Is Paying Off Your Mortgage Early a BIG Mistake?

this is the biggerpockets podcast show 6 21. most of us have some goals that are similar we want freedom we want our time back we don't want to be stuck in a commute that's pretty much an overall general consensus we can all agree with but there's some people that really want to make a ton of money and they're limited in their ability to do so at their w-2 job there's other people that just want a little bit of money but they want it to come easy there's other people that know they have a creative itch that they want to scratch and real estate helps them do it and then there's other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people what's up everyone this is david green your host of the bigger pockets podcast coming at you today with a seeing green episode in today's show we are going to take questions from different people that have submitted them and you're going to hear my perspective how i see it because i'm mr green we have a lot of really good stuff for you several different topics that i don't get asked very often that i thought was really cool that people ask questions so one of them had to do with is there a way around a debt service coverage ratio loan or is that my only option when it comes to getting financing if i don't have a w-2 job we go into a very very sort of a deeper situation of when you should pay off your property's mortgages and when you should use uh financing or leverage i think there's a lot to learn from understanding there's not one way to do it but there is usually a right way for you to do it and so i break down this particular situation and give advice that you might not be expecting me to give and then i actually talk about why i decide to publish my books with bigger pockets publishing all that and more at this seeing green episode if you're looking to learn if you've got questions that you want to ask if you want to hear other people asking questions so that you don't have to be the one to ask it this is the right place to be and for today's quick tip speaking of bigger pockets publishing my newest book just dropped today with them is called skill so i my last book that i wrote was called soul this was a book written for real estate agents to learn how to make money in the real estate agent game this book is about how to become a top producer and make really good money so if there's a real estate agent in your life that you know that you love that you appreciate that you're rooting for go to biggerpox.com skill and get a copy of this book to give to them it is a very difficult business to be in most people have no direction of what to do and this book is written to give a very specific play-by-play for real estate agents to be good at their job so if you're working with an agent that's good but you want them to be great if you have people in your life to sell homes and you think that they would be happier if they made more money please go get them this book give it to them i would appreciate it and so would they all right that's enough ado let's get into today's show hi blessing david my name is deborah fung my questions for you all right okay i'm a a widow i lost my husband couple months ago and right now i'm not working i quit my job as a teacher a year and a half ago to stay home taking care of him and after he's gone he left me with his life insurance so i get the life insurance i pay off the house i'm currently leaving so i also purchased a property in colorado spring pay off and i still have 200 000 cash in my hand now i learned about this real estate investment made me feel like paying off my mortgage wasn't a the smartest move um however my i'm thinking should i get a cash out refinance from the current two properties that i have already paid off to buy more properties and also um i don't know should i pay them off or should i just i mean for the new property should i just do a uh 25 down payment um also for the 200 000 cash in hand the same thing do i do i uh find profit more properties just pay the initial initial down payment or just or should i just buy one property within the 200 000 range pay them off and and receive rent coming in as the positive cash flow uh currently i'm still taking care of three kids two are in college and one is staying home with me he's a um he's he'll be a sophomore in high school so yeah that's my questions and thank you for your help bye hey deborah thank you for the question first off condolences i'm very sorry to hear about your husband and please send those condolences to your kids as well i lost my dad when i was 27 and my brothers were even younger than me and it's incredibly hard when that happens sometimes it feels like the entire cornerstone of your family falls apart so you'll be in my prayers as far as the question from a practical perspective that you're asking here of should you take out loans or should you own properties free and clear and if you're gonna take out a loan how much should you be taking out i see all the options that you're presenting and i can tell from the way you're spitballing that you've got a lot of uncertainty and questions in your mind and i'm really glad you reached out let's talk about when you should take out loans and use what we call leverage and when you should pay a property off the majority of the time the people that are listening to me are coming from a perspective of trying to grow an empire okay so the advice i would give them is different than you if you have a different goal than what they have and that's what we have to get into here this is the way that i look at borrowing money to buy homes or using leverage it will increase your ability to grow wealth which is what i'm going to call offense but it comes at the price of being more risky which is what i would refer to as defense so ideally we want to be able to have as much offense as possible with as much safety or defense as possible and