Is Paying Off My Mortgage Early a Mistake?

David Greene:
This is the BiggerPockets Podcast, show 621. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute. That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job.
There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch and real estate helps them do it. And then there’s other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people.
What’s up everyone? This is David Greene, your host of the BiggerPockets Podcast coming at you today with a seeing Greene episode. In today’s show, we are going to take questions from different people that have submitted them. And you’re going to hear my perspective, how I see it because I’m Mr. Greene. We have a lot of really good stuff for you, several different topics that I don’t get asked very often that I thought was really cool that people ask questions.
So one of them had to do with, is there a way around a debt service coverage ratio loan? Or is that my only option when it comes to getting financing if I don’t have a W2 job? We go into a very, very sort of a deeper situation of when you should pay off your properties mortgages, and when you should use financing or leverage. I think there’s a lot to learn from understanding.
There’s not one way to do it, but there is usually a right way for you to do it. So I break down this particular situation and give advice that you might not be expecting me to give. And then I actually talk about why I decide to publish my books with BiggerPockets Publishing. All that and more at this seeing Greene episode.
If you’re looking to learn, if you’ve got questions that you want to ask, if you want to hear other people asking questions so that you don’t have to be the one to ask it, this is the right place to be. And for today’s quick dip, speaking of BiggerPockets Publishing, my newest book just dropped today with them. It’s called Skill. So I, my last book that I wrote was called Soul. This was a book written for real estate agents to learn how to make money in the real estate agent game.
This book is about how to become a top producer and make really good money. So if there’s a real estate agent in your life that you know, that you love, that you appreciate, that you’re rooting for go to biggerpockets.com/skill and get a copy of this book to give to them. It is a very difficult business to be in. Most people have no direction of what to do.
And this book is written to give a very specific play by play for real estate agents to be good at their job. So if you’re working with an agent that’s good, but you want them to be great, if you have people in your life that sell homes and you think that they would be happier if they made more money, please go get them this book. Give it to them. I would appreciate it and so would they. All right, that’s enough ado. Let’s get into today’s show.

Deborrah:
Hi, blessing, David. My name is Deborrah Fang. My questions for you are okay, I’m a widow. I lost my husband couple of months ago and right now I’m not working. I quit my job as a teacher a year and a half ago to stay home taking care of him. And after he’s gone, he left me with his life insurance. So I get the life insurance.
I pay off the house I’m currently living. So I also purchase a property in Colorado Spring, pay off, and I still have $200,000 cash in my hand. Now, I learned about these real estate investment. Make me feel like paying off my mortgage wasn’t the smartest move. However, I’m thinking, should I get cash out refinance from the current two properties that I have already paid off to buy more properties?
Also, I don’t know, should I pay them off or should I just, I mean, for the new property, should I just do a 25% down payment? Also, for the 200,000 cash in hand, the same thing, do I find more properties, just pay the initial down payment? Or should I just buy one property within the $200,000 range, pay them off and receive rent coming in as the positive cashflow?
Currently I’m still taking care of three kids. Two are in college and one is staying home with me. He’ll be a sophomore in high school. So yeah, that’s my questions. And thank you for your help, bye.

David Greene:
Hey Deborrah, thank you for the question. First off condolences, I’m very sorry to hear about your husband and please send those condolences to your kids as well. I lost my dad when I was 27 and my brothers were even younger than me. And it’s incredibly hard when that happens. Sometimes it feels like the entire cornerstone of your family falls apart.
So you’ll be in my prayers. As far as the question from a practical perspective that you’re asking here of, should you take out loans or should you own properties free and clear? And if you’re going to take out a loan, how much should you be taking out? I see all the options that you’re presenting and I can tell from the way you’re spitballing that, you’ve got a lot of uncertainty and questions in your mind, and I’m really glad you reached out.
Let’s talk about when you should take out loans and use what we call leverage and when you should pay a property off. The majority of the time the people that are listening to me are coming from a perspective of trying to grow an empire, okay? So the advice I would give them is different than you if you have a different goal than what they have. And that’s what we have to get into here.
This is the way that I look at borrowing money to buy homes or using leverage. It will increase your ability to grow wealth, which is what I’m going to call offense, but it comes at the price of being more risky, which is what I would refer to as defense. So ideally we want to be able to have as much offense as possible with as much safety or defense as possible. And that’s what we’re striving for, but the two are typically mutually exclusive.
