it\u2019s still a breakeven for you. Now, you have three potential units going up and rent instead of the two that you\u2019re in right now. There\u2019s an argument to be made that that could work. Is the storage of that barn going to save you money that you were spending to store your equipment somewhere else, and what\u2019s your quality of life like? Do you enjoy the house you\u2019re in more than you would enjoy living in that one?
Here\u2019s what I want to make sure you\u2019re not doing. You crushed it on your first deal. You\u2019re living in North Carolina, you\u2019re living for free on a house act. That is incredibly difficult to do. Most people don\u2019t get to live for free. It\u2019s a win if you just live for less than what it would be to pay the full mortgage. I don\u2019t want you to think that every deal\u2019s going to be like that one and be in a rush to jump into the next one because you had a good experience on the first one, but I also don\u2019t want you to miss out.
So, if I was in your situation, I would look into getting a HELOC on my primary and using that for the down payment. I would look into borrowing the money from someone else and paying them interest to use their money to buy the new property, or I would analyze where I live now and what I\u2019m saving versus where I would live there and what I\u2019d be saving. And if that is a superior move to where you are now, yes, you could sell your house, and you could go buy that property. Just make sure if that\u2019s the road you take that you put it under contract contingent on selling your home so that you don\u2019t lose your deposit. If you\u2019re not able to sell your house or you don\u2019t want to put your house on the market, try to sell it to get the money, and then, when you go to buy this other property, it\u2019s off the market or somebody else has bought it. Let me know how that goes.
All right. Our next question comes from Wendy Clark in Meridian, Idaho. I love your podcast with the very helpful in-depth information you provide and with your sense of humor and your chair swiveling. That is funny. She\u2019s mentioning the chair swiveling because when I start talking and thinking at the same time, I sometimes fidget a little bit, right? So, I\u2019ll do this thing with my chair, or I have a couple other little idiosyncrasies, and she\u2019s calling me out on that. That\u2019s fun.
I currently have no portfolio, but I own my home free and clear in my trust, and I want to know if it\u2019s possible or smart to move into the ownership of my real estate investing LLC instead to rent the house. It\u2019s individual, three bedrooms, two baths to traveling nurses for short to medium term rentals as it would be part of my new REI business, and would this be doable? Is it smart or not smart or helpful?If you\u2019re not the person to ask, I apologize. If not, who would you kindly direct me to be the person that I could ask this to?
Thank you so much, David, for all that you do to teach us and move us forward and upward on your REI journeys. With gratitude, Wendy.
Well, first off, Wendy, that is very sweet of you. You said a lot of very sweet things in here, and I can tell from the way you worded this that you are overwhelmed, and your mind is a little bit jumbled with all the options. Let\u2019s try to take this big ball of yarn and straighten it out into several little strings that we can analyze more clearly.
You did mention that your home is owned free and clear in a trust. So, does that mean that there\u2019s a stipulation that it cannot be used to generate income, or if it generates income that you\u2019re afraid that that means the income has to stay in the trust? That could be what you\u2019re getting at here. I would wonder if you do rent the home out even though it\u2019s in a trust. If you could claim the income as business income that is not related to the property itself? So, maybe the appreciation of the home or the loan pay down the equity that stays in the trust, but the cash flow that comes out of running it.
Could your LLC rent the home in the trust and then keep the additional cash flow? That\u2019d be one way I would look at it. The first thing is you have to ask a lawyer. That\u2019s who you\u2019re going to go to that understands trust law because I don\u2019t. I\u2019ll just tell you that right now. I\u2019m thinking out loud, but I don\u2019t know if that\u2019s the case. Then, you want to talk to your CPA and find out \u201cWhat would the tax implications be if I do this?\u201d If you don\u2019t have a CPA, and you want to sign up with a new one, you could email me in. I\u2019ll put you in touch with the one that I use, but that\u2019s exactly what I would do.
