BiggerPockets Real Estate Podcast - 645: Seeing Greene: Will Borrowing Money from Family Ruin Your Real Estate Deal?

Starting point is 00:00:00 This is the Bigger Pockets podcast show 645. The way I've always approached life or any goal that I have is that there's going to be something about me that has to change to be successful in whatever I want. So if, for instance, I want a better body, I'm going to have to change my eating habits and my workout habits. I'm going to have to go to the gym and develop different muscles or stronger muscles to get what I'm looking for. If you're looking to save money in taxes, you can use some strategies that work with your

Starting point is 00:00:28 current W-2 situation. That is much harder. It would be much easier for you if you found ways to make income that were not beholden to the W-2 world. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast here today with a seeing-green edition of the podcast on these episodes. We take questions from you, our fan base, and those that we are trying to help grow wealth.

Starting point is 00:00:51 And I answer them in-person, myself, giving the best advice that I possibly can. and then we let everybody else hear how the information was disseminated, what my advice was, and most importantly, what I was thinking when I gave it. The goal with this is to help you overcome the obstacles that you're facing in your investing career, give you information to better equip you to build wealth, and make a connection with you because I love you guys and I know you love Bigger Pockets, so we're happy to join. In today's show, we get into some really cool stuff. One of the things is we bring in some private lenders and you get a special treat. You're going to get private lending advice from people who wrote the book on

Starting point is 00:01:26 private lending for bigger pocket. So you're definitely going to enjoy that. I also talk about how to get out of the fear box when you're scared in every step that you want to take in a different direction, gives you something else to be scared about and it bounces you back to right where you started. And then we get into when to sell, when to hold, when to bail and when to fold. So one of our questions is all about, should I keep my house? Should I sell my house? If I sell it, what should I do with it? What's happening in this crazy market? And I take my best stab at that. All this along with some tax advice and some other specialists joining me for backup on this episode. You don't want to miss it.

Starting point is 00:02:00 Really glad you're here. But before we get into the show, today's quick tip, go to biggerpockus.com slash podcasts. You see, all the different BiggerPockets podcasts have their own show pages where you can get cool, free content. If you want to learn how to build a bigger brand for yourself, well, at Biggerpockes.com slash Ari Show, you can get a masterclass from Brandon Turner and how to do just that. We've also got lots of freebies like Scott Trench, the, author of Set for Life and the Bigger Pocket CEO has a free rookie checklist.

Starting point is 00:02:30 Amy Majury has information on a four-second power pitch for raising money. Dave Meyer has data drops with relevant information that you need to make good decisions investing in this market and more. So visit BiggerPockets.com slash podcast. Check out your favorite show and see what free goodies we have for you there. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question.

Starting point is 00:02:56 What if you could buy brand-new construction homes, 10% below market value, and the best markets across the country, without making real estate your second job? That's exactly what rent-to-retirement does. They're a full-service, turnkey investment company, handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%.

Starting point is 00:03:20 They've partnered with bigger pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value in the best markets across the country, without making real estate your second job?

Starting point is 00:03:47 That's exactly what rent to retirement does. They're a full-service, turnkey investment company handling everything for you. In some cases, invests. investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit BiggerPockets.com slash retirement to learn more. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast?

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Starting point is 00:05:37 So I'd like to change the question to how can we use unused depreciation against income from a salary job? The answer is, yes, there are certain things that you do have to do. So either, for example, you have to be active in the real estate and not have very much income from your salary job. Or you could be a real estate professional. Those are very specific tests. Or there are a few other things that you can do that are going to require, frankly, some work with your tax advisor. The challenge is you can never use more than 500,000 of losses from real estate or business against your salary.

Starting point is 00:06:22 That is a strict limitation. Hey, hey, thank you for that. Reply, Tom. That is some very good advice and also very specific. So since Tom has handled the specifics of this, I will take a more general approach with my two cents. The way I've always approached life or any goal that I have is that there's going to be something about me that has to change to be successful in whatever I want. So if, for instance, I want a better body, I'm going to have to change my eating habits and my workout habits. I'm going to have to go to the gym and develop different muscles or stronger muscles to get what I'm looking for.

