Finding Cash Flow, Refinancing Sooner, & NNN Properties

The 1% rule, HELOCs, BRRRRs, cash-out refinances, and cash flow are all topics on this episode of Seeing Greene. As always, you’ll be joined by our jiu-jitsu loving, metaphor-creating, top-tier agent and investor, David Greene as he takes questions submitted via video, on YouTube, and through the BiggerPockets forums. With so many new investors getting into real estate, there is no better time than now to sit down, relax, and get into the mind of an expert.

If you’re a rookie figuring out how to get financing for your first real estate deal or a veteran investor debating cash flow vs. appreciation and the usability of the 1% rule, be sure to stick around. David touches on all these topics and more as he dives deep into some of the most asked questions around the real estate community.

You’ll hear about out-of-state investing, the best real estate investment for cash flow, the implications of partnering with a romantic partner, ADUs (attached dwelling units), and how to get around the dreaded six-month seasoning period of cash-out refinances. If you’d like to ask David a question, be sure to submit yours here!

David:
This is the BiggerPockets Podcast show 567. What’s going on everyone? It is David Greene, your host of the BiggerPockets Podcast, here with a Seeing Greene episode. Now, you know it’s Seeing Greene because I’ve got a green light behind me, a green shirt on, and Greene as my last name. And we are going to get into some awesome stuff, but first, you know you’re in the right place if you’re here to find financial freedom through real estate. That is exactly what we help you do. We do that by bringing on different guests that have achieved this for themself, that have found success in areas, have made mistakes, and share how they made them. And then ask questions that you yourself are thinking.

David:
I want to try to give you as much educational help as I possibly can so you avoid making bad decisions and make good ones instead. And today’s show is full of just that. Now, if you’re new here and you like today’s show, check out biggerpockets.com, it’s a free one-stop-shop for all things real estate investing to help you save time and money, avoid mistakes, and tap into the wisdom of two million fellow members. Another little piece of advice for you, if you like the show and you like getting these questions answered, go check out the forums on BiggerPockets. It is full of people asking questions just like this and other members of BiggerPockets answering them.

David:
Now, today’s show is pretty awesome, and we cover a lot of really good stuff. Some of the best stuff would be, how to get a hard money lender to give you capital. We get into trying to figure out how you can get approved for that loan to get started. There’s a really good question about why certain asset classes cash flow much better than others that I think gives a lot of insight into how to pick the right one for you. And then one listener points out that BP seems to have changed their stance on something that has been preached here for a very long time. And I give some insight into why at one point that is what was being told. Now, it’s a little bit different, but most importantly, why that’s happening and how the changing of your strategy can help you be successful in an ever growing and changing market.

David:
Now, if you want a chance to ask a question yourself and tell your friends that you are featured on the BP Podcast, don’t just send me an Instagram DM, go to biggerpockets.com/david and put your question there. You can be a featured guest on the biggest real estate investing podcast in the world. You can also find the link in the description to do just that. Now, before we get on with the show, a quick word from today’s show sponsors. All right. Thanks to our show sponsors as always. For today’s quick tip. We want to know what have you thought abour our recent co-host?

David:
We had a great time with Henry Washington, Craig Curelop, and Rob Abasolo. If you have feedback on what cohost you’ve enjoyed, please let us know on the show notes page, biggerpockets.com/show567, that’s the web page, and you can add some notes about what you thought about the co-host and what you’d like to see more of. All right. That’s all I got. Without further ado, let’s get into today’s questions.

Daniel Jewel:
Hey, BiggerPockets. My name’s Daniel Jewel. I’ve got a question in regards to proof of experience. Right now, the deal that I have worked out with my mentor/boss/partner is I get paid $25 an hour to do work on his rentals or on flips. Now, if it’s flip, I get 10% of the end profits. Now, I don’t have to have anything invested or anything else like that, but I’m trying to branch off and do things on my own because he’s going in a direction where, he’s just going a different direction, but I don’t want to bring him along with me because he want to go that way, I want to go this way, but I don’t have a lot of proof of experience.

Daniel Jewel:
I got pictures, I got invoices and all that other stuff, but when I am approaching a hard money lender, they want to see more. They want to see more like JV agreements and everything else like that, but I don’t have that. So is there any other kind of paperwork apart from title, which he won’t let me be on, that I can get in the future or if anybody else has this same situation, maybe they can prevent this.

David:
All right, Daniel, thank you very much for your submission there. I see the quandary that you have found yourself in. Basically, what it sounds like is you’ve been working for a flipper and this is how you’ve been learning the business. He pays you $25 an hour, and then as a kicker, you get a 10% cut of the profit of the flip. This is a great way to learn the business. This is a great way for you to contribute to the motto without having to take risks. Like you said, you’re not putting any money in. I think more people should do what you’re doing rather than trying to go borrow money from someone that they know and possibly risking it. It’s better to work with somebody else who’s doing it and learn the business that way.

David:
The downside, like you’re seeing, is you didn’t get this documented that great. So you have been being paid $25 an hour, I’m sure there’s some kind of documentation for that. Your bonus probably won’t be able to be documented very well. I think the key here is you’ve talked to hard money lenders that want to see a JV agreement. I’ve dealt with many of them that don’t ask for that. This might be as simple as just finding a different hard money lender that doesn’t have those same requirements or maybe opening the conversation with, “Hey, I have been working for someone else doing flips for a long time. I’m ready to do one as the main person instead of as the JV partner, what do you need from me in order to move forward with approving me for the loan?”

David:
And if they tell you, “Well, we need all this stuff.” I would probably just move on and find a different one. Now, look, in today’s market, it is very hard to find deals, it’s very hard to find contractors. It’s not very hard to find money. Money is everywhere, that’s what’s fueling a big part of this rise in prices that we’ve seen in real estate. So look for the money because that’s the easiest thing for you to find. I would start off by looking for different hard money lenders and not just working with one that says we need a JV agreement. Now, if you can’t do that, let’s talk about a couple of options that you might have.

