Why Rental Property ROI Isn't As Important As You Think

this is the biggerpockets podcast show 603. i like to take a bigger perspective i like to look at the whole country and say what's going on and how does that affect individual markets and then when i find the market that i like that's when i get involved and say what's the roi on this property versus that i think my humble opinion too many people start by looking at a property finding what cash flows and then trying to justify buying it based on whatever macroeconomic stuff that they look at or ignore what's up everybody this is david green your host of the bigger pockets podcast here today with a seeing green episode on today's episode i will take your questions your comments your concerns what the people want and i will do my best to give an answer taking my advice and perspective into account about what they can do to overcome their challenges and how they can build wealth through real estate if you are new to this podcast i'd like to invite you to check out biggerpockets.com this is the best real estate investing platform in the world we've got podcasts like this where we interview people that have been successful real estate investing and share their secrets as well as bringing industry experts to educate you on individual components to real estate investing we've also got a huge forum with tons of questions that you can ask or read that people have asked in the past as well as an amazing blog where you can read tons of articles written by other real estate investors that all want to help you do the same there's also over 2 million members that are on the same journey as you i'm david green like i said before and i will be your host for today's episode this was fantastic in today's episode i actually have been confronted with a little bit of smoke so there were some unhappy people that didn't like some of the comments that i made about cash flow and i will address that about halfway through in today's show we're also going to cover topics like scaling quickly without using hard money or what your expectation should be with how to scale safely we talk about vacation areas or areas that people are moving away from and how to find the right personality of the area that you're in so you can pick the right strategy we talk about looking at a deal whether you should sell it or whether you should keep it how much equity you have in the property and where your biggest challenges are going to come from and then we talk about should i keep saving to buy in this market or should i find creative ways to be able to get a deal now before prices get higher and more look today's show is from the people for the people you guys submitted some great questions and i do my best to give you the answers that i possibly can and then explain the reasoning behind why i'm giving that answer i hope you guys love it i hope you join me on this journey and continue liking it and please stay connected you can follow me online at davidgreen24 you also can follow biggerpockets themselves on facebook on linkedin on instagram on youtube they're everywhere so just put bigger pockets into a search engine and see what you get there's a bookstore with tons of good content if this is the first time that you're coming here you're gonna love this and if you're someone who's returning thank you so much for staying loyal for taking this journey with me and for following along for today's quick tip i'm going to ask all of you that own real estate to take a look at your portfolio ask yourself how hard your equity is working for you we have seen a big increase in prices as well as rises in rents but home values and the rent you can get for a property do not appreciate at the same pace oftentimes values outpace rent when that happens you can sell a property and buy two or three more spread your your equity out over several different properties so now you're going to be appreciating even at a faster rate and most importantly increase the cash flow that's coming back to you so we have a metric that we call return on equity where you look and say hey with the money that this property makes me in a year if i divide it by the equity in the property how high is my return many of you will find if you look at your current portfolio your equity is not working very hard for you i'd love for you to sell that property and go buy a couple more get that cash flow higher and spread the wealth out over several more properties all right that's all i had for the quick tip let's bring in our first question hi david my name is sharon pace i'm with 4p homes best in galveston texas and looking to figure out better ways to scale in our business we've flipped four properties already we have two more that we burred into short-term rentals but looking to find out how how we can scale faster um but yet smarter uh in this i guess a market that we're in um we've been using hard money and private money but it's we're finding it's harder to pay back our private money lenders when we're trying to refinance out of these deals so looking to figure out how to gain more capital um and scale a little bit faster thanks hey sharon thank you so much for this question i love how honest you're being what i'm hearing you say is hey we got a good thing we're buying short-term rentals that cash flow really well so what obviously we want a lot of them but we're not able to get them as quick as we want because after we refinance at the end of the bur the repeat the last r is kind of getting slowed down because we can't pay off our entire hard money note that we took to buy the house we can only pay off part of it which means it's tougher to get money to go by the next deal so let's break down how you ended up in this situation and what my advice would be for you to improve it first thing i want to say is um there's this this theory that in most things in life you're looking for three benefits but you can only get two so for instance if you want a contractor you want one that works fast does a great job and uh is cheap so those are the three things you want pick two of them because if they work fast and they're cheap they're not going to do a great job if they do a great job and they work fast they're not going to be cheap that's just the way that life tends to work because if you're really good and you're really fast you can now charge more for your services so you stop being cheap and so at different stages in our investing career we have to value different elements differently like when you're new cheap probably matters more and maybe fast matters more but you don't get great quality of work and then you start to want more quality of work and you realize the speed's going to go down and then ultimately you realize price is the least important you want the other two so let's talk about how i look at scaling you can do it quickly you can do it safely and you can do it profitably which of those two do you want to highlight as far as what you're going to do because you can't do all three if you want to do it fast you're going to sacrifice on doing it safely or on doing it profitably if you want to do it profitably you're going to sacrifice on doing it safely or fast so here's part of where i think that you may have been led astray um there's a couple rules to burr a lot of people think that when you bur you need to pull a hundred percent of your equity out every single time all your capital or more to put in the next deal and if you don't get that then that means you did it wrong i don't know where this came from because i wrote the book on burr and i say that makes it a home run deal if you get all your capital out you crushed it you should never expect every single time you swing the bat to get a home run if you normally were going to put down 25 percent