that's what we're striving for but the two are typically mutually exclusive you can't have both at the same time so what somebody has to figure out is how much do i care about risk and how much do i care about growth so for you debra anytime you take out a loan you have to make the debt payment on it and as a new investor you could easily find yourself in a place where you pick the wrong tenant or you buy the wrong property and you're not able to generate rent from the person or you have to spend money to fix things up and now you're in this situation where you don't have enough money to make the payment on the mortgage and you're also not making money from the property and you could lose the entire thing and that's what i don't want to see for somebody in your situation now if you're not working and you don't plan to work that does increase the risk of investing in real estate and the reason it increases the risk is you don't have money coming in from a job in case you make a bad decision or something goes wrong with the property you're sort of operating without a bulletproof vest i would say one mistake that bullet's going to get right in there and it can really hurt you that's what i don't want to see happen now if you're planning on getting a job and you are going to work and you think you can generate decent money that now opens up some doors to where financing could be a safe option for you because even if something goes wrong you've got a cushion with money coming in from work so the first question to ask yourself is do you want to work are you willing to work or is that not the case there's so many scenarios that i could lay out for you but in general if you're not gonna work i would probably advise you to not take out a loan okay just buy whatever you're gonna buy in cash and at least learn how to invest in real estate with as little risk as possible you're still gonna have property taxes you're still going to have homeowners insurance you're still going to have different expenses like repairs and maintenance that are going to pop up but you are having less of a debt service if you're not taking on a loan so that you can kind of learn the ropes kind of like training wheels while learning to ride a bike now let's say you take to this like a fish in the water or at least you become competent at it at that point you're going to make better decisions on what you buy and how to manage it and at that stage i would say taking on a loan to buy property could make some sense because you're not learning at the same time that your risk is high your risk is going to be much lower because you've already learned how to do the job and there's less surprises that are going to jump out for you and if you do that well you may never have to get a job because you can make a career investing in real estate full-time all the money you make can come from the rent but you're not going to do this by just snapping your fingers jumping into becoming an amazing investor you're going to have to start very small start slow start with low risk buy in good areas pay the house off learn how to manage the tenants i would recommend looking for what we call small multifamily a duplex a triplex a fourplex something along those lines if you can with 150 000 maybe you had more i think you said you have 150k you're probably not going to get a bigger property like 10 units it's gonna be very hard to make that work so get what you can get for the money pay cash for it make sure you buy in the right area get a property manager that's really good that can kind of teach you the ropes get that first property see how that goes and then scale from there next question is from yasir in atlanta i'm a 21 year old from atlanta georgia and was trying to see what you do if you were in my shoes i've never bought any real estate i got a good job paying well and i just didn't want to let that money sit in the bank should i start with a multi-family unit how much should i save for emergencies really good here yes here first off this is a situation where you would really benefit from listening to the bigger pockets money show so they get into personal finance how to live beneath your means how to make more money how to manage the money that you have at a more holistic level than just investing in real estate so you should check that out and other people that are in your situation especially younger people that haven't learned how to manage money yet can get a lot from listening to a show like that let those seeds get planted of how to build and grow wealth at a very young age second off before you start worrying a ton about investing in real estate i think your energy would be better put towards finding a career do you know what you want to do are you going to work in the trades can you make good money learning a trade are you in college right now and you plan to get out of school and work a job do you know what you're going to do to make money so making money at work is much less risk than just buying real estate and the best real estate investments typically happen when you're already making decent money at a job and you can afford to take on a mortgage now i'm going to assume here that you have some money saved up you're able to do this you're ready to buy real estate you're financially strong because that's the position that i advise most people to start from if you're not at that position get to that position first but if you are there you should house hack you should look for small multi-family property that you can afford live in the house and rent out the other units or maybe buy a house with a lot of bedrooms live in one bedroom and rent out the other bedrooms when you're young this strategy works the best you're not going to want to rent out bedrooms if you're married if you have kids it's a completely different scenario so if you're still young and you're single which i'm assuming you are you actually didn't