Then, rather than them saying, \u201cNo, you can\u2019t do it.\u201d Here\u2019s what everyone needs to understand. You go back and say, \u201cHow could I do it?\u201d Or you throw options, and you wait for them to say, \u201cOh, yeah, that could work.\u201d So, I just came up off the top of my head, could your real estate investing LLLC rent the home in your trust, and then, lease it out to traveling nurses and keep the profit that it makes while paying your trust rent to use the home that you\u2019re not in anymore, right? I don\u2019t know that that would work, but that\u2019s what I would throw in front of the CPA or the lawyer to find out if that would work.
I love that you\u2019re asking this question of me. I love that you\u2019re being involved in Seeing Greene. You\u2019ve got a great idea. It\u2019s not going to be as challenging as what you\u2019re probably thinking. There is a way around this problem. You just got to ask a CPA and a lawyer what to do. I\u2019d start with the CPA because they\u2019re usually going to be cheaper, and then, I\u2019d ask them if they had a real estate lawyer referral you could talk to.
Thank you, Wendy, for your awesome question, and let me know how that goes.
All right, everyone. Thank you for submitting. My favorite part of the show is we have questions that we can answer, and that\u2019s what you\u2019re all here for. Please make sure to like, comment, and subscribe to the channel.
In this segment of the show, I\u2019m going to read comments that you, I, audience have left on previous shows to see what everybody thinks. These are often fun, insightful, sometimes mean, but usually cool.
Our first comment comes from Professor X. This was just perfect. The answer to the question scenario about paying off properties was exactly what I needed. I\u2019m going to keep working and enjoying living at the same time.
I love hearing that because it\u2019s more about just getting a bunch of money. It\u2019s about getting money in a way that you enjoy and enjoying life while you do it. Thank you, Professor X.
Our next comment comes from Marshall Hennington. By the way guys, these all come from episode 747. If you want to go listen to that and find out why people are commenting.
Excellent, David. You\u2019re a good dude and very humble. I have followed BiggerPockets these last three years, and it inspired me to have acquired two homes, a triplex and two fourplexes, and I\u2019m currently an escrow on another property, and I own my own main home. All due to taking action. Yes, it is. Five years ago, my credit sucked, and I was in debt and had student loans. I cleaned up all those problems and that was five years ago. Now, I\u2019m building a small portfolio. I also plan to pay off three properties in the next three years. If I can do it, anyone can do it. Get to work fellows and start your new life.
Marshall, that is an inspiring comment. That is an encouraging comment. It\u2019s a freaking awesome comment. I love hearing this, and what I love about it is you didn\u2019t just say how you got a deal. Most people come and that\u2019s their question. How do you get the deal? Okay, I got the deal. How do I get my next one? But you actually talked about how you cleaned up your entire life to get the deals. Real estate didn\u2019t just get you some cash flow. Real estate caused you to clean up your credit, pay off your debts, manage your money better, put systems together to scale the multiple properties and be disciplined enough to pay them off.
There are so many benefits that you picked up from your pursuit of real estate, and this is why I tell people, let real estate be the carrot that drives you to make better life decisions. This is my opinion. I don\u2019t speak for everyone. But when I hear people say, \u201cDavid, how do I buy real estate with no or low money down?\u201d My first inclination is to say, \u201cWhy do you have no money? Is there a good reason?\u201d Maybe you have child support payments that are just destroying you, or maybe you\u2019re a caretaker for a sick parent or child and you can\u2019t go make more money. That\u2019s okay. You should not feel any shame about that. But what if it\u2019s just that you\u2019re 38 years old and you still live at your mom\u2019s basement chasing the dream of being a video game engineer, and you need to let that go and get your grown man on.
What if you have terrible spending habits, and you make good money, but it flies out the window just as easily because you\u2019re not disciplined? Is the fact that we don\u2019t have money an indication of a bigger problem in our lives? It\u2019s easy to look for a way around that. Well, how do I buy real estate without having to change anything about my life? I don\u2019t like it. I\u2019d rather that we said, \u201cI want to buy real estate.\u201d These are the habits that are getting in the way of buying real estate. I need to change them, okay? If you want to have a six-pack, of course, there\u2019s always an answer around it. You could get liposuction, okay? You could have ab implants. I think that that\u2019s a thing that people actually get to look like they have it, or you could say, my lack of exercise, my poor diet, my lack of sleep, my issues are stopping me from having a six-pack.