and you leave 16 in the deal even though you may think you failed you're still better off than if you put down 25 if you leave 11 in the deal you're still better off than if you put down 25 or 30 percent so maybe your expectations when you first started to think about scaling were off because you thought you were going to buy a house fix it up rehab it pay off all the money get all your money back and bam be right into the next deal and you're finding that adding value to real estate is harder than you thought i think a lot of people are in this boat and here's where i think that that where why i think that happens where that comes from when you're evaluating real estate the easiest part to evaluate tends to be the cash flow i can look at the income the expenses are relatively easy to control and understand the only expenses that are really hard to control would be things like vacancy and repairs the rest of it more or less you can sort of account for it so cash flow is the easiest thing to calculate and therefore gives us the strongest feeling of security the arv man that stuff you depend on an appraiser and you don't control it you don't know what comp they're gonna pull from the rehab wildly unpredictable sometimes they go fast sometimes they go slow sometimes they find stuff sometimes they don't sometimes they come back and say hey we actually don't have to fix that it'll be cheaper other times they come back and say you need to borrow a whole bunch more money there's a lot more that's wrong rehabs are very tricky to control now in a burr it's all about the appraisal and the rehab you're adding value to the property through the rehab and then you're hoping it appraises for as much as possible to pull the money out and this is where bur investors get messed up is they approach it like buy and hold investors that are only having to calculate one metric which is just cash flow we're having to juggle several balls as a burn investor you're having to juggle the cash flow you're going to have at the end you're having to juggle the rehab and how you're going to add value and then you're having to try to make sure that you get the highest appraisal possible and with more balls in the air it's more likely that you're going to drop one and if you look at it like you have to have a perfect finish you're gonna think you're doing something wrong but you're not doing anything wrong you're still better off than the traditional buy and hold investors if you're leaving less money in the deal than they did you're just not going to be able to scale as rapidly as what you thought now what i think that you will find is as time goes by rents go up your operating system becomes slicker smoother and more efficient so your expenses go down and you will start making more money on these prof on these properties they will become profitable that will give you more money to buy more property with so if you don't have a perfect bur and you end up still owing some money on the note you'll have cash flow from the properties to make up the difference in what you weren't able to pay the hard money lenders that you're talking about basically if you give yourself a couple years to build up some momentum you're gonna find that what you think you don't have right now will be naturally happening and i say this to people all the time is they just think it's going to be easier than it really is to get started every new agent thinks that they're going to walk in and in their first six months they're going to sell 12 homes and if i say it's going to be hard they go okay maybe in my first 12 months i'll sold 12 homes and then they find that they don't sell maybe one or two houses for the whole year it's very tricky but when you've been doing it for 10 years it's very hard to fail you just have leads coming in all the time all these people know who you are and they're just coming to you and you actually need some help with your business so remember that as you're building your portfolio it will always be harder than you thought in the beginning but it will get easier than you thought the longer that you do it okay next question comes from nadia chase this is a written question number one what do you think about investing in an area where people are moving away from like joshua tree california and the surrounding areas number two where do you research whether or not a market will appreciate over time all right let's start with question number one here nadia it's a bit tricky because you're sort of asking two different questions you're saying well you literally did ask two questions but part one was two different parts you're saying what do you think about investing in the area that people are leaving and then you're saying what do you think about joshua tree and those are actually different questions i'm largely opposed to investing in an area where population is decreasing so if in most cases if you buy real estate and you have significant reserves and you do it wisely you're you don't lose unless the one achilles heel you can't get a tenant so if half the population was abducted by aliens and just disappeared if um you see what happened in detroit where the entire industry was based on one table leg and the auto industry collapsed all those jobs leave there was nothing you could do at that time if you owned in detroit to not lose money there was no tenants nobody was living there so you absolutely want to pay a lot of attention to where are people moving how much rent are they paying what kind of wages are they earning to determine what kind of rent they can pay what jobs are paying those wages and what's moving to those areas i talk about this all the time which is kind of part two of your question but joshua tree is a vacation destination that's what makes this different people largely buy short-term rentals in that area so i don't think i'd be looking at are people leaving joshua tree i would be asking of the population that vacations in joshua tree which largely are going to be living in southern california the los angeles area how many of them are leaving because people leaving an area doesn't necessarily change real estate values a whole lot it depends on the demographics of the people that are leaving so in the bay area there's a lot of expensive housing that's paid for by people that are executives of really wealthy companies like the google the netflix the amazons if those companies move their headquarters out of silicon valley i would be very concerned about the luxury real estate i would think it would have to change because the people who own it are leaving the state now let's say that people are leaving the state that are at lower income brackets that tend to be people who rent they don't own i would be concerned if i own some of the low-income multi-family properties in the area because your tenant pool is the one that's going to be leaving so the question i think you shouldn't be asking is are people leaving southern california because yes a lot of people are the city of la is is falling into disrepair there's a lot of people that are very unhappy about how it's being run i don't know it'll stay that way right at some point usually the pendulum swings the other way and people come back but for right now that's true the population is decreasing but we have such a shortage of housing it's not really changing home prices we still have more people that want to buy than people that want to sell even with everyone leaving and that's why we haven't seen a decline in prices so the question would be are people leaving southern california that would vacation in joshua tree i haven't seen any indication of that being the case the vacancy rates are very low for that area the demand is very strong um i think uh people that host this podcast uh rob abasolo and