Why We’d Buy a Rental Property That LOSES Money Every Month…

this is the Bigger Pockets podcast show 949 what's going on everyone this is David Green your host of the Bigger Pockets podcast today we have episode 949 and if you don't know what a palindrome is go check out Google because you're in one right now we've got a great show for you on seeing green episodes we get into listener questions from you our base and we're going to be talking about what you could do to build well through real estate with Rob adding his little spice into the seasoning Rob how are you today oh you know sounding like a gremlin because I lose my voice so easily after I go to conferences but I'm hanging in here man and uh I'm excited to answer some questions yeah we got some really good ones so in today's show we get into a lot of different things including how to allocate Capital when you've got a bunch of properties but they're not performing super well what asset classes you can consider moving into if the one that you're in right now is struggling how capital gains work and how you can use a Cash out refinance to sort of get money out of properties ta free and we start to show off with a great question about if somebody should buy a property that they know is not going to cash flow when they first buy it all that and more in today's scene green and most importantly if you want a chance to ask your question please head on over to biggerpockets.com David the link is in the description down below pause this send us your questions and let's jump back in hi David I'm Tony I'm from San Jose California my wife and I have an opportunity to buy her grandmother's house off market for about 860 and it's worth about a million 50 it does need about 190 on repairs we're looking at possibly making it a long-term investment due to the equity and appreciation value that it has gained in the last couple years unfortunately the rents aren't going for what the mortgage will be I would be upside down about $6 to $800 a month but longterm would it be a good investment for us to maybe take the hit now without cash flow and potentially have a good investment later we would have to make it our primary home so we will offset some rent but it's not going to be the full mortgage payment what do you think David thank you oo Tony man I love questions like this we are going to get into some good real estate investing conversation right now this is the age-old question of which has caused me to be labeled a heretic and blasphemer of real estate Sound Advice Rob I just want to thank you for always sticking by me even as people have criticized me for saying there is more than just cash flow when it comes to investing real estate and questions like this highlight the age-old question Sith versus Jedi orc versus elf and cash flow versus Equity so let's break this down Tony's got an opportunity to buy his grandmother's property in San Jose which is a high appreciation Market in the Silicon Valley area of California where all the tech companies are if you have an iPhone it was probably made down there he could buy it for significantly under market value which I call buying Equity so he's going to be in for 8.60 it's worth about a million 1550 needs $190,000 worth of work but I am assuming if he spends the money to fix it up that will also increase the arv by at least that same amount otherwise when it makes sense to do the work not really the problem is it's not going to cash flow he's going to be bleeding $600 to $800 a month when he first buys this property so I've got a way of looking at deals like this and we're going to get into that in a second here uh but we're going to be talking about if someone should ever do something like this a few other details to include if he buys it from her according to California's Prop 19 he won't have the value the properties property taxes readjusted he'll be able to uh take over whatever the property taxes are currently uh if it's grandmother or grandfather or father mother to I say that wrong you could say no I was going to say you could say if he if it's grandmothered in that's probably exactly where that phrase came from that's exactly right so he'll get to keep those old property taxes uh but he'll be bleeding $600 to $800 a month all right Rob let's start with you is this a hard no well I have questions I have questions about this so let me ask this clarifying question he mentioned that he may move into it as a primary residence and so if he moves into it as a primary residence do we know how much his monthly I don't know his monthly rent or his monthly situation would change he didn't say anything about that he just mentioned he'll be bleeding 600 800 a month so let's take this question from the perspective of it would be a pure rental cuz that's how most of our listeners are going to be assuming okay so generally uh I'm very anti-h flow sorry a very I'm very anti- anti-h flow meaning I don't really like inheriting properties that are going to lose me money every single month but I would say considering this isn't like the one most Prime Market in existence which is San Jose in terms of appreciation this is a very rare scenario in which I'm like okay I do actually think there's an appreciation play there because historically San Jose has paid off really really