The Cash Flow Market “Mirage” That Traps New Investors

David:
This is the BiggerPockets Podcast show 591. CEOs of tech companies don’t necessarily bet on a company, they bet on a market. What they were getting at is in the right market a lot of companies will do well and the actual company itself doesn’t have as much to do as the market that it’s coming up in. And real estate is like that too. When you have a really solid market like this, you can make a lot of mistakes and you can be okay. When you’re in a really tough market, you can do a lot of things right and you’re not going to be okay. And because I realized that I started paying a lot more attention to the bigger factors that affect how our individual properties perform.

David:
What’s going on everyone? It is David Greene, your host of the BiggerPockets real estate podcast here today with a special Seeing Greene episode. Look, if you’re trying to find financial freedom through real estate, if you want a better life, if you want to live life on your own terms, or if you know that you have potential that you are not reaching and you believe real estate is the vehicle that you are going to get to it, you are in the right place. BiggerPockets is a community of over 2 million members, all on the same journey as you and we at BiggerPockets are dedicated to helping you get there. We do this by providing an incredibly powerful forum on the website, BiggerPockets.com, where you can ask any question that comes up to real estate investing. As well as research question that other people have answered. We have a very, very strong list of blog articles where you can read articles other successful investors have written detailing how they did it.

David:
And we have the world’s best podcast where we bring on different guests to describe how they won at real estate, how they made mistakes at real estate or experts in the field such as tax strategy, lending, rehabs, analyzing deals, commercial, triple net, short term rentals, long term rentals, you name it, we got it. That come in and give you a play by play understanding of how they succeed at real estate and more importantly, how you can too. On today’s show we get into some really, really good questions. So what you’re in for now is if you go to BiggerPockets.com/David, you can leave a question and I will answer it right here for all of you to hear. We get into some strategy talk as well as some nitty gritty, some brass tacks, there’s a little bit of everything on this episode, but it’s a lot of fun.

David:
One of the issues that we got to was a really good question no one’s asked me about and the guest said, “Hey, I’ve got a bunch of money in the bank. I’m saving it to go do a BRRRR deal, what do I do with it in the meantime? Should I pay down my loan? Should I not pay down my loan? Should I pay down my loan, get a HELOC, what do you think is the best bet?” One of the people asking a question on our show said, “Hey, I want to get from residential into commercial. What should my criteria be?” We talked about, should you buy one property and pay it off and just live off the cash flow? Or should you buy several properties using a loan as well as how to get a loan when you leave your W2 job and more, we have some incredible questions today so make sure you listen to this entire episode.

David:
Before we get to it. I want hit you with today’s quick tip. Look, we are wrapping up the first quarter of 2022 already. Now, many of you made goals as we all did this together to start the year. Now’s the time to check in and see, where are you at with them? I encourage you to use BiggerPockets to help you achieve those goals. So if you have questions that you need help answering, check out the forums. If there’s a specific topic that you want more information in, go to BiggerPockets.com/store and see if have a book on that topic where we can help you. If you’re looking for a partner, consider going to a meetup and meet other people and find someone you think that you can trust to get into business with. BiggerPockets has so many different ways to help you with your goals.

David:
In one of the shows we interviewed Jonathan Greene, same last name as me who, said he actually time blocks time in his calendar to get on BiggerPockets and interact with the other members, just to bring value to them. Doing something like that can have an incredible impact on your business, so do it. Looking for an agent? Check out our agent finder. There’s all kinds of ways that we can help you and we want to do that. So see where you are with your goals. If you’re behind that’s okay, you got plenty of time to catch up. And if you’re on pace, see how BiggerPockets can help you get ahead. All right. I want to encourage you before we move on to listen to us on our YouTube channel, we take these same podcasts and we do put them on YouTube. When you’re listening on YouTube, you get to see some of the weird hand gestures that I make or funny faces that I make.

David:
But more importantly, you can leave us a comment. And that’s what I’m looking for. If you go to YouTube and leave a comment about what you liked, what you didn’t like, what you want more of, I will know how to answer these questions better. Please be sure to like, share, and subscribe what you see there. And if you’re listening on iTunes, Stitcher, or any of the places you get podcasts, leave us a review there too, they really, really help. We want to stay the number one real estate podcast in the world. All right, enough of that, let’s get to our first question.

Caleb:
Hey David, my name is Caleb. I’m a home builder and a realtor here in north central Texas in Fort worth specifically, I actually got 42 new sets of plans that I have to get started this week. So it’s going to be really busy, but my question is obviously pertaining to investing. So my wife and I, we have our primary residence and we also have an investment property that we just put under contract to sell. And when it’s all said and done, I’m going to walk away with about $80,000 investment for investment purposes. That’s not including our personal savings and all that other personal finance guru, recommendations. That’s strictly just money to use to invest. There’s two schools of thought here, and I’ve kind of been going back and forth between the two once this house closes. One option is to split that money into two 20% down payments on around $200,000 properties.

Caleb:
And so basically I’m doubling down. I’ll be turning that one rental property into two rental properties, just because the amount of equity that I was able to pull out of it by selling it, I didn’t want to refinance it because the rates and the price just wouldn’t have made sense for the amount that I could have pulled out without doing an appraisal. It was kind of a complicated situation.

Caleb:
Anyways, it was better for me to sell it. So option number one is to double down, buy two houses with that. Option number two is the BRRRR strategy to save up enough cash to where I can buy a house cash, remodel it myself, doing all the work and then refinance and just do the traditional BRRRR thing. I think that would take me another six months or so to save up the money that I would need in order to achieve that or find somebody to partner with. What are your thoughts on this scenario? What would be the best course of action in your mind and what are you betting on appreciation wise in 2022, that’s this year. All right, man, I really appreciate it. I love all of BiggerPocket’s content. You’re awesome, thanks.