You can’t have both at the same time. So what somebody has to figure out is how much do I care about risk and how much do I care about growth? So for you, Deborrah, anytime you take out a loan, you have to make the debt payment on it. And as a new investor, you could easily find yourself in a place where you pick the wrong tenant or you buy the wrong property and you’re not able to generate rent from the person, or you have to spend money to fix things up.
And now you’re in this situation where you don’t have enough money to make the payment on the mortgage, and you’re also not making money from the property and you could lose the entire thing. And that’s what I don’t want to see for somebody in your situation. Now, if you’re not working and you don’t plan to work, that does increase the risk of investing in real estate.
The reason it increases the risk is you don’t have money coming in from a job in case you make a bad decision or something goes wrong with the property. You’re sort of operating without a bulletproof vest, I would say. One mistake, that bullet’s going to get right in there and it can really hurt you. And that’s what I don’t want to see happen.
Now, if you’re planning on getting a job and you are going to work and you think you can generate decent money, that now opens up some doors to where financing could be a safe option for you because even if something goes wrong, you’ve got a cushion with money coming in from work. So the first question to ask yourself is, do you want to work? Are you willing to work? Or is that not the case?
There’s so many scenarios that I could lay out for you, but in general, if you’re not going to work, I would probably advise you to not take out a loan, okay? Just buy whatever you’re going to buy in cash and at least learn how to invest in real estate with as little risk as possible. You’re still going to have property taxes.
You’re still going to have homeowner’s insurance. You’re still going to have different expenses like repairs and maintenance that are going to pop up, but you are having less of a debt service if you’re not taking on a loan so that you can kind of learn the ropes. It’s kind of like training wheels while learning to ride a bike.
Now, let’s say you take to this like a fish in the water, or at least you become competent at it. At that point, you’re going to make better decisions on what you buy and how to manage it. And at that stage, I would say taking out a loan to buy property could make some sense because you’re not learning at the same time that your risk is high.
Your risk is going to be much lower because you’ve already learned how to do the job and there’s less surprises that are going to jump out for you. And if you do that well, you may never have to get a job because you can make a career investing in real estate full time. All the money you make can come from the rents, but you’re not going to do this by just snapping your fingers, jumping in to becoming an amazing investor.
You’re going to have to start very small. Start slow, start with low risk, buy in good areas, pay the house off, learn how to manage the tenants. I would recommend looking for what we call small multi-family, a duplex, a triplex, a fourplex, something along those lines. With $150,000, maybe you had more, I think you said you have 150K, you’re probably not going to get a bigger property, like 10 units.
It’s going to be very hard to make that work. So get what you can get for the money, pay cash for it. Make sure you buy in the right area, get a property manager that’s really good that can kind of teach you the ropes. Get that first property, see how that goes. And then scale from there. Next question is from Yasir in Atlanta.
I’m a 21 year old from Atlanta, Georgia, and was trying to see what you do if you were in my shoes. I’ve never bought any real estate. I got a good job paying well, and I just didn’t want to let that money sit in the bank. Should I start with the multifamily unit? How much should I save for emergencies? Really good here, Yasir.
First off, this is a situation where you would really benefit from listening to the BiggerPockets Money show. So they get into personal finance, how to live beneath your means, how to make more money, how to manage the money that you have at a more holistic level than just investing in real estate. So you should check that out and other people that are in your situation, especially younger people that haven’t learned how to manage money yet can get a lot from listening to a show like that.
Let those seeds get planted of how to build and grow wealth at a very young age. Second off, before you start worrying a ton about investing in real estate, I think your energy would be better put towards finding a career. Do you know what you want to do? Are you going to work in the trades? Can you make good money learning a trade? Are you in college right now and you plan to get out of school and work a job?
Do you know what you’re going to do to make money? So making money at work is much less risk than just buying real estate and the best real estate investments typically happen when you’re already making decent money at a job and you can afford to take on a mortgage. Now I’m going to assume here that you have some money saved up. You’re able to do this.
You’re ready to buy real estate. You’re financially strong, because that’s the position that I advise most people to start from. If you’re not at that position, get to that position first. But if you are there, you should house hack. You should look for small multi-family property that you can afford, live in the house and rent out the other units. Or maybe buy a house with a lot of bedrooms, live in one bedroom and rent out the other bedrooms.