David:
The first is you find a different partner that does have the experience doing flips that you don’t and you bring them in as your JV. So imagine you find an experienced flipper that’s not your partner, because like you said, you two are going different ways. You find somebody else and say, “I will give you 10% of the profit on my flip, you don’t have to do anything. I just need you to be a partner on the deal so that the hard money lender will approve my loan.” Problem solved. You might only have to do that one time because now that you’ve flipped this house as the main person in it, you have proof to go to the next hard money lender and you can do it yourself. This is probably a problem you’re only going to have to deal with once, and if you can overcome it, I think that you’ll be okay.

David:
All right. Our next question comes from Tim Mitchell. Tim says, “I’ve seen several of your Q&As. And an episode 4887 and 501, you answered questions on when to do a cash out refinance versus a HELOC. You emphasize that for keeping property after purchasing it, a cash out refi is better. And for short term investing like flips or rehabs, a HELOC is better. I just wanted to know if my purpose is to BRRRR a property, which of the two would you recommend?” All right, Tim, well, there’s a little bit of ambiguity in the question. I’m not sure if you’re saying once the property is already rehabbed, should I take out a HELOC on it or should I refinance it? Or if you’re saying, “I want to use the money to buy the property that I’m going to BRRRR.”

David:
I’m going to assume that you mean the second one because most of the refinances in a BRRRR are going to be a long term loan, not a short term HELOC. Here’s what you have to ask yourself, a lot of us associate in our head, “I’m going to take money out of this deal to put it towards this deal.” And it makes sense when we think that way. I refinanced this one and I bought that one. And oftentimes teachers like me when we’re explaining how this whole thing works, we do share it that way because it’s easy to digest. But in reality, I don’t know that I ever take funds from one thing and put them into another. I take out the funds and then as opportunity comes, I send out the funds.

David:
I have money coming in from real estate sales, from loan commissions, from flips that I did, from short-term rentals that I own, from long-term rentals that I own, from book royalties that I write. There’s all this income that comes in and then I just keep it in different places and then invest it into properties when they come. So the first thing I want to say is, free your mind from looking at it like, I took money out of this house and into the next one. Money’s money and you can get it from a lot of places and you can invest it in a lot of places too. Now, you probably don’t have a ton of money and that’s why you’re refinancing the property to get the money out. So that’s why you’re looking at it the way that you are.

David:
But I want you to understand that money is money for a specific reason. If you do a long term refinance, let’s say you pull $100,000 out of a property on a cashout refi, and now you have that loan locked in place for that $100,000 that you borrowed against the property. Now, keep in mind, it’s 100,000 extra maybe, maybe you already had a loan on there and when you did a cash out refi, you owed money and now you’ve added $100,000 to the balance. You can use that money for everything. You can use it for anything. You can use that money to buy your BRRRR. And then when you refinance it out, you could just buy the next BRRRR with that money.

David:
If you do the HELOC, you can use that money to buy the next property, and then when you get it back, you can pay it off and then you can wait until you need it again and go get the next deal. So HELOCs are nice for what you’re talking about because you’re only paying the interest on the money when you’re using it. If you do the cashout refinance, you’re going to be paying interest on that money all the time. Now, there’s a couple downsides to the HELOC. Usually, the interest rate is higher, so even though you’re not paying to use that money all the time, when you are using it, you’re going to be paying more.

David:
A HELOC is typically adjustable rate, so if interest rates go up, the amount that you owe on that HELOC can go up and it can go up quick. So I wouldn’t say that there is a certain way that you should be doing it versus what you shouldn’t be doing. The question is, “How quickly am I going to use that money? What is the velocity of that capital that you’re pulling out of your deal?” If you know you’re going to be turning it over really quick, you put it in the property, you refinance, you rehab it, you refinance it, get it out. You just go by the next property, do a long term cash out. If you’re going to be using it seldomly, you’re just waiting for the perfect deal to come along, use the HELOC so that you can pay down the money that you borrowed to do your BRRRR once you refinance it, and you could wait until the deal comes along to pull the money out.

David:
So it doesn’t matter what type of asset you’re spending the money on, what matters on is how quickly you’re going to be using that money. Now, I tend to use both. I usually do the cash out refi first because the rates are better. If I can lock it in at a lower rate, that’s better than having a HELOC that’s adjustable and can bounce around. And then after I’ve cashout refied my properties, I take a HELOC on the equity that is left. So I always start with the big rock, that’s going to be the cash out refinance. And then I move on to the HELOC afterwards, and that’s money that I just basically have interest that I’m running all the time and I use it for flips or investments into businesses, stuff like that.

David:
I hope that helps. Now, if you reach out to a loan officer, they can usually explain to you what the cost of each one would be. So when you do a cash refinance, you’re typically going to have higher closing costs, but you’re going to have a better rate and it’s locked in. HELOCs are going to be higher rates and they’re adjustable, but the closing costs are significantly less. Happy to help you with that. If you want to reach out to me, I’ll get you in touch with one of my guys, if not, just make sure you find a good loan officer that has both products that can explain to you how they work.

David:
And a lot of these questions, if you find the right person, they can give you the details on it.

David:
All right. We’re going to have a bonus question here from our producer, Eric. Eric was listening to me talk, and he had a personal question of his own that has to do with, when should you consider the cost of capital? So you often hear it said that if you refinance a property over 30 years, what’s the total interest that you’re going to be paying on that money. A lot of people’s minds go to that. They say, “Well, should I do it? Because over 30 years, I’m going to be paying this much more interest.”

That’s an important question when you are doing it on your primary residence and you’re going to refinance it to spend on like a boat, a car, a vacation, because you’re just spending money so you need to know how much it’s costing you over a long period of time. If you’re reinvesting that, the question becomes, “How much money am I going to spend over 30 years to borrow it? Versus, how much money am I going to make over 30 years if I reinvest it?” And you make so much more, it’s not even worth wondering what you’re paying on it.

David:
All right. Our next question comes from Zaid K. Zaid asks, “I’ve been looking at triple net properties and evaluating deals, and the cashflow flow returns are lower than what I’m currently doing with my residential stuff. They’re a higher risk, because it’s a recourse loan since I’m a beginner, and significantly higher debt. I am a little perplexed on how this type of investing is efficient to scale, but yet seems riskier and less efficient to me. I’m not sure what I’m missing and would appreciate your thoughts and input. PS, I have read commercial real estate investing books and I have been networking with broker and other investors.”

