The Real Estate Winners and Losers Of The Next Recession

David:
This is the BiggerPockets Podcast show 627. Recession and market crash are not synonymous. They’re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment. This is the point I just want to keep hammering is stop thinking that just because we’re having a recession, we’re going to have a market crash. We can, but it often doesn’t happen.
What’s going on, everyone? I am David Greene, and I’m your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene edition, as you can see from the green halo behind my head if you’re watching on YouTube or Spotify or some way that you can actually see the podcast. We have a great show for you today where different BiggerPockets community members come and ask questions specific to their wealth-building opportunities, how they want to build out their business or where they are stuck, as well as overall strategy.
We get into ways that you can keep your costs down as a new wholesaler, who wants to grow a business. We talk about when to replace the major home systems in your properties, HVAC, roofs, things like that. We also talk about how to deal with a difficult agent or what to look for in an agent so that you don’t end up in a bad spot. And then, we address when it’s okay to lose your earnest money deposit to get out of a bad deal or when you should move forward and stick with it.
We also talk about the economy, different investment options in different economic environments, and my closest guess to what I think is going to go down, looking into the crystal ball that is my shiny head. And before we get to the show, today’s quick dip, go to biggerpockets.com and check out the forums. These things are awesome. This is like being a fly on the wall and being able to listen to conversations between both newbies and very experienced investors, sharing information freely. My advice is go check it out.
And if you see a topic that you find is very interesting, but a part of it or a perspective of it that didn’t get addressed, go to biggerpodcasts.com/david and ask me to clarify whatever you didn’t understand from reading the conversation. All right, let’s get to today’s first question.

Cody:
Hey, David, first off, thank you so much for taking my question. Always get super inspired by the BiggerPockets Podcast. Even some of the topics I don’t even think that are going to pertain to me, I’ll listen to it. And I always come out with a nugget of truth that always helps me and gives me super inspired on the other side. So, thanks for that. So, my first main question is this. I have a buddy, Ryan, he invests in stocks and bonds heavily. He’s very successful with it, and him and I always have this debate on the real estate market and where it’s heading.
I always send him just bits and pieces that I hear on your guys’ podcast. And he’s still not totally sold on the market continuing to go up. And I’m just curious if you could dive further into depth why you feel like the market’s going to continue to go up. I guess the biggest thing he’s opened up my eyes to now is with looming recession. And if you look at the statistics, we’re actually already in recession from my understanding and just where you feel like things are going to go once we continue to travel down that path because it’s like one market goes typically and the other markets are going to go.
So, if you could just dive further into depth with that and really explain more fully why you feel it’s going to go in the direction it’s going to go, that would be amazing. My other question is this. So, right now our portfolio, we have one long-term rental. We’ve done a couple of flips. We now own a short-term rental up north that we’re getting going. And we’re finishing a tiny house that we got.
And also, we’re doing a buildup north with my in-laws. With so heavily involved in short-term rentals, I’m just curious with recession looming and things going crazy with the market. I’m just curious where you feel like the short-term rental, how it’s going to look, how the short-term rental market’s going to look if we go down that road. Thank you so much for taking my question. I really appreciate it, and take care.

David:
Hey there, Cody, thank you for the question. You are echoing the sentiment of just about every single real estate investor or a wealth builder in general in our country right now. So, if you go in the crypto space, they’re asking the same question but from a crypto angle, what’s going to happen with crypto? If you’re talking to stock traders, if you’re getting to any form of people that give financial advice or build wealth through different securities or assets, they’re all trying to figure out the same thing, what’s going to happen with the economy? And real estate investors are no different.
Now, here’s what I can tell you. It’s only going to do one of three things. The economy’s going to get better and prices are going to keep going up. It’s going to get worse and prices are going to keep going down or it’s going to stay exactly the same. We never know at any time what’s going to happen with the economy. Now, what it sounds like you’re doing with your friend is a trap that many people fall into. What they do is they hear a perspective from someone like me or someone else. And they say, “Hey, what he said makes a lot of sense.” That element, that perspective that he provided was really good.”
And then, you go tell your friend, and then your friend says, “Yeah, but did you think about this?” And then, that perspective wasn’t offered when I was talking. So then, you come back and say, “Hey, what about this perspective?” And then, I answer it. And then, you go back to him and say, “Here’s what he said.” And then, they give you another one. And this goes on forever. It’s like a game of ping-pong of Forest Gump versus a wall. It never actually ends.