tony robinson are literally building and developing uh a lot of tiny homes in that area and there's a ton of demand so it's not as simple as are people leaving or are people coming in you got to look at what type of people are leaving and coming in what demographic they're in and what type of housing that they are using as far as where i research that well a lot of it to be fair i learn from people i know in the industry that do the research so i'll spend a lot of time talking to multi-family people that are super good that have to know this type of stuff and i'll ask them what they see and they'll just they'll tell you everything right these guys are analytical nerds that love to talk about it so i get a lot of my information from there but i know they get their information from places like the u.s census bureau and even places like um like online news sources like fox business news or cnn money yahoo finance those types of places will often post articles that talk about where people are leaving and where they're moving to where home prices are going up and why so the i as a real estate investor i'm a little unique in the sense that i don't just focus on what's my roi on this one property if i run it on a calculator i like to take a bigger perspective i like to look at the whole country and say what's going on and how does that affect individual markets and then when i find the market that i like that's when i get involved and say what's the roi on this property versus that i think my humble opinion too many people start by looking at a property finding what cash flows and then trying to justify buying it based on whatever macroeconomic stuff that they look at or ignore so if you fall in love with the property because you really want that cash flow but it's in the detroit you find yourself wanting to buy it even if the numbers are saying don't do it so i just removed that temptation from my life i look at the big picture i see what's going on in detroit versus what's going on in birmingham alabama or what's going on in madison wisconsin or what's going on in lakeland florida and i say hey i like those areas then i niche it down to which city would i want to buy in or what part of town then i niche it down to what price point did i niche it down to what type of property then i need to down to what can i actually get under contract instead of the opposite way so hope that that helps you a little bit and good luck in your investing journey hey david i'm a newer bigger pockets podcast listener and recent pro member looking to start building some momentum now i currently live and runs in new york city my career allows me to work remotely on the east coast now i've been wanting to relocate out of new york city given the cost of living here um but i still want to be in a city with a strong social scene and quality of life so i think boston dc north virginia richmond rally kind of kind of deal now here's my question comes in i'd like to start some real estate momentum by investing in a duplex or triplex to relocate into now given where the market is today for these cities and that they're not in close proximity to me right it's hard for me to scope out and evaluate rental opportunities what would you recommend for somebody looking to start their real estate journey while relocating should i stay patient be creative continue looking for that duplex triplex remotely or perhaps invest in a condo in one of these cities instead and continue my rental hunt when i'm living in this city i'd like to invest in thanks david all right thank you mike this is a very practical question and i like that you're asking it so if i hear you correctly you're saying i want to leave new york and i want to move to one of these other cities should i go buy the duplex triplex fourplex that i want so i can househack in that city and stay here until i find it or should i just go buy a condo in that city and live there and then start looking for my next property once i'm already there i don't know that either of those are your best options or your only options i think you can get a lot of work done from where you are my advice would be you start looking for people to help you i don't know this because you didn't mention it but it sounds like you're doing the typical consumer i go on zillow i go on realtor.com i look at houses i try to figure it out i call that analyzing it even though i'm not sure what i'm supposed to be looking for i don't know the area i don't know if i'd want to live there i spent a bunch of time noodling it in my head and by the time i come to some kind of conclusion somebody else bought the property i think we could just improve your system i think the first thing you need to do is find an agent in that area that you feel comfortable with that's going to hunt them for you i think the second thing you need to do is go visit whichever city you think you want to move to and get to know that area because you're going to be living there now i do say in long-distance investing you don't have to visit the area you're going to you don't have to visit the property right there's still some value in visiting the area if you don't know it but that's for investment property if you're me living in it and you want to know what type of places it's close to you want to know if you like the restaurants that are close by or how busy the streets are this is your quality of life so you definitely want to go visit that place and see which part of town you want to be in so when your realtor says hey i found a triplex it's over here and they see it on a map you can tell from that map what you're actually getting and if you like that part of town now when you visit meet with the realtor maybe meet with a couple realtors if you don't get a good vibe off of the first one then when you go back to new york they will send you the properties that you could potentially buy now you're in a position where you know if you're gonna like it analyzing it makes a lot more sense you can put one under contract i don't think you need to move to the area and buy a condo to learn the area i think you can visit it now if you're the type of person who just says nope one or two visits won't do it i need to really soak in the entire atmosphere and get a feel for it then yeah moving there and buying a condo would not be a terrible idea you just got to make sure that the condo you buy has a solid hoa they're not in any kind of trouble it's in a good area where you think that if you decide you want to rent it out you can still make some money on it that there's some demand i would recommend buying a two or three bedroom condo not a one-bedroom condo so you can rent it out by the bedroom after you leave because that they're a little bit tougher to cash flow but but i don't think that the two options you presented are your only options build your team find out from your lender how much you can afford and what your payment is going to be go learn the area find out which parts are zoned for multi-family because that's where your duplexes triplexes and fourplexes are going to be and go drive those areas and see if you like it see what's in within walking distance and then tell your realtor here's the preferred places i like to live tier one tier two tier three send me the listings that come from there and you can take it from there good luck on your search buddy all right we've had some great questions so far thank you for submitting these questions i've got some comments that i'm going to read from previous episodes i'd love it if you could leave me comments on this episode so if you're watching this on youtube please tell me what you think what you uh would like to see what you didn't like and what you did now i've asked this on previous episodes and you have been faithful in responding we