David:
All righty. Well, thank you, Caleb. That was a very well thought out video with some really good questions in there. And I’m happy to tackle this for you. Now, let me start off by saying to you and to the audience, this is a subjective interpretation of what I think you should do, which is based on what I would do, but you’re in a different circumstance in life than me. So take that into consideration if you’re listening to my advice. Not everybody’s in the same situation and not everybody is seeing the cards being dealt the same way that I’m seeing them, but with you guys understanding that if I was in Caleb’s situation, here’s what I would do. I would go ahead and answer. First off the last question you asked is probably the best place for us to start. It’s what do I see happening in 2022?

David:
And that’s a great question to ask because my advice is going to be geared off what I see happening. The same advice doesn’t work in every single market. You really got to adjust your strategy to what’s being offered to you. So here’s what I see in 2022: more money being printed, money that has already been printed hitting the actual consumer experience. So you’re going to see gas prices go up more groceries go up more. The price of assets go up more. So this wave was started, this tsunami in the middle of the ocean of inflation. It’s now making its way to shore. So we’re going to see more of that. I think you’re going to see more people rushing into real estate because they are recognizing that is a great inflation hedge. We’re also not building enough of it. I think rates might go up a little, they might go down a little.

David:
They’re largely going to stay the same. So I don’t think the rate issue is going to play a very big role in real estate. But I do think that real estate is going to go up in value, both in rent and in how we value it as far as what it would sell for. So overall it’s going to be another really strong market, that’s what I think. And that’s why I’m going to give you the advice I’m giving. So option one was, should I take my $80,000, save up more and then use the BRRRR strategy. So theoretically, you’d get the majority of that 80,000 back to go buy the next house. Now that’s usually where I tell people that they should go. You can preserve more capital, you can scale faster, it forces you to get a better deal because you have to buy below market value.

David:
However, with the competition that we are seeing, my fear Caleb is that in the six months that you try to save that money, especially if something happens and it takes more than six months, prices are going to go up faster than you can keep up with them. So you may end up never getting the amount of money you need to buy a place cash because prices are going up faster than you could save money. Even if you do get to a point where you can pay cash for something and do the BRRRR deal, or you give up and you go the hard money way so you can buy something, how much will prices have gone up while you were waiting? Now maybe in the area that you’re in, I believe you said it was Fort Worth, maybe prices aren’t going up as fast. If you’re in the $200,000 price point, it’s probably not red hot.

David:
So if there’s a lot of fixed upper properties, if you really can do it in six months or even better, if you could find the money from somewhere else, borrow it from somewhere, get a small loan, something to get started sooner, I’d recommend that. If you can’t do that, which is probably going to be harder to do. I would say, take that money and spread it out over several different properties. Get as many of them as you can in the best locations possible. Now here’s my advice to you, I don’t want you to look at how many properties you own. That is a misleading number. It’s why people say I have X amount of units, X amount of doors. It just doesn’t matter. Look, you could have one property in a great area that makes a ton of money, or you could have another property in a terrible area with a ton of headaches, but 50 doors.

David:
Would you rather manage 50 headaches or one great property? It’s why you don’t want to look at how many properties or how many units you have. Instead, what you want to look at is how much cash flow do I have, how much equity do I have, and how much debt have I taken on? Now when interest rates are low and we expect inflation to continue, having debt is actually a good thing if it’s good debt, not consumer debt, we’re talking about real estate debt, debt that pays you because you bought it with an asset that brings in income. So what I would recommend you do is you take on as much debt as you can in the best areas that you can with the most cash flow that you can and the most equity that you can. Now, I realize that’s saying, go do everything. But what I’m saying is the way you use your money should be taken into consideration with that strategy.

David:
So if it was me and I had $80,000, if I could buy four properties and put 20% down, that’s what I would do, but I wouldn’t go and say, I’m going to put the whole 80 or whole 100 into one property, just pay cash for it or something like that. You’re better off in this environment to get more real estate, to take on more debt, because you’re going to be paying it back with cheaper dollars and to get more revenue coming in. Now don’t make the mistake of thinking that the cheaper houses are the better deals or the safer deals. It’s not true. Doesn’t matter the price of the home, it matters the location of the home and the quality of the tenant you’re going to get. Sometimes a more expensive home is much safer than a less expensive home, even though the price point is higher and it feels scarier.

David:
So I would be looking for areas you think you’re going to have more growth, just look at which parts of Texas are growing faster. You’re a home builder. So you obviously have a very good idea where homes are selling right now. I would invest in those areas putting as little money down as I had to to get the loan that I wanted to get and taking on as much healthy debt as possible to get the most expensive real estate in the best area. And then I would let inflation do its job as prices go up, as rents go up and eventually you’ll be able to refinance those properties that they’ve gone up in value, so you don’t have to do the BRRRR method and do it all within a six month period. You can sort of do it over several properties at a longer span of time. Thank you very much for that question.

David:
All right, question number two is from Micah S. in Oregon. “In your recent Q and A podcast, you mentioned placing notes against a commercial investment property versus syndicating. Wondering what terms you’re using on that money while you renovate or turn a property around. With that is there a dollar figure you go after? What’s the interest rate you’re offering the investor and over how long? Lastly, are you putting them on title at all for their peace of mind or strictly a personal note?” Okay there Micah, thank you for asking this. Here’s where I’m going to start. If you’re asking because you’re trying to do the same thing you probably don’t want to copy my model because we’re in a different position. I have a lot of experience investing in real estate. I’ve never lost money investing in real estate. I have a ton of money that I keep aside in reserves.