really big for anyone that inherited or ever got property at any point in the past so I think as long as he feels like he can afford it um you know bleeding kind of gives the impression that maybe he can't afford it and so if that $6 to $800 is going to be detrimental to his financial situation absolutely not I would probably just sell it take the money and go but if it's a an expense that he's willing to put up with for two three four five years then it's definitely up for consideration how do you look at it I have a framework that I look at these deals through involving 10 ways you make money in real EST State uh we've already talked about buying Equity that's one of them he's buying a buttload of equity here so that's a really good deal uh I don't love buying a property that's going to bleed money if it's always going to bleed money so I wouldn't want to do this in like you know the Midwest $70,000 house rents are not going up that's a different story but I talk about something called Market appreciation cash flow which is buying into a market where rents are likely to continue appreciating every year more than the national average as well as Market appre iation equity which is buying into a market where the value of the property is likely to continue increasing over the years at more than the national average San Jose is very strong in both of those so barring any unforeseen circumstances those rents are going to be going up a lot and after a couple years he's not going to be bleeding money and after a couple more he's going to be making money and after a lot more he's going to be making a lot of money and have a lot of equity so this is really a question of delayed gratification versus immediate gratification he's going to feel some pain in the immediateness because he's going to be not covering the mortgage but he's probably going to make an insane amount of money over the long term so now we move into how do you do this wisely if you're going to do it well there's a couple ways uh we talk about portfolio architecture do you have other properties in your portfolio that are cash flowing solid maybe something you bought years ago that also benefited from Market appreciation cash flow that provide cash flow that would cover the money that you're losing on this one now you're balancing your portfolio I'm taking some cash flow away from these houses to get a long-term Equity play with this one so I'm getting all the benefits of long-term Equity without the risk of losing the property foreclosure because I'm pulling cash flow from somewhere else do you have a great job and you live beneath your your means well you've got cash flow coming in from work even if it's not coming in from your portfolio in which case this becomes less risky to someone who is living beneath their Means versus someone who's living paycheck to paycheck and it's these details that stop you from being able to just tell people always buy cash flow or always buy you have to look at your specific scenario and my advice is to construct your life in a way that you can buy amazing deals like this one that he's being offered without having to turn them down because you're in a financially strong position yeah okay so something else to consider here is that he said that he's losing $6 $800 every single month uh I mean I I'd imagine that he's probably not exactly losing that because of Debt Pay down too do we think that he's buying this like with a brand new 30-year mortgage or do we think he's kind of walking into I don't know like a subject two or something like that no I think he's probably going to be getting a uh a new mortgage from the way he described it okay so he'll have a little bit of Debt Pay down but probably not in the amount of time yeah it probably won't be that significant here in the first five years I like where you went though cuz that's another one of the 10 is loan pay down if he could take over a mortgage that's already 15 years into being paid off he's paying off significant principal every single month which makes even though he might be losing 600 to $800 a month in cash flow the principal reduction could be2 or $3,000 a month which means he's actually gaining wealth yep and then the other thing to keep in mind is that he does have the equity so while he's quote unquote bleeding $600 to $800 when you think about what you're actually losing over the course of let's say three years so if it's 600 bucks times 12 what is that David you know 600 time 12 yeah that would be 3600 time two there you go okay so he's going to lose $7,200 a year and that 7200 times let's say three he's going to lose about $22,000 in the next 3 years quote unquote that that's what he's going to bleed however he is walking into multiple six figures of equity so if he does kind of like that overarching math he's actually not losing any money at all not at all you know he has it feels that way every month and maybe technically from his bank account standpoint he is but from the net worth side of his entire life he's not actually losing any money he's walking into a pretty good situation so if that's something he feels like he can weather for a few years and that's definitely that's a definitely a deal I'd take um because it seems like if he can hold on to it until he's maybe even in a stronger