actually got a lot of comments um on a particular show that i did where i talked about uh cash flow and how i think people have erroneous views of cash flow so one of the one of the comments comes from all phase landscape and building services inc and they said i really am disturbed by how bigger pockets has abandoned cash flow as the most important thing in investing feels like they have gotten too rich or to california to remember the fundamentals for smaller investors literally everything said in this podcast was in stark contrast to brandon's freedom number concept and the fundamentals laid out in his book i understand the game has changed since then but only because we're at a different point in the cycle it feels a lot like 2007 right now and i'm not banking on appreciation if it happens that's just a bonus why is cash flow unreliable if you are analyzing setting aside money for management repairs capex and fixed expenses now this i assume is coming from when i talk about how so many people or maybe too many people think that they're going to buy a handful of properties and retire and not have to work anymore and if they just find a couple properties they can be done and we're seeing massive changes in our economy with inflation in rules regarding real estate and in the way that real estate investors are being treated the tax code could be changing i think this is just my opinion that the way things have worked for a long time is going to be changing i think that there could be a point where the way real estate investing work changes and i'm trying to put people in a better position to not end up losing their properties now here's my opinion this is not bigger pockets it's just me as david cashflow is amazing i love cash flow i invest for cash flow i like cash flow but i believe cash flow in residential real estate is intended to stop you from losing the property it is not intended to grow you wealth so when i what i'm getting at here is if you're cash flowing 200 or 300 a month it takes a lot of properties to be able to have a significant amount of wealth that gets built from that cash flow and if your goal is to quit your job it takes a lot of properties before you can quit your job if each of them is making 200 or 300 a month and when you own that many properties like i have it becomes a full-time job to manage those properties so what happens is you trade one secured job for one less secured job because your w-2 income is reliable in most cases and your rental income is not in almost every case and when i say it's not reliable what i mean is things break you didn't anticipate tenants trash your house that you couldn't have accounted for you don't know what's going to go wrong and everyone that's bought rental property will admit you catch them at an honest moment when they first bought their property they didn't do as good as they thought things broke that they weren't aware of this still happens to me today sewage pipes that you didn't know that you should get checked on end up leaking and cause significant problems trees need to be pulled out of a property that you didn't realize there's a rat infestation that you didn't realize like lots of stuff happens and if you get a couple properties and quit your job thinking that hey i'm making 300 bucks a month in cash flow i'm good on six different properties you'll find that 300 in cash flow rarely comes in every single month and what i'm trying to advise people against is prematurely celebrating the win you've got a couple properties that's great you've got some momentum you're learning how to be a better investor you're building your skill level don't quit and become a vampire sucking all that cash flow to pay for your living expenses right away continue to build when i talk about appreciation being how people build wealth that is partly referring to the value of a property going up you will build wealth faster from that than cash flow but i'm not only referring to the value of the property i've said many times appreciation applies to cash flow too the properties that i bought that cash flowed five hundred dollars a month when i bought them now cash flow two thousand dollars a month okay over like eight to ten year period i bought them in areas like california like arizona like texas that were growing people were moving their wages were growing in those areas so rents went up faster there than they did in other parts of the country where nobody was moving to once they're going at 2 000 a month instead of 500 a month i can now start to rely on that cash flow more if i want to quit my job like i did when i quit being a police officer and i got into a commission based system that cash flow was much more reliable for me to do it and that's all i'm trying to highlight here i no one at bigger pockets and none me is not saying don't care about cash flow we don't know what's going to happen with our economy we don't know if a recession is coming we don't know if laws are going to be passed that limits how much you can raise your rent or how much you're allowed to make as an investor there's already talk in california of um like taxing short-term rental income an extra 25 percent by the state if you ran your numbers and you said hey i'm good to go i can retire i have three short-term rentals and then that law gets passed you're looking for a job again so i'm just trying to keep everybody safe i'm not saying don't chase cash flow i'm saying don't let cash flow become the savior to the life you don't like continue to build your skills continue to work hard find ways to work at things that you like more don't get a handful of properties and say oh i'm done i'm at the front of the race and i can stop that's what the hair did when it was racing the tortoise you want to be the tortoise slow steady continue to live beneath your means don't let lifestyle creep come in continue to accumulate properties over time you fix up those properties less things break you get more stable tenants you realize which areas work and which areas don't your rents increase your cash flow grows and then it stabilizes and then live on the cash flow all right next comment comes from john moore my first few properties didn't really cash flow much 10 to 15 years ago and i used to feel lucky if i could use some of that money to go out to dinner or buy some new tools once in a while but now i live on it and don't miss running my painting business one bit all right so oddly enough john here is sort of highlighting the point that i just made when he first bought the property for the first 10 to 15 years they didn't cash flow well and if he had been looking at hey i need to buy a property that after all my expenses and setting aside money for maintenance and setting aside money for vacancy and setting aside money for capex and setting aside money for whatever uh surprises come and having the money that i need to spend myself on this property he probably never would have bought anything because real estate tends to not work that way when you first buy it but buying it and continuing to run his business he bought more and more properties and i presume he got better at doing it he bought him better areas he got better deals he had better management and after 10 to 15 years just like what i said his cash flow probably grew similar to how mine did and at that point john exited the game and he said i don't want to run the painting business this is the right way to do it everybody now a lot of my advice is coming from the fact that we don't know what the government's going to do they're printing so much money we don't really know if we're at the top of a cycle or if we're actually at the bottom of one they might print a bunch more money and we can have another run in prices just take a second and think for a minute