BiggerPockets Real Estate Podcast - 762: The US Dollar’s Downfall, Flipping vs. BRRRING, and Where to Find Cash Flow

Episode Date: May 7, 2023

The US dollar could be ousted as the world’s reserve currency as more and more countries move away from using a dollar-backed standard for trade. This could lead to an economic domino effect causing more inflation and a difficult domestic economy. But what will this do to the housing market? How will investors be affected, and will this global move put downward pressure on the US economy? Welcome back to another Seeing Greene where your “this is just my opinion” host, David Greene, shares his take on economics, lending, investing, and where to find cash flow in 2023. This time around, David touches on topics like flipping vs. BRRRRing and which makes more sense with high mortgage rates, why using a HELOC to invest in real estate could be risky, what to do when your rental won’t cash flow, and how to turn a troublesome rental into a fully-occupied cash cow. Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot! In This Episode We Cover: Why the US dollar is in danger and what it means for real estate investing  BRRRRing vs. flipping and what to do when high interest rates are eating your cash flow Using a HELOC to fund your down payment and the danger of doing so in 2023 How to get pre-approved for a mortgage as a self-employed individual  What to do when your rental property is losing money, and where to invest IF you sell it Real estate side hustles and how to learn while earning some extra income  How to increase occupancy when your rental property isn’t getting tenants  And So Much More! Links from the Show Find an Agent Find a Lender BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch BPCON2023 Listen to All Your Favorite BiggerPockets Podcasts in One Place Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area David's BiggerPockets Profile David's Instagram David’s YouTube Channel Work with David BiggerPockets Lenders BiggerPockets Webinars Seeing Greene 750 Jessie Dillon on The “Real Estate Rookie” Podcast Joe Asamoah’s Section 8 Rentals Proof That David Greene Has Legs! Enter to Win a FREE Copy of David's New Book, "Pillars of Wealth" Books Mentioned in the Show: BRRRR by David Greene Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-762 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the bigger Pockus podcast episode 762. I don't know that I'd say it's apparent that the dollar will no longer be the world's reserve currency, but it is moving in that direction, and I've been talking about this for years. So we've known that inflation is going to be a problem since before COVID, especially during COVID. We've known that we've printed so much of our money, and America's position within the global market has weakened to the point that other countries don't feel like they have to keep the dollar as the reserve currency. If the world stops using the dollar as the reserve currency,

there is a very high chance that money that is in other countries is going to flood back into our country. What's going on, everyone? It is David Green, your host of the Bigger Pockets Real Estate podcast here today with a seeing green episode where I do my best to bring the heat to teach you more about real estate, to answer your questions and to expand your knowledge base when it comes to real estate investing and I think we hit it out of the park today. Today's show is fantastic. We talk about what to do when your STR or short-term rental is no longer cash flowing and it's time to move on to a new deal.

We get into when you should use the Burr method specifically when you're using HELOC money as well as some other issues regarding HELOC money and the best use for it. How the dollar may impact real estate investing in America was likely to happen if the U.S. dollar loses its position as the reserve current. of the country, which we've been talking about on the podcast for a while. All that and more on a fantastic show. You've upgraded how to buy properties, but did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab.

That's where blind spots can creep in. Enreg works exclusively with real estate investors. They understand portfolios, how risk compounds as you grow, and why insurance should protect your upside, not just a checkbox. One uncovered claim can undo years of progress. Before your next acquisition, review your insurance. Talk to NREG and get investor-specific coverage from specialists who actually understand real estate at NRE.com slash BPPod. That's NREIG.com slash BPPod.

What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky DTI restrictions. They focus on your property's income potential. No tax returns or personal income statements needed. Simple, efficient, and tailored for investors like you. Imagine a lender that sees the gold mine in your property, not just the numbers on your paycheck. That's the host financial difference. And they're approved in 47 different states, so your next big deal could be just around the corner.

Ready to unlock your property's true potential? Visit hostfinancial.com. Don't let old school lending hold you back another day. That's hostfinancial.com. Running your real estate business doesn't have to feel like juggling five different tools, and the tools are blades. or flaming torches. With Resimply, you can pull motivated seller lists,

skip trace them instantly, for free, and reach out with calls or texts, all from one streamlined platform. The real magic? AI agents that answer inbound calls, follow up with prospects, and even grade your conversations so you know where you stand.

That means less time on busy work and more time closing deals. Start your free trial and lock in 50% off your first month at Resimply.com slash bigger pockets. That's R-E-S-I-M-P-L-I-L-C-BeggerPckets. All right, before we get to our first question, today's quick tip is find the expert and let them do the work for you. Learn to leverage your community.

So many of you are asking great questions and you're coming here. But what I then do is want to connect you with the expert that can answer it even better. We have bigger pockets. Have a lot of ways that we can help you with that. You can listen to our regular podcast where we bring in experts in different fields from bookkeeping to construction to appraisals to subject to financing, everything that you could ever want. Contact those people. You could also use the agent finder or under the tools on the biggerpox.com website connected with a lender, with an agent, with a multifamily specialist, whatever you're looking for. You could check out Biggerpockes.com slash boot camps to take a course from a person who will teach you on a specific strategy.