financial situation eventually maybe he can do a value ad and he can put $180,000 into this property because that's how much he says it needs in repairs and if he does that then can he increase the equity from 300K to four five or $600,000 and that's that's where the wealth really starts compounding well said Rob you're actually speaking right out of the framework of my last book pillars of wealth people can pick that up at biggerpockets.com pillars where I talk about how we typically only look at uh energy in our bank account or in our wallet but there's actually energy in your stock portfolio and there's energy in your real estate we just call it equity and like you said when you look at it from the big picture you're like all right I'm going to be losing $21,000 over three years to gain $250,000 or so like that's a incredibly good return and that's not even considering the fact that rents are going to be going up over time and real estate investing is this is what it's really like to do it it is more complicated than purely a cash on cash analysis although that's very important it's a fundamental to understanding it it's not the only thing you have to be good at maybe like playing basketball you got to be able to dribble the ball but it's not all about dribbling there's other things you have to take into account to be good at basketball same thing for real estate investing so uh well handled Rob I really like your perspective there yeah well good good for you Tony sounds like a great great house keep us updated come back with another question when you have it update yeah Tony and if you're looking for some good Mexican I recommend La Victoria in San Jose make sure you get that orange sauce all right our first question comes from Lauren who writes in the real estate rookie Facebook group I am a first-time property manager for a long-term duplex the first floor tenant has been living in the house for 20 years without any lease as the former owner of the house was her sister and her rent is only $600 which is basically free the new owner my boss has already told the tenant that there would be a lease incoming and the rent increase Once I arrived the market price for the apartment in its current state is about 950 I'm looking for advice as to how to best handle the rent increase it seems unfair to me to ask someone to pay $300 more without a lot of notice but it's also unfair to expect to pay so little and I know she's expecting to pay more how would you go about a timeline in rent increases and creating the lease interesting yeah so this one seems right up your alley you've probably come across this a few times in your career I'd imagine huh oh God all the time like one of the biggest mistake investors make is thinking that they're helping somebody by keeping the rent low and then later on they need to increase it or that person maybe the property falls into disrepair and they realize I need to spend all this money to fix the place up but I'm not getting rent I have to charge more rent to make up for this and the Tenant is upset about it so Rob I know that you love conflict and you love hurting people's feelings how would you go about handling this oh with a baseball bat in my hand no I'm just kidding it's a tricky scenario right yeah I'm a softy man I am not I am not good for this this is why I go into short-term rentals I don't have to deal with this ever but um typically it kind of lands as a one two punch so I would have the conversation over the phone I would let them know that there's going to be an increase which sounds like Lauren did and I'd say hey just so you know um you know the new new property manager the new boss new management whoever you want to call it they're in place we will be increasing grents I'm not sure what that is right now I'm going to get you an answer at the end of the day I'm going to send you an email and then we can check in afterwards that way they kind of understand and you can sort of have time for them to sort of process it you can process it then send it in writing formally that same day so that you can kind of get all the numbers out there let them digest it you can digest it because I think what you don't want in my opinion you tell me if I'm wrong here but you don't want to be like hey I know you rent 600 we're going to actually increase it to 900 and then becomes an instant tense negotiation where you someone's going to back down or it's going to end very poorly whereas I think if you send it in an email it's in writing at least people can both like like process it on both ends and then you can discuss it what do you think I love it and it has nothing to do with the fact that an email allows you to avoid the discomfort of this conversation at all right no no cuz I think you can still have it I think you can still have it but it at least gives them their opportunity to come up with maybe N More non-emotional rebuttal that you're probably already going to be prepared for so it's like drop the bomb and let everything kind of settle before you actually have the conversation yeah say hey just checking in I wanted to talk I know it's a lot but let's let's let's get into it and then you can kind of explain it a bunch all right Lauren here's what I'm going to break it down first off Lauren and anyone listening