I\u2019m going to go make changes in my life so that I could get what I want, way healthier. Not only to get the six-pack. You get better cholesterol levels, more healthy life, better energy overall, a better mood. A lot of you might meet people at the gym that are friends. A lot of benefits that will come out of making these changes. The book I\u2019m working on for BiggerPockets right now, keep an eye out for it. It\u2019s going to be called Pillars of Wealth. Has to do with the ways that you can change your entire financial picture, not just one part of it which is real estate investing.
Marshall, thank you so much for sharing that. I hope you post that in the BiggerPockets forums as well.
Guys, we love and we so appreciate the engagement. Please continue to like, comment and subscribe on this YouTube channel. And if you are listening on Spotify, even if you\u2019re not listening on Spotify, but you have the Spotify app, do me a favor, go there and keep an eye out for polls. Spotify has recently allowed us at BiggerPockets to ask questions to see what you like about the show, what you don\u2019t like, and how to make it better. So, keep an eye out for those polls and engage with them, participate with them whenever possible because we want to make the show as good as possible. If you could take a quick moment right now to leave me a comment on today\u2019s show and let me know what you thought, what you liked or something that you noticed, I would love it.
All right. Our next question comes from Casey Penessey.<\/p>\n
Casey says he and his brother have several rental properties that they want to sell. They do want to reinvest, but they\u2019re a little concerned about the timeframe restrictions of Section 1031. Remember, you can exchange properties in a 1031. You use a qualified intermediary, and by doing so, you avoid most, if not all of the income tax from selling the properties.
So, you really have two choices. The first is you do have\u2026 You would meet those two tests which is 45 days from the time you close on the old properties to find or identify up to three potential new properties that you choose from, and then, 180 days to close on those new properties.
You can also do a reverse 1031 exchange which means, you can actually buy the new properties before you sell the old properties, and that gives you a lot more time to actually be dealing with this. So, the 45 days is 45 days after you close, but you can do it up to two years before you sell the new property. So, you just need to work with a qualified intermediary who really understands reverse 1031 exchanges to do that.
The other option you have is to sell the property, recognize the game, and then, close on a new property or new properties by the end of the year. What happens then is your new properties, you\u2019re going to get bonus depreciation for 2023. That\u2019s 80% of the cost of leasehold improvements and contents of the building which probably is about 20% to 22% of a property with a good cost segregation, and that is probably enough to offset the tax from the game. Actually may save you money. So, be sure to run the numbers and decide, \u201cDo I want to do a regular 1031 exchange, a reverse 1031 exchange, or do I want to simply recognize the gain, and then, buy new properties?\u201d But be sure you do that by the end of the year so that you match up the tax benefits from the new properties in the same year as the tax consequences of selling the old properties.
All right, David. What do you think?<\/p>\n
I think that was some fantastic advice, Tom, and I don\u2019t really have a whole lot to add to it. You covered every single base that I was thinking, and you did it much better than me because you know taxes, and I don\u2019t. It\u2019s nice to see you on the podcast again. I love when we get to hear from you. You\u2019re my favorite tax person. You made a very good point there. I\u2019ll just highlight that.
When you are trying to shelter income from one year, it has to be the real estate that you bought in the same year. You can\u2019t be in January closing on a property and use the depreciation to shelter income from the previous month in December. The cost segregation studies don\u2019t always have to be done at the time that you buy the property. You could buy it in December and do your cost tag studies in January for the previous year\u2019s taxes, but you do have to buy the property in the same year that you are taking the loss.
Very good point there.
All right. Our next question comes from Arjun Kadam. Arjun owns one property aside from his personal home and has about 500,000 in equity at this point.