David:
I have very healthy income streams coming in from things that are both real estate and non real estate related. So someone lending money to me is different than them lending money to I’m presuming you. Now I don’t know you, maybe you’re a billionaire, but you’re probably not going to be submitting a question to BiggerPockets if that’s the case. So here’s what I’ll say. I’ll share with you my terms, I’ll share with you why I give them, I’ll share with you who the right person to invest with me is. And then I’ll give you some advice if you’re trying to do this for yourself. When I’m raising money, I’m not doing it in a syndication and here’s why: when you invest in a syndication, you are not investing in a person, you’re investing in a property. So you have to hope that property performs well and your return is tied to how well that thing goes.

David:
So I’ve invested in syndications before where no fault at all of the general partners, a hurricane hit and destroyed the property, which meant we all did not make money for several years because any money that property made went right back into fixing it up. So the returns were bad. And if you were depending on high returns in that syndication, you would be screwed and there’s nothing that you can do about it. It’s okay because syndications tend to give of a higher return, but that’s because they are associated with more risk. Now, the position that I’m in, I just couldn’t lose someone’s money. I can’t sleep at night. I wouldn’t feel right about everything. Anyone who gives me money when they’re lending to me is not lending in a property they’re lending to David. They are trusting David’s going to pay me back. Not that property’s going to pay me back.

David:
And it may sound like a subtle difference and somewhat nuanced, but it actually makes a difference. So if I start a syndication and I borrow money, I feel like I’m going to have to pay people back even if the property goes terrible. So what happens is I’m taking on extra risk to get the same return as I would get if I didn’t do that, it doesn’t really make sense. So instead, what I do is I guarantee the note personally, they get paid regardless of how the property performs. Now, another part of your question was, do you put a lien on the property to secure them? You said so they can have peace of mind, right? The answer is I do if I can. So I have several properties I’m raising money for right now. If one person comes to me and says, “Hey, I have $500,000 and I want to lend it to you.”

David:
That would be a note on that property in second position, easy enough. If I get 10 people with $50,000, then what would happen is I’d have a second, a third, a fourth, a fifth, or I would have to combine them all together. And now it becomes a syndication. You see what I’m saying? So it depends on the amount of money that someone lets me borrow. If I can put a note on or a lien on the property I should say to secure their financing. Now, most people that lend to me don’t need that because they trust me. They know I’m going to pay them back. They see my track record. They hear me on the podcast all the time or I have a personal relationship with them so that doesn’t become an issue, but I have no problem doing it and I’ve offered to do it without someone even asking in times where they have enough money, that can be tied to one property.

David:
But often it’s not like that. Sometimes I borrow money and I flip a couple different houses with it. Sometimes I borrow money and I put it in different deals. And then I BRRRR the money back out, I refinance it, I put it into the next one. So sometimes I can’t tie it to a property because it’s moving around amongst different things. But for the majority of people, if you’re considering letting someone borrow money that you don’t know is a really good investor or has a really good track record, or you don’t know personally, even if you know them personally, even in that case, you want your money to be secured against that property. You want some kind of lien in case that person can’t pay you back. Now, as far as the terms that I offer, they obviously differ depending on the amount of money that I’m being given and how long they want to let me borrow it for.

David:
Typically, I’m looking for a person that wants an alternative to a bank. I’m not looking for the real estate investor that wants to go out there and tear the world up and just set the earth on fire. That person doesn’t want to lend their money to me. They want to go learn how to invest themselves. I’m looking for the person that doesn’t want to learn how to invest, doesn’t have the time, doesn’t want to take on the risk, is already good at something else that they’re doing and they just want a return on their money without having to go put a lot of work into it. I’m not looking for the person that says, “Hey, I’ll let you borrow my money but tell me everything you’re doing in this deal.” That would just slow me down too much to even be able to use the money. So I’m looking for people that want an alternative to a bank. That’s why I pay 8% interest on the money that I borrow.

David:
And it can go up more depending on what’s going on in the economy or depending on how much they’re letting me borrow. If they let me borrow more, sometimes I offer a higher rate of return than that, but that’s the gist of it. I don’t think most people are going to be able to offer the same terms and rate that I do. That’s just the way it goes. So if you are looking at this Micah and you’re trying to figure out how you should do it, you’re probably going to have to tie their return to the equity in the deal. Unless you’ve got 100s and 100s of 1000s of dollars sitting in reserves where you can actually pay them what we say is debt.

David:
So I pay debt, they get their 8% and it doesn’t matter how the property does, every month they get a deposit just like if it was a bank. If you’re not experienced, if you don’t have as much money, you probably can’t guarantee it the same way that I can. You’re going to have to tie it to the equity in the property. They’re probably not going to get their interest until the very end when you pay them back, you’re going to have to structure it differently than I do. And if you want to invest with me or let me borrow money, stick around on to the end of the show and I’ll tell you where you can go to register to do just that.

Shane:
Hey David, I have a lending question for you. My name is Shane. I’m a college student. I have two properties at the moment, two single family houses and I’m looking to get my third. And my problem is I don’t make a lot of money on paper. I work in real estate sales, closed about two deals a month last year, it was my first year. I made nine bucks an hour as an EMT and obviously college student. So I’m looking to get out of the house I’m in now, which was supposed to be a flip. It’s way too big of a house for me to be living in. I’m going to turn this one into just a larger, higher end rental. But so I’m looking to put a seller finance offer out, get into that and then do a balloon payoff in I don’t know, about five years or less. So I need to qualify without a lot of income for a personal home, which will eventually be a rental, but I just need help refinancing after I get into it. Thank you.

David:
All right. Thank you for that, Shane. Luckily for you, this is not too difficult of a have a problem. So if I hear you correctly, what you’re telling me is that you want to refinance out of this loan that is seller financed with some private money and hard money into just a straight 30 year fixed rate mortgage, but you don’t make a lot of money so your DTI isn’t solid, you’re having a hard time with the refi. What you need to do is to find a broker like me and ask them if they have the debt service coverage ratio loans, or DSCR. Those are loans where the bank is going to take the income that the property itself would be making if you rented it out and use that to qualify you as opposed to money that you are making working nine dollars an hour as an EMT, I believe you said.