So, I don’t think it’s healthy for you to keep going back to your friend and trying to say, “The economy’s going to go up or the economy’s going to go down,” because we don’t know. Now, let me broaden the perspective of everyone listening here. Economies will go up and economies will go down. It is going to go down. Okay? At some point, Cody, that’s going to happen. I’m not betting that the economy’s not going down. I’m not betting that the economy’s never going to go down.
I’m betting that when it goes down, it will go back up. I’m betting that when it goes down, I can weather that storm because I didn’t quit my job and go work on the beach. I kept working and I kept money in reserves and I lived a very frugal lifestyle so that I can afford to make some of these payments. I can actually lose money in real estate or on short-term rentals for a period of time. Now, do I want to? Absolutely not. But am I arrogant enough to think that it’s never going to happen and I’m entitled to making money every single month or every single year that I ever own real estate?
That’s insane, but because we’ve seen a run-up in prices for so long, there is a contingency of people that believes it is unacceptable to ever lose money for a period of time on a house. And it’s just not realistic. There’s no relationship that doesn’t hit hard points where people aren’t happy. There’s no child you raise that acts perfect all the time. There’s no investment that never loses money or goes bad. The key to successful real estate investing is to continue to survive when it gets bad, and that’s the advice I continually give. Prepare for the worst, prepare for the worst, prepare for the worst.
I’m not the person that says get four houses and quit your job. That’s very risky to me. I want you to keep that bulletproof vest on in case bullets start flying again. I want you to put a fortress around yourself in case the White Walkers come, the White Walkers of inflation or a recession, and you’re prepared because you’re standing behind the north wall. That’s a Game of Thrones reference. That’s the way that I approach wealth building. All right. So, I don’t know what’s going to happen and I don’t have a crystal ball, but I’ll just tell you what I’m preparing for.
We should have went through a recession when we shut down the country for COVID-19. We destroyed our GDP. We stopped being productive. It makes sense that a recession would happen. As you mentioned, many people show we’re in a recession. And I agree. We are in a recession, but prices aren’t dropping. And that’s what people have to understand. Recession and market crash are not synonymous. They’re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment.
This is the point I just want to keep hammering is stop thinking that just because we’re having a recession, we’re going to have a market crash. We can, but it often doesn’t happen. And I believe the reason everyone assumes it will is that in the last recession we had a market crash, but here’s why that happened. The last recession was a result of the market crashing. What I’m saying is the market didn’t crash because we had a recession. We had a recession because the market crashed.
The market crash caused the recession and that’s not likely to be the case now. The reason we had the last crash was that loans were given that people couldn’t repay and they all reset at roughly the same time, and you had way too much supply for the demand that was out there. Home builders were throwing up houses as fast as they can and people were buying them based on pure speculation. We had too much supply and not enough demand when all the houses hit the market at the same time. We are in the opposite environment in most markets that I’m looking at right now.
We have too much demand and not enough supply. So, I don’t know if a K-shaped recovery is the right way to explain this, but the way that my crystal ball is working, what I think is going to happen is you’re going to have people at the lower end of the economy that are going to get squeezed very hard, people that don’t have a lot of money. Their gas is going up. Their food is going up. Their rent is going up, but their wages are not going up and they’re not able to make more money at work. Then you’re going to have people at the top of the economy.
And I’m going to describe those as people who own assets, people who have a portfolio and make their money through mostly investing. The people that have followed the cash flow quadrant as Robert Kiyosaki put together and make their money as investors, not employees and not self-employed, those people are going to continue to build wealth because their wealth is coming from assets, not from a W2 job. So, I don’t know what’s going to happen. But what I am guessing is going to happen is that the wealthy are going to grow their wealth through this recession and the poor are going to lose more of it. And it sucks.
This was the problem with printing ridiculous amounts of money is this seems to happen every single time that we do it. It’s like giving a kid sugar. Yeah, they feel really good for a little bit of time. And then, they go crazy and then they crash. And that’s what we’re talking about here is a crash that’s coming. I just don’t know what’s going to affect home prices. So, the best thing you can do, if you continue to buy real estate is to put more away in reserves than what you thought before. Now, the second part of your question had to do specifically with short-term rentals. Are people going to keep traveling?
And I got to say, this is a question that’s at the top of my mind as well. I am worried about this. I think about that. Because I’ve been buying short-term rentals. In fact, if you want to be in the best market, you have to be in the short-term rental game because of this supply and demand problem. It’s the only way to make them cash flow in a lot of cases. What I’m doing to prevent against this is I’m only buying properties in areas where I think more wealthy people are likely to frequent. That’s the way I’m looking at it. If the wealthier people aren’t as affected by the recession, they’re still going to travel.