what was housing worth 30 years ago when someone that you know bought their house 30 years ago what did they pay all right my parents bought their first house about 35 years ago in manteca california and they paid 62 000 that house right now would probably be worth 500 to 600 000. so it's gone up times 10. that's without all of the money that's been printed and the ridiculous amounts of inflation we've had so i would expect over the next 30 years that what i'm buying to be worth more than 10 times what i'm paying for it now and i know that sounds insane because i'm talking about a 2 million property being worth 20 million dollars but that's because we're looking at 20 million from today's lenses right when my parents first brought that property maybe it would have cash flowed like 17 a month or something but what was 17 worth back then it would certainly be cash flowing more a lot now so again play the long game don't get a little bit of cash flow and immediately quit your job lose your safety net go all in on drinking the beach and um or sitting at the beach and drinking my ties and living the dream and telling your boss that he should shove it okay like cash flow's great but it's very unreliable i have problems happening in properties all the time and i notice that certain areas problems don't happen certain areas they do if i quit after my first three years of investing i'd be stuck with a bunch of properties right now that don't cash flow well because something's always going wrong because i kept in the game and i kept buying i learned what areas work better what areas work worse which neighborhoods i got better at investing and now my cash flow is more reliable all right next comment california is so frustrating for investors yes i look long-term and don't plan to sell but we have rent control in los angeles even worse restrictions are placed on rent with duplex and multi-family properties how can a person upscale beyond single family homes if these restrictions are in place this is from higher spirit that's a great point southern california particularly los angeles is known for these type of rent control policies and to be frank there is a lot more vitriol towards landlords now than i think there's ever been there's like there's hate groups out there that target real estate investors and at times they've even targeted bigger pockets because we raise rent when it comes to the market rent now different people have different political opinions on why that should be but what i would like to maybe pause it for you to all think about is if you buy a property and you expect the cash flow to be a certain amount and then the government changes the rules and say nope now we're going to put rent control you can't raise the rent but your taxes keep going up and inflation keeps going up and that 400 a month that you thought was really good money is now worth the same as 200 a month after inflation you can find yourself in a big jam can you guys see where i'm getting at here it's dangerous to get a couple properties and think that you're good to go because these restrictions do get put in place hire spirit to you here's something i would think about if you're going the multi-family road that might not be the best market for you to be investing in okay that's a great market to house hack in you own the house and you rent out parts of it so you are keeping your own living expenses really really low you're generating additional rental income for yourself and some of those rules of protect tenants don't apply the same because you own the house as your primary residence you have more rights in that case than being a pure landlord so what i'm getting at is different markets have different strategies we talked about joshua tree earlier that's clearly a short-term rental strategy the same like house hacking wouldn't work that great in joshua tree because there's probably not a ton of people looking to live there all the time that's a vacation destination la is strong on the house hacking side it's strong on just owning versus renting if you just buy a house and you're not even an investor it's going to be a lot weaker on the cash flow side so if you're looking to to scale something and grow more cash flow you probably want to get out of a market that has those kind of restrictions and get into a different one i would recommend my book long distance real estate investing because i lay out the systems that you need to invest in a different market now i do invest in california i live here someone mentioned to california that's probably a shot at me because i live in california but i also invest in other states and i know i have different strategies in the different areas that i'm going to and i don't think that that should be any kind of a shock to people you should expect different children to have different personalities right well every market i invest in has its own personality real estate has a personality itself and we want to use a strategy that works best for the person out of the market that we're in some of them are long-term plays where you get a lot of appreciation some of them are shorter term plays where you're going to get a lot more cash flow sometimes it's a short-term rental play so you're going to put more time but you're going to get a higher return and other times it's a set it and forget it i'm not going to make a ton of money but man it's going to be easy and i'm going to forget that i even own the house so understand the market you're investing in and pick a strategy that's going to work for that specific market and you can avoid some of these frustrations thank you for your question your comment there higher spirit all right are these questions and replies resonating with any of you were you thinking the same thing why does david keep hating on cash flow well i hope i just explained i don't hate on cash flow i hate on the way that people look at cash flow as it's going to be their savior from life or maybe you're like yes praise david i have been thinking the same thing and this makes sense whatever it is you're thinking we want to hear your honest perspective tell us in the comments what you're thinking maybe you didn't get clarity on something and i can explain it more maybe you want to hear more about a certain topic or you hear my view and you want to know what information i'm using to present that view from i want to interact with you guys and i want you to be a part of the podcast because this is your show you are here and i am here to help make you money so let me help you do that go on the on the comments leave one also subscribe to this page and please like the channel hey david my name is nick vincent um i'm from the shreveport louisiana area so i'm new to real estate we just acquired our first property back in december of 2021 we just called a lot of for sale by owner signs until we found somebody that was willing to give us a good deal we got the house at 50 000 i put 20 down so 10 down we have 40 000 on the house um the house appraised for 78 thousand dollars so there was a lot of meat on the bone we bought it uh we did about 8k worth of rehab got the tenants in there didn't even have to put a for rent sign up we had some people that knew us and ended up getting into the property so that one has worked out pretty well we just got our first rent check on it last month so i've also been trying to get into a partnership for a couple years now and i guess because of that deal and a couple other things that i've been doing um there's a guy i've been talking to and we decided to go into partnership together i found an off-market deal and i guess here's kind of the meat of my question so on this off market deal we are looking uh the house is a hundred and twenty thousand dollars um that area appraises for anywhere