When you’re young, this strategy works the best. You’re not going to want to rent out bedrooms if you’re married, if you have kids. It’s a completely different scenario. So if you’re still young and you’re single, which I’m assuming you are, you actually didn’t mention that, buying a house and renting out the rooms is one of the best ways to learn the fundamentals of real estate investing, choosing tenants, having them sign leases, managing people while keeping your risk relatively low.
BiggerPockets has a book on house hacking written by Craig Curelop. I would recommend that you check that one out, get some ideas of how to house hack as well as Google the term house hack and learn some strategies that you can use where you can put a very low down payment, 3.5%, get your first property and learn the fundamentals without taking too much risk.

David:
Hi David. My name’s David also. Firstly, I just want to say thank you so much for all the content that you put out and all the insights that you provide. You’ve taught me so much and you’ve really helped change my wife and I’s life really. So just can’t thank you enough. Thank you so much. Just to give you a background, we own a number of short-term rentals.
We own a few long-term rentals, but mainly short-term rentals in Tennessee. We’ve purchased them over the last few years. They do really well for us cashflow wise. We recently purchased expensive home here in Orange County in California. So we are actually pretty much using all of our W2. I work as a teacher, my wife works in retail and we’re pretty much using all of our W2 income that’s going to go directly to our mortgage.
We earn a lot more money from our rentals, but we’ve always thought about cashflow, cashflow, cashflow. You’ve kind of helped shift our mindset with looking more about appreciation, just underlying the benefits, particularly the long-term benefits of appreciation. So we’ve really shifted our thought about that. But with this higher price property that we’ve just bought, we’re starting to be in a little bit of two minds.
Do we need some more of that cashflow that may have not been as important previously? We are kind of at a point where we’ve been able to refinance a lot of those properties. So we have quite a lot of capital to be able to deploy that we want to purchase more rental properties with. We are in two minds as to, do we just keep going with the cashflow, just keep buying these vacation markets?
Or do we diversify potentially buy more of your traditional markets that have the likelihood to appreciate population growth, job growth, all of those kind of things? Places like Phoenix or Tampa or Salt Lake city, those kind of places. So maybe just wanted to get your idea based on our situation, what you would advise.
I know you’ve had some people on your podcast before talking about renting by the room, just being creative like that. We’re pretty on top of the short-term rental thing, so we feel really comfortable with Airbnb. So we’re more than willing to do something like that even in a more traditional market provided the regulations lend itself to that.
But yeah, really want to shift away from the vacation rental markets that have been so good to us, but then at the same time still want to be able to make a little bit of cashflow. So just wanted to get your idea on what you think. Maybe you could point us in the right direction. We’re at a bit of a crossroads at the moment, and then potentially if you have some ideas on markets.
I know I mentioned some of those growing markets that we all know about, but yeah, just wanted to get your insights on this particular situation for us and any advice you might have. Thanks again for everything, and I hope to hear from you soon. Thanks.

David Greene:
Hey David, thank you for the question. All right, here’s what I’m picking up from the way you went about that. You and your wife are not sure what your goal is. You know you want to make money in real estate, but you don’t know how, you don’t know what you want your life to look like. You’re not sure what you value the most.
And because of that, you’re kind of bouncing around between all of these different options and you’re not sure which direction to take. Let’s break down in general, the different roads you’ve got. You’ve got the high cashflow road. This is where you’re going to try to build up as much cashflow as you can every month, meaning the properties are going to generate rental income and your expenses are lower than that.
So you get to keep that money. You kind of get the immediate payoff right off the bat of cashflow. In general, cashflow comes at the expense of appreciation because you usually make more cashflow in markets where homes are lower price and therefore don’t go up as much. Or you make more cashflow at the expense of more work, which would be the short-term rental market, where you got to put in more work to get that cashflow.
Then you’ve got the appreciation road. This is going to make you the most wealth in real estate, but it comes with the most delayed gratification as well as the highest risk. Because when you’re playing the appreciation game, you’re not getting as much cashflow or sometimes you don’t get hardly any. So you could lose the property more easily than if it was cash flowing very strong.
And even when it does work out, you don’t have access to that money. It sits in equity in the property until you access it via a cash out refinance or selling the property. So the appreciation road as opposed to the cashflow road has less of an immediate payoff. It’s more of a long-term play.