And that’s why I’m getting into the more luxury space, because that’s where the people who are going to be traveling haven’t been impacted by the economic well is where I think the bottom half is going to. Now to be clear, I’m not some greedy landlord who’s reveling in the fact that the people at the bottom of the economic spectrum are going to get hurt. I’m actually heartbroken about that. It’s very sad. I don’t think this is good. When a lot of other people were saying, “Print the money, print the money, print the money,” I was on this platform saying, “This is going to be worse if we actually do it.”
And now, the worst is coming. Just like someone who runs up a credit card bill and then has to pay it back with interest, that’s what’s happening in the economy of our country because we made those financial decisions. We didn’t want to save up the cash and pay for it upfront like Dave Ramsey. We wanted to run up our debt and now the bill’s coming due. So, to wrap all this up, I would say, I don’t know what’s going to happen. I wouldn’t try to argue with my friend and convince them that prices are going to keep going up.
But what I would say, if that inflation comes and we continue to print money, if we make more decisions to print more money, housing is going to keep getting more expensive. If we don’t do that, or if they actually contract the money supply, if they pull money out of the economy, God, that would be amazing. I would love it. It would cause people like me to lose money in our net worth. My overall net worth would drop if they constricted the money supply because assets would become worth less, but it would be better for the country as a whole.
So, if you see that happening, that’s where I’d say, “Okay, stop buying. It’s time to wait for these prices to come down and a correction to happen before I jump in.” But until I see that happening, pure interest rate increases is not enough to slow the demand that we have for real estate in the best markets where everybody’s moving to. All right, next question comes from Jeff Row in Denver. I’m from Denver, Colorado, and I’m a new real estate investor focused on house hacking using rent by the room and Airbnb. Do you have any tips for what I should do after realizing a buyer’s agent representing me on a deal doesn’t have my best interest but it’s too late to anything about it?
I missed a lot of the warning signs of a bad agent, but now that I’m past the termination deadline and my earnest money will be lost if I walk away to become apparent that the buyer’s agent I’m working with just wants to throw me into a home without understanding my short and long-term goals, what I’m trying to accomplish and why I’m looking to invest in real estate, do you think it’s worth losing out of the earnest money deposit, which is 16,000 to work with a better agent and get a better home for my goals? And do you have any tips for how to prevent a similar situation in the future?
Yeah, this sucks, man. Because as an agent, I understand what it’s like to be an agent. As an investor, I understand what it’s like to be an investor. I think there’s an inherent flaw in the way that agents work or the regulatory environment I should say, the environment they work in. Agents on one hand work on pure commission, meaning you can use them for years and they don’t make any money. They actually lose money to pay for all of their licensing requirements, their time, their gas to show you homes. Just by being an agent, they’re losing money. So, they have to sell a home to make it worth doing it at all.
On the other hand, they’re asked to be a fiduciary, meaning that they have to look out for your own best interest. And that’s crazy. I don’t know why we combine fiduciary with a commission job. A lawyer is a fiduciary, but you pay them by the hour. You have to pay your lawyer. So, it makes sense to ask them to be a fiduciary. I just think that the idea that buyers agents only get paid if you close on a house and they have to be a fiduciary is a massive conflict of interest. It makes no sense that things are set up that way, but that’s the way it is.
And because that’s the way it is, you often get a case where an agent is being trained and taught and motivated to get you into a property and sell something. And you’re looking at it like they’re going to look out for me. There’s an inherent conflict of interest right off the bat. Now, you didn’t mention anything specific that the agent did. And that part concerns me a little bit because I don’t want you to get into the thought of, “Hey, something came up that I didn’t know was going to come up. It’s my agent’s fault.”
There might actually be some responsibility on your end in this case, Jeff, where you just didn’t understand what you were doing or you didn’t get clarity from the agent on what their job was. Now, if they’re making big mistakes, they’re making decisions without talking to you first, they’re telling you, “Don’t worry about things that you should worry about.” Yeah, you got a really good point here, but nothing’s really been mentioned other than they just want to throw you into a home. Now, the specific question of should I lose my money and find a better home, that is oftentimes the right move. Okay. Nobody likes to lose money.
We don’t like to lose earnest money deposit, but it’s the cost of doing business in a way. Nobody likes to pay for a home inspection, right? Like I’m looking at buying a house that is very big where the inspection’s probably going to be $1,500 just to look at it. And the odds are, they’re going to find too much stuff in the inspection to buy the house. So, should I not go after it because I’m going to lose $1,500 or do I look at, “Well, I might have to do this 10 times to get a house so I should set aside $15,000 for inspections?”