Hey, David. I\u2019m a huge admirer of you, and oh, I have a not so secret admirer. There we go. And really wanted to ask you a question that\u2019s been on my mind for a while now. I\u2019m a new investor in the Phoenix, Tucson market. In the last four months, I\u2019ve made over 10 offers on resale properties, and each offer has been over asking. I\u2019ve been seeing that because of the huge spike in the values of homes in the last two years, especially in Phoenix. There\u2019s not much of a difference in price between a really old house versus a brand-new house. In some cases, the difference is as low as 10 to 12K. Considering that a new house will not have any capital expenses for five to eight years and will also attract better renters, do you think it makes sense to invest in a brand-new home as long as the numbers make sense for it to be a good rental? What suggestions would you give to someone who wants to buy brand-new properties for rental investments? Are there any red flags? I have never really seen anyone discuss the prospects of buying a brand-new home as a rental property on BiggerPockets and would like to really hear your thoughts on the same. Thank you.
All right. First off, Arjun, congrats on asking what might be the best question of the entire Seeing Greene episode. This is awesome, and I love how you\u2019re thinking. In fact, my mind used to work in a very similar way when I was a new investor. So, assuming that you want to have a career like mine, you\u2019re off to a good path. If you don\u2019t want to have a career like mine, well, I don\u2019t blame you because sometimes, I don\u2019t even want to have my own career, but you\u2019re asking good questions, nonetheless. Let\u2019s get down into this, all right?
All things being equal. It is absolutely better to buy a new home than it is to buy a resale home, okay? So, now again, this is the caveat of all things being equal. There are less capital expenditures. You\u2019re getting better technology. They\u2019re more energy efficient. Your tenants are going to like them more. There\u2019s a lot of benefits of buying a new home, but all things are usually not equal, and here\u2019s where we\u2019re going to dig in on this, okay? Arizona\u2019s not the perfect market to make this point, okay? So, what I\u2019m saying is in general, markets like Arizona, you probably would be better getting the new home construction. Not every market\u2019s like that, and here\u2019s why.
In any market, they typically build homes in the most desirable areas first. Now, Arizona\u2019s different because it\u2019s all desert. So, of course, there\u2019s some areas that are better than others, but objectively speaking, it\u2019s just a different part of the desert depending on where you are if you\u2019re like in Phoenix, right? So, you don\u2019t have as big of a difference between homes that were built 50 years ago and homes that are built today. But what if you\u2019re in Austin, Texas? They\u2019re going to build the best homes in the best part of the area. What if you\u2019re in San Francisco, California? They\u2019re going to build the best homes on the beach side with the cliff views, the ocean views, the closest proximity to the freeway. What if you\u2019re in Southern California? They\u2019re going to build the best homes in the best locations with the best weather and the best views.
You see where I\u2019m getting at? So, after they\u2019ve built on the best land, they then go to slowly inferior land as the construction develops. So, you get more homes being built further away from the ocean, further away from the downtown centers, further away from all the infrastructure that you want. You got to drive farther and fight more traffic to get to the best restaurants or the best entertainment.
Now, of course, this is not hard and fast across everything. I imagine in areas like Kansas, it\u2019s not a huge difference. There\u2019s just a bunch of land, so part of it is understanding the market that you\u2019re getting into, but you\u2019re asking very good points. New construction is better. What I want to make sure that you get right is that location\u2019s even more important than age of construction. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is, unless you pay to have your house picked up and move somewhere else, which usually is not financially feasible. You\u2019re better off to just buy another house somewhere else. You can\u2019t move it, which is why location is the most important thing. It\u2019s also the first thing tenants and owners search for, \u201cWhere do I want to live?\u201d Then they say, \u201cOkay, what\u2019s the best house?\u201d Nobody looks at pictures of houses and then says, \u201cOh, I really love that. When I\u2019m going to buy it? By the way, where is it?\u201d You start with location first. That\u2019s always the most important part.
The other thing with new construction is it often comes with more regulations than stuff that was built previously. In almost every market I\u2019ve seen, if I buy a 40-year-old home, a 50-year-old home, it has almost no restrictions on renting. There\u2019s no HOAs. There\u2019s way less likely to have the covenants, codes, and restrictions that say what I cannot do with the property. You get freedom.