Then you’ve got the short-term rental game, which kind of stepped into the industry, that combines the two of them. You’re now able to buy in high appreciating markets and generate more cashflow, but it comes at the expense of being more active and less passive. So here’s your problem, David. You’re not sure what you want to do.
It sounds like you don’t want to have to work a lot and you want a lot of cashflow, but you also want a lot of appreciation and that’s why you’re stuck. My advice is that you and your wife are going to have to sit down and ask yourself what kind of lifestyle do we want to live? If it’s all about having more of your time back now, I would say you should chase after cash flowing properties that are stronger on that side, which are probably going to be small multi-family or larger multi-family that you probably haven’t considered.
You can hire a property manager and manage it. It will put off more cashflow and you won’t be as directly involved. If you say no, we’re willing to work right now, then the short-term rental game is what you should keep doing. And you should just find different markets to get into if you can’t make it work in the one you’re at.
The more short-term rentals, you get, the more income you can generate, the more money you have to pay someone else to manage it for you. And that’s one way that you can get your time back. Another road that you could consider would be the appreciation game where you say, hey, we’re willing to work really hard right now. We don’t need as much time, but when our kids are older, that’s when we want to know that we’ve got a lot of money set aside.
So I can’t answer your question unless you know what your goal is. If you’re really not liking short-term rentals, because that was my original thought when you were talking is, hey, you want appreciation and cashflow? That’s the perfect mix. You’ve got to hire somebody else to manage these properties for you. Now I’m actually looking for something like that myself.
I’ve got a couple of short-term rentals now and I plan on getting more. I want to hire a person that will manage the logistics of it. So if you’re listening and you want to make some extra money, get paid by the hour, message me if you have experience with short-term rentals. David, you could do the exact same thing.
I’m looking for someone that has done it before, they can manage the cleaners, the supplies, the reviews. They don’t have to worry about getting it booked, but they do have to make sure it’s ready for the next guest that wants to stay in it. If I can do this, so can you. That’s what I think that you should be looking for.
But before you get too deep into that, you’ve got to talk to your wife and figure out what you want your life to look like. Then submit another question, letting me know and I’ll give you some more specific advice about different strategies or roads that you could take to get where you want. Hey, we’ve had some great questions so far. I love being able to do these episodes. So I need more of your questions to keep doing it.
Please go to biggerpodcast.com/david and submit your question there. For everyone that has already submitted, thank you very much. If you’re listening to this on YouTube, please hit that subscribe button so you get notified when additional episodes come out, as well as like this and share it with anyone you know who’s also a real estate geek.
At this segment of the show, we like to read some of the comments from previously shows we’ve done and give some air time to people that were on YouTube and participating in the conversation there. Our first comment comes from Daphne Hill. Love these shows David. You are a natural teacher and never make guests feel like their questions are dumb or have been answered hundreds of times before.
Thank you. Thank you for that, Daphne. I appreciate that. Made me feel good. Next comment comes from Lauren. David, I would appreciate some bookkeeping recommendations. Should each property have a separate bank account or use one account for all properties? Set everything to autopay, et cetera. In my personal situation, I have no partners, closing on my first short-term rental in April and looking to get my second short-term rental after, thanks.
Well, Lauren, I will try to answer this, but I will say, I don’t know that my way is necessarily the best way. And I know that right off the bat. How I typically work bookkeeping is that I have all of my single family properties managed in one account. So I have a bookkeeper that goes over all the property management statements, puts them into a spreadsheet.
I can see what every property makes or loses and all of the expenses are on auto pay coming out of that account as well as all the income goes into it. I have a separate account for short-term rentals. And the reason I created a separate account is I wanted to keep more reserves in that account than in the other ones, because I feel like the income from short-term rentals is less reliable.
So therefore, I offset that risk by putting more reserves in that account. Then I have a different account set up for my 15 or $16 million property that I bought because it’s huge and it needs a ton of money in reserves and I don’t want that money to be mingled with the other money because I need to have extra money in there for that really big property where the mortgage is $80,000 every single month.
Then I’ve got a different account set up for my real estate sales, a different account set up for money that comes from the one brokerage and so on and so forth. I run a private mastermind where I teach people how to build wealth and how to be entrepreneurs. And so that has its own bank account. So I like to keep mine basically by income stream, is how I set up my bookkeeping.