David:
So you can try banks, you can try credit unions. They’re probably not going to have products like that. You need to go to a broker like me who goes and finds different lenders and then we find the one that has the product that you need. And then we broker the deal for you. So luckily for you, it’s not too complicated or too hard. You just have to be asking the right people. You could call a hundred credit unions and probably none of them are going to have the product you need. So the right direction for you to go in is a mortgage broker. All right, in this section of the show, we are going to go through the comments that are dropped on YouTube. Now I love when you guys drop me comments on YouTube, because it gives me an idea what type of content you want to see, what type of questions we should be picking.

David:
It also lets other people see what you think of the podcast, what everybody kind of thinks of it. So this is one of my favorite segments where I get to go through and share some of the comments we had. The first one comes from Christa Seals, “#DavidGreeneforpresident.” That’s pretty cool. What do you call the emojis where the hands go up like this? Praise hand emojis, and then a smiley face. “Thanks for dropping all this knowledge. Economics definitely affect real estate so I appreciate you touching on those topics.” Well, thank you Miss Christa. I appreciate that. That is a thing that most real estate influencers or teachers, whatever you want to call us, want to shy away from. It is easier to tell you how to analyze a deal, it is to tell you how to pick a tenant, it’s easier to tell you how to rehab a house than it is to get into the huge, complicated macroeconomics of real estate.

David:
But I heard a very smart person tell me once that CEOs of tech companies don’t necessarily bet on a company, they bet on a market. What they were getting at is in the right market a lot of companies will do well and the actual company itself doesn’t have as much to do as the market that it is coming up in. And real estate is like that too. When you have a really solid market like this, you can make a lot of mistakes and you can be okay. When you’re in a really tough market, you can do a lot of things right and you’re not going to be okay. And because I realized that I started paying a lot more attention to the bigger factors that affect how our individual properties perform. So I appreciate that you noticed that.

David:
Comment number two, “These are my favorite. How can we know if it’s a Q and A episode, search coaching calls in the title?” Okay so [Aberance Art 00:21:58], this is a very good question. How do I know what type of episode I’m going to get, especially because you like this one. Well, one way is that the light behind me is green, you know it’s a Seeing Greene episode. But maybe you want to find out before you actually open and start watching it. So another way would be to look for the title artwork. So if you see just my face, it’s probably just me on a Seeing Greene. If you see me and Rob Abasolo or me and some other co-host, then odds are it’s an interview with someone or a deal deep dive or a topic deep dive into a specific strategy or something that we’re working on or deal we did maybe. But when it’s just me, it’s more likely to be a Seeing Greene episode. Another thing is that you can check out the show description.

David:
So if you check out the little arrow that points down and it drops down the whole show, you’ll see the topics that we talk about when there’s a lot of them with timestamps you’ll know, hey, that’s more likely to be one of these Q and A episodes. When it’s just a paragraph that describes the guest we’re having it’s probably not a Q and A episode. So thank you for asking that. That’s actually a very smart question. And the last one from [Talita N. Runalinho 00:22:57]. “Hi, David. At 54 minutes, you answer on return and equity and the advice you gave him. Can you make a more detailed video on your thought process around equity return doing a cash out verse selling and a 1031 into another, when to do either one. Thank you.” This was from episode 570.

David:
All right. So I can make more videos. If you guys check out my YouTube page, I do talk about this, but let me just take a second to give you the summary of it right now. Whenever I have a decision of, I have a lot of equity in a house, should I keep it or should I sell it, or should I refinance it, or should I sell it? You’re you’re trying to figure it out. I turned it into like this flow chart. So the first question is, do I have equity? If the answer is no stop right there. If the answer is yes, move along to do I want to sell, do I want to refinance? If I want to sell the first question I ask myself is, is this a property I want to keep? Now, there are a few metrics I look at when I’m deciding if I want to keep it, the first would be, is it causing me a headache?

David:
Maybe the location’s bad. I would want to sell that one. Maybe the property manager in that area just is terrible and for whatever reason, I can’t make that property work. That’s causing me a headache, I might want to sell it. I would ask myself, are the rents going up consistently? If they’re not going up consistently, I probably don’t want to hold it long term. I would ask myself, is the value likely to continue going? Will it continue to appreciate? If the answer is yes, I might want to keep it and that would lead to maybe I should do a cash out refinance. If the answer is nope, it’s not going up, I probably want to sell it. So those are the questions that I start to ask myself. What benefits would I have by keeping it? Is it going to appreciate? Is the cash flow going to go up? And is it causing me headaches?

David:
If the answer is these are all bad, that’s going to be a sell. If the answer is, these are all good. That becomes the cash out refinance. And then it becomes very simple. I’m going to cash out refi and I’m going to go buy more property. When I go buy the more property I ask myself those same three questions. Is it going to cause me a headache? Is it going to increase in cash flow and cash flow strongly? And is it going to appreciate, and if you just keep real estate that simple, you’ll find that you can scale pretty fast, pretty easily. All right, let’s take another video question.

Andrew Freed:
Hi David, Andrew Freed. Thank you for taking my question. I currently have eight units, one of which I’m house hacking and that kind of brings up my question. What low down payment loan product would you recommend for somebody wanting to house hack a three to four family this year, but has already used his FHA loan? Thank you, appreciate your help. Take care.

David:
Now Priscilla Rodriguez had a very similar question. They’re asking about low down payments and FHA loans. So I’m going to answer both of your questions here at the same time. All right, let’s look at your options here. You’re thinking the right way, you’re house hacking, you want to buy another three or for unit property so you can repeat the process, but you’re trying to put less money down and borrow more. In a high inflation environment that is usually a better strategy. The problem is if you’ve already used your FHA loan, you don’t have a ton of options. Now, when you’re buying a single family residential property with a conventional loan, you’ve got 3% options, 5% options. You’ve got different options depending on the price point of the home and the location of where it’s at. When you’re going after a multi-unit property, those go away. So with a duplex, you can get 15% down on a conventional loan in most areas.