On all the new home construction, you get hit with the HOAs that say, \u201cYou can\u2019t or can\u2019t do this. These are all the things you have to do with the property. We have regulations for this part of the city where you\u2019re not allowed to rent it out this way.\u201d You see what I\u2019m saying? When you buy new home construction, you are also buying into new rule sets. Not all the time, but most of the time. So, if that\u2019s the road you\u2019re going to take, make sure that you have a very good agent or broker that can look into this for you to make sure that you\u2019re not missing out.
Buying a property that you\u2019re now not able to rent out to people or that has more expensive HOAs or other restrictions that won\u2019t let you use it the right way. It\u2019s because of that that I have typically not bought very many brand-new homes. I usually end up buying the resell myself because they\u2019re in the better locations, and they have less restrictions on how I can use them, but I love how you\u2019re thinking. This was an awesome question.
All right. Our next question comes from Nels in Minnesota.
Hey, David. I\u2019m a newbie investor from Minnesota with no properties under my belt who has been consuming all things real estate investing for the past year. So ready to get into the game, especially with my lease ending this summer. I\u2019m all in and will likely be house hacking a small multifamily property by myself, but there\u2019s more to the story.
My grandfather passed during the pandemic, and he left behind two properties to my mom. We are a close-knit family, and she wants me to manage what has done with these properties. I\u2019m thrilled to not only help set her on a path\u2019s retirement but take my own steps towards financial freedom as she wants all decisions to benefit her, my siblings and me.
The properties, number one is a partially completed project in rural Wisconsin, not far from where I live in Minnesota. Think of a completely empty house with not much other than a bunch of tools and new appliances, none of which are even hooked up. An evaluation of this property puts it in the $150,000 to $200,000 range. The second property is completely paid off, three bedroom, one bath with a nice size lot in San Jose, California. Well, San Jose\u2019s right down the street from me. My grandfather show\u2026 My grandfather has owned it outright since \u201969 and not a thing has been updated since as far as I can tell. It needs work, but it\u2019s valued right around a million.
Although my grandfather\u2019s passing is unfortunate, we have an opportunity to create a family legacy because of him. If you were in my position wanting to take steps to both retire my mother and launch and scale a real estate in business myself, how might you attack this strategically?
Here\u2019s my initial thoughts. Sell the Wisconsin home to get my mom\u2019s some financial cushion and use the excess plus some of the equity in the San Jose home to add value to that property. Work with a local property manager out there to make monthly cash flow. However, if we want the cash-out refi route, we would also be able to put equity into additional properties and really get the ball rolling. Is this option a no-brainer?
On top of this, I make a high W-2 salary working in tech which will also fuel this engine. All in all, I feel like there is so much potential in all of this, and I\u2019m okay making mistakes, but I\u2019m needing a little push to jump off this diving board.
Thanks for all, you, Rob, and everyone at BPD. You guys make learning so fun and dreams achievable.
All right. Nels, that is a lot of detail and a really good situation for you to be in. First off, sorry about your grandfather. That is very sad, but the silver lining is that your grandfather left quite a bit of opportunity to his family. Another reason that I encourage people to invest in real estate, when you\u2019re gone, that real estate stays, and the people that you love can really benefit from it. That\u2019s got to be a really good feeling to know, on your deathbed, getting ready to pass that your family is going to receive a huge blessing when you go to take the sting out of missing you.
Second, you live near me. You need to reach out to me directly to talk about some of this real estate stuff. We\u2019re going to do our best to answer what I can on the show, but you\u2019re going to need a little bit more detail and opportunities. I do like what you\u2019re thinking. I don\u2019t think it makes sense for you to keep this project in Minnesota. You might have to put a little bit of money into it before you sell it, but it is probably something to sell. You don\u2019t have experience in managing property. It doesn\u2019t sound like this is a highly appreciating area. You\u2019re better off to sell that property and get the money and put it into something where it going to get a higher return, which could be that second property in San Jose. Here\u2019s why.