mention that buying a house and renting out the rooms is one of the best ways to learn the fundamentals of real estate investing choosing tenants having them sign leases managing people while keeping your risk relatively low biggerpockets has a book on house hacking written by craig kerlopp i would recommend that you check that one out get some ideas of how to house hack as well as google the term house hack and learn some strategies that you can use where you can put a very low down payment three and a half percent get your first property and learn the fundamentals without taking too much risk hi david my name is david also first i just want to say thank you so much for all the content that you put out and all the insert insights that you provide um you've taught me so much and you've really helped change you know my wife and i's life really um so just can't thank you enough thank you thank you so much um just to give you a background we own a number of short-term rentals we earned a few long-term rentals but mainly short-term rentals in tennessee we've purchased them over the last few years they do really well for us cash flow wise we recently purchased our [Music] expensive home here in orange county in california so we uh are actually pretty much using all of our w-2 i work as a teacher my wife works in retail and we're pretty much using all of our w-2 income that's going to go directly to our mortgage we we earn a lot more money from our rentals but we've always thought about cash flow cash flow cash flow you've kind of helped shift our mindset with looking more about appreciation just underlying the benefits particularly the long-term benefits of appreciation so we've really um shifted our our thought about that um but with this higher priced property that we've just bought we're starting to like be in a little bit of two months like do we need some more of that cash flow that may have not been as important um previously um we uh are kind of at a point where we've been able to refinance a lot of those properties so we have quite a lot of capital to be able to deploy that we want to purchase more rental properties with we are in two minds as to do we just keep going with the cash flow just keep on in these vacation markets or do we diversify potentially buy in more of your traditional markets that have the likelihood to appreciate population growth job growth all those kind of kind of things um uh you know places like phoenix or tampa or you know salt lake city those kind of places um you know so so maybe just wanted to get your idea on based on our situation what you would advise i know you've had some people on your on your podcast before talking about um renting by the room just being creative like that we're pretty on top of the short-term rental thing so we feel really comfortable with airbnb so we're more than willing to do something like that even in a more traditional market provided the regulations lend itself to that um but yeah i really want to shift away from the the vacation rental markets that that have been so good to us but then at the same time still want to be able to make a little bit of cash flow so just wanted to get your idea on what you think maybe you could point us in the right direction we're at a bit of a crossroads at the moment and then potentially if you if you have some ideas on on markets i know i mentioned some of those growing markets that we all know about but um yeah just wanted to get your insights on on this particular situation for us and any advice you might have thanks again for everything and uh i hope to hear from you soon thanks hey david thank you for the question all right here's what i'm picking up from the way you went about that you and your wife are not sure what your goal is you know you want to make money in real estate but you don't know how you don't know what you want your life to look like you're not sure what you value the most and because of that you're kind of bouncing around between all of these different options and you're not sure which direction to take let's break down in general the different roads you've got you've got the high cash flow row this is where you're going to try to build up as much cash flow as you can every month meaning the properties are going to generate rental income and your expenses are lower than that so you get to keep that money you kind of get the immediate payoff right off the bat of cash flow in general cash flow comes at the expense of appreciation because you usually make more cash flow in markets where homes are lower price and therefore don't go up as much or you make more cash flow at the expense of more work which would be the thing the short-term rental market where you got to put in more work to get that cash flow then you've got the appreciation row this is going to make you the most wealth in real estate but it comes with the most delayed gratification as well as the highest risk because when you're playing the appreciation game you're not getting as much cash flow or sometimes you don't get hardly any and so you could lose the property more easily than if it was cash flowing very strong and even when it does work out you don't have access to that money it sits in equity in the property until you access it via a cash out refinance or selling the property so the appreciation road as opposed to the cash flow road has less of an immediate payoff it's more of a long-term play then you've got the short-term rental game which kind of stepped into the industry that combines the two of them you're now able to buy in high appreciating markets and generate more cash flow but it comes at the expense of being more active and less passive so here's your problem david you're not sure what you want to do it sounds like you don't want to have to work a lot and you want a lot of cash flow but you also want a lot of appreciation and that's why you're stuck my advice is that you and your