Hoarder Houses and Investing Tips for Late Starters

David:
This is the BiggerPockets Podcast Show 717: Quit to Become a Real Estate Professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do. Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Green episode for you, green light flashing behind my head.
All right everyone, we got a really good show. In today’s show, if you haven’t seen one before, I take questions from you, the audience, and I answer them for everybody to hear. Today, we get into some really good stuff, including how you should solve problems with contractors that stop replying to you or aren’t doing the job that they said they would do, when you should buy a home with sentimental value over financial value, when you should flip versus BRRRR, how to know if you should hold the property or if you should flip it for a profit, and what to do if you’re playing catch-up because you got started investing later in life. All that and more on today’s show.
Before we get to our first question, today’s quick tip is remember that when you’re investing in real estate, you’re not always trying to make money. In fact, most of you are here because you’re trying to get out of trading your time for money. You’re trying to get a life of financial freedom, which is what we’re all about here at BiggerPockets. What you’re really looking for is time. Investing in real estate can get you time back, time that you don’t have to spend working. Now of course, we often look at time through the value of money. The more money I have, the more I can spend my time on what I want. But when a deal goes better than you were hoping that it would, you got more time or you started earlier in the timeline than you were expecting. And when a deal goes bad, you just lost yourself some time, you’re going to have to wait longer before the deal performs the way that you would expect it.
But real estate will always go up because inflation always goes up. We’ll have of course momentary times where it goes down like right now, but those moments never last and it gets turned around, so buying real estate is a very smart financial move. Remember, you’re not trying to earn money, you’re trying to buy time.
All right, let’s get to our first question of the day.

Corey:
Hey David, thanks for taking my question. Mine is deal specific. I’m currently under contract on a house. All in, I’m going to pay $270,000 for, it needs 60,000 in renovations, and the ARV is going to be $420,000. I have a $75,000 personal loan that needs to be paid back. It was used for my real estate business. It needs to be paid back at the beginning of 2023. So I wanted to do the BRRRR method, pay back my investors and hold onto the house. However, when I did the math, my monthly payment is going to be around $200 more than what I think I could reasonably rent the property for.
So alternatively, I could just flip the property, pay back my investors, have a little bit left over for the next deal, and then employ a buy and hold strategy moving forward. There has been a lot of talk on the podcast about holding onto properties because of the rate of appreciation we’re experiencing right now, even if it’s slightly cash flow negative, so I just wanted to hear what you would do in this situation if you would employ the BRRRR strategy or do a fix and flip. Thanks David.

David:
Hey Corey, this is a great question, a great question and I’m glad that you asked it because we all get to learn from a minute. So it is true. I have said in the past that sometimes it makes sense to hold a property that doesn’t cash flow or even loses a little bit of money for the long-term benefit to take a short-term loss, but your question is about your specific situation. When does it make sense to hold a property? For you, it probably doesn’t, and here’s what we’re getting at.
You’re already in some debt. You said you owe $75,000 to other people. If you’re in a position where you’re going to hold a property that doesn’t cash flow, I only recommend that when you’ve got either so much money coming in from other sources or so much money coming in from cash flow of properties you already bought that it covers your loss. That’s not the case for you. You’re not making money from other deals and it doesn’t sound like you’re making a ton of money at your job where this would make sense.
The other thing that you brought up, which was a really good point, is that you do this because of the long-term appreciation. But we’re not in a market right now where we can reasonably expect short-term appreciation. It may go down, it may stay the same, it’s probably not likely to go up in the next year or so. Eventually though, real estate always goes up. You just don’t need to hold this specific property hoping it goes up. You want to hold real estate as a whole in general for a long period of time.
Now, the reason that when you ran your numbers, you’re seeing that it isn’t going to cash flow is probably because you’re not buying a cash flowing property. In other words, you said it’s going to be worth 430 I believe. If you had just went to go buy this property right now for $430,000, it wouldn’t cash flow. So you wouldn’t buy it, right? You wouldn’t want to own this asset as a long-term buy and hold in the way that it’s designed to be operated. You’d pass on it.
So if it’s a situation where you would pass on the deal after the BRRRR is done, you probably don’t want to keep that as a BRRRR. That makes more sense to flip. Now, if this was a situation where you said, “Man, this is a triplex, it’s going to have three units, it’s going to cash flow really strong,” those are the properties that I would say you want to hold at the end of the BRRRR.