Starting point is 00:06:55 If you're looking to save money in taxes, you can use some strategies that work with your current W2 situation. That is much harder. It would be much easier for you if you found ways to make income that were not beholden to the W2 world. So I don't think you have to quit your job and just start a brand new venture. But can you look for ways to earn income that would be reported differently than W2 that is much, easier to shelter with the current tax rules that we have. This is why I'm a big proponent of stop looking at it like, should I go W-2 or should I go full-time investing? There's a whole spectrum in between. You can become a loan officer. You can become a real estate agent. You could become

Starting point is 00:07:34 a title officer. You can start a construction company. You could get into pool service. You could be like Tom and become a CPA. There are so many different ways that you can serve in the real estate field and earn income that are different than a W-2 job. And many of these will give you the flexibility to work that opportunity while still having a W-2 job and still investing in real estate. So if you're passionate about real estate, find something within the scope of real estate that you really love, like what I've done, and work that. And if I can help you with that, Prashant, please let me know. I'd be happy to connect you with someone from one of my companies. If you'd like to do that within the world I'm in, and maybe you could reach out to Tom and ask the

Starting point is 00:08:11 same. All right, our next question comes from Darby in West Central, Missouri. I will summarize Darby's question. He is currently in his mid-40s, owns 13 doors made up of single and multi-family properties. His question is rooted in the phrase seasons of life. When Darby started his real estate journey, he was a single man with no children and plenty of free time. Fast forwarding 20 years, he is now happily married with three children and a full-time job in health care. He now has an investment portfolio to manage and maintain and a hobby farm to look after. Needless to say, Darby is very busy, but he's still hungry and wants to continue. scaling his investment portfolio. He loves the passive income stream that is provided and the increase

Starting point is 00:08:53 in equity he's seen during this inflationary time period that we're in. Darby has a very solid debt to income ratio, still has some cash reserves and a lot of equity that he can deploy from what he's seen, particularly due to inflation in his portfolio. He doesn't need cash flow because he has several steady income streams but would like to focus on long-term appreciation. Darby also mentions that he prefers investing locally because investing out of state appears daunting. He would like to invest in an extremely, but that in all caps, passive way, where I could still balance my career and family while also scaling my portfolio. Interested in your advice, David, and perspective on my investing future.

Starting point is 00:09:33 And I would love to hear your thought on an upcoming podcast. Keep up the good work. All right, Darby, so let's talk about a few things here. You did a very good job of laying out what your goals are. that. You also laid out the challenges. And the bad news in this is that most of what you're describing here is you want to have your cake and eat it to. You want to have extremely passive income. You also want it to be something that's going to grow inflationarily. And you also don't need cash flow. And then you don't want to invest that estate. But you mentioned you're in West Central

Starting point is 00:10:09 Missouri. Now, I'm not an expert on your area. But when I just think off the top of my head about West Central Missouri, I don't picture any rapid appreciation type of environment happening in that location. If you're looking for appreciation, there's two ways that you get it. You have forced appreciation. That would be finding a property and adding value to it. In the multifamily space, this would be increasing the NOI. And you do that by increasing rents and lowering expenses. That's going to take quite a bit of your time, which you've also mentioned you don't want to do. The other way outside of force appreciation would be natural appreciations. And this would be investing in a market that is seeing increasing demand but steady supply or restricted supply so that the scarcity of the resources that everybody wants makes the prices go up. And that is an actual legit concrete method that you can use to put appreciation in your favor. Appreciation is not always the same as speculation, which is just hoping that prices go up. There's actually things that you can do and decisions that you can make that put the odds in your favor of that happening. That's one of the ways that I'm investing. And it sounds like you want the same.

Starting point is 00:11:14 The problem with forced appreciation is it's going to take time and effort, which you've said you don't want to do. The problem with natural appreciation is you're going to have to pick a market outside of Missouri. That's also something that you've said you don't want to do. You're also in a position with golden handcuffs. So you've got income coming in. You don't need to do this, but you'd like to do this. So you are in a position that I often call the fear box. And it's not the perfect analogy because I don't know if you're necessarily afraid, but it works the same way for people that are.