wife are going to have to sit down and ask yourself what kind of lifestyle do we want to live if it's all about having more of your time back now i would say you should chase after cash flowing properties that are stronger on that side which are probably going to be small multi-family or larger multi-family that you probably haven't considered you can hire a property manager and manage it it will put off more cash flow and you won't be as directly involved if you say no we're willing to work right now then the short-term rental game is what you should keep doing and you should just find different markets to get into if you can't make it work in the one you're at the more short-term rentals you get the more income you can generate the more money you have to pay someone else to manage it for you and that's one way that you can get your time back another road that you could consider would be the appreciation game where you say hey we're willing to work really hard right now we don't need as much time but when our kids are older that's when we want to know that we've got a lot of money set aside so i can't answer your question unless you know what your goal is if you're really not liking short-term rentals because that was my original thought when you were talking is hey you want appreciation and cash flow that's the perfect mix you got to hire somebody else to manage these properties for you now i'm actually looking for something like that myself i've got a couple short-term rentals now and i plan on getting more i want to hire a person that will manage the logistics of it so if you're listening and you want to make some extra money get paid by the hour message me if you have experience with short-term rentals david you could do the exact same thing i'm looking for someone that has done it before they can manage the cleaners the supplies the reviews they don't have to worry about getting it booked but they do have to make sure it's ready for the next guest that wants to stay in it if i can do this so can you that's what i think that you should be looking for but before you get too deep into that you got to talk to your wife and figure out what you want your life to look like then submit another question letting me know and i'll give you some more specific advice about different strategies or roads that you could take to get where you want hey we've had some great questions so far i love being able to do these episodes so i need more of your questions to keep doing it please go to biggerpox.com david and submit your question there for everyone that has already submitted thank you very much if you're listening to this on youtube please hit that subscribe button so you get notified when additional episodes come out as well as like this and share it with anyone you know who's also a real estate geek at this segment of the show we like to read some of the comments from previously shows we've done and give some airtime to people that were on youtube and participating in the conversation there our first comment comes from daphne hill love these shows david you are a natural teacher and never make guests feel like their questions are dumb or have been answered hundreds of times before thank you thank you for that daphne i appreciate that made me feel good next comment comes from lauren david i would appreciate some bookkeeping recommendations should each property have a separate bank account or use one account for all properties set everything to auto pay etc in my personal situation i have no partners closing on my first short term rental in april and looking to get my second short term rental after thanks well lauren i will try to answer this but i will say i don't know that my way is necessarily the best way and i know that right off the bat how i typically work bookkeeping is that i have all of my single family properties managed in one account so i have a bookkeeper that goes over all the property management statements puts them into a spreadsheet i can see what every property makes or loses and all of the expenses are on autopay coming out of that account as well as all the income goes into it i have a separate account for short-term rentals and the reason i created a separate account is i wanted to keep more reserves in that account than in the other ones because i feel like the income from short-term rentals is less reliable so therefore i offset that risk by putting more reserves in that account then i have a different account set up for my 15 or 16 million dollar property that i bought because it's huge and it needs a ton of money in reserves and i don't want that money to be mingled with the other money because i need to have extra money in there for that really big property where the mortgage is 80 000 every single month then i've got a different account set up for my real estate sales a different account set up for money that comes from the one brokerage and and so on and so forth i run a private mastermind where i teach people how to build wealth and how to be entrepreneurs and so like that has its own bank account so i like to keep mine basically by income stream is how i set up my bookkeeping and i have different accounts for the different sources of income now there are some sources of income that kind of all fit together like all of the single family rentals or book royalties that i would receive okay there's times where or maybe speaking fees i can put all those into the same account but i typically put all the money into the same account when there's not expenses associated with it so for example i don't have expenses associated with book royalties from books that i've written there's nothing that i'm paying for that so i'm okay to stick all that into an account because there's nothing coming out there's no risk associated with that that's just kind of the way that i set it up if i have an income stream that has some risk associated with it i put it in a separate