And I have different accounts for the different sources of income. Now, there are some sources of income that kind of all fit together like all of the single family rentals or book royalties that I would receive, okay? There’s times where… Or maybe speaking fees, I can put all those into the same account, but I typically put all the money into the same account when there’s not expenses associated with it.
So for example, I don’t have expenses associated with book royalties from books that I’ve written. There’s nothing that I’m paying for that. So I’m okay to stick all that into an account, because there’s nothing coming out. There’s no risk associated with that. And that’s just kind of the way that I set it up.
If I have an income stream that has some risk associated with it, I put it in a separate account where I can keep more reserves in that specific account. And then I have a spreadsheet that my bookkeeper has to take all of these different income streams and all of these different businesses and take my net profit from every profit and loss and put it in the column for that income stream.
Then I look at that every single month and I see, hey, which properties are doing well? Which asset class is doing well? Where am I losing money? Where am I making money? And I kind of put my time and energy towards the stuff that I think is making more money. Now I’m in the process of switching bookkeepers right now and it’s taken them a long time to get up to speed.
So it’s probably been three or four months now I’ve been flying blind where I haven’t been able to see yet how much of these businesses are making. And I hate this feeling. It’s just the worst every time you have to switch over, but it was necessary because I’m working at a faster speed now than the person that I had could keep up with.
So I don’t know that I answered your question, but hopefully by giving you a little bit of insight into me and my life and how I’m structured, that right answers will make themselves known for you. Our next question comes from William Kahn. Love the show. Just giving a comment to support you guys. Thank you for that, William. Appreciate it.
Next comment comes from CD Mane. Wow, finally, the audio isn’t screaming for help. Hey, we’re slowly getting better. Shout out to the production team at the BiggerPockets Podcasts for making me sound like a normal human being. I tend to move around a lot when I talk. I get too close to the mic. I get further away from the mic.
I don’t know why I do that, but I’m a person that can’t sit still. Do you guys have that problem? Do you ever get a phone call and you start talking on the phone and you get up and start walking around? That is me every single time. I constantly walk around the parking lot of the area where my offices are because I can’t sit still and talk on the phone. If that’s you, if you do the same thing, tell me in the comments.
Tell me I’m not the only crazy person that has this compulsion to move around and walk when I’m on the phone. And then also let BiggerPockets know that you love the production team, that they’re doing a great job. That my audio sounds good and that they got me looking fresh. Last comment comes from randoms on my mind. Wow, that house hacking topic was fantastic. I didn’t think about the math behind house hacking.
I’m going to look into that. Well, that’s what I’m here for. It’s to open your eyes as to new strategies that you might not have understood, because I’ve helped so many clients with house hacking and I’ve done it myself that I have some unique insight into that that not everybody has. So if you live in California and you want a house hack, reach out, let me know.
I’d love to be able to help you do that. Same thing goes, if you have a house you want to sell, or if you need a loan, I would love to work with you. And what I’d love even more is if more of you leave comments like this letting us know what you like about the show.
So please tell us what hit, tell us what you like, tell us what made you think, tell us what worked and then even say, hey, if I don’t like this part of the show, that’s okay. Let us know that too. So if you’re not following on YouTube, make sure you do so and leave me a comment.

Jenny:
Hi David. From Melbourne Australia, I’m Jenny. I’m a professor and a real estate investor with properties in Atlanta, Los Angeles and Melbourne. I’m wondering if BiggerPockets publishing would be interested in a book I’m writing called Investing in Real Estate Like a Professor.
The book is aligned with the goals of BiggerPockets, to help people make good decisions about getting started and building a sustainable portfolio in real estate. Professors have a particular way of looking at the world, which I think a lot of investors and would be investors will relate to.
Our perspective weaves through the lessons of history, the dilemmas of the human condition and applies these big ideas to our own lives. I started writing it with other professors in mind as my audience, but I think now that the book would also appeal to a general audience like BiggerPockets where learning is centered in the process of investing. One thing that professors do in our jobs is publish.
So I have some existing relationships with book publishers, but I’ve read all of your books, which are published by BiggerPockets. My questions are, why did you decide to publish your books with BiggerPockets instead of a traditional publisher? And how would I contact BiggerPockets Publishing to find out if they have an interest in my book? Thanks a lot, David.