So I hope that makes sense. I think for you, it makes more sense to flip this property, make your money, pay off your investors, get yourself out of debt, have a nice chunk of change to go get the next property, and it’s okay if you keep flipping them until you find the property that works as a BRRRR, just like it’s okay if you keep using BRRRRs until you find a property that doesn’t work as a long-term buy and hold and then you flip. Much like in poker, you got to play the cards that you’re given. You can’t play a hand different than the one you’re holding right now. The important thing is you’re doing the right thing, you’re taking action, you’re making money, and you’re just deciding how you’re going to hold the property based on the nature of the property itself and not based on the situation you’re in or, “I want to be a buy and hold investor.” Eventually that is going to be where you make your wealth, but it’s okay if you flip some properties in the process to get there. Thanks for the question and good luck on your deal.
All right, our next question comes from Dean [inaudible 00:06:11] out of Sarasota, Florida. Dean says that I have $200,000 in cash sitting in my savings, and I just moved to a brand new market for myself, Sarasota, Florida. I would like to start my real estate journey in buying rentals to retire early. What is the best way to do that in brand new market with $200,000 cash? Is it buying single family homes or going big on a 10 unit plus rental? Thank you.
All right Dean, great question here. First thing, this shouldn’t come as a shock. If you listen to Seeing Green or you listen to me in any context, I’m always going to say, especially as a brand new investor, your initial goal should be to house hack. You’re in a brand new market. Put as little of that $200,000 as you have to down and buy yourself a property that you can rent out to other people and learn the fundamentals of landlording, of real estate operating, and real estate investing in general with low stakes as a house hacker, eliminate your own housing expense. That’s a big one.
The next thing I’m going to say is after you got that down, it’s not bad to go for a 10 unit plus rental if you’re going to get a good cash on cash return, and I do like doing that in an area like Sarasota because population is expected to continue moving in that direction. That’s a really strong market, so I do like it. The benefit of buying single family homes is that they’re more flexible. They’re easier to buy and to sell. You can refinance them. When you buy a 10 unit apartment, you got to sell the whole thing or refinance the whole thing. When you have several single family homes, you can sell one, you can sell two, you can refinance a couple, you can refinance one. There’s some flexibility with how you operate the portfolio itself.
But at this stage in your journey, it’s not super important for you to have flexibility. You don’t really have any real estate yet. So just house hack once, house hack twice, house hack thrice. Continue to house hack every single year, and don’t rush into buying the apartment complex anytime soon. There’s a very good chance that the market’s going to continue to soften, so you’re in a position where waiting is to your advantage. Just don’t wait on a great deal if it crosses your path.

JD:
Hi David. My next question is on contractors. The rehab that I’m working on is a duplex that I’m trying to add rooms in order to increase value. First contractor I had to get rid of because he did not pull permits and charged me for things that he did not actually complete. I brought in a second contractor and things were going well until he disappeared on me and stopped replying to my texts and phone calls. Every now and then I would get a reply, but it never amounted to him actually doing what he said he was going to do. And then he said that he had a family member that was sick in the hospital, and it was a month I had to threaten him in order to get him to start responding.
So what I learned from the first contractor is I put into this subsequent contract my ability to charge for delays and for problems. I’m trying to figure out what’s fair, how do I deal with this situation, because he truly could have had something happen but the way that he handled it was not cool. He disappeared and he basically caused a month of delay and he didn’t have a backup plan. And I don’t want to be a jerk, I want to be fair, so how do you deal with situations like this when people do things, they don’t perform, they say they have problems, but they don’t really give you much to work on or work with, and I could use some help. Thank you.

David:
All right JD, and fortunately this is one of the more common questions that I get in my life is people reaching out to me saying a contractor in some way, shape, or form is not doing the job and I can’t make them, what do I do? Now the answer most people give is the contract has to be airtight. The tighter the contract is, the better you are. Here’s the problem with that. The contract itself is only applicable when you’re in a court of law. When you’ve already decided to try to sue the person and the judge has to figure out who’s in the right and who’s in the wrong, what they say is, “Well, what does the contract say?” Just like with real estate sales, just like with everything else, the contract is all that matters.
If you’re in that position, you’ve already lost a ton of money. Our goal is to prevent ourselves from ever being in a situation where you got to sue a contractor. So here’s the advice that I give, and this is what I’ve learned over years of doing rehab projects with contractors. The first is that accept that they are good at swinging hammers and sawing wood, they’re not great with other elements of business. You will receive so much relief when you lower your expectation. In general, this is not every contractor of course, every once in a while you get a brilliant business person, the problem is when you get one of those, they don’t stay doing these small single family projects like we’re used to. They move on to bigger stuff and you never work with them.