account where i can keep more reserves in that specific account and then i have a spreadsheet that my bookkeeper has to take all of these different income streams and all of these different businesses and take my net profit from every profit and loss and put it in the column for that income stream then i look at that every single month and i see hey which properties are doing well which asset class is doing well where am i losing money where am i making money and i kind of put my time and energy towards the stuff that i think is making more money now i'm in the process of switching bookkeepers right now and it's taking them a long time to get up to speed so it's probably been three or four months now i've been flying blind where i haven't been able to see yet how much of these businesses are making and i hate this feeling it's just the worst every time you have to switch over but it was necessary because i'm working at a faster speed now than the person that i had he could keep up with so i don't know that i answered your question but hopefully by giving you a little bit of insight into me and my life and how i'm structured that right answers will make themselves known for you our next question comes from william khan love the show just giving a comment to support you guys thank you for that william appreciate it next comment comes from cd main wow finally the audio isn't screaming for help hey we're slowly getting better shout out to the production team at the bigger pockets podcast for making me sound like a normal human being i tend to move around a lot when i talk i get too close to the mic i get further away from the mic i don't know why i do that but i just i'm a person that can't sit still do you guys have that problem do you ever get a phone call and you start talking on the phone and you get up and start walking around that is me every single time i constantly walk around the parking lot of the area where my offices are because i can't sit still and talk on the phone if that's you if you do the same thing tell me in the comments tell me i'm not the only crazy person that has this compulsion to move around and walk when i'm on the phone and then also let biggerpockets know that you love the production team that they're doing a great job that my audio sounds good and that they got me looking fresh last comment comes from randoms on my mind wow that house hacking topic was fantastic i didn't think about the math behind house hacking i'm going to look into that well that's what i'm here for it's to open your eyes as to new strategies that you might not have understood because i've helped so many clients with house hacking and i've done it myself that i have some unique insight into that that not everybody has so if you live in california and you want a house hack reach out let me know i'd love to be able to help you do that same thing goes if you have a house you want to sell or if you need a loan i would love to work with you and what i'd love even more is if more of you leave comments like this letting us know what you like about the show so please tell us what hit tell us what you like tell us what made you think tell us what worked and then even say hey if i don't like this part of the show that's okay let us know that too so if you're not following on youtube make sure you do so and leave me a comment hi david from melbourne australia i'm jenny i'm a professor and a real estate investor with properties in atlanta los angeles and melbourne i'm wondering if biggerpockets publishing would be interested in a book i'm writing called investing in real estate like a professor the book is aligned with the goals of bigger pockets to help people make good decisions about getting started and building a sustainable portfolio in real estate professors have a particular way of looking at the world which i think a lot of investors and would-be investors will relate to our perspective weaves through the lessons of history the dilemmas of the human condition and applies these big ideas to our own lives i started writing it with other professors in mind as my audience but i think now that the book would also appeal to a general audience like biggerpockets where learning is centered in the process of investing one thing that professors do in our jobs is publish so i have some existing relationships with book publishers but i've read all of your books which are published by biggerpockets my questions are why did you decide to publish your books with bigger pockets instead of a traditional publisher and how would i contact biggerpockets publishing to find out if they have an interest in my book thanks a lot david all right thank you jenny man this is a very unique question that i haven't been asked before in a public forum so first off my producer of the show reached out to you to put you in touch with the bigger pockets publishing team so hopefully that goes well as far as the next two questions what do i think about approaching book writing i think what i'm getting at is you're asking what do you think about approaching writing a book from the perspective of an individual person written for their specific scenario and then why did i choose bigger pockets publishing and the answer to both of them is oddly enough the same answer so i think when you're learning how to invest in real estate you shouldn't just be learning about well how do i do it because there's a million ways to do it it's more what is my goal and how do i make this work for what i want and that's the thing is every person is different most of us have some goals that are similar we want freedom we want our time back we don't want to be stuck in a commute that's pretty much an overall general consensus we can all agree with but there's some people that really want to make a ton of money and they're limited in their ability to do so at their w-2 job there's other people that just want a little bit of money but they want