Starting point is 00:11:42 So imagine that you're in the middle of a box or maybe a field. And you don't like where you are in life. So you want to go somewhere else. And you're looking outside and you're like, ooh, I could go there. I could go there. Anywhere's better than where I am. Which direction do I want to go? And you start walking in that direction.

Starting point is 00:11:57 And then you hit something that scares you. It's like an electric fence in that field. Ooh, I don't want to go out of state. Okay, I'm going to come right back to where I was. And then you start walking in a different direction. Ooh, that looks like it's too much work. I don't want to go there. And you start walking back to where you were.

Starting point is 00:12:10 You start going in a different direction. that looks like it's got a little bit too risk. I don't want to go there. And you bounce around from all the things that you find that you don't like and you find yourself exactly where you started in the very middle of this field and you're still not happy with where you're at. And I understand that is why you reached out and you submitted this question to us here at Bigger Pockets on the C and Green Edition and I appreciate that. But what I'm getting at is you're going to have to let go of something. You're not going to pull this off with all the restrictions that you're putting on yourself. if you want something super passive, you're probably not going to get a lot of appreciation.

Starting point is 00:12:47 Unless you go into a market where you can get that. There's plenty of markets I can give you right now where I'm saying, hey, you could buy a property. It's not going to cash flow a ton. It's probably going to go up a lot in value. And in the future, it's going to cash flow ridiculously well. But that means investing out of state. Or I can say, hey, you can create a ton of appreciation by buying a property and adding

Starting point is 00:13:04 value to it. But that's not going to be extremely passive. So I think rather than trying to find an investment that doesn't exist, you'd be better off to say of everything I'm worried about, investing out of state, putting a lot of work into what I'm going to be doing, needing appreciation, not wanting a whole bunch of effort to be spent. You're going to have to let go with something. You have to make peace with that. My advice would be to let go of the fear of investing out of state. I think that's the easiest hurdle of everything you mentioned to get over. So I think you should find an area that a lot of either Californian or New Yorkers are moving too. This could be like the area of Texas, maybe Dallas or Frisco, you like to see a lot of appreciation there. Austin, I think, still has a lot of room to run. South Florida is exploding right now. You've got a ton of opportunity in that market. You've got areas in suburbs around Nashville or around Atlanta that we're going to likely continue to see a lot of really strong growth. I think Savannah, Georgia is primed to do really well as more people move there. And both South and North Carolina have a ton

Starting point is 00:14:07 of opportunity that I would expect continued appreciation from businesses and people that are moving there. You would then find a property in one of the best neighborhoods that you could and hire a property manager to manage it. Maybe you get a short-term rental and you pay somebody 25% of the revenue to manage it for you. And that 25% may have been your profit margin. So you're not going to cash flow a ton. But by buying in the best neighborhood that you possibly can and getting the best property that you possibly can and waiting, the revenue will slowly grow every year and the property will likely continue to appreciate if you buy in the right area. That would be the simplest solution that I can recommend to you for how you can achieve the appreciation that you want without a ton of

Starting point is 00:14:50 work, but you're going to have to accept that you're walking outside of investing in your state. Another option would be investing in someone else's fund. You could invest in a syndication. You can invest in a fund like Branden's at ODC and just give someone else for money. and let them grow it. That's going to be very passive for you. But I don't think you could say you're getting appreciation. You're getting a return. This is now becoming more like cash flow. So as you can see, there isn't going to be the perfect investment vehicle for everything that you want. And that's probably why you're stuck in the middle of the fear box. Because every single direction that you start walking in, there's something that you don't like about it. So in order to create a path for yourself out of it,

Starting point is 00:15:29 I'll summarize my advice here, figure out what you are most okay with. compromising on and go in that direction. My advice would be to invest in a growing market. Don't worry as much about cash flow. Because you've already got a lot of cash flow, pick the best neighborhood, the best property in the best market that you can and let time do its thing. Hey Dave, John Ramboree from Orlando, Florida here. I've been listening in bigger pockets for roughly about three years now. And I have a question that probably a lot of people are asking, which is, do I sell? So some background. I bought this place just over a year ago. It's my one and sold property at the moment. However, I bought it for the equity growth and it has grown.