David:
I really like this question, Zaid, and I’m glad that you asked it. And for those that are about to listen, I’m going to give you a different perspective at which you should look at your opportunity and the deals that you’re looking at and the strategy that you’re going to take than you’re probably using, and Zaid’s question is going to allow me to do that. Basically Zaid, what I hear you saying is, I’m told that I can scale triple net better and faster. But when I look at it, the returns are lower and the risk is higher. So why would I want to scale that?

David:
Now, it sounds like Zaid is thinking the same thing we all think when we get started, “What am I doing wrong? This doesn’t work. I was told to look for cashflow.” And so I’m looking for cashflow, but I can’t find it anywhere. I was told to look for a lot of equity in the deal because you make your money when you buy, but there’s no deals out there with equity. This is a very frequent thing that comes up all the time. And because I run the David Greene team, I have to deal with clients that have these same questions constantly, and I’m very well equipped to answer this question.

David:
Here’s what you’re missing, Zaid. You’re assuming, my guess is, based on the way you asked the question, you have this presupposition, that all real estate is basically the same. You’ve got short term rentals, long term rentals, commercial, triple net, flips, maybe not flips, but any like buy and hold real estate. It’s all apples and apples. And so I’m just basically comparing the return and the risk on every property and finding the best one, but it’s not. Real estate actually works on a spectrum, it has a personality to it. So when you’re investing in, say, a short term rental, on that spectrum, cashflow is super high, but convenience is super low. It’s a lot of work to run a short-term rental, it’s more like buying a job. It is not passive income.

David:
Having a business is just like owning real estate, but business is less passive, it’s way more active than owning real estate, but it also gives you a higher upside, you can make a lot more money. It’s a spectrum. Triple net investing where your tenant is basically paying for most of the expenses, they’re paying the property taxes, they’re paying for a lot of the maintenance, they’re paying for the insurance, and then they’re also paying you rent. It’s very convenient. Triple net investing means you don’t have to pay for a lot of things. The tenant has to cover almost all of it. That’s the benefit of it.

David:
This is why people say it can scale because you don’t do a whole lot of work. Unless you have a vacancy, there is nothing to worry about. I recently bought a $60 million commercial property that was triple net just like what you’re talking about, and I was floored at the analysis of it. I was expecting it to be incredibly complicated because it was such a big property and so expensive, but there was almost nothing to. It was, “Here’s the income that’s coming in. Here’s what we have to pay for property management. And here’s what your loan amount is going to be and the debt you’re going to have.” And that was about it.

David:
The diligence on this deal came from looking at the tenants. The leases is where the work was actually put in. Now, if you can understand that, it makes sense why the returns are lower. You’ve got to something up to get something. If you want to get the convenience and scalability of triple net investing, what you have to give up is the return. You want to hire a return, get into short term rentals. Now your risk profile will go up and the amount of work you’re doing will go up, but you will make more money. What I want every listener to understand is so many people get stuck, not taking action because they haven’t accepted that all of real estate operates on a scale. And the further you go in one direction, the further away you go from other things.

David:
I see this phenomenon with things like cashflow versus equity. In most markets, you’re going to get more appreciation where there’s less cash flow in the beginning and you’re going to get more cashflow in the beginning if there to be less appreciation. I see this constantly. I see that returns can be really high in really bad areas where you have to spend a lot more time managing the property. So you’re giving up time and you’re giving up convenience to get that higher return. And this is why people get into bad deals, is they look at a spreadsheet that says, “I’m going to get a 25% ROI.” And they get really excited and they buy the at turnkey property in a terrible area.

David:
And then they spend all their time trying to keep a tenant in there and they go, “Real estate sucks. I hate it.” But if you had walked into it knowing that you were buying real estate that was going to suck and you were going to hate and you were willing to endure that in order to get the 25% return, you wouldn’t have been upset.” Now, this is something I’ve learned just from dealing with clients who come to me with these pie in the sky expectations, “Hey, I want to buy Bay Area real estate. I see the renter going up, I see the property values are going up. Interest rates are really low. I really want to be able to borrow $900,000 at a super low rate and I can get really high rent.” And they’re right about all of it.

David:
But what they’re giving up is the ease of buying it. It’s very difficult. You’re going up against a lot of other are people that want those same properties. So in the beginning when you’re first on the hunt, you’re going to work a lot harder than the person that just goes to Indiana or Detroit and you can find a property right off the bat. But the upside, once you get it, is huge. You’re never going to regret it. So the reasons, Zaid, to sum this up, that you’re having such a hard time understanding it is because you’re looking at all real estate like it works the same, but it doesn’t. All real estate has a personality, just like all kids.

David:
Some kids are very strong willed and it drives you nuts, but then they become great leaders and they accomplish great things because their will overpowers it. You can’t have a person who is very agreeable and doesn’t really push for anything, and then also want them to go push through obstacles. That’s how personalities work, you have to give and you have to take. The reason they say it scales is because there’s not a lot of work you do, so there’s less time involved, and the less time is involved, the more scaling can happen, but the returns going to come down as well. Hope that helps, Zaid, and everyone else.

David:
All right. We asked for your comments and feedback and you gave it, and I’m so pleased that I’m going to be able to share some of it. It has been overwhelmingly positive, it seems that people are loving this show format. And that makes me really happy because we put a lot of work into collecting all this information and setting it up so that I can answer it and making sure that I answer it well. So I’m really glad that you guys are liking it. I want to take a minute to share some of the feedback that we’ve been receiving. First comes from Dave H. You asked for comments and feedback. This series of detailed Q&A has been some of the best content for a newbie like me.

David:
Some of the questions are exactly what I would’ve asked. Other questions from more experienced investors get me thinking about things I hadn’t considered. Keep it coming. Dave, thank you. That is literally what I’m hoping for. I’m hoping that I can answer questions that newbies would have, because those are typically the people that bring it up, but do it in a way that experienced investors gain some insight into what’s going on behind the scenes. In fact, the whole idea of seeing Greene, is that you’re seeing it from my perspective, and I can offer practical insight and practical solutions, but I also like to peel back the layers of the onion and show you what goes on in the industry behind it so that more experienced investors can gain from it.