it to come easy there's other people that know they have a creative itch that they want to scratch in real estate helps them do it and then there's other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people so when you're writing a book it is best to be asking yourself well who's my audience that i'm writing this book to and i'm writing it from to a perspective that they would understand and i think that that's what you're getting about when you're talking about writing it from a professor's perspective well the reason that i publish my stuff through bigger pockets is the majority of people that follow me trust me listen to me respect me they're people that are in the bigger pockets community so rather than writing a very niche topic where i said okay i'm going to write about like say how to be a real estate investor as a first responder because i had a career in law enforcement i was able to run on a broader topic like long distance real estate investing or the burr method but give it to a more specific audience that already was looking at real estate from the same perspective of me and that's why bigger pockets publishing made the most sense the people that were already following me were bigger pockets people the people who read my books typically aren't finding about me for the first time just from the book they're finding about the book from this podcast from the youtube channel from social media from my involvement with bigger pockets in general and that means that they're more likely to get something from the book because as i hear people say i hear your voice in my head when i'm reading it or they've heard me answer questions like this before so they know my background or my philosophies when it comes to different real estate investing strategies so that's why i went with bigger pockets publishing i also just really like this company they they have a good heart they mean well they're trying to help people empower themselves they're not looking at giving people a handout they're looking at giving people a hand up all things that i really can get behind and like so it's also fun frankly to make money for the company that i love working for so thank you for asking that question and i wish you the best of luck on your own book writing endeavors all right the next question comes from jones in my hood the bay area california hey david my question is about a heloc for rental properties heloc stands for home equity line of credit i recently bought a single family in oakland montclair hills which i closed on earlier this year even before closing i gained over 200 000 in equity on the property i bought the house for a million the property is currently rented on a one-year lease agreement i was looking to tap into this equity va heloc to grow my real estate portfolio i also have a good amount of equity in one of my rental properties in cincinnati my loan balance is 85 000 and i estimate property values is around 180. i've been researching a bit and i found it's difficult getting a heloc on a rental property why is this the case and is there a way around it i don't want to do a cash out refinance because i have a pretty good rate on these properties and i haven't found a property which i would like to buy yet i don't want to have cash sitting in the bank either so my preference is for the heloc well first off congratulations on that property that you're able to buy i work in that area and montclair hills is a great area the fact you got something for a million means like you did really good that's a pretty low price for that that area second off let's talk about why a heloc is hard to get on an investment property so what a heloc is is it's really a second position mortgage on a home so the lender's only going to give a second position mortgage if there's enough equity to support paying off the first mortgage and then paying them off if something happens and the house goes into foreclosure most helocs will basically take the value of the home subtract what you owe on that home and let you borrow up to 80 of the difference so you might if you only have 20 inquiry in the in the property you might not be able to get a ton out of a heloc on that home now as to your question of why are they hard to get on investment property the reason is because to a lender's perspective an investor is more likely to let a house go to foreclosure than a person who lives there so if someone lives in the property as their home it's perceived as being more secure because people would let all their properties go except for the one they live in that would go last so the risk profile to a lender is higher if it's an investment property now there are still some banks that do it but you're generally looking for credit unions in the area of where the home is that's where i have found luck is going to credit unions to get heloc's on investment property now i also understand you don't want to have cash sitting in the bank so the heloc seems like your best bet i will give you this piece of advice interest rates are going up and helps typically are adjustable rate mortgages everyone i've ever seen has been adjustable rate if you take out a heloc and you use the money just know the payment can keep going higher as interest rates keep going higher and if you're running your numbers based off of whatever the payment is when you first take out the money you could find yourself surprised when the payment goes up later hey david mason here from austin texas wanted to say thank you for everything you guys at bigger pockets do and for this show that you all provide to to like-minded investors i've been listening for about nine months that have been such a huge fan it's changed a lot of things for me so so thank you for that and um i've gotten to the point where i've got to now submit my own question because it's been so valuable um a little bit of background about me and my situation i'm 24 i sold my tiny home in