Starting point is 00:16:10 I have about 100K of equity in it at the moment and kind of want to get into a new living situation, cut my living expenses than half, and I want to move into some cash flowing units. However, the market's so crazy right now, one of the options I see is maybe selling this place, pulling out my lakewood asset from it, keeping it aside and maybe six to 12 months when this place looks when the market looks a whole lot better, making some big deals on three, four, five places. My other options to refinance, but the members aren't 100% there. Give me your thoughts. How do I make this market work for me when I have a high equity property?

Starting point is 00:16:52 Thank you. All right. Thank you for that, John. Let's break down some of what you have proposed. First off, if you sell and then rent or live with someone else and wait for the market to what you said improve, which I assume you mean prices are coming down, cash flow opportunities will arise. You're taking a pretty big gamble that that's going to happen.

Starting point is 00:17:13 So I know there's a lot of people out there saying a crash is coming, get out of real estate, wait, and it could happen. I'm not here to say it can't happen or it won't happen. But I would ask a couple questions. What would make that happen? A lot of people say, well, interest rates continuing to rise is going to push home values down. Let's say that's true because it very well could be. The reason that it's pushing home values down is because it's making it more expensive to own them. So if that does happen and home values

Starting point is 00:17:41 come down, you're still not going to achieve the cash flow you want because your mortgage payment is going to be that much higher. Like you don't really avoid the problem of cash flow by just having the market have home values drop. So I don't know that that's the best strategy. Like even if you do get a house at a cheaper price, your mortgage will be higher. You're not going to cash flow. And then if it doesn't happen, well, now you just got out of your asset and now you've got nothing and then the market took off on you. I would probably be looking at hedging your bets. So if I was in your position, I would first ask if I moved out of the house I have now, would it cash flow? I'm assuming the answer is no, and that's why you're not talking about that. So the next question is,

Starting point is 00:18:20 what would have to be different about this house so it would cash flow? And oftentimes, the answer to that question is I would need more units. What if you had a, single-family home with a garage conversion and a separate unit in the back, or a duplex with an ADU, or a house with two levels with separate entrances that also has an ADU, something where you could get more than one unit out of your property. In that situation, it probably will cash flow. So what if you sold the house you're in now and you found a new property that was like that, something that had more than one unit that would make more cash flow for you? You could then buy that property with the low down payment as a primary residence homeowner. This would allow you to get out of a

Starting point is 00:19:03 house that doesn't cash flow into a house that could cash flow if you didn't live in it and probably will still have a cheaper mortgage than what you have now if you are living in it. And it would allow you to save that nest egg, that liquidity that you mentioned to the side in case the market does go down. I like that overall approach. Now, what if the market doesn't go down? Well, you could just look for other properties to buy. You could buy a property that does cash flow. You could buy yourself a short-term rental and then you could have two properties instead of one. You've basically eliminated all of the things that could go wrong. You don't have to worry about the market taken off on you. You don't have to worry about if the market crashes and not having enough capital. You've improved your situation. So if you

Starting point is 00:19:45 do move out of the new house that you buy, it will cash flow and it will become a rental property and you open doors to let yourself buy a new investment property that like a possible short-term rental that can earn you more cash and get you more experience investing in real estate. So this is advice that I often give. When people are in an either-or situation, try to be creative and look for a way to get away from either-or to give yourself multiple options. I always feel better having multiple options, especially if you've got a lot of equity because you don't have to move all that equity from one house into a new house. You can often spread it out amongst a couple, like you mentioned. Hope that helps and let us know how that goes. All right, we've had some great questions so far,

Starting point is 00:20:26 and I want to thank everybody for submitting. Please continue to submit your questions at biggerpockets.com slash David. And in addition to doing that, please continue to comment on YouTube. And this segment of the show, I like to read some of the comments that you all have left on BiggerPockets YouTube page and see what you're thinking. Comment number one comes from Stephanie Mokris. Okay, I am official. addicted to the Bigger Pockets podcast. I'm a travel nurse with a one hour and 20 minute commute, and I love listening to you guys while driving. Thank you for all the value provided to your audience. I do have a question regarding this series. What is the strategy used to pay the private lenders

Starting point is 00:21:03 back? I can see in a flip or a burr, but how about if the borrower used the private money for a turnkey property? Okay, that's not just a comment, it's a comment mixed with a question. That's pretty cool. We got a little hybrid here. Thank you for that, Stephanie. All right, when I borrow private money, which I do pretty frequently, there's been a lot of people that have been sending me money, and then I pay them a return. I kind of set it up like a bank. So instead of it at the end of when I pay them money back, they get it with interest. While I have their money, I just deposit the interest into their account every single month. So they get access to that capital.