David:
With a three or four unit property, you’re going to be looking at 20 to 25% down, depending on your circumstances. The FHA is the exception. So here’s what I would say. The property that has the FHA loan on it, if it has equity, refinance out of that into a conventional loan that frees up your FHA loan, which you should then use to buy the next property. Now FHA loans are great. 3.5% down is awesome. They also have a lot of flexibility on things like credit scores, but they’re not something you can just keep doing over and over and over again. You can only have one at a time. So what you want to do when you’re using that loan is you still want to look for a really good deal. You still want to get something in a high growing area or as below market value as you can so that you can refinance out of it faster, meaning you have the equity to get in at to 80% loan of value and then use it to buy the next property.

David:
All right, moving on to the next question. We have question five from Maxime. “Hey David, in episode 570, you had mentioned that good new deals are getting harder and harder to find as more investors are coming into the market. Given that technology has made investing easier…” Yes, I did say that. “Do you think that these two trends are indicators of home ownership levels decreasing as investors push up the real estate prices? If so, how hard do you think it will be to break into the market 10 to 15 years from now? I am 15 right now. So not investing just yet. Just interested in real estate and planning ahead. Thanks.” Well, first off Maxime, kudos to you for being 15 and listening to this podcast and thinking ahead, that’s way further than I was when I was 15. Also we just interviewed Dominique Gunderson who got her start at 17 years old.

David:
So you may not be as far behind as what you think. Now, let me clarify a few things. I don’t think it’s just investors that are making the market too hard for people to buy homes. I work in real estate and real estate sales, and I see that a small percentage of the people buying homes are investors. It’s still mostly people who just want a place to live and want to own not rent that are buying the majority of homes. I don’t think the problem we have is because there’s too many investors. I think that the problem we have is because there’s a lack of inventory. So if I was in new your situation, here’s what I would be thinking, monitor the amount of homes that are being built in the area where you want to buy. So it doesn’t matter if you live in Tucson, Arizona, and they’re building a lot of homes in New York.

David:
What you want to know is if you’re going to be buying in Tucson, how many are they building there? Pay attention to that. If they’re not building more homes, it’s going to be harder and harder and hard to get these homes when you become of buying age. If they are buying homes, then that means prices probably won’t be going up as fast in those areas as they are in others. Another thing to think about, and this is going to be hard to swallow, not just for you, but for everyone else. When we had a more consistent money supply, saving up money, made more sense. You knew if I can save up X amount of money, I can go buy a house. I remember a conversation I had with one of my aunts when I was your age, 15. And she said, “Shoot, I think if you go into a bank and you have $30,000 that you say you have as down payment, they’re going to give you a loan.”

David:
And at the time she was actually kind of right. It was very hard to save up money. And $30,000 was a lot more then than what it is now. The problem is if you’re saving up money, I don’t know what that money’s going to be worth when you go to actually buy something. So it might not be enough of a down payment, or it might be actually less than what you started with because the purchasing power has gone away.

David:
So I do want to encourage you to save your money. You shouldn’t be spending it on dumb things, especially if you want to be an investor, I just wouldn’t get completely wrapped up in, hey, I’m just going to save up money and buy a house. A really good strategy for someone at your age would be to find a wholesaler or a flipper or someone like Dominique, who we interviewed on the podcast, who has a business, where they find off market deals and learn how to find your own deals so that you’re not dependent on whatever prices are on the market when it comes time to buy a house, you’re also going to learn a ton about real estate and about life in a business like that. So I think if you could find a good one, that’s a great place to start.

David:
The next question comes from Michael N. in Denver, BP headquarters town. “I have a rental property, two bedroom, two bath with a garage and a town home in Arvada, Colorado.” If I’m saying that wrong and it’s Arvada, please forgive me, Coloradans. “I bought it for 200,000 five years ago. Currently looking to sell it for 350.” Well kudos to you, Michael. “I want to use about a $100,000 to invest in either Detroit, Pittsburgh or Kansas City. Is this a good idea? My question is, should I buy $100,000 of property cash and just cash flow forever? Or should I buy multiple properties in multiple cities and just put 20% down on each and on possibly five properties. Less risk with one property paid off, more risk with multiple properties. Which plan is better? I’m planning on owning long term either way. Thank you.”

David:
Okay, Michael, let’s break down your question. First off, good job buying the property. You’ve now got this $100,000, probably a little bit more to go invest. So the question is what’s the best way for you to invest it? Well, the first thing is I think you have to define your strategy and maybe think through if you want to BRRRR a property, how many properties you want to own over the long term. I don’t know how old you are. I’m assuming you’re on the younger side because you’re you have this rental property that you bought that was smaller. If you’re older, that’s typically when we play more defense. If you’re younger, we typically play more offense, but those strategies are not set in stone. It really depends on your financial situation.

David:
In general in the market we’re in right now, I think we’re going to see a run up in prices. We’ve continued to see a run up in prices. We’re continuing to see the dollar becoming worth less and less. So I would encourage you to buy more properties, putting less down. I wouldn’t go pay cash for something and as you said cash flow forever. I would be looking at how can I put as little money down on as many properties as I can in the best areas that I possibly could. That’s what my preferred strategy would be going forward. Now the second part of your question here has to do with where to invest, Detroit, Pittsburgh, or Kansas City and is this a good idea? Here’s what markets like that tend to have in common. They’re going to be lower price points, they’re going to appear to cash flow higher on paper because they’re all going to meet the 1% rule.