who finds themselves in similar situations even if you're not a real estate agent check out my book at bigger poo.com skill there's something that I call Basic line adjustment and it has everything to do with what we consider fair so if you think about what makes you happy in life it's when you got something better than what you expected or what you thought was fair you go to La Victoria Mexican restaurant and you order a burrito and they put in a little Street taco cost them 45 cents but you're like that is so cool I was not expecting that but if you happen to go and buy a burrito that you thought came with two tacos and they only gave you one free Taco you feel like you just got ripped off even even though objectively that's not the case expectations determine how happy we are if you can exceed expectations you will be happy and if you fall short of them the person won't be rather than fighting with someone over a free Taco it's so much easier to just adjust expectations here's what that would look like I would go to the tenant and I would say hey here is a list of other units in similar condition uh in your area and what they're renting for and I would use the the best cases with the highest rent so i' probably be showing she said it's around 950 is I'd find the ones around 975 and I'd say this is what current market rent is however you've been a great tenant so we are willing to rent to you for only $900 you've set a baseline at $975 and then you said I will give it to you at 900 which looks like a win for them but the person who's receiving this is thinking 600 is fair market rent maybe they were expecting to go to 650 so the 900 looks like a big jump if the Baseline is 600 you you start by moving the Baseline up to 9975 then you give them your number which is significantly less than the Baseline making it look like it's a better deal for them and it is still $50 less than the 950 she thought she was going to get now if the tenant says I cannot afford it it's not a matter of them thinking that they were ripped off because they see what fair market rent is it's them of their own valtion choosing I don't want to pay that higher rent and I'm going to move out on my own much better than just saying hey here's what the rent is now the tenant has to figure out is 900 fair is 950 Fair am I being ripped off can they even increase rent by 50% at one time all of that makes them think they're the victim and they're being ripped off versus if you start with setting the Baseline where you want it and adjust from there so I got a question so do you think it is better to show properties that are more expensive like you said like a th000 bucks 975 or do you think it would be better to show what they could actually get for $600 and say hey by the way $600 apartments in this area this is what they look like I think you do both that's a great Point that's a great point I mean you've sort of set the ceiling and the floor by bringing in what you did I like that Rob dropping a little bit of that orange sauce salsa on my on my taco I'd imagine that there's the the the benefit of doing something like that would be that you're kind of showing them not not not necessarily like hey you've got nowhere to go but like hey if you decide to not move forward with us if you want to stay in the same budget you're going to be taking a pretty drastic dip in quality and so it's best to kind of like work with us through this that's exactly right you're showing them hey this is Market rent and so I'm giving you a discount and then you're also saying but if you don't want that discount here's what you can expect to be walking into you've now set two very good baselines for that person to see the obvious right choice is to pay that $900 and be grateful that it's still $50 to $75 under Fair market Rent All Right Lauren so cutting to the chase I say you go right for fair market rent right away I don't like the idea of build up to what fair market rent is and if she can't afford to pay it then like Rob said she just looks at what Apartments she can get for $600 and I don't think you need to feel bad about that because she was getting a discount the entire time theoretically she's been saving $300 a month for God knows how long off this rent and so that's a win for her she there's some gratitude that should be there if the person understands what fair market rent actually is I think there's a little tricky kind of thing that we sort of glazed over maybe it's not as big of a deal as I'm thinking but I feel like it is she said that this tenant doesn't have a lease and has been in this property for like 20 years yeah so they're a tenant I'm sure if they were like hey I'm going to stop paying it wouldn't be that easy to just get them out of there so there's something to be said about how can you diplomatically approach this in a way that's going to basically not make them squat right well I think you have to treat them like a new tenant can this person afford the rent do they make enough money to be able to pay that rent right like you still have to screen them if you want to take them on as the tenant moving forward the same way you would if it was any other tenant you're not going to treat them any differently than your next tenant if their debt to income ratio can't afford that rent you're