David:
Ogres are like onions, they’ve got layers and Shrek was green just like this green light behind me. Next from [Jusoh Sol Walled 00:19:51], “Absolutely love this format. Please keep it up. It would be helpful to hear advice on scaling, particularly as it applies to financing debt, to income loan type, etc, and how to balance debt load versus risk.” I love that question, I love talking about it. If somebody wants to submit a question specifically on that, go to biggerpockets.com/david and let me know what you’re trying to figure out with your scaling. Jusoh here has actually inspired me to make a video and I’m going to make one and put it out that talks about how I personally manage risk and reward in my own portfolio.

David:
This works with business, it works with real estate, it’s really a principle I’ve developed that keeps me safe so that I can aggressively scale without having to worry about losing everything. So thank you for that, I’m going to work on that video today. Next is from Michael Randall, and this is great, “I don’t mean to be argumentative, but I thought I’d share my thoughts.” It’s like when you say, “No disrespect, but,” the whole Ricky Bobby thing, except Michael actually wasn’t being disrespectful, I just thought that was funny, “I don’t mean to be argumentative, but I’m about to argue.”

David:
“All I would ever hear on BiggerPockets for years was to focus on cash flow and betting on appreciation and inflation, etc was a gamble. And that was a big no-no. Now, you guys are saying the opposite. Sure, over 30 years, real estate will work out as an investment, no one ever argues that, and a deal today will most likely be a good investment in the long term. That is the only part that makes sense to me.” All right. Here’s why I love this question. It is absolutely indicative of the culture and the background of BiggerPockets in general. And if you’ve been listening to all the episodes that have ever been made like many of you awesome fans do, you’re probably thinking the same thing.

David:
In fact, I had to wrestle with this very hard. So I’m going to do my best to give you some insight as to where the advice came from, why the advice has changed. Now also to be fair, not everyone on BiggerPockets agrees with me. Brandon and I have a way of looking at the economy in real estate and developing our strategies that some people don’t have. So this isn’t the opinion of necessarily of BiggerPockets, this is the opinion of David Greene. And because you hear my voice on BiggerPockets all the time, I want to take a second to give you some background into why this is the way that I’m thinking.

David:
First off, you got to understand the history of where BiggerPockets came from. Josh Dorkins started this company after having a terrible experience owning rental property himself, I believe in Southern California, and he had questions about what to do when things were going wrong and he had nowhere to go. So he started an online forum for real estate investors to come and ask questions so they could get answers that he never got. And that really hits close to home for me because that’s how every business I ever started was. I had a problem, it was causing me pain, it was hurting me and I was frustrated, and instead of just being mad about it, I went out there and tried to create the solution and Josh did the same thing and it grew up to this behemoth that BiggerPockets is now.

David:
Now, Josh ended up, I believe losing those properties because they didn’t cash flow. And this happened at the same time as a lot of other people are losing property. So if you’re younger and you don’t remember, right around the years 2000 to 2006, loans were being given to people that they could not afford and they were giving artificially low interest rates that would reset later so they could afford the house on day one, but they couldn’t afford it two years later. And everybody started to lose their properties because they could not rent them out for as much as they had to spend on the loan and they could not sell them because the value of the properties was dropping too fast.

David:
So you ended up being left with a property that was going to bleed you dry every month or just let it go. And when the value of your property is less than what you owe on it and you’re losing money every month, the majority of people didn’t see any reason to keep it. So they all sold it, it flooded the market with inventory, tons of foreclosures. Most of these houses were in disrepair and we walked into what I would say now is like the golden era of real estate investing. There was ton of supply and very little demand. Now, there were certain challenges to that market, there wasn’t a lot of money going around, it was hard to get financing because banks were so gun shy by giving loans to people after seeing how many people had defaulted.

David:
But if you had the money, if you had a job at that time, that was consistent and if you had the wherewithal to buy properties, that’s when I got started, it was great. The reason all of the advice that was coming out of BiggerPockets and probably everywhere else was cash flow, cash flow, cash flow, is because at that time, people were buying properties that did not cash flow and they didn’t even know they were supposed to cash flow. They didn’t even understand that cash flow was a term. They were buying for pure speculation, “I’m going to buy at this price, I’m going to sell it when it goes up.” They were treating real estate like stocks. They were not listening to podcasts of people that talk about how to own property, how to analyze property, how to manage property.

David:
They weren’t educating themselves. They just saw that everybody else was making money and they said, “Oh, I think I’ll go do it too.” They were just hoping that it would work out. And nobody lost the house to cash flow. The only people that lost house is didn’t cash flow. So the overwhelming advice, like imagine where a general is going to send their troops, they’re going to send reinforcement to wherever the line is the thinnest and they need the most help. And everyone was making the mistake of buying property that didn’t cash flow, they just assumed it would always go up, and cash flow is what will keep you safe when values go down.

David:
Now, let’s fast forward all the way up to 2022 where we are now, you’re hearing us say, I should say, you’re hearing me say, “Hey, if a property doesn’t cash flow a ton, that’s okay. I’m still buying it. Here’s all the reasons why I would, and it’s going to cash flow in five years. It’s going to cash flow in three years.” Basically it’s because the rules of the game have changed. There is now way more inflation than there was back then. We had more fiscally conservative policies than what we have now. People didn’t just create money out of thin air and dump it into the economy.

David:
The reason that prices were going up so fast back then is because the loans were bad. The loans are actually good now, it’s the money that we are spending is worth less. And people don’t understand that. So a million-dollar property might be worth like a $600,000 property back then, there’s been that much inflation. So it gives us this idea that everything’s getting expensive, but it’s really not, our money’s just becoming worth less. And if you look at saving money in the bank now, your money’s becoming worth less and less and less as inflation eats it, saving money in the bank back in 2010 was different.

David:
It was better to save money because that money could stretch, it could go really far. You could buy a property for 100 grand instead of 300 grand. So you wanted capital to do it. Fast forward to now, the price of the assets are going up so quickly that if you wait too long to buy them, they just become more expensive, and the money that you’re saving in the bank is becoming worth less and less and less. You actually make way more money owning assets in an inflationary period than you do saving money. When there’s not a lot of inflation, assets are riskier, they’re more work. You’re going to spend your money on that asset, and if you’re only going to get a 7% return, well, you could go get that on the bank and do no work, so why would you go buy real estate?