january for a good profit and was able to kind of use that to start a short-term rental here in austin texas with my girlfriend and the good problem to have is that it's done so well that we were just so hungry to do it again and rinse and repeat so to say we had quite the time getting the conventional loan just because i am 10.99 and uh you know banks love w-2 income and we were able to get it done of course but for that reason debt service coverage ratio or dscr loans are very attractive to me now um the problem with resources and with those now is that of course a lot of them are requiring 15 and usually 20 down so my main question is is there a way to creatively finance say half of the down payment or the range that we're kind of looking in is you know nicer homes to instead of hitting a so-called triple or going for a triple trying to hit a home run with the next one um and those kind of range of homes 20 would be out of our resources as of right now and i don't want to just wait and save for that long um so i want to know if if there was a way or creative financing via a hard money loan or um obviously cash out refinance is an option but we're within that six month period where it's we gotta wait again but if there was an option to creatively finance say 10 of the 20 of down payment or equity kind of in the deal um if if lenders or someone out there did that or if you knew of any kind of creative ideas um obviously there's friends and family but i didn't know if there were other options or anything but but yeah i appreciate again what you guys do and any and all input would be greatly appreciated thanks all right mason you are in a position that many people are in where it's not enough just to be financing eighty percent of the value of the property you're hoping to finance 90 95 of it maybe a hundred percent of which means you don't have a big down payment now the easiest way to solve this problem is to get a primary residence where you can put five percent down or three and a half percent down on an fha loan and you don't have to borrow the money but if you're looking to buy a pure investment property you do run into this problem and here's why it's designed that way in general only people that already have a good amount of money are the ones that are buying investment properties they're literally investing the down payment that they already have into a property which is where they set it at 20 but you're looking at investment property from a different perspective you're not wanting to invest money you already have you're wanting to grow wealth through an asset and you're wanting to borrow other people's money you've got a couple options so from the lending perspective you can look into an 80-10-10 loan that's a loan where you borrow 80 of the property's value on your first position loan then you get a heloc or a second position loan for 10 of the remaining balance and then you put the other 10 down yourself so if you find a mortgage broker that you feel comfortable with you can ask them if they have access to 80 10 10 loans you can always reach out to us at the one brokerage and we can look into that for you as well you also have the option of borrowing money from someone else so if you're going to be putting 20 down on a property what if you put down 10 and you borrow the money from somebody else to put down the other 10 and you split ownership 50 50. that's another option if you don't have a ton of cash you're right to look into the debt service coverage ratio loans because you're working as a 1099 but those are typically going to be 20 down loans there was a time where we were able to get them for our clients at 15 because we did a lot of volume those have gone away right now they may be coming back later so when you're someone that does a lot of business with us you've done more loans you've sent us referrals like now we sometimes have access to getting you those better loan programs if the lender is willing to give them out because we do a lot of business with them but you can't count on that that's what i'm getting at those are oftentimes like a special circumstance so your best bet might be to make other people money through what you're doing give them a chunk of the equity in exchange maybe they put all of the down payment in and they get 60 of the equity and you get 40 of the equity in the cash flow for finding the deal and managing the whole thing but you're gonna have to come up with something like that where you find other people that have money and you give them something to make it worth their while if you don't have that cash and then just remember as you get older as you do better at work as you start making more money you will become less and less dependent on other people until you can buy real estate with your own money all right our last question comes from john paul kessinger in mount hope west virginia hey david i'm a paid firefighter in a small town getting paid via 1099 for my department i'm looking at getting my first rental i'm concerned that my 1099 may be an issue on getting a loan i also have one mark on my credit from an unpaid medical bill from four years ago i paid it two years ago but it's still showing up i have enough cash for a 20 down payment i'm worried about rising interest rates and whether this is a good time to start also do you have any advice on what i should do to get pre-approved for a loan or where well that's a silly question there's mortgage brokers everywhere that you can talk to about getting pre-approved if you'd like reach out to me and i'll get you in touch with my team that does my loans happy to do that for you we're the one brokerage because we're the one brokerage that can do it all now as far as your question about is now a good time to invest it depends on the market so i will say right now i don't really know much about west virginia i don't own any property there and i don't know anyone else that does