And then, when I do get the one house that works, there’s so much equity and it’s such a good deal that it covers the $1,500 I had to spend to get there. You’re in the same situation. So, looking backwards, being mad at the agent isn’t going to help you. You got to ask yourself, “Is this house worth buying or is it worth losing 16,000 to get a different house?” Just look at right where you’re at and say, “This is such a bad deal. I’m going to lose money on it. It’s going to be a headache. I’d rather lose 16,000 than take on that problem.”
And if it’s not that bad, maybe you close on it and you just get a different agent for the next property. But my advice to you and everyone else is the same. When you meet your agent, be very, very clear of what your expectations are and ask them if they can help you. You’ll often find that much of what we think is an agent’s job isn’t the agent’s job or that agent doesn’t believe it’s their job.
And if you don’t get this whole like premarital counseling session going on, it is very easy to end up in this situation, Jeff. I’m very sorry that’s the case. I hope it gets better.

Kris:
Howdy, David, I got my Florida ahead on, I’m moving down to Florida next week down to Fort Walton Beach area. I believe you just bought Apartment Bella there or about to buy an Apartment Bella and something like that. I had a quick question. The question is when do I replace my air conditioning and heating unit or HVAC, whatever you want to call it, and water heater. So, the backstory is I have a place from 2005, which is the one I’m in right now. It’s going to be a rental in Milford, Delaware. It’s from 2005, all the stuff’s from 2005. It’s a gas furnace and gas water heater.
And then, the place I bought in Florida last month, it’s from 2002, just replaced the water heater because the insurance company wouldn’t give me a policy because the water heater was too old. So, do you just replace the one from 2002 and then wait until the one from ’05 cuts out or do you just wait until either of them cuts out? I know you’re probably just going to say build up your reserves and be ready, but I’m already there. I just didn’t know, do you be proactive since it’s a rental, you don’t want it to go out while the tenants are in here? Yeah, basically, the question, when do you replace the HVAC? Thanks, David.

David:
You got to build up a lot of reserves so you can be ready no matter what happens. I’m just kidding. You’re asking really good questions here. And I like that you mentioned something, you said the insurance company, what you’re referring to was the homeowner’s insurance company. And here’s a quick tip for everybody out there. When you’re buying a house that has an older HVAC system or an older support system of any type, see if a home warranty will cover replacing it when it goes out. This is a trick I learned as an agent. So, what will happen is we’ll get into negotiations with a seller and I’m representing the buyer. Or no, sorry, let me rework that.
I’m usually representing the seller and a buyer is saying, “Hey, your air conditioning unit shows that it only has a couple of years of useful life left. We want a credit for $15,000 for another one.” Well, I don’t want my seller to lose $15,000 to close the deal. So, instead we’ll say is tell you what we’ll do. We’ll pay for two years of your home warranty so that if it goes out, it will be replaced by the home warranty. And then, I basically get my seller to have to pay $800 or $1000 instead of $15,000, and we save the deal. That’s typically the cheapest way to solve this problem. So, if you know you have an HVAC system that could be going out, the first thing is, can I get a home warranty to cover it?
Now, you mentioned it’s too old, that’s not going to work. As far as when do you replace it? This is just my personal opinion. You let it go as long as you can before you replace it, assuming you can get another part and put it right back in. I’ve seen stuff that I was told it’s on its last legs that six years later is still running and it’s running fine. That’s one of the reasons I say don’t replace it right away. You’re also a younger guy. It sounds like you don’t have a ton of capital. So, for someone like me, I would probably replace it right now because I just don’t want the headache of a phone call coming in and I got to schedule it maybe when I’m trying to do something else.
But for someone like you, you might want to get some more life out of that thing before you replace it. So, save up the money so you can replace it, but I wouldn’t replace it if it’s working. Now, in a scenario where you can’t get a replacement, there’s supply chain issues. Maybe it’s smarter to just get it now when you’re in control. You don’t want to leave your tenant in Florida without air conditioning. That would be absolutely miserable. So, that’s something that I would consider. I’ll also give you this little piece. I’ve had properties in Florida that when they went vacant, had the air conditioning stolen right out of the property.
So, depending on where you’re buying, they make cages for air conditioning units that you can put in there that make them very difficult to steal. If it’s not an area that you feel really good about, or it’s not an area where there’s neighbors that can see it, oftentimes there are more rural areas out there in Florida where people don’t see what’s going on. Very easy to grab those things, back a truck up into the yard, rip it out, throw in the back of the truck, drive off. They got your air conditioner. Consider getting a cage especially if you get a nice new shiny air conditioner that’s going to be blinging for the entire neighborhood thieves to see. All right.