between 180 to 220 000 the house is actually in really good condition the guy just wants to get rid of the property it's just a very good deal so i was going to do it on my own but i figured it was a good opportunity to get into a partnership with somebody we've been talking about this for a while so the options that we have and what i've been curious about is do we obtain this property using a dscr loan i was going to go through calibers smart vest line that way they're not looking at debt to income and anything like that and then once we obtain the property do we then do a cash out refinance for the leftover equity that's just sitting there and then go out and obtain more properties because that's our goal is to obtain rental properties and along the way if we could do a fix and flip do it but you know really we want to do buy and holds um and really get up to like 50 60 rental properties i see this is a really good opportunity for our partnership to get going um so the options that we're looking at is that one the more you know mortgage route or two we have an option to where my partner can leverage his house he's got something that is worth about 160 and so we have friends with the president of a bank that is willing to give us um a line of credit on that money and we can go over there and buy that house and then we were thinking about just selling it within a month the market's hot and that's a really good bulletproof area selling the house taking that hundred thousand dollar equity and then going out and buying you know four or five other properties off of that one our area we can generally get properties anywhere between the range of like 40 to 60 maybe even 80 000 and then really move from there so my question is which option is the best for quickness and to just be more efficient and what our goal is which is to just obtain more rental properties with option one i do have to put out some cash reserves it would be about we're going to do a split on it so it'd be fifteen thousand dollars from my reserve cash and the same for him on option one option two i don't have to do that at all like basically i found the deal he's gonna put up the money then we sell it and then we do a split on it and then that's gonna be the money we use for our company to continue to buy more properties so i hope that question kind of makes sense um and what the dilemma seems to be i'm leaning more towards getting the property and renting it out because why not you do the cash out refinance have a tenant in there paying the mortgage my partner's leaning more towards like it'll look really good for us to go ahead and obtain a property and then sell it and then our company be worth you know anywhere between 80 to 100 000 from the junk that we started and then go out here and obtain more properties but i just want to make sure that what we're doing because it's such a good deal that we're going to be in a good position to move forward to really start loading ourselves up with as many properties as we can um we'd like you know within this year to get anywhere between like six to ten and just from this one deal i think that we're going to be able to do that so i would really really appreciate your advice on this situation thank you so much your content is amazing uh thank you david yes my content is amazing thank you for that no that's not true this is just real estate that we're talking and i do this all the time so this is actually pretty simple your question is what's amazing and you listeners that are listening you are what's amazing so let's talk about this dilemma that you find yourself in it is the classic should i hold or should i sell um i've got a way that i like to analyze this and i'm going to break that down i've probably done this before so i'll go through that and then i will try to apply it to your specific situation so when asking the question of should i sell it or should i keep it you did a good job of explaining if i sell it i can get a bunch of cash and that can sort of launch me into the business but if i keep it i can have a a rental property the first thing that i want to say is what is your biggest challenge is it finding more deals is it not having enough money to buy them is it not getting lending you basically want to know what your biggest challenge is and work around that so for a long time for me my biggest challenge was financing it was just very hard to get banks to let me borrow because i had so many rental properties already they saw it as a bigger risk i know that's weird because you think the person who owns more would be better at it but that's not how they see it like as a side note there's a bank that will remain unnamed in jacksonville florida like six years ago that said we don't want any more exposure to residential real estate we think it's going to collapse so we're only giving commercial loans like tell me how that one worked out when it comes to residential real estate so no one really knows how these things are going to work out but my point is i would start with someone that would give me money and i would find out where will they underwrite and i would have to go make my strategy work there so this idea of knowing what's the most scarce resource will help you with making the decision when it's specific to you and your partner versus just everybody else who's listening here i'm assuming that money is probably more scarce than deals because you've mentioned that you found these first two deals relatively quickly so i'm gonna give you advice operating under that assumption that it's easier for you to find deals than it is to find money so now we're starting to see things weighing towards selling it might be better but let's not jump to that right away let's go through my roi versus roe matrix so when it comes to selling a property i have clients ask me this all the time right like especially if they're in california those are the ones i love because they come to me and say hey i own this rental property or i own my primary residence david should you list it and sell it for me and we can reinvest the money or should i keep it and rent it out the first thing that we want to figure out is is this a property you want to keep if the answer is no we look for a way to justify selling it if the answer is yes we look for a way to justify holding it so what goes into is this a property that i want to keep well the first thing is is it a headache are you going to get bad tenants do you have legal restrictions like what uh i think it was higher spirit mentioned in the comments about los angeles is rental controls is the property itself just a money pit and things keep going wrong is it in an area that you don't want to own in long term okay if the answer is i don't want to keep this property like that's that should become pretty apparent as you're asking yourself those questions is it going to appreciate is it on the way up are rents going up and is the value going up now let's say the answer to those questions becomes yes i do want to keep this property the rents are going up it's appreciating it's no headache at all it's in a great location i've already fixed everything up it's performing wonderfully at that point we started asking the question of okay how much money can we pull out of it and then go put that into the next deal so to sum this up the first question you ask is is this a property i want to keep if the answer is no just sell it you're not losing real estate when you sell you are gaining equity through the form of capital to put into new real estate okay so as long as you buy something new you're not losing a property when you sell it which is how i want you to look at this deal you guys have under contract there's a hundred thousand in equity there you're going to turn that into more rental