So the people that work with us as investors are typically the ones that are not super business savvy. They don’t manage cash flow very well. They have to pay their guys, they have to buy materials, they have to buy tools, and they don’t know what money’s coming in and what money’s going out. So they will frequently try to get you to pay for everything upfront. They usually don’t have a strong operation, kind of a system going on. They don’t have the same employees that show up every day to work. They’re constantly cycling through people to do the work, and they don’t know if they’re going to get good labor or bad labor, and they don’t want to tell you that.
So here’s what I do. When I draw up the contract, I have a full scope of work that they give me prices for, but I treat it as if I’m hiring three or four separate contractors to do that scope of work. I will have my contractor say, “I’m going to do this part first, demolition and rough in for these things. Then I’m going to come in and I’m going to put in the sheet rock and the drywall. We’re going to tape and texture. We’re going to put in the plumbing. We’re going to run this electrical. After that, we’re going to do this section, and in the last segment we’re going to add the finishings and we’re going to put the finishing touch on the property.” So I’ve got four separate jobs now.
What I do is I pay them to do each segment, so maybe they get one quarter of the total scope of work to do the first part. When they’re done with that, they send me pictures and videos and I have someone who’s boots on the floor go to the property and actually check to see the work was done. This could be a property manager, this could be an agent. This could be a BiggerPockets member that lives in the area. This could be someone you pay on Task Rabbit, because I have seen times where a contractor sent a picture of a wall that was painted, but the rest of the house was not painted. It’s possible if you’re not careful for them to take advantage of you.
Once the work has been done to my satisfaction, I send them the second draw and they do the second part of the work. Now, the benefit of this is I can only be ripped off by 25% of my deal. And if they stop replying to me, they stop talking to me, I don’t know if work is going on, I can find another contractor and say, “Here’s the scope of work. Here is what I will pay you to do it. Do you want to take the job?” And then they can jump in and pick up where the first contractor stopped replying. “Hey, I understand someone’s sick in the hospital. There’s nothing you can do. I’m going to move on and get the second part done with someone else. If your family member is recovered and you can work, we can jump back in and have you do the third, but if not, I’m going to get somebody else.” Doing it this way gives you some flexibility and freedom.
Now, here’s where I’m going to put on my little angry teacher hat and you’re going to get a red mark on your paper. If you’ve read my book Long Distance Real Estate Investing, I detail this pretty clearly there. I make sure that I cover all of you guys that are listening to this and all you BiggerPockets fans from losing money because contractors are one of the two ways that I see people lose money in real estate. One of them is contractors. The other is low appraisals, particularly with the BRRRR method, those are the two ways that you can get yourself in trouble.
You’ve got to manage your contractor’s payments. Every scenario that I’ve seen in my whole career where someone came to me and said, “The contractor stopped replying,” every one of them, they paid the contractor too much money up front, sometimes the whole job. Once they get their cash from you, there’s no incentive for them to finish the job. They’re going to finish it whenever they want. And if you’re thinking, “Well, I’m going to leave them a bad review on Yelp. I’m going to go to the Better Business Bureau and I’m going to report them,” most people hiring contractors will never look at that. They’re going to get a recommendation from someone else. They’re going to get a bid that’s really positive, really low, and they’re going to pick them. So it doesn’t hurt them as much as you would think to be able to do that.
So for everyone out there listening, every contractor’s kryptonite is not getting paid. They’re not good at managing money. If you set it up so they get paid after the work is completed, they will be very motivated to get that work completed because their guys are saying, “I need to get paid. I need a forward on the next thing I’m going to get paid on. I can’t find the tools. You need to buy more. I ran your truck into a wall. We need a new truck.” They’re constantly having people come to them and saying, “We need money. We need money. We need money.” They then turn to the customer and say, “I need money. I need money.” If you’re the person that gives them all the money, you solve their problem, now they’re not incentivized to solve your problem. If you make it so they only get their problem solved when they solve your problem, human nature will be working for you, not against you, and you’ll have a much better result with your contractors. It’s not in just having an airtight contract. It’s in the incentive structure that you set up when you’re working with them.
Hope that works out for you JD, sorry that that’s happening. I see you’re in the Sacramento region. Make sure you come to one of the meetups that I hold. We do them out there pretty often.
All right, at this segment of the show, I like to get into the comments that you all have left on YouTube. I’ve seen other podcasters doing this and I love it. They read the comments from their shows so everybody gets to hear it. Sometimes people say something funny or cool or profound or meaningful and everybody gets to hear. So if you’re listening to this, do me a favor and leave a comment on this show. Tell me what you thought, what you want to see more of, what you liked, what you didn’t like, and maybe I’ll read one of your comments on a future show.