David Greene:
All right, thank you, Jenny. Man, this is a very unique question that I haven’t been asked before in a public forum. So first off, my producer of the show reached out to you to put you in touch with the BiggerPockets Publishing team. So hopefully that goes well. As far as the next two questions, what do I think about approaching book writing?
I think what I’m getting at is you’re asking, what do you think about approaching writing a book from the perspective of an individual person written for their specific scenario? And then why did I choose BiggerPockets Publishing? And the answer to both of them is oddly enough, the same answer. So I think when you’re learning how to invest in real estate, you shouldn’t just be learning about, well, how do I do it?
Because there’s a million ways to do it. It’s more, what is my goal and how do I make this work for what I want? And that’s the thing. It’s every person is different. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute.
That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job. There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch in real estate helps them do it.
And then there’s other people that just love human beings and they want to work in the industry where they get to talk to and sort of be in touch with other people. So when you’re writing a book, it is best to be asking yourself, well, who’s my audience that I’m writing this book to? And I’m writing it to a perspective that they would understand.
And I think that that’s what you’re getting at about when you’re talking about writing it from a professor’s perspective. Well, the reason that I publish my stuff through BiggerPockets is the majority of people that follow me, trust me, listen to me, respect me, they’re people that are in the BiggerPockets community.
So rather than writing a very niche topic where I said, okay, I’m going to write about say how to be a real estate investor as a first responder, because I had a career in law enforcement. I was able to run on a broader topic like long distance real estate investing or the Burr method, but give it to a more specific audience that already was looking at real estate from the same perspective of me.
And that’s why BiggerPockets Publishing made the most sense. The people that were already following me were BiggerPockets people. The people who read my books, typically aren’t finding about me for the first time just from the book. They’re finding about the book from this podcast, from the YouTube channel, from social media, from my involvement with BiggerPockets in general.
And that means that they’re more likely to get something from the book because as I hear people say, I hear your voice in my head when I’m reading it or they’ve heard me answer questions like this before. So they know my background or my philosophies when it comes to different real estate investing strategies. So that’s why I went with BiggerPockets Publishing. I also just really like this company.
They have a good heart. They mean well. They’re trying to help people empower themselves. They’re not looking at giving people a handout. They’re looking at giving people a hand up. All things that I really can get behind and like. So it’s also fun frankly, to make money for the company that I love working for. So thank you for asking that question and I wish you the best of luck on your own boo writing endeavors.
All right, the next question comes from Jones in my hood, the Bay area, California. Hey David, my question is about a HELOC for rental properties. HELOC stands for home equity line of credit. I recently bought a single family in Oakland Montclair Hills which I closed on earlier this year. Even before closing, I gained over 200,000 in equity on the property. I bought the house for a million.
The property is currently rented on a one-year lease agreement. I was looking to tap into this equity via HELOC to grow my real estate portfolio. I also have a good amount of equity in one of my rental properties in Cincinnati. My loan balance is 85,000 and I estimate property values is around 180. I’ve been researching a bit and I found it’s difficult getting a HELOC on a rental property. Why is this the case?
And is there a way around it? I don’t want to do a cash out refinance because I have a pretty good rate on these properties and I haven’t found a property which I would like to buy yet. I don’t want to have cash sitting in the bank either. So my preference is for the HELOC. Well, first off, congratulations on that property that you’re able to buy. I work in that area and Montclair Hills is a great area.
The fact that you got something for a million means you did really good. That’s a pretty low price for that area. Second off, let’s talk about why a HELOC is hard to get on an investment property. So what a HELOC is, is it’s really a second position mortgage on a home. So the lender’s only going to give a second position mortgage if there’s enough equity to support paying off the first mortgage and then paying them off if something happens and the house goes into foreclosure.
Most HELOCs will basically take the value of the home, subtract what you owe on that home and let you borrow up to 80% of the difference. So you might, if you only have 20% equity in the property, you might not be able to get a ton out of a HELOC on that home. Now, as to your question of why are they hard to get on investment property?
The reason is because to a lender’s perspective, an investor is more likely to let a house go to foreclosure than a person who lives there. So if someone lives in the property, it’s their home, it’s perceived as being more secure because people would let all their properties go except for the one they live in. That would go last. So the risk profile to a lender is higher if it’s an investment property.