going to have to come up with a plan for how they can move out and get somewhere else before you put a lease together but Lauren also did ask about how could I put a lease together because this person hasn't paid one at all start with an estole certificate where the tenants basically going to say hey here's what I've been paying for rent and here's what is in the apartment is mine and here's what belongs to the owner as far as appliances or other things like that once you've got that in place you can construct a new lease but again screen this tenant the same way you would a new tenant that you'd be putting in there use the same standards for everyone make sure you're biing by fair housing laws you don't want to get yourself into a situation where you're expecting more from this person than you would from a different tenant but I mean are they buying this house and they get to keep the tenant or not keep the tenant yeah if they don't have a lease then like they don't have a right to be there yes I guess I feel like that depends on the state there could be some like there could be some laws that don't apply to contract law there could be like some specific protections which Lauren didn't mention which state the area is in or how that would go so I usually talk to property managers to get a background on that we're having to assume that there's not additional protections outside of what would fall under standard contract law fair fair fair fair and if you want to know more about ways to use what we call the binder strategy we talked to Old Dion mcney great head of hair on that guy head over to Bigger Pockets episode 448 or the Bigger Pockets rookie podcast episode 369 to learn how Dion handles situations just like this all right thanks for sticking with us we're going to get into some capital gains questions in just a moment but first let's get into some of your comments and remember as always make sure to like comment and subscribe to our Channel let us know in the comments what you think about today's show if you've ever been to live Victoria in San Jose and like their food and if you want to be featured on an episode of seeing green head to bigger o.com David all right our first comment comes from episode 941 where Hardy KH said I love your shows it's hard to know what to do in the current real estate environment and I always appreciate your wisdom and guidance clearly Hardy was referring to Rob on this one thank you Hardy I appreciate that next we've got shiby 189 I feel like I sound like a DJ at 97.9 because I've got my conference voice great content I really enjoyed the the comedic portions of the show good balance of education and light comedy I about died when David quoted 8 Mile laughy cry Emoji I've never heard a person say out loud laughing cry emoji that sound is that like when Siri reads your text back to you yes laughing cry Emoji I wonder who at Apple names the Emojis like how we're going to call this one the Yas Queen we're g to call this one dancing ballerina like who who has that job someone has it which is interesting like emoji nameer if anyone works at Apple and knows how this happens we want to know all right up next we have Mitchell blet 239 quick question do you pay capital gains on your net profit or the sales price of an investment property and second if the answer is net why don't you Cash out refinance prior to sale thanks o this is a great question our producer Eric crushed it here what do you think Rob okay so you are going to pay capital gains on your net profit not on the sales price and the reason that you don't want to do a cash out refi prior to the sale because it's not about the it's not about being in debt it's about the cost bases of the property meaning like what is your actual cost to get into that property and what is the pro what is the profit on it regardless of if you took out like cash out and you took out debt because I know a lot of people say well if you have debt you don't pay taxes on debt I know that's like what kiss hockey's main thing he always kind of emphasizes that point but cost bases is the thing to keep in mind whenever you're selling a property very great I I actually had a client who ran into the same exact problem when you're trying to sell her property in Oakland and she had done a Cash out refinance first Mitchell you're mixing up the net profit with the equity in the property they are often the same thing so that's a normal thing to get wrong but they're not the same so let's say someone buys a property for $500,000 sells it for a million okay that's a $500,000 profit assuming there weren't realtor expenses and closing cost because you could write those off as well as improvements that you made okay but if you paid the property down to 400,000 before you did it you'd actually have $600,000 in equity but you'd only have a $500,000 gain they just look at what you bought the asset for and what you sold the asset for the cash flows that it made have already been taxed the loan pay down is not included in the gain here they're just looking at the sale price and the price that you paid for it the Cash out refinance confuses things because if you took out a loan and now you owee $800,000 on the property and you sell it for a million what Mitchell's thinking is is you're only going to get taxed