Or you can reach out to me and I will put you in touch with my team, my people, and the people that I use. But whoever it is, however you're doing this, make sure you're talking to the expert and not trying to figure this out yourselves. I wouldn't recommend anybody represent themselves in court. And in the same way, I wouldn't recommend that anybody try to learn the jobs of other people involved in the real estate transaction. Focus on what you do best and let them do what they do best. All right, let's get to our first question. I'm excited. Hey, David, my name's Josh.

I've done about a half dozen deals now in the Grand Rapids and Lansing area of Michigan. So I'm, you know, getting my feet wet and doing okay. and my question revolves around, I'm doing my first burr, and it's actually working out pretty good. I purchased the property for $42,000. I've got 55 into the rehab, all said and done, closing costs and everything. And I just had a desktop appraisal done because it's not quite finished yet. I had a desktop appraisal done and it came back at 140, so I should be able to refite 75% LTV and take all my money out, which is great. the issue is that typically when I evaluate properties whether or not I want to buy them,

I look at my cash on cash for the first 12 months. But then after that point, I transition to evaluating properties based on return on equity once they're in my portfolio. This property, because of interest rates, is only going to cash flow about $150 a month, which is fine because I'm leaving nothing behind. So it's an infinite cash on cash, even though it's a little lower monthly cash flow than I would like, typically. But, you know, it's a long-term play, and that'll grow. So, but the issue now is that I have at $40,000 in equity, and I'm only making $150 in cash flow a month.

That's a really low return on equity on day one. So from a, like, ongoing evaluation standpoint, it looks like I should sell the property and flip it instead of keeping it as a burr. So my question is, with interest rates where they are, is it ever the right choice to burr or flip? or I guess to if you're looking at return on equity, is it ever the right choice to Burr instead of flipping or should I just be flipping? Or how do you look to evaluate because my return on equity is going to be really low? But I do want the long-term benefits of another long-term rental in my portfolio. So I'm just a little curious about how you would evaluate these and what your advice would be for a Burr property with a low return on equity because it's a Burr property. So thanks a lot.

Appreciate the podcast. Josh, my man, such a good question and such a good position to find yourself in. This is just going to highlight so many good teaching points. You just won on the price is right and you have to choose between a Ferrari or Lamborghini. That's the situation that you're in. You've got 100% of your initial capital back out of the burr, but you're recognizing with the equity that's left in the deal after the refinance, the $150 a month is not. incredibly high cash flow. Let's go your two options. You could sell it and get the equity back out of the deal, put it in something else, or you could hold it. Benefits of holding. Well, you don't

need to get money out of that deal because you've already got your initial money out. So you still can buy more real estate. This isn't stopping you from buying more real estate. Holding this property over the long term will lead to appreciation and likely rent increases. How to capitalize on that? is in an area that rents are likely to keep going up every single year and the property is likely to appreciate every year. If it's not in one of those areas, if it's in a stale market that just doesn't grow, rents don't increase. We might lean a little bit more towards selling and getting the equity out and putting it into something else. If it's an area where growth, I'd lean more towards holding. Now let's look at the benefits of selling that property. You would get a little bit more

equity out of it, likely, if you sold because you're going to be leaving. That's something about Burr is you get all of your money out, but there is still value left in the deal. For the people who argue Burr is risky because it's increasing leverage, it's not. When you refinance it, say, 75% loan to value or 80% loan to value, that is no different than if you put 20% or 25% down on a house. Just because you get 100% of your capital out, does that mean you get 100% of the equity out of the deal? You're still leaving it in there. But if you sell, you're also going to have closing costs. You're going to have realtor commissions.

You're going to have expenses associated with it. So for more expensive properties, the portion of closing costs is a smaller proportion of the overall money you're getting out. On inexpensive properties, your closing costs are a higher percentage of the money you're getting out. So it usually makes more sense to try to avoid selling or even refinancing in some cases cheaper real estate. Whereas more expensive real estate, you have the best.

benefit of if you have to sell, you're getting more money back than what you're paying in the closing costs. Another expense you'll have if you choose to sell are capital gains. You're probably going to have to do a 1031 if you want to roll over your gains so you don't pay taxes because those can be significant on deals like this, whereas if you hold it, you can avoid that. So once you've considered all of this information, you're in a little bit of a better position to decide if keeping makes more sense than selling. If you sell, you're going to have taxes. You're also going to have closing cost. You may not get as much of that equity back out of the deal as what you're hoping to, unless you do a 1031 exchange. And if you do a 1031 exchange, you got to have the next deal lined up.