Starting point is 00:21:36 It almost functions like passive income, and it's as passive as possible because they don't do anything. They just get a check, or actually, no, they even get a check because they'd have to deposit that. They get a direct deposit into their account. All they have to do is pull up that. app on their phone and check to see that they made money. And I can pay that money back in several ways. Oftentimes, it could come from the refinance of a property. It could come from the refinance of a different property and then I could use that money to pay back that person's loan. It could also come from the good old-fashioned way of me just earning more money, right? I borrow money because

Starting point is 00:22:07 I make money in several different ways and so I have it coming in at all different times and I can pay back loans just by saving up money and paying it back. It could come from money that I have in reserves that in a worst case scenario, I could just pull it out of reserves and I could pay somebody back their capital. It could come from selling a property or a couple other properties. At any given time, I have several properties that I own free and clear. And I could refinance those and reinvest the money, but I'd rather borrow the money from other people, get them paid passively, develop a relationship with them, and then keep the equity that I have in my properties as a safety net. So I could always refinance those and pay it back. To your point, you said, what if someone borrows money to buy a

Starting point is 00:22:46 turnkey property. That could be dangerous because turnkey properties are typically not coming with any equity. So a refinance is usually not an option. They're often in areas that don't appreciate as much, not every one of them, but turnkey companies tend to operate in mass in low appreciation, but high cash flow markets. So if that's something that you do, you are going to have to have a plan for how you get that money back or else you're going to have to sell to repay the person and you don't know where the market's going to be when you go to sell. Now that's becoming risky. in general, if someone isn't making a lot of income, isn't saving money, and doesn't have a plan to pay back their investor, they probably shouldn't be using private money, and they definitely shouldn't be doing it to buy a turnkey property. Next comment comes from Dakota Slatton.

Starting point is 00:23:32 I love the content. I'm 20 years old. These videos give me great pointers to get my foot in the door. Greatest podcast all around. Ah, thank you for that, Dakota. I appreciate your sweet words there. Hopefully we continue to impress you and do our job of holding. your attention and giving you value. Last comment comes from pure unwind ASMR. This was related to the

Starting point is 00:23:52 Amy Majuri podcast we just did on raising private money. This is so powerful and I'm going to rewatch all four when they're available. Thank you so much for this. Well, that feels good to hear too. I'm glad we are providing value and helping improve your lives because that's all that really matters in this entire world, a beautiful chaos that we live in. All right, we love it and we appreciate your engagement, please continue to do so. Like, comment, subscribe on YouTube. And if you're listening to this podcast on an app, please give us an honest rating and review there, whether it's iTunes, Spotify, SoundCloud, Stitcher. Let us know what you think about the podcast and give us a rating. It helps us reach more people. Thank you very much for that. People love to call real estate

Starting point is 00:24:33 passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with BiggerPockets for over a decade, and if you want to learn more, visit BiggerPockets.com slash retirement. People love to call real estate passive income, which is interesting

Starting point is 00:25:16 because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with BiggerPockets for over a decade. And if you want to learn more, visit BiggerPockets.com slash retirement. Tired of traditional lenders holding you back, host financial is here to change the game. They've ditched the DTI restrictions

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Starting point is 00:26:54 Sign up for free at avail.co-Biggerpockets. That's A-V-A-I-L-C-O-Bigger Pockets. I recently had the pleasure of meeting Alex Bishiers and Beth Johnson, Bigger Pocket Publishing's newest authors who wrote a book, Invest to Live, about how to raise private capital or use private lenders to grow your portfolio. And I thought it would be a good idea to bring them in as some backup here to help me answer questions, particularly about raising capital and borrowing money to invest in real estate. So let's see what they have to say.