on 200,000 but you won't you'll get taxed on the full 500,000 and the government will say well you already got that money out of the property right you don't get to avoid paying taxes on it okay let me just clarify that you're right I was wrong I said it's net but I did eventually correct myself and say it's more on cost basis so we got there in the end we know what you me net after all of the expenses those are included in your net yeah good job Rob thank you thank you and another question from seeing green repeat guest Tom me about steps to take to get 10 finance properties hey David my name is Brad Hunton from granberry Texas and my question is what do I do with my current portfolio I currently own 16 long-term rentals across Texas and Louisiana with 11 of them being Class C Properties in West Texas while on paper the cash flow looks amazing I rarely hit the projected numbers I have an opportunity to sell the C Properties for a substantial profit and I'm seeking advice on what to do I have private money loans totaling around $100,000 at 10% interest for the next four years so my two-part question is do I keep these properties now that most have been renovated and use the cash flow to pay back the private money loans or do I sell and pay these loans back with the profits and use the remainder to buy into class A or B properties in the Dallas Fort Worth area a third option is do I keep the loans and roll them into a higher class property with little to no cash flow but substantial appreciation with a plan to cash out refi in four years to settle the debts thank you well thank you Brad you got yourself in a pretty good scenario here you've got a lot of equity you've got a lot of cash flow and you've got plans to grow your portfolio in the future so Rob what was jumping out at you when you were listening okay so I guess Here's my thought he kind of answered it pretty pretty beautifully himself when he was giving us his options but he said that he's buying in cclass properties he's rarely hitting the projections but it does sound like maybe he's cash flowing uh maybe there's a lot of expenses that come along with these houses that are unexpected and that's why he's not hitting his cash flows and then he said well I could sell them at a substantial profit and then get into more a or b-class properties I think that's probably what he should do because he may get into less properties but given that he is kind of interested in the whole High appreciation thing I think he's going to see more appreciation in the A to B Class properties and neighborhoods and lastly He also mentioned that he has a lot of private money debt um at 10% and you know it it seems like he's maybe in the mid middle slashback side of his like investing career I don't want to be too presumptuous here but I feel like at this point the faster he can get out of some of this High Ines debt the better and he can start kind of I don't know rounding third base on his investment structure did you play baseball I quote unquote played football in the ninth grade well apparently you watched sports center before we recorded today so well done that was me man I used to work for Gatorade and when they interviewed me they're like so how much do you love sports I was like love them and then when they hired me they're like this guy lied didn't you come up with names for professional athletes like pton Manning like nicknames uh I mean yeah occasionally that was part of your job what was his name the sheriff or the Marshall or something like that yeah the sheriff I didn't come up with that someone else did but I I came up with the Cartographer for who for pton Manning cuz he makes Maps he's a map maker routes I don't know it didn't really work they didn't get picked you found your place hosting the bigger pocket podcast let's just I guess so say that our our win Gatorade loss all right getting to Brad here first off Brad highlights a very important point the properties that look great on a spreadsheet often don't work out that way in real life and this happens more often than not in the bad areas Brad referred to these as C areas it sounds like they might be more C minus type properties and uh this is especially true when your properties are lower priced and you have to think about the fact that things break in real estate whether they're cheap or expensive but a new roof a new air conditioner a new water heater are a small portion of the overall value of the property and rent when it's an expensive property they're a big portion of it when it's a cheap property and this is one of the reasons that people think that they're going to go get cash flow and then they find out that it's more like cash no it doesn't actually come in so I'm inclined to think that Brad should sell those properties and 10301 them into some of the areas where he's going to experience higher growth that's not only in equity this is also cash flow growth right so I'm working on a book right now that talks about how you identify those areas and if I'm going to sum it up it's basically a function of uh tenants that are willing and able to pay higher prices so if you buy in markets where jobs with higher wages are being introduced uced and there is constricted Rental Supply rents have nowhere to go but up and your tenants can still