We’ve had some great questions so far and I want to thank everybody for submitting them. Please make sure to like, comment, and subscribe on YouTube to what you’re hearing. In this segment of the show, I like to go over comments we received from other listeners. I saw Nate Bargatze do this and his people often left very funny comments. And it was funny when he read them. So, if you’ve got something funny to say, I want to hear about it. Go to the comments right now and leave a comment about this show. And I might read your comment on future episodes.
Comment number one from Real Estate Scroggs. I was listening to the podcast in my car as I do every day when David said, “Hey Siri.” The little Siri globe came up on my phone. I thought she only stood your specific voice. I guess I was wrong. LOL. This comes from an episode where we interviewed somebody named Siri and I started the show off by saying, “Hey Siri.” And then, I wondered how many people’s phones just went off. Oh, my Siri is going off right now as we speak. That’s funny. So, apparently, that is the case. I’ve triggered Siris all over the world.
Next comment comes from Michael Batista. Hey, BiggerPockets, would love to see you talk more about flipping lease options. Michael, this was a very popular strategy in the past. Here’s why it’s not as popular right now. Lease options work best when the market isn’t going up in price. When you’re not seeing asset prices inflating, it’s better for the landlord in that situation because they put more of the cost on the tenant. They have to take care of their own repairs. So, cash flow’s higher. The downside is with the lease option, you get an option to buy the house at a certain price and the way that assets have been going up, they’ve been greatly outpacing any lease option.
So, any landlord that did that put themselves in a situation where they were losing massive appreciation and equity, just so they could save on repairs. If we see the market slow down to reasonable levels or even go down a little bit, I think you will see the popularity of lease options return because they make a lot more sense when the asset isn’t gaining value super quick. In that case, you may see people selling their homes directly to the tenants who can’t save up a down payment and take a portion of their rent every month to go towards it. If that happens, I’m sure we’ll be bringing you more of that information.
Stephanie Clemens. LOLs, I’ve been waiting for you to make that leap into your preferred version of the quick tip. Heard that quick conversion many episodes ago. So, Stephanie’s referring to the fact that my previous cohost Brandon Turner used to love to do the quick tip with Josh Dorkin where they would say, “Quick tip.” And four years, Brandon forced me to do this high-pitched quick tip that I staunchly opposed. I tried to work it into my contract and I just couldn’t get it signed. As soon as Brandon was gone, I went the opposite road and I now often do the quick tip in a Batman voice. Quick dip. Where’s the trigger?
First off, it’s good practice for my Batman voice. And second off, it just helps me restore balance of the force because for years, I was forced to do it in a falsetto that I absolutely hated. There is nothing as embarrassing as interviewing Joco Willink on your podcast and being forced to do a high-pitched quick tip with Brandon Turner like you’re in a barbershop quartet. Next comment comes from Jonathan Hawthorne. When is Brandon going to come visit the podcast? I miss that guy.
All right. I wasn’t going to say anything, but because you guys are leaving really good comments like I asked, I feel like you have to, especially because it’s a Seeing Greene episode. Two episodes from now, you will see my best friend, the Bearded Wonder back joining us on episode 629. So, stay tuned. And if you’re not already subscribed to the podcast, please subscribe to both the podcast and the YouTube so you get notified when we bring Brandon back. And from flies on a wall, I guess that comes from, I’d like to be a fly on the wall during that conversation. This is a person that likes to listen in conversations.
How do I submit a voice call in question for the show? Well, we love those. We love it when you make a video of yourself asking the question that we can put it on the show. Just go to biggerpockets.com/david. And if you’re trying to remember, what’s the URL, as long as you remember biggerpockets.com and my name, you’ll be good. All right. Are these questions and replies resonating with you? Have you enjoyed hearing some of the advice that I’ve given? Did you know that you could get a home warranty company to replace your older appliances as long as they approve it when you’re in escrow?
Did you know you can get the seller of a house to pay for your home warranty company to keep the deal alive? I’ve sold a ton of houses on the David Greene team. I’ve done a ton of loans with the One Brokerage and I want to bring you all the experience that I have to help you become a better investor. Also, if you’re in my area, I want to help sell your house or help you buy a house. Please hit me up about me helping you with that and also hit us up at the One Brokerage to help you with the loan.