David:
Well, now you can’t get a 7% return on the bank, you’re going to get a 1% return. And the value of that real estate is going up much faster as well as the rents, as well as the cash flow in the future. So I’m not telling people to buy properties that don’t cash flow, I can do that because I have enough other properties that do cash flow, it’s fine, or I have money coming in it from other areas. But that doesn’t mean that everybody else can do that. What I am saying is don’t look at cash flow as the only reason to buy, and don’t assume it’s going to be your savior. You don’t make very much money in real estate from the cash flow.

David:
You make money from paying down a loan, having appreciation and your rent’s going up every single year. Your cash grows, it very rarely is a significant impact in year one. So I hope that makes sense, is if you listen to older episodes, there’s tons of talk about cash flow is cash king, cash flow is cash king because that’s what would’ve saved you, that’s what was hurting people. We were very worried about people buying properties that didn’t cash flow. In today’s environment, it’s different. There’s not as much worry about people losing their jobs as it was back then, properties are going up in value so that if something happened, you can sell them much easier.

David:
And it’s not guaranteed, you still should be looking for cash flow in a property. But I don’t think the ROI on your money is the number one factor that matters, I think buying in the right area is much more important than the ROI right now. I think looking at the ROI 10 years from now is way more important than looking at the ROI right now. Think the story of the tortoise and the hare. The hare shut out the gates right away, that’s like buying a turnkey property in an area that is not going to appreciate and is tough to own. You’re getting cash right off the bat and you feel good about yourself, but that tortoise just kept steadily going and going and going, and eventually, it ended up passing the hare.

David:
That’s what it’s like when you buy in a great area with a solid tenant base, with a lot of great jobs moving in and rents going up every single year. Because of it, your cash flow catches up to that hare pretty quickly and then passes it and keeps going where the hare stopped. That’s where the advice is coming from, that’s why you’re feeling confusion. I really appreciate you asking that question, Michael and I hope that my answer helped.

Carly:
Hi David, thank you for taking my question. I’m currently located in the Greater Boston area, but have a six unit in Upstate New York where I’m originally from. My family is actually planning to relocate back to the Upstate New York area. And we plan to use some of the profit from our primary residents for investment purposes. If our goal is to increase our monthly cash flow, what type of investment asset classes and strategies should I be considering? Should I look to partner with someone who has more experience to get into larger commercial deals, look into syndications, maybe venture into self-storage, how should I be thinking about this? Thanks so much.

David:
Thank you very much, Carly [McKay Love 00:29:25] moving from Boston back to New York. This is a good question. Here’s what I hear you saying. We’re selling a property, we’re going to have some equity. If our goal is primarily cash flow, where should I be looking? There’s all these options. The short answer to that question is, if you’re just looking for the most cash flow you can get and you’re relatively new of an investor, the best asset class for you is small multifamily. That’s your two, three and four unit properties. Why, you ask? Well, the financing is really easy. You can get Fannie Mae, Freddie Mac loans at 30 year fixed rates, even though they function a little bit more like commercial property because they’re meant to generate income.

David:
If you buy them as a primary resident, you can get away with putting way less money down. You could put down as low as like 5% on a lot of those properties if you get the right loan officer that finds you the right product, we do that pretty frequently with my team. They’re also the easiest to manage and they’re very easy to analyze. So you can get a property manager that will just manage it for you. You don’t have to do a whole lot of work. And the analysis is pretty simple, it’s like taking the analysis of a single-family home and it’s almost the same thing. What’s the rent? What are the expenses? You can find the rent of each of the units. That’s really, the only difference is you’re doing it for four different units instead of just one.

David:
And then there may be a couple additional expenses, maybe you’re paying for the water or you’re paying for the garbage. It depends on the area that you’re in, I don’t know what it’s like in New York, but that would be really simple. Your questions about syndication and self-storage, those are niche strategies. I don’t know that they would get you as much cash flow as benefit in other ways. So let’s say for instance that you got into self-storage, that probably give you a much more value-add component. I don’t know that the cash flow would be the same, but it’ll be a lot more work. You’re buying a business, you’re not buying real estate when you get into self-storage, you’re buying real estate as a business would be the best way to look at it. But you’re running that business by owning that real estate.

David:
That’s a lot more time, not like buying small multifamily. A syndication of value is that you spend no time, you don’t do hardly anything. And you can get a good return, the problem is you don’t get the long term benefits of real estate ownership, because the syndication’s going to sell those properties in order to pay you back. You’re just going to be getting some money over a short period of time. So you’re not actually owning real estate so to speak as investing in a business that owns real estate, that’d be a better way to look at it. So if it’s purely cash flow you’re looking for and you’re new, this is the best way to get started.

David:
This is like having a bike with training wheels, you could fall, but it’s a lot tougher to fall. You’re not going to go super-fast, but that’s okay when you’re new, you don’t need to be going really fast, and you learn the fundamentals of riding the bike. And once you get good at that, you can start looking at some of these other niches and other strategies taking off those training wheels and riding faster.

Alex:
It’s Alex here from the west side of Cleveland. Hey man, I just want to let you know, I love your stuff, I follow you and Brandon, you guys have awesome books and awesome feedback and I’ve gained so much knowledge from you guys. So thank you for that. I’m wondering, I’m looking to start investing out of state, when you’re investing on a state and you’re finding your deal finder, do you let them know that you’re an agent? The reason I ask is, currently I’m an assistant to a real estate agent and I’m looking to get my license and I plan to become a realtor.

Alex:
Do you feel that it helps you letting the other real estate agent know that you are a realtor or do you suggest not letting them know? I appreciate your feedback, man. Thank you so much. And again, thank you for everything you’ve done for all us rookies out there. Appreciate you.