afford to pay them so identifying those markets and moving your portfolio there basically guarantees that you're going to see increased rents every single year and with that increased cash flows if he leaves a portfolio where it's at and there's no reason for rents to go up he's going to have the same problems in 10 years that he's got right now what do you think Rob yeah yeah that's s that's that's exactly right what are your thoughts on the um the high interest debt you feel like you should get out of that or you cool with him cruising on that for now I was wondering why he's got 10% debt if he could just Cash out refinance some of the houses at like 7% or 8% and pay it off that way maybe he's not showing income so he's not able to do that and if the properties aren't cash flowing I was wondering why he had debt at 10% when he could get a mortgage that would be less than that uh my thoughts would probably be you move the properties into an area because they're not cash flowing anyway meaning his expenses sorry his maintenance his capex and his vacancy are probably too high you move it into an area where you have less of that and even though your mortgage could be higher it's I'd rather be paying money towards the mortgage than I would be just throwing it away to maintenance and uh vacancy and then you start taking the cash flow and paying off the debt maybe you take some of the properties that you moved over you do a cash out refund then and you you pay off half of that 100 Grand and then you tackle the other half with the cash flows from the properties that you bought yeah I like that I think I'm a little bit more in favor here of just consolidation if he's got a lot of long-term properties that aren't really killing it for him I mean it sounds like he's got some cash flow but yeah I'd say uh triage and get into something that's going to treat you better over over the course of like the next few years from an appreciation standpoint I mean it'd be wonderful if he could sell 16 properties and buy two fourplexes in a really good area or two short-term rentals in a good area and then he could just manage those short-term rentals and get a lot more cash flow with a lot less time and then use the money from that to pay off the $100,000 and find himself into new asset class so Brad let us know are you open to the idea of a new asset class like short-term rentals medium-term rentals small multif family or even an apartment complex right what if you sold 16 single family homes bought one 24 unit apartment complex or something with the money and manage that I bet you that would be less of a headache than having 16 individual homes man I remember my single family portfolio got to like 50 60 properties and you would think that was passive income it was anything but it was uh very frustrating pretty much every 2 to 3 days it was another maintenance request coming in another problem happening with the property another thing that I had to try to figure out and I realized it was very inefficient to to scale with that asset class well as we often say on the Pod the cheapest houses are the most expensive that's really good thank you our next video question comes from our old pal Tomy hey David this is Tommy from San Antonio again uh following the steps as you laid them out love house hacking with Clos on the duplex so now I have two properties on my VA loan going forward trying to stack up to 10 I was wondering can you give me three actionable steps to make sure that I can fill up using conventional loans multiple times over and over ideally moving out every year is it just bringing in the most income that I can in each year or what particular guidelines any suggestions you have would be appreciated keep rocking it okay so I think I know what he's saying here basically we always talk about on the show uh how house hacking is the ultimate Catalyst for wealth and you often talk about how hey you can buy a property for three and a half% down and then you can live in it for a year and then after that year you can put three and a half% down again on another property and move into that one so I think he's looking for more of like a bulleted action plan on how someone would actually achieve that yeah and I'm going to recommend the sneaky rental tactic to our old buddy Tomy from San Antony the sneaky rental tactic it's really I mean a lot of these strategies are really simple but we give them cool names like Burr and house hack it basically just means you buy a house with a primary residence loan which is incredibly powerful you get a slightly better interest rate but you get way lower of a down payment I mean if you just think about the difference between putting 3% down and 20% down you can buy almost seven houses with 3% down than you could buy one with 20% % down it's crazy you don't even have to save that much money and often if you're house hacking and saving on your mortgage that is going to provide the 3% in savings that you would need to buy the next house so you house hack one time keep your mortgage lower that provides your down payment for the next one and you just move every single year that's why people don't do it they just don't want the discomfort of having to move instead they'd rather have the discomfort of working a job that they hate for 40 or 50 years