Ladi:
Hey, everyone, thanks for the podcast. My name is Ladi Sonabari. I’m from Brooklyn, New York, and I’m trying to wholesale my way into my first investment property. Now, I’m not really sure how to do this cost effectively. I’m trying to figure out how best to estimate my after-repair value without having to pay a contractor or an appraiser with every new lead that I get, that doesn’t seem very cost effective at all. And I would likely go broke before I get my first commission. So, thanks a lot for your help, and I’m looking forward to hearing back from you. Thank you.

David:
All right. Thank you, Ladi. This is a good question. There’s a few pieces I’m going to have to pull together to give you a good answer. The first would be often your realtor can provide that for you. If you have a realtor that sells a lot of homes in the area that you’re working with, they can say, “Hey, here’s what your after-repair value would be because they sell a lot of houses.” If you’re going to be the realtor yourself, you got to learn how to run a comparative market analysis. This is where you take a list of homes that are actively for sale, homes that are currently under contract or pending and homes that have previously sold.
And you see what price for what condition and what size the home is in to put together what you think yours would sell for. Now, here’s a caveat that’s not often talked about that you will only hear if you’re working with a realtor who does high volume. Certain markets are much easier to predict the ARV than others. Let me give you an example. When I was buying in Jacksonville, Florida, if I was in a specific zip code and I knew it was four bedrooms and two bathrooms, I could give you a pretty tight range, like 140,000 to 160,000 ARV, unless there was something incredibly unique about the property. In other markets like California, where I sell houses for clients, our ARVs are all over the place.
Big homes, small homes, homes with views, tract homes, custom homes. It’s much harder to track down what the ARVs going to be. And we have a much bigger discrepancy with the appraisers when they actually come back with their appraise value. So, depending on the market you’re in, it could be close to impossible to really nail it down, or it could be pretty simple. Most investors are buying in cash flow markets where there’s not a huge discrepancy in the price of the asset class.
So, here’s what I would do. I would talk to other investors or other real estate agents and I’d say, “Hey, a neighborhood like this, standard three bedroom, two bathroom, not a lot of issues, but not upgraded. What does it sell for?” And they’re going to give you a range. I then go look on Zillow or a Realtor or whatever website you use. Look up standard three bedroom, two bathrooms, and verify if that range they’re talking about makes sense. I would then do the same thing for what’s your standard four bedroom, two bathroom or four bedroom, three bathroom.
And all you’re trying to do is build a baseline understanding of the range that those houses are going for. So, you may say, “Hey, if it’s 1600 square feet or less, it’s going to be worth 180.” If you’re getting into 2000 square feet, they start to bump into 210 to 220 range. Something like that to just get a baseline to go by. Once you have the baseline, then you can actually put together what you think the ARV based on the detail of what you’re going to put into the house. Question five comes from Brandon in Grand Rapids, Michigan. My portfolio is seven doors, single-family rentals, four doors, short-term rentals and eight doors rent-to-own mobile home contracts.
Hey, David, I have an interesting question. Or at least we are perplexed. We purchased a commercial property, a four-unit short-term rental in August of 2020 and a five-year adjustable-rate mortgage at 4%. The total loan was 344,000. Now that interest rates are on the rise, we are concerned about our position and then this loan balloons in a couple of years, but I ran all the scenarios and we decided to stand put with a five-year ARM but looked into refinancing recently at 4.5 for a 10-year ARM. In hindsight, we screwed up on the front end with not securing a 10-year ARM. However, here we are. What is your advice?
All right. So, adjustable rate mortgages are not the worst thing ever. I’m not actually someone who says ARM, bad, but I would say if you’re dealing with adjustable rate mortgages, you need to be in a position where you’re not worried about the rate going up. Based on the tone of your question here, you are worried about the rate going up, which means you shouldn’t have gotten adjustable rate in the first place. You’re playing it fast and loose there, Iceman. So, here’s my advice. You should refinance but not into a 10-year 4.5% rate. You should refinance into a fixed rate.
Now, if you can’t do it because it doesn’t cash flow, the 10-year rate is, or the 10-year period of time is okay, but you’re going to have to be committed to saving the cash flow from that property and putting it aside and not living off of it. You could easily get yourself in a jam again because we don’t know where rates are going to be when that 10-year period of time ends. Now, for anyone else, who’s considering an adjustable rate mortgage or a HELOC, I’m typically advising against that in general and saying you should do the cash-out refi.
And that’s because the fed has come out and said, “We’re going to keep raising rates.” They’ve let it be known rates are going to go up unless something changes. That’s the default. So, getting an adjustable rate mortgage is not very wise if you know rates are supposed to go up and HELOCs are adjustable rate mortgages. So, in general, if there’s no reason to think rates are going to keep going up, I may lean more towards going that road. I’m going to do my first one probably ever myself, but again, it’s like an 8/1 ARM.