You mentioned it\u2019s a three bedroom, one bathroom, right? I\u2019m a real estate broker, and I serve in that market. If you were my client, and I hope that you will be, you would come to me, and I would say, \u201cLook, we got a three bedroom, one bathroom. Can we turn this into a four bedroom, two bathroom?\u201d That would increase the value a lot. If it\u2019s worth a million as is that we\u2019re talking like hundreds of thousands of dollars that you can increase the value of this home. \u201cCan we convert the garage to add more square footage? Is there a way that\u2026 You sent us on a nice size lot. Do we have options to make this property worth more in addition to just updating it?\u201d
Now, you also said to be put in touch with the property manager. I\u2019ll be able to help you with that, but let\u2019s make sure that it makes sense to rent it out. You might be able to sell this thing after you\u2019ve made it worth more and buy a lot of rentals. Buy an entire apartment complex with the money that would come from this paid off thing that would cash flow much more than this property would, which would then allow you to spread that cash flow amongst your family. Maybe take ownership of that apartment complex and split it up amongst you, your siblings, and your mom, like you said, and everyone benefits.
Really, you and I need to sit down and look at how much money we would get out of the property in its current condition, how much we would get if we upgraded it, and how much we would get if we sold it and reinvested the money into somewhere else. But the one thing that I do think you\u2019re on the right path with the selling the Wisconsin property, you\u2019re going to have a hard time finding tenants in most rural areas as a general rule, and I don\u2019t think that that\u2019s an area likely to appreciate, so you\u2019re better off to probably sell it and take some of that money, put it into the property that is going to benefit a ton from being upgraded and basically, build your family\u2019s financial future from this point forward on the backs of what your grandfather left you.
So, thankful to him for what he did for you, and thankful to you for having a heart that wants to help your entire family. Make sure you reach out to me.
All right. Our last video comes from Veronica Gordon from Chicago.<\/p>\n
Hi, David. My name is Veronica. I live in the suburbs of Chicago. Love your podcast. I\u2019m learning a lot from listening to it. I appreciate your candid stories and your honest advice.
Hey, I am reaching out to you today because I want to know what your next step would be in scaling our business.
My husband and I have two long-term investments and we just recently completed a flip for our long-term investments. We have property A that makes about $200 and profit free and clear that I\u2019m not so happy with, and our second property makes about 400 plus in profit and both of them are townhouses.
Want to know what would be your next step? Sell property A, 1031 it, and find something else like a multifamily. Sell both properties since they\u2019re townhouses and we could be making a little bit more on them, or do we invest out of state? Maybe look at short-term rentals. What would your next steps be?
We\u2019re in our \u201940s. We\u2019re looking at maybe getting some passive income for our retirement, and also, helping to fund our children\u2019s college.
Love your show, and I appreciate your advice that you can give me.
Thanks. Bye.<\/p>\n
All right. Thank you for that, Veronica. This is another really good question here. Okay. You\u2019ve got two town homes. You just completed your first flip. You didn\u2019t mention how the flip went, so we don\u2019t have anything to go on there, but if the flip went well, I would encourage you to keep doing that. I think this is a market where if you can get really good discounts on real estate, flipping makes a lot of sense. You don\u2019t necessarily have to hold it. As much as I would\u2019ve advised people to four, five, six years ago because the appreciation that we were seeing that was exploding is slow down a lot, so you\u2019re not missing out on as much if you\u2019re not holding the real estate.
Regarding the two properties you have, $200 a month in cash flow and $400 a month in cash flow. You can definitely improve that.
In general, townhomes don\u2019t make great long-term investment properties compared to regular homes. The rents don\u2019t go up on them as much. You can\u2019t do as much to improve the value of the house, so they\u2019re likely to appreciate every year and they\u2019re likely to get more rent, but not as much as if you got the money out of the town home and into a home.
So, the first thing I would look at would be selling, like you said, property A. 1031 it into a multifamily property that\u2019s likely to have more cash flow. That might not be as easy as it sounds because rates are likely higher now than when you bought it. So, the townhome might be cash flowing at the low rate. But if you sell it and reinvest the money, unless you get significantly more rent, you might not get an increase in cash flow.
So, I need you to run the numbers looking at whatever that equity is you have in the townhome at today\u2019s rates. Would it cash flow the same or more in another property? Now, assuming that it does, one option that you could get into would be buying multifamily real estate. Another one would just be buying a single family home in a great neighborhood and trying to find one that could have two units, a house with an ADU. Can you find one of those? Could you find a couple of those? If you can, then, you have the obvious recourse of selling the second house and going and doing the same thing again.