Our first comment comes from Mark Ruth. “I’m finally under contract on number three. Most of what I learned from YouTube about real estate investing is not to put the properties in your own name and use a LLC. However, my lender says the fixed rate loans that you get from the secondary market requires the property to be in your personal name. How would I reconcile that?”
Okay, so there are many people that say don’t put the property in your own name, instead use an LLC, and the reason is for lawsuits. First off, if you don’t have a high net worth or you don’t have a lot of equity in the property right off the bat, that’s not really something you have to worry about. But let’s say that you do. It is very true that it is harder to get good loans in an LLC, and this is the trade-off everyone has, and real estate investors hate trade-offs. We want really low interest rates, but we don’t like to pay points for the closing costs. We want to buy in a market that’s appreciating and going up, but we don’t like the competition with everyone else doing the same. When the market’s bad and we can actually get really good deals, well nobody else is buying and prices aren’t going up, so we don’t like that either. Real estate investors hate trade-offs, but they’re a part of life and you have to accept them.
Your problem here is that if you choose to put properties in LLC, you sometimes cannot get conventional financing. And if you can, it’s usually going to be a rate that’s worse as if you put it in your personal name. Some way around that is that people go put it in their own name and then they later move the title into the LLC. There’s a trade-off for that. The lender could call the note due because technically you sold it to another entity even though you own that entity without telling them. Now, in my experience, that doesn’t happen very often, but it could happen.
So the way you reconcile this is you ask yourself what is more valuable to you? Is saving the money by putting it in your own name more valuable to you, or is reducing the risk by having it in an LLC more valuable to you? You just objectively turn it into a number. You have to quantify the risk of keeping the property in your own name. Now, I started off this reply by saying in most cases if you don’t have a high net worth or there’s not a ton of equity in the property, it’s not that much risk. It’s not like tenants are running around suing landlords every single chance they get over anything. And in the rare cases that you do get sued, your homeowner’s insurance will often cover you for most of what the lawsuit would be or all of it. So it’s not as big of a risk as people think.
In general, the people who need to worry about putting their properties in an LLC are people who own a lot of real estate or have a high net worth. So as a general rule, if you don’t have a high net worth, you don’t own a ton of real estate, you don’t have a ton of equity, your own name is fine. Just maybe buff up your insurance coverage in case you get sued. And if you do have a high net worth, it’s usually worth it to not get the better rate, but to get the protection of the LLC. Hope that helps, thank you for the question there Mark.
Giovanni Alvarez says, “I love the end of this episode,” which was episode 699, “Referring to are my standard set too high, I think it’d be awesome if you and Rob can go further into the mindset, psychology, personal development, and emotional intelligence needed to become a good investor. We need more of this for the upcoming year. Thank you for everything you do.”
Well, thank you for that too Giovanni. I personally love to get into mindset stuff. A lot of our listener base hears that and goes, “No, just give me the practical stuff. I just want to know what paper to sign and what metric to use,” but there is a lot to be said for the mindset, psychology, personal development, the intangibles that go into making someone a really good investor. So I’d recommend you check out my YouTube channel on Friday nights, it’s youtube.com/@DavidGreene24, where we talk a lot about this kind of stuff. Every once in a while here at BiggerPockets, we do a mindset episode for you.
But what you could do is you could come on and you could submit a question yourself at BiggerPockets.com/David and ask more about the mindset, the way that Rob and I or Brandon or other investors look at life and look at money and look investing. I personally believe that’s even more impactful than just telling you the 1% rule or the 80% rule or another way of explaining the BRRRR acronym for the 700th time. I think the mindset stuff will actually help people more, but that isn’t what people always want to hear. So come in, ask your question, and I’d love to get to know you better. Thanks Giovanni.
Adrian A says, “No. David said, ‘Irregardless,’ I’m done with the show. JK, I love the show and all the good info you guys provide us. You’re the man David, keep it up.” This is a problem in my life. I’ve receiving therapy, I’m going to counseling, trying to get this fixed. Sometimes I say regardless, sometimes I say irregardless, I don’t know why. They mean the same thing. I’m pretty sure the correct English is regardless. Sometimes irregardless slips out. It’s got something to do with my brain thinks that irregardless makes more sense, like without regard, but regardless also means without regard, right? So I don’t know why I do that. I know the English majors out there definitely catch it and put a comment in there. Thank you Adrian for your patience with my stupidity and my less than black belt mastery of the English language. I am working on that, especially because I am a professional podcaster now.