either so i can't tell you if it's a good time to invest in your market but in the markets that i'm investing in i think this is the best time to invest now let me tell you why and the perspective i have and then you can decide for yourself if you agree so i am investing in markets that i think are going to be very strong for the future more people are moving there than normal okay so there still is not enough supply to keep up with the demand that's going to push rents and it's going to put prices of those assets higher at the same time rates have gone up meaning a lot of people are scared so there's less buyers competing with me for these homes than there was before so i don't have to go in as fast or as aggressive as i was going in specifically because other people are getting out so i have all of the the long-term upside with inflation that continues to spiral out of control with the near-term upside of less competition so i'm going at it hard i'm looking to buy some really expensive properties very soon because these interest rate hikes have caused everybody to slow down now depending on when you're listening to this my this advice might be of a different value but the fed has said they're going to continue to raise rates which means when everyone who goes oh no interest rates went up i don't want to buy real estate when they realize that they're going to keep going up today's rate that feels expensive will seem cheap and when the rates seem cheap everyone's going to jump back in and you're going to get another flood of people that are all trying to buy real estate so i actually think that this is kind of the best of both worlds this is a unique opportunity this is the same thing i saw when i bought when i bought my maui condos those have both gone up between three and four hundred thousand dollars each in about a year since when i bought them because i recognized the same thing the sheltering plays happened a lot of people thought oh don't buy real estate there's a crash coming i saw the window i jumped in when everybody else wasn't jumping in and boom i did really well on those so that's my advice that i would give to you also if you're worried instead of putting 20 down on one house what if you put five percent down on a house to live in and then next year did the same and then next year did the same and spread that money out over several properties and just house hacked that would be the best way to reduce your risk if that's what you're looking to do and john as far as your 1099 income if you have a stable work history where you've done it and you've claimed this on your taxes which i'm sure you have you can get approved to get a loan with 1099 income it just takes more time it takes more effort for the processors to get all your information together to submit it to the underwriter the underwriter has a lot more questions that they have to verify because you're probably making different amounts of money every month if that's not the case it's even easier but don't let your 1099 income deter you just need to find a mortgage broker and let them know your situation and they'll tell you what they can do for you your other option is a debt service coverage loan where they're going to use the income from the property instead of your own income here is what i would say for someone in your position i would advise you to get a 30-year fixed rate and not an adjustable rate mortgage even if the teaser rate is lower because unless you're in a position where you have overtime that you can work or you can earn more income you don't want to end up with the loan that's going up over time faster than you can make up the difference in money to get it paid all right that was our show for today i want to give a big thank you to everybody that submitted a question and i want you to do the same please go to biggerpockets.com david and submit your questions there so that i can answer your question and we can have more of these seeing green shows to learn from if you enjoyed this please let me know in the comments and if you say something funny insightful clever we will make sure that we read it on a future episode of this podcast so that other people can hear what you said and then let me know what you think of the show if you want to hear more questions about a certain topic let us know my production team will read those comments and they will find the stuff that you're looking for lastly please subscribe to us on youtube and share this with someone else that you think might benefit from hearing it if you would like to get in touch with me or follow what i'm doing you can find me on instagram facebook linkedin twitter pretty much all of them at davidgreen24 there's an e at the end of green or you can find me on youtube at youtube.com davidgreen real estate go give me a follow there thank you everybody if you've got some down time go check out the bigger pockets website they have an amazing forum with tons of questions being asked literally the best in the world they also have a very very strong blog section that i used to just read religiously when i was new learning how to invest in real estate i read every single blog that ever came out and learned a ton from that biggerpockets has a lot to offer you more than just this youtube channel or just this podcast so go check it all out [Music] you

Channel: BiggerPockets

Views: 38,310

Keywords: paying off your mortgage early, pay off mortgage early, should i pay off my mortgage early, pay off mortgage, pay off mortgage fast, real estate investing, real estate investor, heloc, home equity line of credit, house hacking, house hack, buy a house in cash, should you buy a house in cash, should you pay off your house, how to get prepparoved, cash flow, rental property, rental property investing, financial freedom, financial independence, biggerpockets, seeing greene

Id: r-wwK2cLnI4

Length: 43min 25sec (2605 seconds)

Published: Sun Jun 12 2022