David:
Well, thank you Alex. That’s actually some very nice things that you said. All right. This question’s pretty simple and there’s a couple of things that I’m going to cover when I answer it. It’s if I am investing out of state and I’m an agent in the state I’m in, do I tell the other person on the other end that I’m an agent? First off, what a lot of people do is they go to the agent that they are having represent them and they ask for a referral fee, they ask for a percentage of the commission back to them. That can be customary in the world of real estate agent. So if somebody is in Texas and they say, “Hey, I need to sell my house in Texas and I want to move to California.”

David:
There’s agents in Texas that will say, “Hey David Greene, I have somebody that’s moving to California. If you give me 25% of the commission, I’ll let you work with them. And this does happen pretty frequently. So what a lot of people will do is they’ll ask for that same bonus back from their realtor. I rarely ever do that. I only do that when I’m buying very expensive property like over a million, oftentimes around like one and a half to two, two and a half million dollars. And we’re the easiest clients ever, because we don’t need that much work. So typically if you work with me, if you’re a realtor, I in the very beginning, I will ask you some questions that have nothing to do with analyzing the deal.

David:
I want to know about the area, I want to know about what resources that you have to help me with this thing, I want to know about what type of people live in that community, what they do for work, what they do for fun, how many people are moving in there, maybe a little bit about what the city is building or not building, that type of stuff. And the rest I can do. I understand how the contract works, I understand how to do everything. I’ve done it so many times. So I’m the best client you could ever have. In those cases, I’m okay asking for a referral feedback that I put towards down payment.

David:
But when I was first starting off and I wasn’t buying expensive property, I never did that. I wanted the deal much more than I wanted the little bit of money that was going to come my way. And I didn’t want the realtor to not work for me because they were going to be making less money. So I don’t ask for the referral fee, except in very specific cases. I do let them know I’m an agent and that’s mostly because I’m usually telling them, “Here’s what I want you to do, and I’m coming from the perspective of an agent.” Let me give you an example. I have an agent in Phoenix that I recently was talking to about a deal that a partner and I were looking into that was very expensive.

David:
And I told him, “Here’s what I want you to do, I want you to call the listing agent and find out why it was pulled off the market.” He did, he got back to me. I said, “Okay. She sounds like she was pretty eager from how quickly she called you back to put her under contract.” He said, “Yeah, she wants to get this thing sold.” I told him, “All right, here’s what I want you to do. I want you to call her back and I want you to make the case that you are trying to sell your client on the property.” And the reality was, I was going to him and saying, “I want to look at it.”

David:
But I said, “Call the agent and say, ‘I’ve got a buyer for you. They do this all the time. They will close on this deal. I just need to know if we can come to terms on the price before I bring it to him. You guys are currently listed at 1.8, you’ve been on the market for 63 days, what are the odds we can get this thing below 1.7. I don’t want to waste your time?’” And I said, “I want you to tell me what her tone sounds like if she’s like, ‘man, I don’t know, but I really want to try,’ that let’s know that the sellers are ready to get moving and she wants to get it sold.

David:
If she laughs at him and hangs up, that lets me know that there’s not a whole lot of interest there and if we’re going to write an offer, it’d have to be higher. So I tell them I’m an agent because I’m often giving them direction on how I want the negotiation to go because I know how to do that as an agent. Here’s the danger in it. If you tell them I’m an agent, they often assume that means you know how the contract works. And I got burned on this one time. I bought a property in Florida, now in California, if you have an inspection period of 12 days, on day 12, you get a notice to perform. And then 48 hours later, you have to decide, do I want to move forward with the deal or do I want to back out and get my money back?

David:
But if nobody may makes you perform, your deposit is never at risk, you can just get it back if you back out. In Florida, that doesn’t work that way. On day 12, you can no longer get your deposit back. So because the realtor in Florida assumed I knew how contracts worked there, they didn’t know that it was different in California, I didn’t know it was different in Florida, I never waived my inspection contingency and I assumed that that meant I could get my $5,000 deposit back. Well, 30, 40 days into escrow, they’re asking me why we’re not closing and I had literally forgotten I’d put it under escrows buying so many houses.

David:
So I looked at it and I realized that I can’t buy it. There’s a hole in the roof, it had been raining, nonstop, the entire inner workings of the house, the studs themselves had dry route, the whole thing would have to be torn down and rebuild. I said, “I can’t buy it.” But I didn’t realize I wasn’t going to get my deposit back. Now, the only reason my realtor wasn’t hounding me saying, you need to move on,” This is she, thought I already knew that. So that’s an example of how if you tell someone you’re a realtor, they might assume you know certain things that you don’t. So I would say, yes, tell them you’re a realtor, but be very clear that you want to be treated as if you’re not a realtor unless you tell them any different.

David:
Our next question comes from Jared, “I’m currently house hacking, having trouble finding properties within the 1% rule that won’t require lots of maintenance and repairs. And even though it’s very cheap to borrow money, I’m not sure how to go about my next deal. I have MLS searches all around Michigan with real estate agents, but they agree that the market just isn’t great right now deal wise. Should I wait for rents to appreciate the way housing prices have or is staying patient through these important years a potential mistake?” Very good question. And I think Jared that this applies to a lot of people who are listening that are in this same boat.

David:
Let’s start off with what you are using to refer to a good deal. It sounds like you’re looking for something that meets the 1% rule. Now, the 1% rule is more of a 1% guideline, and it states that if a property will rent for 1% every month of what you paid for it, it will likely cash flow. So if you buy a $200,000 house, it should rent for $2,000 a month. That would be the 1% rule. That’s not a rule that I believe people should use to make their investing decisions. It is a rule they should use to decide, do I want to even look at it if I need it to cash flow? So I will do this in my head all the time, I’ll be looking at a deal and I’m like, “Okay, that’s a $400,000 house, the 1% rule is 4,000. The rents are 3,200.”

David:
That is close enough to it that will cash flow. I will actually analyze this deal and see how much the ROI would be. Let’s say that it’s a $400,000 house and the rents are 2,000, that’s half of 1%, it’s not even close. It’s not going to cash flow at all, I won’t even look at it unless I’m looking at it from the perspective of how I would increase rents. That’s how the 1% rule is meant to be used. It’s a very initial once over to see if you like this thing, not something you should be using to decide, is it a deal? I think Jared what you need to do is to get clear with yourself on what a deal means.