There are still some banks that do it, but you’re generally looking for credit unions in the area of where the home is. That’s where I have found luck, is going to credit unions to get HELOCs on investment property. Now I also understand you don’t want to have cash seating in the bank. So the HELOC seems like your best bet.
I will give you this piece of advice. Interest rates are going up and HELOCs typically are adjustable rate mortgages. Everyone I’ve ever seen has been adjustable rate. If you take out a HELOC and you use the money, just know the payment can keep going higher as interest rates keep going higher. And if you’re running your numbers based off of whatever the payment is when you first take out the money, you could find yourself surprised when the payment goes up later.

Mason:
Hey, David. Mason here from Austin, Texas. Wanted to say, thank you for everything you guys at BiggerPockets do and for this show that y’all provide to like-minded investors, I’ve been listening for about nine months and have been such a huge fan. It’s changed a lot of things for me. So thank you for that.
And I’ve gotten to the point where I’ve got to now submit my own question, because it’s been so valuable. A little bit of background about me and my situation. I’m 24, sold my tiny home in January for a good profit and was able to kind of use that to start a short-term rental here in Austin, Texas with my girlfriend.
And the good problem to have is that it’s done so well that we are just so hungry to do it again, and rinse and repeat so to say. We had quite the time getting the conventional loan just because I am 1099 and banks love W2 income. And we were able to get it done of course, but for that reason, debt service coverage ratio or DSCR loans are very attractive to me now.
The problem with resources and with those now is that of course, a lot of them are requiring 15 and usually 20% down. So my main question is, is there a way to creatively finance say half of the down payment? Or the range that we’re kind of looking at is nicer homes to instead of hitting a so-called triple or going for a triple, trying to hit a home run with the next one.
And those kind of range of homes, 20% would be out of our resources as of right now and I don’t want to just wait and save for that long. So I want to know if there was a way or creative financing via hard money loan or obviously cash out refinance is an option, but we’re within that six month period where it’s I’ve got to wait again.
But if there was an option to creatively finance say 10% of the 20% of down payment or equity kind of in the deal and if lenders or someone out there did that, or if you knew of any kind of creative ideas. Obviously there’s friends and family, but I didn’t know if there were other options or anything. But yeah, I appreciate again, what you guys do and any and all input would be greatly appreciated. Thanks.

David Greene:
All right, Mason, you are in a position that many people are in where it’s not enough just to be financing 80% of the value of the property. You’re hoping to finance 90, 95% of it, maybe 100% of it, which means you don’t have a big down payment. Now the easiest way to solve this problem is to get a primary residence where you can put 5% down or 3.5% down on an FHA loan and you don’t have to borrow the money.
But if you’re looking to buy a pure investment property, you do run into this problem. And here’s why it’s designed that way. In general, only people that already have a good amount of money are the ones that are buying investment properties. They’re literally investing the down payment that they already have into a property, which is where they set it at 20%. But you’re looking at investment property from a different perspective.
You’re not wanting to invest money you already have. You’re wanting to grow wealth through an asset and you’re wanting to borrow other people’s money. You’ve got a couple of options. So from the lending perspective, you can look into an 80,10,10 loan. That’s a loan where you borrow 80% of the property’s value on your first position loan.
Then you get a HELOC or a second position loan for 10% of the remaining balance. And then you put the other 10% down yourself. So if you find a mortgage broker that you feel comfortable with, you can ask them if they have access to 80,10,10 loans. You can always reach out to us at the One Brokerage and we can look into that for you as well.
You also have the option of borrowing money from someone else. So if you’re going to be putting 20% down on a property, what if you put down 10% and you borrow the money from somebody else to put down the other 10% and you split ownership 50/50? That’s another option if you don’t have a ton of cash. You’re right to look into the debt service coverage ratio loans, because you’re working as a 1099, but those are typically going to be 20% down loans.
So there was a time where we were able to get them for our clients at 15% because we did a lot of volume. Those have gone away right now. They may be coming back later. So when you’re someone that does a lot of business with us, you’ve done more loans. You’ve sent those referrals. Now we sometimes have access to getting you those better loan programs if the lender is willing to give them out, because we do a lot of business with them.
But you can’t count on that. That’s what I’m getting at. Those are oftentimes like a special circumstance. So your best bet might be to make other people money through what you’re doing. Give them a chunk of the equity in exchange. Maybe they put all of the down payment in and they get 60% of the equity and you get 40% of the equity in the cashflow for finding the deal and managing the whole thing.