The question is when should someone use irregardless? Is there ever a time where irregardless makes sense? My producer here says the point of the irregardless is to shut down conversation. So irregardless is a word, it has a specific use in particular dialects. That said, it’s not part of the standard English, and so especially if you’re writing or if you’re using it in formal places, you should use regardless instead. Oh, so irregardless is a way of saying like, “I am done speaking to you. You are beneath me. Move on peasant. I’ve got more urgent matters to attend to,” which might be why I offend people when I say it instead of regardless. Guys, I’m not on an ivory tower of real estate over here. I will do my best to stop saying irregardless. My intention is not to shut down conversation, I actually want to encourage it. And what better way to encourage it than to say, go on YouTube and leave a comment. Tell me what you think about what I just said.
Our last comment comes from Gregory. Gregory, “Ha-ha, the Golden Girls, Matlock, and Murder She Wrote references, awesome, I love it.” I’m glad somebody caught those Gregory, because you’re probably in the 2% of our audience that knows what I mean. If you know what we mean by Golden Girls, Matlock, or Murder She Wrote, please leave a comment on YouTube and let us know which of those three shows was your favorite and why. What memories do you have of these shows when you would watch them? And what context can you provide for everyone else for why they should go look them up?
All right, we love it and we so appreciate this engagement. Please continue to engage. Also, just do me a quick favor, like and comment and subscribe to the YouTube channel here so you get notified whenever we have a new Seeing Green or BiggerPockets episode air. You don’t want to miss this good stuff, and YouTube will help what’s coming if you subscribe to our channel.
All right, let’s get to our next video question that comes from Julie in Reno, Nevada.

Julie:
Hey David. My name is Julie. My partner and I are looking to purchase a home from a family member in rural northern Nevada. This family member is an elderly hoarder and this family homestead has been in the family for over 100 years. Because of the hoarding, the home is in poor condition and probably would not qualify for a traditional mortgage. There is a current mortgage on the property for about $200,000 that is likely 70 to 80% of the current home value. The lot on which this homestead resides is quite large and likely could be subdivided. My partner and I don’t have cash to purchase the home outright. This family member has been unpredictable in the past, so we’re looking for a legal arrangement that would not allow the family member room to litigate or reverse a signed and completed deal. Can you talk about various strategies we could use to acquire and improve the home, including a subject to deal subdividing the lot to fund repairs or use of a DSCR loan? Thanks so much.

Corey:
Okay Julie, I understand the challenges you’re facing here and I’m glad you reached out for help. I’m going to do my best to give you several options that you can move forward. But before I do, I just have to make a disclaimer before we get into it. Objectively speaking from what you’re telling me, it doesn’t sound like this is a great deal. You mentioned that it’s got a $200,000 note that’s probably worth 70 to 80% of what the property’s value would be, so you don’t have a ton of meat on the bone. If this was a deal you were looking at that was not in your family, you would probably just pass on it right away. If the house is worth $240,000 and there’s a note for $200,000, that’s not a deal that people would be jumping at to go buy, especially when it’s in poor condition. Like you said, it’s in such poor condition then it might not even qualify for conventional financing.
So the only reason that I think you would want to buy the house is the emotional value that it has, but it’s coming with a lot of complications. You’re going to have to go rehab it and you don’t have money. You’re not getting it at a great deal. Your family member themselves is going to pose a problem as the seller could likely come back to you and try to take the property back from you once you buy it. The thing screams not a good real estate deal. Now, I just have to say that before I give you any advice because from a financial perspective, it probably doesn’t make sense to pursue this. However, if you want it for emotional reasons, I will still give you the advice that I would for what you can do to try to put in contract. I would strongly encourage you and your partner to sit down and ask yourself if this is the right financial move to make for you for real estate because this podcast is here for buying real estate for financial purposes, all right?
As you were discussing, the number one thing that jumped out at me would be a subject to deal. It wouldn’t make sense to try to go get a loan to buy the property from the current owner because it won’t qualify for financing and it’s not a great deal. The products you can use that you can buy a property that is not a great deal or isn’t going to qualify for financing would be bridge loans, hard money loans, personal loans. They’re going to have higher rates than standard financing. And because rates have gone up, my guess is the rate on the loan that they currently have is going to be significantly better than anything you could get now. So objectively speaking, it would make more sense to take over the note that’s already in place.
Another benefit of doing that is it’s probably an older note, which means in your amortization schedule you’re further along, so a higher percentage of your payment is going towards principle than towards interest. So even though it may not cash flow super strong, if let’s say the payment’s $1,000, when you first take that loan on maybe only $100 out of that $1,000 is going to pay off the principle. But you might be in a position where $500, $600, or $700 is going to pay off the principle. So even though your cash flow is going to be the same, you’re actually building anywhere between $500 to $700 a month of additional equity because a bigger chunk of the payment is going towards the principle. That’s another benefit of buying a property subject to where you’re taking over the existing mortgage.