Starting point is 00:27:28 All right, ladies and gentlemen, thank you for joining me. We are going to jump right into this. So the first question is from Brock Dowice. And Brock says, hey, David, I know you are taking on exclusively debt investors to save yourself some time and effort in terms of getting everyone up to speed. I am curious, what would you consider to be favorable equity payouts on private lending, specifically for high-end flipping $1.5 million plus? Alex, let's start with you.

Starting point is 00:27:55 What do you think about that question? I think that really depends on having a conversation with the person that's going to be providing the capital. Because really, realistically, if you are trying to use it. someone else's capital figuring out what their pain point is, do they want steady cash flow? Are they lending because they need that cash flow to live off of? Or are they trying to get a big payout lump some, which would be more like equity investing? So when you talk about that, really you want to talk with them about what their ultimate goal is and then you can structure the deal in favor of

Starting point is 00:28:27 what their goal is. Since you, since Brock specifically mentioned equity, the equity side would be something it's laid out in the operating agreement between you and whoever this other person is. So that can be fully negotiated as far as percentage of equity. You might want to outline and let them know if they are asking for equity, that they could get some of the downside, too. Equity's not always up. You know, we're kind of in a strange time right now. So making them aware that there is a downside to being on the equity side where, yeah, it sounds great. You're going to get 20% of, you know, whatever the net profits are. but you might also be getting 20% of what the net losses are too. So that's why I say have a conversation with the person first.

Starting point is 00:29:10 So important to acknowledge that the assumption is how high of a return can I get. Oh, if I can get equity in the deal, I can get it higher. You're also losing the floor when you lose the ceiling. And so that's very important to acknowledge. Beth, what say you? I generally like debt more than I like equity. I can see it in some circumstances where they want to offset the actual interest rate so that they can keep carrying costs low and then push that towards the equity side of things.

Starting point is 00:29:35 But as an investor, I don't typically like that simply because I feel like that leaves too many cooks in the kitchen. And even though they're supposed to be playing a silent role or a passive role, there's so much vested into it that they can sort of meddle that I've seen in certain circumstances. And then as a lender, I truly like being in a passive role. That's why I choose being in a debt position as opposed to an equity position. I don't have to care quite as much. So, you know, there's ways in which it works well for some people. It's just not something that I'm a super fan of just because it creates a little bit of conflict of interest.

Starting point is 00:30:08 So I think you mentioned saying that you prefer the equity side. Did you mean you prefer the debt side in the beginning? Oh, I'm sorry. Yes, the debt side. I might have heard you wrong, but you're saying you do prefer to bring in people as debt or sorry, as equity. No, I'm getting myself confused. You prefer to work with people who are coming into your deals as debt. investors versus equity, correct? Correct. Yeah. And you made a very good point that as soon as somebody

Starting point is 00:30:31 has equity in the deal, now there's almost an entitlement. This is my deal too. I want to use this color of flooring or I want to price the house here or can we use my cousin as the real estate agent? Have you seen some problems like that pop up with your deals? I have. I mean, from having that silent partner to show up on the job site, you may not even be there as the active investor and they're having conversations with the contractors. They're trying to make some decisions and insert themselves calling and texting you from the location and wanting to know this and that. And it just becomes a little bit cumbersome to say the least, right? So yeah, I just choose to either be on the debt side or the equity side. Just makes things a little cleaner to know what your roles

Starting point is 00:31:12 and responsibilities are. That sounds like you've got some good stories there for another time. I have a lot of war stories to share. Some bind and some from my investors. Rob, what do you think about this? Yeah, this is a tough one because I think it can go. both ways. And it's obviously going to depend on what kind of transaction we're talking about. Is it a flip? Is it something that you're trying to buy long term? For example, I just bought a hotel. It's a 20 unit. And we have an investor on that, but he's an equity partner on that. And that's a little bit of a different deal because he is incentivized strictly on the IRA and then the sale price that we'll have in three to five years once everything is stabilized. And that was really enticing to him, right? The

Starting point is 00:31:53 the possible cap rate in the exit there. And he wants to be a long-term partner too. But on the flip side of this, I guess if I were going to have it my way, debt is always cheaper than equity in the long run, I think, you know, for most successful deals. And when you have someone in from an equity standpoint, that investor has a vested interest in the performance of that property. And thus, there's a little bit more emotion that I think can get mixed into that, which leads to too many cooks in the kitchen, too much micromanaging. Whereas from a debt standpoint, obviously there's the vested interest that they want you to pay them back and be successful, but it's very black and white. You get paid this. This is a guaranteed return from a debt standpoint.