So, I have eight years where I can lock in a better interest rate or I can save the money or I can sell the house and I’m having a ton of equity walking into it. Plus I have eight years of time for equity to grow. The odds of that going bad for me are going to be very small, but if rates are low and you can, lock them in on a 30-year fix and just be done with it.

Stacey:
Hi, my name is Stacey, and I’m really excited to submit this question today. David, really appreciate everything that you produce and put out in the world for real estate investors, including the podcast. And I’ve been thinking about this question for a while. And then, I saw that you were going to have Henry on answering questions with you and I knew it was time to submit my question. Henry, really appreciate your approach to real estate investing. And it definitely feels similar to what my husband and I are creating.
Call us a little bit unorthodox real estate investors. And the reason for that is we’ve got five doors in addition to our primary residents, which we have paid off in full. And we tend to look at properties a little bit different than most real estate investors. In other words, it’s not always a hardcore number crunch for us, but we do that because it works for us and our style. And as a result of that, we’re always strategizing about plan B. What happens if, and giving ourselves an escape path.
And so, as a recent example, we dipped our toe into the short-term rental space about five months ago. And we did that and we bought a property that was not in a vacation destination, but we felt comfortable with it for two reasons. One, we actually acquired this property that is zoned residential office. It had previously been an office for a counseling office. So, we knew that if something changed with short-term rental regulations, we could quickly and easily convert that back to an office rental.
The other thing we did is rather than go out and spend tens of thousands of dollars in purchasing new furniture and linens and all of that, we went and bought… Actually, correction, we didn’t buy used linens. That’s the one thing we did splurge on and mattresses, but we went out and bought used furniture, high-quality stuff that we found on Facebook Marketplace or Craigslist because we wanted to not spend a ton of money if we found out that this didn’t work for us.
The good news is it seems to be doing all right. And we’ve been steadily increasing our bookings, especially now that we’re hitting into the summer months. So, my question for both of you today is what are some really creative ways to look at plan B with real estate investors, especially because the market’s changing on us a lot, whether that’s short-term rental regulations or whether that’s the rising cost of rents.
How can a real estate investor incorporate some of these very creative plan B strategies into how they think about real estate investing? Thanks so much for taking the question, hope to hear it on the podcast. And again, thanks to both of you for all you do.

David:
Hey, thank you for this, Stacy. I actually really like this question because it’s on the front of my mind all the time. So, what we’re getting at here, folks, is if plan A is to buy a property, to use it for a specific purpose, but something changes in the economy, in the market, in the laws. Is it okay to have a plan B or a plan C and then a plan D? So, what a lot of people are doing is they’re looking at properties and saying, “Ooh, this one would work really good for this thing. Oh, but what if something happens? Yeah, I can’t buy it.” And they’re skipping onto the next one.
And that’s, I think what Stacy’s getting at when she says pure number crunchers. They’re just looking for what’s the highest ROI that I can get. But Stacy, it sounds like is looking at how do I play defense a little bit here. It may not be the best return ever, but how do I cover my downside in case something goes wrong, where I get a much smaller return but I don’t lose the property, that I think is actually wise. I think that most investors I come across that say, “David, teach me how to invest in real estate.” They’re taking a property. They’re plugging numbers in a spreadsheet, usually that somebody else made.
And they’re trying to just do this over and over and over until they get the highest ROI they possibly can to pop out on the spreadsheet and they go, “That’s the one I’m going to buy.” They’re not asking questions like how much time is this going to take? How risky is this? How likely am I to hit that number? What could go wrong? At this stage in my career, I tend to almost look at defense first. So, rather than saying, “Where’s the most cash flow I can get,” I say, “Where’s the best market I can buy in. Where am I likely to be safe?”
And then, from there, how do I find the best opportunity that I can to cash flow? A couple plan B strategies that I’ve put together for myself. I was actually teaching my mastermind about this not too long ago. And we got into this very topic. The first would be if it doesn’t work for its highest and best use, which in many cases is a short-term rental at least if people vacation there, can you turn it into a long-term rental? So, I want the floor plan of the property to be one where I have separate entrances for upstairs and downstairs. If they have a deck that goes around the upstairs and I can build stairs there, that’s awesome.