That’s the route I would take in this scenario. I would say okay, I’m going to take over your mortgage. How much money do you need to get out of this property and move you into whatever home they’re going to move into it? I’m assuming it’s an assisted living facility or they’re going to live with another family member. You want to figure out how much money they need to move on to the next phase of their life and maybe come up with that part out of pocket.
If you can buy the property, you’re subject to financing, now you got to think about what am I going to do to rehab it? And again, you need some cash here to make this deal work. If you don’t have a lot of cash saved up, it’s not a good move. You can figure out subdividing the lots before you actually buy the deal, that’s going to be calls to the city and to tell them what your plans are and to see if that would be approved. They won’t approve it, that’s a quick answer. If they will, you want to make sure you ask them how much is it going to cost to do that and then figure out once you’ve subdivided the lots, who are you going to sell it to and how much are they going to pay because they’re going to have to then go develop it.
This is the best road of action I see for you, but again, the deal doesn’t look great. I think you’d pass on this deal if it wasn’t a family member and if the home hadn’t been in your family for 100 years. It might make more sense for them to sell you the home, let you take it over subject to, and maybe give you some money to take it over so that you can fix it. I don’t know what advice to give you as far as the family member coming back and saying, “I wish that I wouldn’t have done that.” That’s legal advice you’d have to get from a lawyer, it just sounds ugly. It doesn’t sound like there’s any good way to do this or there’s a very good chance that other family members will be upset if they think that you’re ripped off grandma and they wish that they could’ve got a piece of that. It smells rotten from a lot of different angles, so I would be highly cautious pursuing it, but if you’re going to, I think subject to is definitely going to be your best bet. Thank you for your question Julie.
All right, our next question comes from Andrew Carter out of Spain, [inaudible 00:28:20]. “Hey David. First off, I just wanted to thank you and the whole BiggerPockets team for what you guys do on a daily basis helping people around the world. That said, when you and Rob are chatting with this tax guy Matt, you brought up that real estate investing is a grab the wolf by the ears kind of situation. My question is what’s your exit strategy when or if ever you’d like to stop working 60-hour weeks and buying 15 short-term rentals per year? Is there a way to exit and semi-retired to live off your earnings without having a crushing tax bill due? Thank you again and can’t wait to hear your thoughts on it.”
[Inaudible 00:28:58] Andrew Carter. I will do my best to try to answer it. All right. First off, I’m not currently working 60 hours a week. I work when I want to now. Now, does that mean things don’t get done as fast? Yes. Does that mean I don’t make as money as I could? Yes. I’m not saying that everything is just perfect clockwork and I never work anymore. It’s more like if I want things to be better, if I want to make more money, if I want to do something different, I need to jump in and work, but I’m definitely not putting in hours like what I used to.
I also don’t buy 15 short-term rentals every year. I bought 15 at one time because I was forced into a 1031 that I didn’t really want to do, but I had to do because people were stealing the title to my properties. And once I started analyzing deals, I realized short-term rentals are the only thing that’s cash flowing, so I have to do it.
Now that being said, real estate is the best thing ever. Real estate investing is not a grab the wolf by the ears scenario. Using bonus depreciation to shelter your income is a grab the wolf by the ears scenario. And what I mean by that, when you grab a wolf by the ears, you’re safe because the wolf can’t bite you, but you lose your freedom because you can’t let go. So you’re in a stalemate, so to speak, if this is a chess reference here. Real estate itself is not a grab the wolf by the ears. It’s the opposite. You’ve got a bazillion exit strategies. It’s something that I love. So here’s a couple that you can keep in mind.
Always buy properties focused on building equity more than just cash flow. When you focus on building equity, you have more exit strategies to get out from the property. That could be selling it, that could be refinancing it, that could be selling it as well as other properties together in a 1031, that could be selling one individual property as a 1031 or not. But you have a ton of flexibility, and flexibility equals options, and options equal wealth.
Something else you could do is you could buy some short-term rentals, get them cash flowing really good, wait for the market to be in your favor when everybody wants short-term rentals, sell them to the next investor that wants to come in and find financial freedom and quit their job and instead they want to make money through managing short-term rentals, and then you take that money and you go dump it into an apartment complex via a 1031. Now you’re getting cash flow and you have enough money to hire people to manage it for you. You don’t have to work all the time. Maybe you don’t make quite as much as you did when you were doing short-term rentals, but you get all your time back. This is a very easy way to get in, build some wealth, and then basically step out and have mainly passive income getting into multi-family real estate.