David:
If you’re looking for something that cash flows a ton and is relatively easy, you’re not going to find that in hardly any market. There is not enough inventory. You’re competing with people that just want to buy a house because the rents are going up on them every single year and they’re tired of it. And you’re trying to get a deal that makes you money while they’re just trying to spend less money. Your competition is making this a lot harder for you. I do tend to look at long term, I don’t think you buy a house for one year, so I don’t see why you look at the cash flow for one year. You’re buying a house for a long time.

David:
So I look at owning that property over a long period of time what’s going to make more sense. If you’re waiting for rents to appreciate along with prices like you mentioned, it won’t happen, they never do. Prices always outpace rents. So what happens is both prices and rents continue to rise together typically, but prices go up faster and faster and faster. And then prices drop, but rents mostly stay the same. Sometimes they even go up. And then when the market turns around, rents go up and prices go up and then they end up catching rents and then they end up passing them and then we have the next collapse and then they drop it, rent stay the same.

David:
That’s typically the cycle of what it looks like. So I don’t think you should wait for rents to appreciate because they won’t keep up. And the simple reason is, if rents just kept keeping pace with price, eventually you’d be spending so much money on rent that it would make more sense to just buy the house. And that’s what people do. And so renters are always in a certain price point because if they were able to afford more, they would become buyers. Another thing to consider, the 1% guideline that we’re talking about here becomes less strict at higher price points and with lower interest rates.

David:
So what I’m getting at is if you have a $100,000 property, it needs to bring in $1,000 a month for the 1% rule to apply. But if interest rates drop from 12% to 4%, you get a lot more slack as far as how much you need to stick to the 1% rule, it might be 0.8, 0.7 and be fine because rates are so low. So as rates drop like you said, money’s cheap, the 1% rule might drop to the 0.8% rule. That might make more sense. The other thing is that as the price goes up with low interest rates, the 1% rule becomes less and less applicable. So what I’m saying is if I’m going to buy a $50,000 house, it better bring in $500 a month if I want it to cash flow.

David:
But if I’m going to buy a $900,000 house, it does not need to bring in $9,000 of rent to cash flow. It might cash flow at 6,000 or 6,500, which would be more like the 0.65 rule. So at that very low price points, that guideline is very, very solid. You got to pay attention to it if you want it to cash flow. At higher price points, it becomes softer and softer and softer. And that’s something that a lot of people don’t realize. So they go around looking at a $10 million property and wondering why it’s not bringing in $100,000 a month like apartment complexes and stuff like that.

David:
The next question comes from Craig D., “David Greene is a lifelong bachelor, is it better to never be married and be a real estate investor or be married and be a real estate investor? Oh boy, this is really funny. I don’t plan to be a bachelor for my whole life, I just haven’t found the right person yet. We can’t all be as lucky as Brandon and Heather. As far as is it better to be an investor when married or when not married, let’s look at some of the differences here. So I’m looking at buying a property with a friend of mine and he is married.

David:
And so every question that we normally would just sit down and talk about and come up with a solution for how we’re going to use the property to move on, there’s another layer of complexity, we have to now go to his wife who doesn’t understand real estate investing and isn’t looking at this at all like an investment, who’s actually much more concerned with the fact that she gets to say what paint color we’re going to use than is the property’s going to make money. So in that sense, I think being married can be tougher because you have a whole other person you have to respect who’s in this deal.

David:
I think the tax benefits might be a little bit better being married in general, and that probably does apply to real estate. So let’s go advantage marriage when it comes to the tax advantages of owning real estate. I think if your partner in this deal, your spouse wants to be a part of it, I think it can work for you if you split up the responsibilities. This person collects the rent, this person sets up the systems. This an advertise unit for rent, this person talks to the contractor. Having different skill sets can help just like having any other partner. I think that when there’s a difference of opinion, having a marriage partner involved can make it a little more complicated, which is the same reason that I very rarely ever buy properties with partners.

David:
This is something I’m just now starting to do this year, because for the most part, I don’t like when I want to go this way and they don’t because they’re newer, they’re not experienced, they don’t see why I would want to go that way. A lot of the time, the newer investors that I know are just saying like, “What’s the revenue? What’s the revenue? What’s the revenue? What is the cash flow?” And they would buy a property in a swamp if the calculator show that it would make sense, which is funny, because Shrek comes from a swamp and we talked about Shrek a little bit earlier in this show.

David:
And I’m more looking at it from long term perspective. I want to buy an area that isn’t going to cause me a headache, is going to appreciate over long period of time. The rents are going to go up every single year, the value of the property and the ease of owning it is going to go up every single year. The revenue itself in the beginning doesn’t matter, but I want to know what the revenue’s going to be like later. So that often causes conflict between me and my partner. That’s an example of when you have different ways of looking at it, different priorities or different things you want, it could be trickier.

David:
So because I’ve only bought real estate as an unmarried person, I can’t answer all the questions, but I do pay attention to the other people that I see who are doing it with their spouses. And I would say if your spouse is on board, it’s probably going to become a superpower. You’re probably going to get further along than if you were single. If your spouse is not on board, it’s going to feel like you’re dragging somebody along who doesn’t want to be there and you’re going to run a lot slower. Funny question though. Thank you very much for that, Greg.

David:
All right. Next question here. Structuring on owner financing deal in Atlanta and there is a bit of land in the back that I would want to build on. Is that something I could get financing for or will I need to pay for that in cash assuming I got permission from the owners? PS, would be a cash loan property, short-term rental or long-term rental. Let’s talk about if you want to buy property and build because this is a very, very common question, especially that we get in the Bay Area where now you can build ADUs on your property. So a lot of clients come to me and they say, “Hey David, we want to buy this property. Look at all this land, I can build another property on it.”

David:
And it makes sense in theory, let’s talk about if it actually makes sense in practice. The first thing you have to understand is if we’re not talking about building an ADU, we’re actually talking about building a property, that is a huge, huge undertaking. You’re basically becoming a spec home builder. You’re going to have to get the land developed, you’re going to have to get permits with the city, you’re going to have to understand that process. You’re going to have to get a contractor that knows how to build a house from the ground up not just your standard contractor that doesn’t do that.