Starting point is 00:32:37 You'll get a 10% on your cash, whatever it is, whatever you agree on. And it's just a lot simpler and cleaner. I think that you can really keep the emotion out of that because it's just a much easier calculation to make and model for personally. Okay. Next question from Nadia Chase. Hello, David, I have a family member in Switzerland that is willing to partner with us. She is about to retire and is able to ask for a lump sum of money in advance. She said she's thinking about asking $100,000 and either lend us that money as a private lender for us or be a silent partner in one of our investments. We have some experience with private lending. We are not sure how to structure the silent partner option.

Starting point is 00:33:13 And if there are other things we would need to research when working with money that would come from outside the country, finally, which of these two options would you recommend? commend. Thank you a lot. Beth, what do you think? Well, I think we already discovered that, you know, debt is probably going to be cheaper and easier than having an equity position. That said, I think that there are some concerns on the legal and the tax side of things that they would need to shore up first before they entered into some sort of arrangement together legally. And first off, I want to retire and get access to $100,000 lump sum. I'm not sure how that works in Switzerland, but I should just call that out there because that's kind of fun. And so generally speaking for us when it comes to creating joint venture agreements,

Starting point is 00:34:00 we like to come up with at least an MOU or a memo of understanding that helps outline the implications financially, rules and responsibilities, exit strategies, disillusion, and some sort of structured legal arrangement. But again, I think that there's some concerns just having them based in Switzerland and the folks being based in America that could have some challenges legally and tax-wise. Yeah, I actually want to dive into that a little bit because I don't think I've really run across an MOU, very intriguing. How is that really differing from a joint venture or from like an operating agreement? Because I feel a lot of that stuff is typically in those agreements, but what's

Starting point is 00:34:41 different from that? What differentiates them? Well, I'm not an attorney. And we've had attorneys draft up for us before, but I feel like there's a little bit more of a looser construct in terms of just outlining roles and responsibilities, what the capital inclusion might be. It's a little looser framework, but it still has some legal parameters around it. I find oftentimes, especially with my borrowers that we lend to, when we see their operating agreements, a lot of the times they're just canned. Their boilerplate templates, there can be from, you know, online or from an attorney, but they don't really bake into the agreement what the specific scenario might be in terms of who's providing what capital, who does the project management,

Starting point is 00:35:24 how are you going to get your money back out? Is your capital going to be placed in as debt, as opposed to being just your personal part of the project? So MOUs are just how we've started the conversation and drafted them up in a legal framework. We've either, notarized and signed those with the help of an attorney or they've been translated into an operating agreement so that it's baked into something that's a little more specific to this particular venture. Alex, what's your thoughts on this? And I realize I read that question a little while ago. So if you need a refresher, let me know. Oh, no, I'm good. I think Beth pretty much handled the kind of the legal aspect. So the way I'm going to look at it actually is from a relationship

Starting point is 00:36:05 standpoint. So anybody, I get questions like this a lot. You know, my best friend's cousin wants to start a real estate investing business, what do I do? And I always tell people the fastest way to lose friends and family is to lend each other money. So this is someone who's in the family and it's retirement money. So a lot of people take that relationship for granted and be like, oh, you know, I trust them. Don't worry about it. You know, this is my aunt. You know, we're good. We don't need anything because we inherently trust each other because we're family. But in reality, that's probably the situations you need it the most. So like what Beth mentioned, where the framework's already in place, it's on paper, it's black and white. If this happens, then this other thing happens and you're taking

Starting point is 00:36:49 the emotion of the relationship out. So I would definitely say anybody that's thinking about investing with friends and family, even if they're outside of the country or inside of the country, take that into consideration that this, how valuable is this relationship to you? So if this goes bad, is that going to make Christmas dinner really awkward for the rest of your life? Because that might not be worth it. Yeah, it might be cheap capital, but what is it costing you in human capital? That is a great point. I found the quality of relationship is always based on the expectations of the parties. And when you're working with someone close to you, in my experience, whether you're representing them selling their house or you're doing some form of business with them, they tend to