property so selling it isn't losing a rental it's gaining potentially more as long as you can find them which is why i started this question off by asking can you still get deals now the next thing we work on is our roi versus roe matrix so roi is return on investment roe is return on equity so what i would like you to do nicholas is to look at your average return on investment that you can get if you invest a hundred grand in louisiana wherever you are let's say you can get a ten percent return buying real estate so if you have a hundred thousand and you can go put that into investing at a 10 return you figure out what your cash flow would be on that money now we would look at if you keep the property and refinance it what would the return be on your equity and this is the same question that we asked when someone comes to me and they say hey david i've got a house worth 1.1 million in the bay area and i owe 500 000 on it so this is a person with 600 000 or so in equity in their property and they're saying well it cash flows you know 500 bucks a month so it's not a bad deal i can rent it out and i can make 500 bucks a month well what i do is i run some numbers here okay and i'm going to do that for you right now if you have a property making 500 a month times 12 months in a year that six thousand dollars a year you're making in your return if you divide that by the 600 000 that we have in theoretical equity you're getting a one percent return on that equity so that means if you invested that six hundred thousand somewhere else and you only got six thousand dollars a year you'd be getting a one percent return on on investment which is bad so in this case even though it would cash flow five hundred dollars a month i'm going to advise that person you should sell that property buy more with the 600 000 that you'll get a higher return on than what you're currently getting basically your equity is lazy and it's doing nothing for you now some properties make your investment into that property and make no bones about it your equity is an investment don't just look at the capital you put into it also look at the capital that's already in it from the form of equity from what either you made it worth more on the rehab or it's grown from appreciation and ask yourself how hard is that money working now if someone's in california you're more than welcome to mention this uh when you email me or contact me and i'll run you through this but if you're in a different area look up what return on income versus return on equity is so let's sum all of this up the first question you should be asking yourself nicholas do i want to own the property what's the location is it a headache is it going to cause me a lot of problems is it a flood zone is there anything about it that i don't like if you do like the property the next question would be how much of a return would i get on this property versus if i invest that a hundred thousand dollars somewhere else assuming that the appreciation is largely equal because you're staying in the same market the decision becomes pretty easy you invest in the place where you're going to get a higher return and more cash flow on that same money now the only caveat to this would be like i said earlier if it's super hard to find a deal so you sell it you have 100 grand but you can't buy anything else maybe it makes more sense to keep it or if deals are everywhere but you got no money even if the return would be good maybe you can make that 100 grand work more somewhere else so you sell it even though the return on equity was solid there's a lot of things that factor into play but i love that you asked this question because it helped me break down how my mind processes these options and i'm doing the same thing just at a bit of a bigger scale so i'm selling 30 something properties right now and i'm going to 1031 those into different properties that are going to be in different markets where they're going to appreciate more and the i'm going to have less headache so i looked at my portfolio and i said man these 30 properties in this area it's constantly emails from the property management company saying this person's not paying covet restrictions have affected us here this just broke this is going on it's non-stop something all the time so when i asked the question do i want to keep it the answer was no i do not want to keep it i want to sell it i looked at how much equity i had in the portfolio and i realized the same thing i just did with you i'm making like a two percent return on my equity the the misleading piece is i'm making like a 70 return on my initial investment so when you only look at roi it looks like i'm crushing it from all the rent increases that i've had but the portfolio has grown so much in equity from the burring that i did as well as natural appreciation that my money's not working very hard so i'm going to sell it and i'm going to re put it into properties where it will have to work harder get me a better return i'll have a higher upside and less headache i hope that you can do the same all right next question comes from michael o'brien in canada otherwise known as canadia david i love your show and the content has helped me get to this point however in discussing additional properties with my mortgage broker he is suggesting i am close to my limit of residential property loans with my debt ratio he said that in order to get additional properties i will have to look at commercial mortgages with higher rates is there a way around this thank you i have five properties and seven doors okay michael i'm gonna break this one down for you pretty simply um first off when he's talking about debt ratio this is or debt to income ratio what we're talking about is as mortgage brokers we look at okay you make this much money and you have this much debt that shows up on your credit it doesn't matter how much actual debt you have that matters how much is documented and we come up with a ratio that says at the end of the day this is how much michael has left of the money that he brings home we come up with a percentage we add whatever your mortgage is going to be to that and we make sure it stays underneath whatever number it needs to be 40 45 they kind of bounce around for different products and we say based off of your debt you can buy a house that costs this much at this interest rate now the problem becomes when you keep buying real estate if you're not making money on taxes or you're not claiming the money or you had a bad year on that real estate the debt from the property stays there but the income does not continue to increase and so your debt to income ratio starts to become too weak to get approved for additional properties debt to income ratio i want you guys to all understand this is a metric that determines your ability to repay the money that the bank is letting you borrow or the lender is letting you borrow what you can look at are debt service coverage ratio loans which is something that my brokerage does a lot of where we look at the income from the property to repay the debt not the income from you so if you're going to buy a short-term rental and it's going to generate 6 000 a month of income we take that income and we we weigh that against how much it's going to cost to own the property which might be three or four thousand dollars a month and we qualify you that way if that's what he's talking about with commercial loans um that might be your only option typically commercial loans are like five one adjustable rate mortgages um it kind of sucks because as interest rates go up your payment goes up our products are 30-year fixed rate they're just like what you're used to seeing but the rate will be a little bit higher i think in general people make too big a deal out of this like those rates