David:
And then another thing people don’t realize, tiny homes are very popular and everyone says, “Let me put a tiny home back there.” And they don’t think about the fact that you got to run electricity to that, you got to run water to that, you got to run a septic line to that. There’s a lot of infrastructure that goes into putting a property in the ground that the inexperienced investor doesn’t often think about. The financing is the other piece you have to think about. You’re probably going to either pay your own cash or find a source of revenue that’s not a Fannie Mae, Fred Mac loan. You might get a bank that gives you a construction loan, they’re expensive and they’re burdensome.

David:
They’re going to come out and check on the work constantly, they’re going to be talking to your contractor all the time. The contractor’s not going to like it, that before they can get their next draw from you because you’re going to get it from the bank that the bank has to come out there and inspect the work that’s being done and tell them what they want to do different. It makes it very complicated. What I often find is the person who wants to buy a house and then build 100 or $150,000 property on it, whether it’s an ADU or something else, could have taken that same $150,000 and put it as a down payment on a house that’s already built. And you’re getting a full home compared to the small ADU that you were going to build.

David:
You’re getting to leverage and borrow money against that home that you can pay down versus you basically, in a sense, once you’ve built that unit, your cash has just sunk in it, it’s not like you can refinance that one thing. You can maybe refinance your whole property and get some money out, but you very rarely add the same value to the property itself as you spent. Like if you spend $150,000 to build an ADU, you didn’t make your property worth $150,000 more in most cases. So you lose the power of leverage. You also lose the power of being able to sell it at some point. So if I buy my own property somewhere else, I can sell that, I can refinance it, I can split it into two units. I have all this flexibility with what I can do with it.

David:
If I build an ADU in my backyard, I sure I can rent out for extra income, but I can’t sell it individually, I can’t refinance it individually. There’s not a whole lot I can do with it. It’s not nearly as effective as buying real estate and using the bank’s very cheap money to do it. So I hate to be the bear of bad news, everybody comes to me with these really big ideas and I got to be the terrible person that says, I don’t think that’s the best use of your capital, but to be straightforward. It very rarely is. Now, if you find a company that will finance you building an ADU, they will let you borrow money over 30 years, and it actually works the same as if you bought a normal house. I would be completely on board and I would be putting ADUs on every single property that I owned. All right. We have time for one more video question, let’s take a look,

Speaker 5:
David, simple question. When I purchase a flip or a BRRRR, I have to wait six months before I’m allowed to refinance based on some seasoning in period, and this is in Georgia. I guess my question is, is there a way around waiting six months to do the refi or is there a trick to get money faster? Because if I do a hard money at first and then I want to refi once I am done with the rehab, is there a way to not have to wait full six months? Thanks.

David:
Yes, the dreaded six month on the refinance question, this one comes up all the time. Let me give you a little bit of background into why you typically wait six months. First off, this is not for every loan, this is for the best loan. If you want to get a Fannie Mae, Fred Mac product that has the lowest interest rate locked for 30 years, you often have to wait six months. This is because there’s a rule in place that if you do a deal with a lender and then you pay that loan back within six months, the lender has to pay back all the commission that they made on it. So if you refinance your house and then you go somewhere else and refinance it again, that first person that did all that work has to pay back the money, they don’t get anything.

David:
So what happens is many guidelines are put in place that says, we won’t do a deal if it’s been six months, because we know that we’re going to be screwing over the person that took it before. But that’s only for certain loans. These are like the government conventional type financing. Many credit unions don’t have that rule. Many savings in the loans. Institutions wouldn’t have a rule like that. Private lenders don’t have a rule like that. Like you said, hard money doesn’t have a rule like that. I don’t see any reason why you can’t refinance with hard money and then at the six-month period, do your normal refinance.

David:
Yeah, you’re going to pay a little bit more money up front, but if you need that capital that bad, you’re only paying that higher rate for a couple of months. What I would do is I would keep the points low and the interest rate high. So I’d go to them and say like, “I’ll give you a one point, but I’ll pay 12% interest or something like that if you can do this deal.” And I’d refinance it with hard money if I really needed the capital, and I’d only be paying that 12% for a couple of months before I could refinance it again with conventional. If you want the best loan product though, you are going to have to wait that six months.

David:
The question of, can I work around it, is you got to find something that’s not conventional financing. You either got to find a portfolio lender, you have to find a credit union, you have to find a private lending, you have to use a HELOC on another property. You’re going to have to do something like that if you want to get around the six months. All right. I really hope I was able to help some of you brave souls who took action to ask me questions, and I look forward to answering more of your questions this year. We covered quite a few topics, which is awesome. Some of them were about the six month seasoning period, people were curious if that will work, what type of investing we should get into as far as if I want cash flow, that was Carly I believe, should I get this asset class or that asset class?

David:
We talked about why you used to hear cash flow, cash flow, cash flow, and now you’re hearing there’s more than just cash flow. I hope that my answer there brought some clarity to the situation. We talked about triple net investing and how it can appear like it’s not as profitable, and just the confusion that comes from it, which a lot of people have, is they see, “Well, that person’s making $5,000 a month on their short-term rental, I can’t find a long-term rental that does better than $1,000 a month. What am I doing wrong?” Well, it’s because of the fact that real estate has personalities and you have to find the personality that fits for where you are.

David:
I want to thank you all for submitting questions. If you’re listening to this now, I want to hear from you, go to biggerpockets.com/david and submit your question there so that I can answer it the same as all these people did. There are no dumb questions, you’re thinking the same things that everybody else is thinking. Give me the opportunity to share that so that everybody else can hear. Also, if you are not listening to this on YouTube, please go subscribe to Bigger Pockets YouTube channel, and leave me a comment there. Let me know what you liked, what you didn’t like, what opened your eyes to something you might not have seen before and how this show is affecting you and your investing right now.

David:
As you see, I read the comments on air that we get there, so please keep that going. The funnier, the more insightful or the better the comment is, the higher the chance that we are going to read it on the show. I want to thank you all very much for taking this journey with me and for trusting me with your time and attention, please make sure you subscribe to this podcast on iTunes and anywhere else that you listen to your podcast, and I will see you on the next one.

 

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2022-02-06 07:02:03

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