But you’re going to have to come up with something like that where you find other people that have money and you give them something to make it worth their while if you don’t have that cash. And then just remember, as you get older, as you do better at work, as you start making more money, you will become less and less dependent on other people till you can buy real estate with your own money.
All right, our last question comes from John Paul Kissinger in Mount Hope West Virginia. Hey David, I’m a paid firefighter in a small town getting paid via 1099 for my department. I’m looking at getting my first rental. I’m concerned that my 1099 may be an issue on getting a loan. I also have one mark on my credit from an unpaid medical bill from four years ago. I paid it two years ago, but it’s still showing up.
I have enough cash for a 20% down payment. I’m worried about rising interest rates and whether this is a good time to start. Also, do you have any advice on what I should do to get pre-approved for a loan or where? Well, that’s a silly question. There’s mortgage brokers everywhere that you could talk about getting pre-approved. If you’d like, reach out to me and I’ll get you in touch with my team that does my loans.
Happy to do that for you. We’re the One Brokerage because we’re the one brokerage that can do it all. Now, as far as your question about is now a good time to invest? It depends on the market. So I will say right now, I don’t really know much about West Virginia. I don’t own any proper there and I don’t know anyone else that does either.
So I can’t tell you if it’s a good time to invest in your market, but in the markets that I’m investing in, I think this is the best time to invest. Now, let me tell you why and the perspective I have and then you can decide for yourself if you agree. So I am investing in markets that I think are going to be very strong for the future.
More people are moving there than normal, okay? So there still is not enough supply to keep up with the demand that’s going to push rents and it’s going to put prices of those assets higher. At the same time, rates have gone up, meaning a lot of people are scared. So there’s less buyers competing with me for these homes than there was before.
So I don’t have to go in as fast or as aggressive as I was going in specifically because other people are getting out. So I have all of the long-term upside with inflation that continues to spiral out of control, with the near-term upside of less competition. So I’m going at it hard. I’m looking to buy some really expensive properties very soon because these interest rate hikes have caused everybody to slow down.
Now, depending on when you’re listening to this, this advice might be of a different value. But the fed has said, they’re going to continue to raise rates. Which means when everyone who goes, oh, no interest rates went up. I don’t want to buy real estate. When they realize that they’re going to keep going up, today’s rate that feels expensive will seem cheap.
And when the rates seem cheap, everyone’s going to jump back in and you’re going to get another flood of people that are all trying to buy real estate. So I actually think that this is kind of the best of both worlds. This is a unique opportunity. This is the same thing I saw when I bought my Maui condos. Those have both gone up between three and $400,000 each in about a year since when I bought them, because I recognized the same thing.
The shelter in place happened. A lot of people thought, oh, don’t buy real estate, there’s a crash coming. I saw the window I jumped in when everybody else wasn’t jumping in and boom, I did really well on those. So that’s my advice that I would give to you. Also, if you’re worried, instead of putting 20% down on one house, what if you put 5% down on a house to live in and then next year do the same, and then next year do the same and spread that money out over several properties and just house hack it?
That would be the best way to reduce your risk if that’s what you’re looking to do. And John, as far as your 1099 income, if you have a stable work history where you’ve done it and you’ve claimed this on your taxes, which I’m sure you have, you can get approved to get a loan with 1099 income. It just takes more time. It takes more effort for the processors to get all your information together to submit it to the underwriter.
The underwriter has a lot more questions that they have to verify because you’re probably making different amounts of money every month. If that’s not the case, it’s even easier. But don’t let your 1099 income deter you. You just need to find a mortgage broker and let them know your situation, and they’ll tell you what they can do for you.
Your other option is a debt service coverage loan, where they’re going to use the income from the property instead of your own income. Here is what I would say for someone in your position. I would advise you to get a 30-year fixed rate and not an adjustable rate mortgage even if the teaser rate is lower, because unless you’re in a position where you have overtime that you can work or you can earn more income, you don’t want to end up with a loan that’s going up over time faster than you can make up the difference in money to get it paid.
All right, that was our show for today. I want to give a big thank you to everybody that submitted a question and I want you to do the same. Please go to biggerpodcast.com/david and submit your questions there so that I can answer your question. And we can have more of these seeing Greene shows to learn from. If you enjoy this, please let me know in the comments.
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