David:
And they’re going to be challenging markets to own in which you might not be thinking about. So the reason that those houses are cheaper is because there’s less demand for them. Why is there less demand for them? Because the tenant base isn’t as desirable, the industry’s not as desirable. There’s not as many companies with really good jobs that are moving into those areas where they’re attracting high talent, where you’re going to be able to increase the rent all the time. You might not see rent increases hardly at all. So there’s always this temptation, like when you watch the old movies and they’re in the middle of the desert and they see this mirage and it’s this beautiful oasis with all this water and they go running and they jump into it and they get a mouth full of sand thinking they’re drinking water. That’s kind of how I see a lot of these properties.

David:
There’s this spreadsheet magic that goes on where like, oh look how amazing that is. I’m going to get a 22% return and you go jump into it and you come out with a mouthful of stand. I’m not saying you cannot invest in these areas. There are people who do very well investing there. If you know the area, that’s a different thing. I’m saying don’t do it because it looks good on a spreadsheet. You’ve got to have some other reason that you like it. You’re getting deals way below market value, you’re in a better part of town than average. Something like that. My advice would be if you have this money and you want to go invest it, go invest it into a market that is going to see big growth. I like south Florida because a lot of New York is going there. I like Arizona, Nevada, Idaho, Colorado, because a lot of Californians are moving there.

David:
Look at where people in Seattle are living and say, where would they want to move to? Ask the agents who are selling houses there, where are the people moving that you have that are clients and go buy in those areas. That’s what I’m doing. And I think that’s a much better strategy than going into the cheapest market that you can find just because the housing prices are low. Now it may be a little more competitive. You may have to work a little bit harder, but in the long term, if you invest in an area that’s growing, you’re going to do much better than invest in that mirage looks really good from the start because you appear to get really good cashflow, but it never really works out like that.

Dylan Bard:
Hey David, my name’s Dylan Bard, I am a investor and realtor in Lincoln, Nebraska. First off, appreciate you answering this question and all the other questions it’s super helpful, but I’ll get right to it. So scenario is we have some money sitting in the bank account for a duplex BRRRR something like that, down payment and rehab in there. And of course we have a safety net that I don’t talk about because we never go below it. But my question is, do I take that money and do I throw it into one of our other rentals, which would allow us to have a higher cashflow and higher return on equity than having it sit in a bank account that’s getting like 0.1% interest or whatever it is. Is it better having the money sitting there and using HELOC and drawing out when we need to, fixing up, burn it and getting that money back into that. Just your thoughts on this. If you’ve ever came across… If you ever heard anyone use that rather than the money just sitting in their bank account doing nothing. So that’s my question. Appreciate it, thank you.

David:
All right. Thank you, Dylan. I think this is a great question and it’s not one I’ve been asked before. So I like these challenging ones. Let’s talk, if I understand your question correctly what you’re saying is I got all this money in the bank that’s earning me nothing. I don’t want to necessarily put it into property yet. I’m going to use it to BRRR, but I’d like to do something with it. Should I pay off a house or pay down principle on one of my existing rentals to save on the interest portion that I’m going to pay off. And then you’re saying, if I do that, I could get that capital back through a HELOC because I created more equity in that property. You are thinking along good lines. I like that you’re taking in that direction. Here’s a few things to think about. Your interest rate is probably very low.

David:
So putting that money and paying off this note is not going to save you as much as you think. You’re probably not even paying it all the way off. You’re just paying it down some. So the couple little bits of percent that you’re making are not really going to move the needle very much. The other thing is yes, you could pull it out of a HELOC because if you could take all of it out on a HELOC, essentially it doesn’t matter you’re not getting a good return. You’re getting better than nothing and you can still get access to the money. The problem is you’re probably going to lose 20 to 30% of it as in access to it because HELOCs don’t let you borrow a 100% of your equity, they only let you borrow usually between 20 and 30% somewhere in that range. So you’re going to lose some access to it.

David:
I’m not thrilled about paying down the mortgage with that money and then getting it out through a HELOC because then you’re also going to have to pay a higher rate on that HELOC, you’re probably going to be in the 6, 7, 8% range of depending on where you are if you want to take that money out of the HELOC. So now you’ve paid off interest of 3 to 4% to borrow it at 6 to 7%. So I don’t love that idea.

David:
I would prefer to see you lend that out to somebody in the private lending space that you would trust and get a higher return on it, to take half of it maybe and invest it into something else and then save up more money for the BRRRR. Or to take all of it, add a hard money loan or a private money loan from someone else to give you what you need to BRRRR that duplex or saving up to and just do that sooner rather than later. The reason I’m telling you that I would rather see you take action quicker is that that money you keep in the bank is losing purchasing power every day.

David:
That’s what’s hard. It really has just increased the sense of urgency that we have to operate in. And none of us like that, because you don’t usually make good decisions when you have to make them quickly. That’s often when people make bad decisions. So the rate at which real estate is increasing and the rate at which the money supply is losing purchasing power is making it harder to make good wise decisions. And I totally recognize that. It’s basically one of the reasons you have to kind of step up your game when it comes to your knowledge of real estate, your knowledge of local markets, your knowledge of how to operate an asset because the stakes are just getting higher. So I like what you’re thinking, trying to maximize that money. What you’re telling me in practical terms is not worth the risk or the loss of what you’re going to give up if you put that money into paying down your note.I’d rather see you keep it aside and get a higher return somewhere else or just wait before you do the BRRR.

David:
Okay, next question comes from John Gutterman in Indiana. “I currently have three single family investment properties I have bought over the last few months that are in the suburbs of Detroit. I’m a dentist and I’m about to leave a job at a corporate practice and go from being a W2 employee to a business owner. Getting financing on my properties has been extremely easy as a W2 employee, but I’m about to buy a private practice where I will make significantly more and become the business owner. As I understand it, it will be significantly more difficult to get financing as a new business owner showing two years of business income and whatnot. Is there anything I can do to make this transition smooth so that way I don’t have to put my investments on hold for the first one to two years of being a business owner?”