If it’s a tract home and there’s no way to get into the upstairs, unless you enter the house and go up the actual stairs that are inside, I probably don’t like that floor plan. Second, I want to buy them in areas that are in general, more business friendly. They’re going to be places that are sometimes conservative minded but really what you want is business minded. They like tourism. They like business. They want short-term rentals in their area because it brings in money.
That is a situation I enjoy because the politicians of the area are less likely to outlaw short-term rentals, leaving me in a bad spot or outlaw rental property in general. Another thing is can you combine them? Can you buy a triplex and rent it out as a short-term rental rather than just as a long-term rental? So, if something goes wrong with your short-term rental, the backup plan is to make it a long-term rental. Another one is all else fails. Can you rent it out by the room? Is it close enough to businesses that people are going to rent a room to live there?
If you buy it in the middle of nowhere, thinking it’s less risky because the price is lower, but there’s no demand for anyone to rent your space. You’re actually taking more risk. So, I like the bigger properties with more bedrooms and more bathrooms because I know, “Oh man, what happens if everyone stops traveling and I can’t book this thing on Airbnb or Vrbo, well, I’ll rent out the bedrooms and I’ll make the best of it. And I’ll weather the storm.” I’m always looking for that. Different zoning options like you mentioned, that can be a good idea too.
But I think something that people severely underestimate and it’s something that on the David Greene team I’m constantly preaching to our clients is the floor plan of the property, not just the price, not just the area. Does the floor plan work for tenants? If you’re trying to get several people in a property that has 1.5 bathrooms and every tenant has to share the same shower, that’s not going to work. If you didn’t make sure that there’s enough parking to have a lot of people in that house at one time, that’s not going to work. You have to actually look at floor plans that are conducive to what you want to do.
Stacy, thank you for bringing up this whole plan B idea, which I think is becoming much more important with the looming questions that are growing in everyone’s mind about what direction the economy’s going. Next questions from Chad Prather. First and foremost, thank you to David, the other BP host and the guests for growing my knowledge in real estate investing. I’ve been looking for that niche that will be my medium to success. David frequently says to turn your learning to action. He also says not to make the jump without reserves.
I respect there is not a definitive line or amount because every circumstance is different, but what advice or goal can be offered to how much of a reserve should be put into a business plan before I get into a deal? I’m ready to get my white belt. Thank you again. All right, Chad. So, here’s what I would say. In general, six months of mortgage payments, utility payments, everything you’re going to have to have to run that house is a good amount to keep in reserves to be safe.
Now, I am okay with it becoming less than six months if you’re a person that lives beneath your means. Now here’s what that means. If you’re saving zero money every month, six months is the minimum that I would say somebody should keep in reserves for a property. But what if you’re saving 5,000 a month and six months of reserves is $40,000? Well, if your reserves drop down to 25,000 or 30,000, but you can save 5,000 a month from money that’s coming in from work, you’re okay to let those reserves come a little bit less than somebody who is living paycheck to paycheck and doesn’t have the ability to earn more income.
Case in point, when I started investing, I was a police officer and one of the ways that I was able to get over my fear of not having enough money to make the payment was that I knew overtime was basically unlimited. Nobody wanted to work as a police officer. So, we were always understaffed. And I knew if I had vacancies, a big repair I wasn’t expecting, some CapEx event, I could just go work overtime for the next several weeks and save up as much money as I needed. So, I was very confident.
Now, I have a friend of mine, Justin, he’s the one that got me in a jujitsu. Well, he’s the one that connected me with my jujitsu academy. And Justin is going to be getting a position as a firefighting captain. And though he’s getting a raise, I’m getting ready to sell his house for him and help him move somewhere else. Though he’s getting a raise, his overtime opportunities are going to be shrinking, which means his ability to generate more money if he needs it is going down. So, we’re actually going more conservative on the house he goes to buy because he doesn’t have the backup plan of earning more income if something goes wrong.
So, also Chad take that into consideration. Six months is a baseline, but if you can make money and save money, you can go below that. If you can’t, you want to be there or more. All right. That is our show for today. I want to thank you all for being here with me and sharing this time, as well as getting your real estate investing education from us at BiggerPockets and me in particular. This is a blast to do. If you would be so kind, please submit me your questions to biggerpockets.com/david. We can’t make these shows if we don’t have you guys asking questions.
Also, if you’re following a cool thread on the forums and you want to take that conversation and bring it here, I think that’s a great idea. So, if you see something on the forums that catches your attention, bring it to biggerpodcasts.com/david and ask the question there. You can follow me online on social media @davidgreene24 if you have to ask question that you’re embarrassed to ask on the show. That’s all we have for today. Please check out one of our other videos and I’ll see you next time.