and going into retirement broke but if you can live like no one else now you can live like no one else later to quot our old buddy Davey Ramsey so that's what I say is you buy the house with a primary residence loan you live in it for a year then you move out and buy another one and make the one that you bought into a rental just like Tomy did with this duplex and we just call the sneaky rental strategy because you bought a rental property but you did it completely legally with a primary residence loan being sneaky yeah I mean and I think you know I wonder if there's anything to say about like obviously 3 and a half% the reason that this is such a good strategy is because it really you know on most houses let's say they're between two to 400,000 bucks I mean on the high end of that let me do that math really fast on the high end of that it's like 12,000 bucks right so that means you have to figure out how to save an extra, every single month for the next year to save up enough money to put down on the next property so figure out what kind of side hustle can you take extra shifts can you work an extra job is there something you can do can you sell your time obviously that's not the best approach when you're trying to scale but considering your closer to the beginning of this it may be your only option but what can you do on an hourly basis what can you build what can you sell can you consult to make an extra thousand every single month so that you actually have enough Runway to buy a new house every single year a lot of people know they should budget money but they don't well you know what makes it easier to budget money when you have a goal and for those of us that love real estate investing that next house is a powerful motivator so if you couldn't get yourself to budget your money before now that you know you want to get into real estate investing it can make it easier you'll build better financial habits and ultimately I think you'll live a better life when you're not using retail therapy to solve your problems now that's one of the reasons that I don't share the whole use other people's money do something creative for every single time there's nothing wrong with doing those things but don't make them your bread and butter don't build your entire foundation on I just want to go around the obstacle go through the obstacle and then once you've got a good amount of equity and you're someone like Rob AB solo who knows how to manage real estate you can use some of these creative strategies to accelerate your gains but not to get yourself started so tell me you're on the right path my man like just buy a house every single year and ask yourself what do you have to do to buy it and what type of property do you need to buy so that will cash flow when you move out New Year hey one one final question as we wrap this up Dave so obviously he's trying to acquire 10 properties here and if he's buying a property every single year is that debt stacking up against his DTI is he going to actually be able to qualify for 10 houses in 10 years if he's got you know a lot of debt from all these houses that he's acre it is a good question he'll be able to use the income that he's getting from his renters and also the debt that he's taking on the problem is that first year so when he's living in the house he's not going to be able to use any income that he's receiving to help qualify for the next one but once he moves out of it if the mortgage is $2,000 and he's collecting $2,000 from the tenants they basically offset themselves and so your debt to income stays relatively the same got it and as Eminem said in the sequel to 8 Mile I believe it was called 9mile House hack to house stack and avoid anything that's house whack all right everyone that wraps up our show for today thank you so much for joining us and let us know in the comments what you thought about today's show and if there's anything you think that we didn't cover as well as what you think we should cover in future episodes and remember you can head over to bigger poo.com David and submit your question there if you like seeing green make sure you subscribe wherever you listen to podcast you need need apple or Spotify or Stitcher to tell you when new episodes come so that you don't miss anything cuz you never know what type of Education wisdom and light-hearted comedy you're going to get especially now that we got Rob abis solo joining me and we really appreciate all of your patronage and if you'd like to know more about Rob or I we sure hope you do head over to the show notes where you can find our information and follow us on the socials this is David Green for Rob Taco SAU abis solo signing off [Music] w [Music]

Channel: BiggerPockets

Views: 16,155

Keywords: rental property, buy a rental property, cash flow, raising rent, capital gains, capital gains tax, real estate investing, invest in real estate, how to invest in real estate, cash flow real estate, real estate cash flow, how to raise rents, how to raise your rent, what is capital gains tax, capital gains explained, capital gains tax explained, cash flow vs appreciation, appreciation vs cash flow, real estate, biggerpockets, biggerpockets podcast, seeing greene, investing

Id: xQNES2yE8Jw

Length: 38min 45sec (2325 seconds)

Published: Tue May 07 2024