You could also sell the short-term rentals and do different management structures. So I bought a whole bunch of short-term rentals and I believe 10 or 11 of them I set up with a property management company, and they do everything. Those are passive income to me as long as they’re cash flowing and I don’t have to think about it. Now, I do little things to make them cash flow more. I might spend time looking at where I’m going to add bunk beds, add games, get better pictures taken, add things to the property to make people choose it more often, but I’m not managing that property. So by getting something that cash flows at a high degree, you can now afford property management and you don’t have to work forever.
You can also do the same thing in-house. You get enough short term rentals, like 15, you can hire a person to be a full-time property manager that just manages your portfolio and now you’re not working at all. There are literally so many exit opportunities through real estate. It is the most flexible way that I know of building wealth, much more flexible than building a business or a big business or a small business or working at W-2. Even saving money for retirement, real estate is better than all of it, so I don’t want to get you confused by that reference of grab wealth by the ears. It does not apply to real estate investing. It applies to bonus depreciation, sheltering of income that you make from active income making, like the stuff I do with the businesses that I run. Thank you very much for your question, Andrew, and I hope things are going well out there in Spain.
Our next question comes from Mike Higgins in Atlanta. “Real estate tax benefit question, I need guidance. It seems my wife and I are in a real estate tax situation where we cannot take advantage of any potential tax benefits from our properties. Here’s why. We have a combined W-2 income of over $150,000. And number two, neither of us are real estate professionals. Two of the properties are self-managed and the third is under a property management company. All properties are under a Georgia LLC owned by me and my wife. I’ve spoken to two CPAs, both are painting a clear picture where we cannot pass through any expenses or write off any deductions due to the above reasons. What are your thoughts on how to get tax advantage from owning real estate investments?”
Okay Mike, I like what you’re saying here, but I want to clarify something. You are receiving tax benefits from owning that real estate. It’s not sheltering your W-2 income. It’s not sheltering all of your taxable income. It is doing a great job of sheltering the income that the real estate itself puts off. So those three properties, you’re still able to use the depreciation from them to shelter the income that they put off. So if you’re making $50,000 a year in profit from those three properties, probably only paying taxes from zero to $20,000 out of that 50, because the depreciation of the buildings is sheltering the rest.
So when you make money from real estate, or I should say when you make cash flow from real estate, it’s tax-sheltered. The depreciation covers how that income’s coming in. Also, when you do a cash-out refinance on that property, you pay no taxes on any of that. So the equity that you build through real estate is tax free unless you sell. Now, if you sell to get that equity, you can do a 1031 and you can delay the taxes that you’d have to pay on the capital gain. So as you see, the real estate itself is very tax efficient. It’s doing a great job of protecting the money that it makes from taxes. Your problem is your W-2, and what you’re finding out is that your real estate stuff cannot help your W-2 problem.
You’ve only got one option when it comes to that. Well, I guess you’ve got two. You’ve got the short-term rental loophole that they call it, where if you manage the properties yourself, you could become a full-time real estate investor. In the episode we do with Matt Bontrager, we cover that, so that might be something to take some time, look it up. But if you’re not going to do that or if it doesn’t work for you, you’ve got to leave the W-2 world and become some form of a real estate professional, which is what I did. I quit being a cop and instead I became a real estate agent and then I built that into being a real estate team. I’m now the CEO of a real estate company. I started the one brokerage. I’m now the CEO of a loan company. We’re going to be starting an insurance company, and this will be the first time I mention it, but it’s going to be called Full Guard Insurance, and that’s the same thing. These are all situations that make me a real estate professional.
I do podcasting. I write books, I teach courses, I speak to people, I do coaching, consulting. You see what I’m saying? I make my income in the space of real estate. I didn’t try to shelter my police income through real estate. I moved out of the police world and got into real estate so that I could shelter my income.
Now, there’s another uncomfortable truth here. We probably won’t be able to do this forever. I believe in 2023, you can only use 80% of the bonus depreciation to shelter your income, and then it’s going to be 60% and then 40 and eventually it’s going to be zero, and real estate professionals will be right back in the same boat as other people when it comes to bonus depreciation, taking all of the depreciation from your real estate in year one. However, we may have politicians that come back in and reinstate that role. You never know how things are going to turn out.
But what we do know is it you can’t force the round hole into the square peg, or the square peg into the round hole, I probably should say it like that. You can’t keep your W-2 and try to use real estate to shelter that income. Your CPAs are correct. You got to make money as a real estate professional, which is one of the reasons that me here at BiggerPockets and in every endeavor that I have, I’m constantly telling people, “If you hate your job, don’t quit to become a real estate investor full-time. Quit to become a real estate professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do.” Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum. Thank you for your question.