David:
All right. I like the question. This is a challenging one, John I’m going to do my best with it, but I do want to say that this is one that we would want to run through a CPA before we put it into play. Happy to introduce you to mine. If you want to send me a message, you or anybody else, I can make the introduction for you. But here’s what I would do if I was you. When you become a business owner, you’re not necessarily giving up W2 income. It depends how you structure that business. So I have corporations that I run my businesses through, but then that corporation can pay me as a person, a salary, a W2 to work in that corporation.

David:
So if you are going to buy a practice, but you’re still going to work in the practice, which it sounds like you are, one thing to run by your CPA would be if I pay myself a salary out of that business, can I do that? And if so, most lenders will let you use that income that you paid yourself as long as there was not a significant break from when you were practicing dentistry from someone else to yourself. So if you buy the business, jump from the person that you’re working for now to working for your own business, because remember that business is a different entity for tax purposes than you, and then pay yourself the income. They probably won’t see it as a break in employment and you can use whatever income you pay yourself out of that business to buy real estate. Now why a lot of people don’t do that is they don’t want to have to pay taxes when they pay themselves.

David:
And this has to do with the type of structure that you set up. If it’s a C-corp, you’re going to get a lower corporate tax rate on the money that the business makes, but then you’re going to get taxed again when you pay yourself out of it. If it’s an S-corp, the money’s going to flow from that corporation to you. Same as if it’s an LLC, you really have to run this through your CPA to find out how to do it because they’re going to be the one that are helping you with taxes. But there’s a lot of opportunity here. And a lot of different ways you can structure it to where you could show the lender I still make money as a dentist. It’s still coming in similar to the W2 and they will use that income to help you buy your next house.

David:
The other option, as I’ve said before, is a debt service loan. You want to find a broker that will set you up for a loan that uses is the income from the property you’re buying, not from you yourself. That’s something that we do a lot of on my team. And that’s what you want to be looking for is you want ask a lender? Do you have a loan that will use the income from the property not the income from me? You’ve got two really good options there. I hope you can keep buying.

Speaker 6:
Hey David, it’s about 5:20 AM right before I clock in to work. First and foremost, I want to thank you for even looking at this video and putting me on the podcast if that is the case. My name’s [Amecca 00:41:44], I’m from Austin, Texas, living in Lawrence, Kansas, investing in Kansas City area. I’ve done three single family deals and I’m shifting all my focus to apartment complexes. I think I got four to five partners who want to go in together and buy an apartment complex. And my question to you is how do I find that crystal clear criteria? Whenever I present this apartment complex, I’m going to make sure everything that I want is a win-win for everyone. And the only thing I know right now is I want to invest in a area that has a population growth. So I listened to episode 571 and that had some great insights and I definitely took notes and going to take that with me home. But what is the steps to finding my own crystal clear criteria that fits me? Thank you.

David:
Great question, Amecca. Let’s get into this thing. I’m guessing that the reason you want to get into apartments is because the single family homes did not work out as good as you thought. And that is often the case when you get into a easy… The market, I believe you said, Kansas City, easy to get in, hard to get out. We had a question earlier in the show where I talked about the mirage and I believe it was even Kansas City is one of the places they were looking at. When you invest in areas like that, the price point’s lower, you don’t need as much money to buy the property. The risk feels lower because you’re not putting as much money in the pot. The problem is the rents don’t go up, the values don’t go up. Stuff breaks when your tenants leave, it’s very hard, have very thin margins you’re trying to operate on to make it work.

David:
And many people that start in those markets get out. Why do they get out? Well, A, they already learned the fundamentals of running property. That’s the benefit of these. I call them markets like training wheels. You’re probably not going to lose everything. You’re not going to fall off the bike and crack your skull open, but you’re never going to go that fast. So it’s a great way to learn the fundamentals of real estate and then from there scale into where you are going to make more money, which it sounds like is what you’re doing here. So I commend you on that. I also commend you on bringing up the fact you need a crystal clear criteria. Here’s how I would go developing it. A lot of things that people don’t think about when they first get started is the financing component.

David:
So if you found a property, you analyzed it, you spent hours digging into this. You did a bunch of due diligence. You decided I want to buy it. You submitted your letter intent, you go through the process. You go to the bank and they go, “Whoa, whoa, whoa, whoa, whoa, what’s your net worth? Oh, you can’t buy a property like this. You need a person with more money backing you. What’s your experience with this? Oh, we can’t lend to you, you’ve never done it before.” And all that work was for nothing. So I would recommend that you start with the lender, find a person or a bank or an institution that will lend you the money for this. And say, if you were to look at this deal right here, what would you need from me? And they will give you a list of the criteria that you’re going to go through.

David:
It’s very different than residential properties. As I bought more and more commercial properties, I’ve seen in some ways it’s easier, but it’s very different. A lot of the times they’ll want a key sponsor. That’s a person who’s got a really big net worth that’s going to be on the hook, kind of like a co-signer and they’re going to want a chunk of the deal because they’re taking on the risk of, hey, if this thing goes bad, it’s my credit that’s on the line. Because the bank wants to know that if you manage this thing poorly, somebody else has a lot of money and they can come them and they can still make that payment. You might not have been thinking about that when you’re considering getting into this different asset class. The reason I like to start with the lender is that the lender’s actually a bigger investor in this deal than you.

David:
So let’s say they want you to put 20% down. In our mind we’re like, that’s way more than 5%. This is ridiculous, I got to put down 20%. In the bank’s mind they’re saying, I’m putting down 80%, 20 is nothing compared to 80. And so, because they’re the bigger investor in this deal, they’re going to have just as much due diligence in some ways, as you. They’re going to have systems in place to limit the chances that this thing could go wrong. So by learning how to meet their criteria, it forces you to analyze a deal from a different perspective and better. So that’s where I think you should start, start with the lender, find out what they need. Now, once they do, they’re going to tell you based on your net worth or the assets you have under control right now and your experience level, they’re probably going to give you a price range.