Another option that you might want to look into. Can you sell one of those, and use the money to house hack? Can you get a better home in a better neighborhood with more than one unit that you guys could move into, live in a smaller space, and get more rent? Not just because you\u2019re getting more cash flow, but also, because you\u2019re buying into a better location that\u2019s going to appreciate over time.
All of your goals have to do with the future. You want cash flow when you retire. You want help paying for your child\u2019s education. You need to be thinking about the biggest payoff you can get when you need it, which is not right now. So, if you sacrifice a little bit of the cash flow in the near term to get a bigger payoff in the longer term with better appreciation buying into a better property, you will make more money with that strategy than just maximizing the cash flow right now. But even if you don\u2019t do that, you can still probably improve the cash flow by getting out of the town home and getting into an asset like small multifamily that\u2019s likely to cash flow more.
Another thing, just throwing this out there, what if you sold both of them in 1031 into an apartment complex? We\u2019re likely to be seeing a lot more of those coming into the market because people that own them have balloon payments due and rates are much higher than when they first bought it. So, if you could go find an eight unit, a 10 unit, a 12 unit apartment complex, can you sell both of them? 1031 into that, get way more cash flow, and then, set yourself up so that cashflow grows every year because you have 12 units increasing at rent, not one unit of a townhome or two units of two different townhomes. That can set you up very nicely.
I think that we\u2019re poised in this market. There\u2019s a lot of opportunity for new blood to be getting into the commercial multifamily space. So, people that never were buying apartment complexes can get in on those smaller like five unit and up stuff, and they should be doing it because the people who own them now are not going to be able to refinance or sell for as much as they want to with the increase in rates and the cap rate expansion that we\u2019ve seen.
Thank you very much, Veronica. Love the question.
All right. That is our show for today, and guess what? I remembered to keep the light green for the whole time.
Thank you. Thank you.
I\u2019ve been practicing this all week. I come into my office. I visualize success. I go and I turn the light from blue to green, and it is working, and so, I want to encourage all of you to do the same. What can you visualize right now that you want your life to look like that will change, and what hard thing can you go do? I missed jiujitsu for nine months because of life happening, and I finally went back this week, and it kicked my butt. I\u2019m exhausted from that different kind of exercise, even though I\u2019ve been lifting weights for six months. How many ways have we fallen out of shape in ways that we don\u2019t realize it?
Have you been steadily showing up to work at your W2 and doing a good job, but putting your future goals aside? Did you go into your journal and make a plan for what you wanted your life to look like, and you were sticking according to those goals, but there\u2019s other parts of your life that you haven\u2019t been analyzing or evaluating that are falling apart? What can you do to build the smallest bit of momentum today? Something different. Can you start the day with a five-minute run? Can you do 15 pushups today? Can you read a book that\u2019s different than you normally read? Can you listen to a podcast that you normally wouldn\u2019t have listened to? Can you do anything that will shake you out of the complacency that we so easily fall into and get our mind thinking in different ways?
Thank you very much for joining me today. I want to see you win, and that\u2019s what we\u2019re here for. If you\u2019d like to be featured on Seeing Greene, just go to biggerpockets.com\/david. And if you\u2019d like to know more about me, you can find me at David Greene 24 on all social media, so go, give me a follow, and then, check out my website, davidgreene24.com and do this. Go to my website. Check it out. Then, DM me on your favorite social media, and tell me what you like about my site. I would love to get your guys\u2019 feedback just like you love to get mine. Let\u2019s make this a two-way relationship here.
Lastly, if you\u2019re listening to this podcast and you didn\u2019t know that BiggerPockets has a website, we do, and it\u2019s awesome. You are absolutely missing out if you\u2019re not checking out the website and all the resources that BiggerPockets has to offer you. So, go there. Make a profile. Start checking that out and find yourself lost in that wonderful world just like I was when I first found it myself.
This is David Greene for Seeing Greene signing off.<\/p>\n