that you get on conventional mortgages are incredibly low they're awesome they're not normal no one's lending money at that rate so once you get to more properties you should have more experience and you should be able to find better deals and you should be able to make it work with an interest rate that's maybe half a point one point one and a half points whatever it is higher so before i went to commercial which is an adjustable rate mortgage i would look at the dscr loans which are 30-year fixed rate and i would ask your mortgage broker if they have access to those if not i would look for a mortgage broker that does all right we have time for one more question this comes from desmond in omaha nebraska hi david my name is desmond and i just wanted to start by saying thank you for fielding questions like this you know i really love the format of the show and listening to other investors um and what they're struggling with and your insight into their situation so really appreciate that so kind of jumping into my question um i'm located in the midwest 24 years old and my background is in chemical engineering which is currently my primary source of income i'm just getting started in real estate investing so i don't currently have any investment properties in my portfolio but i'm interested primarily in buy and hold single family rentals where i ideally obtained properties using a bur strategy so to give a little bit more context on my situation i graduated college debt free in 2020 that was largely due to academic and athletic scholarships i had and working throughout college and all of that allowed me to live well below my means um after graduation and save a large majority of my paycheck when i started working um in 2021 i bought a single family home that i live in um proposed to my now fiance and started saving for wedding and honeymoon related expenses i've known for a long time that i wanted to get involved in real estate investing and have been listening to this podcast and reading books about real estate but i had to use the money i was saving on other important life things like buying my primary residence getting an engagement ring paying for part of the upcoming wedding and honeymoon and those related expenses um that kind of leads me to my question so in 12 months i think i'll have saved forty thousand dollars um i estimate i'll need her down payment on my first single family rental and to cover the cost of the rehab and then anything over that forty thousand dollars i'll tap into the equity on my home and use a heloc to finance now that i'm finally so close to being able to start my journey into real estate investing i'm starting to have major fomo where i see prices going up and other investors swooping in on deals in my area and it makes me wonder if i should try to get creative in financing so i can start investing sooner or stick to the plan i have in place and save up now so i can start in 12 months what's your advice on this do you think i should try to get in sooner or with other l in my area and i'm beginning to build relationships with real estate agents and lenders thanks in advance for your insight on my situation all right thank you desmond this is a great question i think a lot of people are in this same boat i think you're wise to notice that prices are going up as well as interest rates and we don't know what's going to happen but all indications are that the fed is going to continue rising rates and that prices are probably going to continue to go up could they go down because rates are going up sure no one knows my best bet is that they will just go up slower than what they were going up because of rates going higher people like me are still going to buy them and so your fomo might actually be somewhat healthy you need to get involved rather than trying to save another 40k what if you just found a way to buy a house with less than 40k my advice to you would be you house hack you need to go buy a primary residence and put a smaller percentage down on that property so you don't have to save up all the money you don't have to go buy an investment property put 20 25 down if you still don't have enough to do that ask about different loans where there's down payment assistance available and if there isn't any of that available i would ask a family member if you could borrow some money from them and then pay it back now you should have no problem paying that money back because your own housing expenses are lower since your house hacking instead of paying the rent if you're in a position where you say no i already own a house i don't want another one well can you sell that house and use the money to buy the property you want can you rent out the house that you are living in now and then go house hack to get your housing expenses lower what sacrifice are you willing to make to make this happen you're going to sacrifice something my advice is you should always sacrifice comfort okay don't sacrifice your future don't sacrifice wealth building sacrifice the fact that you don't need at 24 years old to have a nice big house that you could be living in right now and try to get your fiance on board with how you guys are going to spend a couple years living beneath your means and being less comfortable so you can have a way better future later in other words there's a way to move your money around you have some equity in the house you have right now you have a housing expense that you don't need to have that you can reduce by house hacking you can lower your down payment by buying a primary residence instead of an investment property get your foot in the door then as those properties go up in value you can access that to buy the next rental property and you can get some momentum going find a way to get this initial momentum that you need started by making some sacrifices if you got through school with no student debt on athletic scholarships and working i don't think you're going to have a problem with this also awesome that you're a chemical engineer my uh lending partner christian bashardler is also a chemical engineer and you guys have a very unique way of looking at the world all right thanks again for taking the time to send me your questions we have had a great response from our audience and i encourage you all to ask more questions you can do this by going to biggerpockets.com david and submitting your video or your written question for me to answer look we can't make this show if you don't give me content to go by i can't help you or the rest of the community if i don't know what questions you guys have real estate feels scary it feels overwhelming it feels challenging but it doesn't have to it's actually one of the most simple ways to build wealth there is let me help you do that let us at bigger pockets help you do that as well please give us a subscribe on the channel share this with other people that you know let me know in the comments what you thought and if you want to ask me a question directly you can always find me on social media i'm at david greene pretty much everywhere you can also send me a message through the bigger pockets platform thanks everybody i will see you on the next episode stay focused and keep grinding [Music] you

Channel: BiggerPockets

Views: 51,441

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, rental property, investing in real estate, income property, bigger pockets, passive income, roi, return on investment, cash flow, appreciation, housing market, buy or sell, buy or wait, should i buy or wait, brrrr, brrrr strategy, brrrr method, short term rentals, real estate markets, house hacking, house hack, hold or sell, sell or hold, when to quit your w2, when to quit your job, interest rates

Id: qp49N78_TIs

Length: 57min 41sec (3461 seconds)

Published: Sun May 01 2022