David:
Let’s say they say, okay, three to five million is what you’re going to be able to buy in. Well, that’s the first part of your crystal clear criteria. You know right off the bat, I’m looking in the three to five million price range or below. Once I had that, I would ask myself in the area that I want to invest, what’s the best location that I can be in the three to five million range? Now you’ve got the location down. So you’ve got the price. You’ve got the location. Once you’ve got that, I would say to myself from here, what are the assets that I will need that will support me? The team I’m going to need to build. You’re probably going to want a property manager. You’re probably going to want a handyman. You already know you’re going to need that lender. So start finding the pieces that are going to help you, that work in those areas.

David:
That’s the next thing that I would do. If you can’t find any, maybe that area is not going to work for you, but you are definitely going to need them. You mentioned demographics briefly. That’s the next thing to look at. What type of people are moving here? What type of people live here? What’s the job industry like? Why do people live here? Do they live here because they want to work? Do they live here because they really like the weather? Is it just, these are people that have lived here their whole lives and so they never get out of this city and they just keep continually living here forever. You want to know who is my tenant base because that’s the customer that you’re serving. That’s the person you’re trying to create an environment for, to live in. So you want to know who’s going to be there and are those the kind of people that you want as your customer base?

David:
The last piece is what broker are you going to use to help you find in the deal? Now you may just go on LoopNet or CoStar and look for it yourself and go with the listening broker. That’s what most people do. You may go to a broker and ask them to help represent you. But I think that’s a really good start for you when it comes to the crystal clear criteria that you want. Now there’s a very good chance that when you actually look into this, you realize I don’t like any of these properties or there’s nothing that I want in my price range. If that happens, find a different area or find a different person to partner with you on this deal that does have the experience. But once you’ve got those down, you’ll know very quickly, if this is a strategy that’s going to work in the area that you’re in, or if you’re going to have to look elsewhere.

David:
If you guys want to know more about finding your crystal clear criteria, check out episode 571 that I did with my good friend, Andrew Cushman, where we broke down our system for analyzing properties and screening them before we buy them. And if you want to go even deeper checkout episode 586, where we go through the second set of screening, we pretty much open up our whole playbook and show everybody, this is exactly how we screen for properties. So I think that will probably help you out Amecca, as you watch what we’ve got put in place and you get a little bit more education than you did on the first one. And if that’s not enough, I did another episode with a different partner of mine who’s also the co-host of the regular BiggerPockets podcast with me, Rob of Abasolo where we break down our 10 step system for how we meet regularly to analyze deals and make sure that we keep the ball rolling in our own journey.

David:
So I think you’ve got quite a bit there. If you just look backwards in the catalog of podcast episodes to get you a really good start. Thanks for your question. Really appreciate it and your energy, keep sending more. All right. That is going to wrap up our episode today. So what did you guys get? You got a fast-paced hard-hitting episode where you threw questions at me and I did my very best to break them down. Now, why do we put this on the airwaves for you guys to hear? Well, first off, I think it’s cool if you’re a fan of BiggerPockets, to be able to get featured on the podcast for a question, I would’ve got to kick out of that. So if are one of our guests, thank you very much for submitting your question, please go share this on your social media and let everybody else in your world know that you are awesome, because you are on the best real estate podcast in the world.

David:
But we also do it for the listeners. So many times people have questions that they’re embarrassed to ask or are stopping them from moving forward that really don’t need to. So even if the person on the show today didn’t ask the question that you were thinking, odds are, it was a question in the same vein as the one you were thinking and that hearing how simple the answers can be for some of these commonly encountered problems should give you confidence to get out there, take action, and start doing things. If you enjoyed the episode, please tell me in the comments below, but don’t just tell me you enjoyed it, tell me why you enjoyed it. Tell me what you like about this episode. In this episode, I read some of the previous comments and one person said that they like that I get into the greater economic stuff. That really helps, that lets me know this is what you guys want more of from me.

David:
So tell me what you liked and then say, hey David, I really wish you’d have dove deeper when you briefly touched on this topic, then I know on the next one, that that’s what you want to hear. This is a podcast, we are listening to you, we make it for you, we live to serve you our audience because we know just how much is at stake with helping you find financial freedom through real estate. And I love doing it. Now I mentioned earlier that if you wanted to invest in a deal with me, how you could do it, just go to invest with DavidGreene.com. It’s for credit investors only that’s an SEC regulation, not my rule, but if you register there, I will give you some information about deals that I have coming up and money that I am raising to buy them.

David:
If you wanted to talk to a mortgage broker, you’re also welcome to contact me there. Email me at [email protected] and we can put you in touch with the loan officer who can answer some of the questions that you guys had here. But don’t just do that, I want to hear from you go to BiggerPockets.com/David and ask your questions so that I can answer it on this podcast. Keep the questions coming. There are no dumb questions as you saw from today. It’s really cool when you get to put yourself out there and everyone in the BP community gets to hear it. I want to thank you guys very much for joining me and for giving me your time and attention. I know there are so many options out there and there’s so many things you could be listening to. And I deeply appreciate the fact that you are giving me that time and trusting us at BiggerPockets to help you on your real estate journey.

David:
Please check out the website, check out the forums, check out the blog articles, go to BiggerPockets.com/store and check out all the books that we’ve got there for you to check out, read, gain your knowledge. There is so much out there. I really want to see you improve your position in life. For everyone out there who knows that they were meant for greatness and believes real estate is a way to get there, I believe in you too. Don’t stop, keep learning and I will see you on the next one. Oh, and if you’ve got a second, check out one of our other podcast episodes, because there’s Greene gold everywhere.