Starting point is 00:37:28 look at it like you're going to give them something extra more than what everybody else gets. And the person who's using the money is like, no, we have an agreement in places as a professional relationship. You're used to it from people that are expecting to be professional. And I rarely have ever seen those expectations lower with family. You think it's going to be easier. It's probably easier to get into it, but it is much harder once you're there. So I like that advice. Maybe don't go with friends and family unless that's your only option. It would be better to find someone that you don't know that has more reasonable expectations. So last question. Hi, David and team. My husband and I have contacted several banks regarding lending parameters and have been unable to

Starting point is 00:38:07 identify any lender who would provide a multifamily loan for house hacking with less than 20% down. Do you have a product that allows for less than 20% down towards a multifamily that would be our primary residence? Or do you have any advice about how we could go about acquiring one? Ladies, how do you feel about that? Well, I was going to punt back to David just simply because, I mean, I think that FHA loans can allow, but it's for one to three units. But it's not something that you can technically do most often in a hard money or private money role because it has to be non-owner-occupied. Yeah, I mean, I'm going to say the primary residence part is going to be the sticking point

Starting point is 00:38:42 where, because that falls under any federal regulations as opposed to non-owner-occupied investment property falls under state regulations. And it's very different licensing requirements, very different limits. You know, there's a lot of consumer protection laws in place for primary residences. So that's the difference we are running into. So at the one brokerage, we can do 15% down on a duplex, but three or three or four units, it's going to be 20% down even on a primary residence. That's a new change that was just made for conventional loans. And then you can still go FHA though. So, or FHA or VA, you can get those terms on multifamily housing. So one thing that people do is they'll use an FHA loan to get in and then

Starting point is 00:39:21 they'll refinance it a conventional, even if the rate isn't better. And then they have another FHA loan that they can use for future properties. So if you're willing to play that game, you can do it. But it is a little trickier because multifamily housing is what everybody wants to do for house hacking. It's the easiest way to get into that. And then these regulations were just changed. But it didn't necessarily drop the demand for multifamily housing down because there's so many people that are trying to park their money somewhere. They just did a 1031 exchange. They've got 400 grand. They have to put somewhere. They're not going to go buy a single family house. They're going to buy a triplex. They're going to buy a fourplex. And so these things, at least in the areas that I invest in and work in, are just

Starting point is 00:39:57 getting sucked off the market so fast. There's so much demand for those. So it's tricky for the person that was trying to get into the market, which is what most people that are listening to our podcast are looking to do. So what we recommend people do is instead of just going for multifamily housing, find a house with an ADU, find a house you can convert the garage, find a house that is sort of structured to where it can already be rented out as two units or three units. And many times those are in areas that are zoned for multifamily housing as well. Very good answers, though. I'm impressed with everybody so far. I think you guys for helping me there. All right, that was our show. I hope you liked it. I know it's been a while since we've had

Starting point is 00:40:32 a seeing Green, so I just wanted to say, we're back and I appreciate you guys being here. Please again, let us know on YouTube in the comment section what you think, what you'd like to see more of, what you enjoyed, and maybe what you didn't enjoy so we can avoid doing that in the future. You could follow me online. I'm at David Green 24. Check out my Instagram. That's what I am on Facebook. It's what I am on Twitter, LinkedIn, pretty much everywhere. Or I'm on YouTube at David Green Real Estate. So YouTube.com slash David Green Real Estate. And then please like and share and subscribe to the Bigger Pocket's YouTube channel. Share this with everyone you know so that we can reach more people. I appreciate you guys. If you have any questions, you can message me

Starting point is 00:41:11 through Bigger Pockets or on my social media. And I will see you on the next. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10% below market value, in the best markets across the country, without making real estate your second job? That's exactly what rent-to-retirement does.

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BiggerPockets Real Estate Podcast - 645: Seeing Greene: Will Borrowing Money from Family Ruin Your Real Estate Deal?

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