Our next question comes from Laura [inaudible 00:37:03] in Wisconsin. “I don’t have a specific question. Just what advice do you have for those of us investors who got a late start? There haven’t been a lot of podcasts elated to this topic. Cash flow’s important at this age, but appreciation is nice too. We aren’t comfortable investing in markets that provide the most cash flow. Ease of management is important to us. We love a good property that can take advantage of Jeff’s strengths and add value too. We don’t want a huge portfolio, but are hoping to have enough properties to make a difference in our ability to retire comfortably. I realize this is quite a broad question, but maybe it’s a topic you can tackle in the near future. Thanks for all you do for the real estate investing community.”
All right, now for some context about Laura’s question here, she’s 57, her husband is 58. They got their first property in 2018, and they’ve done a BRRRR and they’ve 1031 into a couple small multi-families and they’re currently doing a live and flip. And her husband Jeff I presume is a contractor, so he understands construction. This is going to be the key here.
Okay, so Laura, if your husband is in construction, you have a benefit that other people don’t have. First off, you’re doing a live and flip. That’s great. I’m sure in retirement you’d like to set your roots down and you don’t want to have to have a house that’s always under construction, but you might have to deal with that for a couple years because you can earn some really good money if you buy a house, fix it up as a live and flip, and then sell it in two years and avoid capital gains on the first $500,000 probably if you’re married I believe.
Another thing you guys can do is to continue having Jeff work part-time. So he’s a contractor, but that doesn’t mean that he has to do all of the work. You guys could find these fixer upper properties and buy them and slowly fix them up over time. So what if you bought a 10 or a 15 unit apartment complex and all of the units needed rehabbing and you just waited for tenants to move out, and then Jeff and his team went in there and rehabbed it, increased the rents, rented it out for more to somebody else, and then waited for the next tenant to move out. That’s one way to do things slowly where it doesn’t feel like a full-time job and you can still enjoy some retirement.
If your goal is to build up more income for retirement, as in like cash flow, the small multi-family or medium multi-family space is going to be your best bet. You’re going to want to look for apartments that other people are tired of managing, buy it from them, and try to only buy stuff that has a value add opportunity. Now, if your husband is able and capable of working, he can do the work, but if he’s not, he should still have contacts within the space that he can hire out to do some of this work for you.
If you’re trying to build equity, that is going to take longer, meaning you don’t want to invest in South Florida or Texas or some of these states that we think are going to receive long-term appreciation and bank on that happening. You’re going to want to do what I call buying equity. This is one of the 10 ways that I make money in real estate is I go in and I buy something beneath market value. Then you’re going to want to add equity or create equity, which is going to be through a rehab. If you can find a way to do both in the same property, you’re good. So you want to go in there and find something that needs a value add component, meaning it needs to be upgraded cosmetically or you can add square footage to it, then buy it beneath market value and you don’t have to worry about time not being on your side.
In fact, here is a cool way of looking at real estate for those that may not be at the end of their career, they may be at the beginning, the middle, or the end. When you make money in real estate, you’re not really making money. You’re just buying time. When a deal goes poorly and you don’t hit the ARV you thought, you didn’t really lose money, you lost time. You have to wait longer before that deal is worth what you thought it would be worth. Now when a deal goes better than you thought, the ARV’s higher than you anticipated or the rehab comes in lower than you expected, you didn’t make money, you bought yourself some time. The deal performed well earlier on the timeline than what you thought.
If you can stop looking at real estate as far as money is concerned and you can start looking at it as far as time is concerned, it takes a lot of the pressure off and the negative emotions associated with the deal gone wrong or a deal that came in better than was expected. You just bought yourself some time. And you can find ways to force yourself to get time by buying properties beneath market value and by using the benefits of your husband’s construction background to add value to those properties after you bought them.
And that was our show for today, hope you guys enjoyed another Seeing Green episode. We got in some really good stuff and I was able to share what I hope was some pretty sound wisdom for you all. If you liked it, please leave us a comment on YouTube. And if you loved it, please consider giving us a five-star review wherever you listen to podcasts at Apple Podcast, Spotify, Stitcher, whatever it is that’s your pleasure. Please go there and leave us a review, we want to stay the top podcast on the airways for real estate and we need your help to do it.
If you want to know more about me, you could follow me on social media. Please do. I’m most active on Instagram, but I’m everywhere else. LinkedIn, Facebook, all of those, at DavidGreene24. There’s an E at the end of Greene, and you can follow me on YouTube where I have a YouTube channel, by typing in youtube.com/@DavidGreene24.
All right, that wraps up our show for today. Thanks everybody. I will see you on the next one. If you’ve got a minute, watch another BiggerPockets video. And if you don’t, I’ll see you next week.