Those can be tricky. Most of the time, Josh, you're probably going to be better off holding it, keeping equity in the property, getting your infinite return, that $150 a month and moving on to the next deal. The only time I would say you're better off to sell and not keep has nothing to do with the bird. It just has to do with location. In the same sense that I would look at my portfolio and say, I'm going to keep the properties that are in good locations. I'm going to sell the properties that are in inferior locations. You're in the same boat. I'd look at it the same way.

Thanks for your question, though, and great job. All right, our next question comes from Joe in Florida. How are you evaluating your portfolio and future investing strategy now that is becoming more apparent that the dollar will no longer be the world's reserve currency? Oh, boy, Joe, you're asking the questions I love, but that scare me. I don't know that I'd say it's apparent that the dollar will no longer be the world's reserve currency, but it is moving in that direction. and I've been talking about this for years.

Like if you listen to this podcast, you hear the stuff that they're going to talk about on the news before they start talking about it on the news. And that's because most people don't look at what's going on under the hood of their car until the light comes on, the check engine light, the check oil light, whatever it is. We're sharing with you guys from bigger pockets what we see happening under the hood before the light comes on. So we've known that inflation is going to be a problem since before COVID, especially during COVID.

We've known that we printed so much of our money and America's position. within the global market has weakened to the point that other countries don't feel like they have to keep the dollar as the reserve currency. I will come right out and say, I don't know what's going to happen, but I will share my opinion on what I'm planning on happening because you're asking about my opinion of my portfolio. If the world stops using the dollar as the reserve currency, there is a very high chance that money that is in other countries is going to flood back into our country. Okay?

That means we will have even more inflation than what we have. Just because we're feeling inflation, like most people don't pay attention to what's going on until the symptoms come. But you can't measure your sickness by the symptom. You have to know what's going on inside your body. It's pretty bad. We printed a lot of money so that we could avoid recessions in the past and there will be a price to pay for that.

And it will come from the weakening and potentially destruction of the U.S. dollar. Now, there's things that are working in our favor. Other countries have done the same thing. They've printed too much of their money, but we see what happened. Look at Venezuela. Look at a lot of other countries that have had serious, serious problems with inflation, which creates affordability issues, which leads to poverty.

And a bigger pocket is we're trying to prevent poverty from happening. So the short answer is, that's why I say we need to buy real estate. That's why I'm buying real estate. If we get massive inflation, the property I bought for $1 million will stop sounding like it's that much money because everything's going to cost $5. million dollars at some point. The things that we think are expensive right now won't be expensive. And I just, guys, just think about this. At one point in our lives, my parents were paying rent that was like $250 a month. Okay. And that felt very expensive. But it was because at that time,

I could buy something of value with the quarter. Like, we used to have, when I was a kid, coins actually were kind of important. I can't remember the last time. I'm, I needed a coin. There's the pain in the butt. At some point, we're just going to get rid of coins. Like, we hardly ever use them, okay? At some point, a million dollars sounded like a lot of money. It still sounds like a lot of money. It's not nearly what it was. And there will come a point in history where we look at a million dollars and think, why is a millionaire a word? All of the book titles that have millionaire in them aren't going to be very important. If any of you that are the younger listeners have wondered why we talk about six-figure jobs, like that's a badge of honor,

you're confused by that. Well, when I was a kid, six-figure jobs meant you were really, it was like the equivalent of making $250,000 a year to be able to make $100,000. This is what inflation does. That process will be sped up if dollars come back into our country or if we can no longer just keep printing money. That's another secondary issue. If the dollar's not the world reserve currency, we can't just keep making more and more

of it and having other countries hold it. What would happen is we would have to actually create more products in America. So not that seeing green is meant to be an economic show, but that does affect real estate, right? So if you think about generally speaking, we import goods from other countries. So other countries make cars, medicine, clothes, everything. I'm wearing a shirt right now that was made America, but that's very rare. Most of them don't come from America. We import useful things from other country, and what do we give them in exchange?

Dollars. Now, dollar has value because it's the world's reserve currency, and so it's considered the safest form of currency. But if that stops happening, they're not going to want our dollars. They're not going to send us their cars, their clothes, our medicine, the things that we need, our supplies. They're not going to trade that for dollars. They're going to insist on something better, like more of those dollars, which creates inflation, or something of value in return.

If that happens, we're going to have to make more stuff in America, which means it will be more expensive. We have labor laws here. We have regulations. We have working conditions that have to be met. We have people that expect a higher wage. I think everyone can agree with me. than in general, it's been hard finding people in America to want to work. COVID kind of showed

what that was like. You've been to a restaurant. They all have signs to say, we're sorry for low staffing. We are trying to hire. If you know anyone who wants a job, have them apply. We can't hire anybody. It's becoming very difficult to get Americans to work, which means if we have to produce our own goods, we're going to have to pay a lot more for those than when we're importing them from a country like China or India. That has a labor force that's worth that is willing to work for less. So what does this mean? It's not good news. It means everything's likely to get more expensive, and that's why I'm encouraging people

to buy real estate. Real estate will collect income that is in proportion to whatever happens with inflation. So rents can go up when inflation goes up. The value of the property will go up as inflation goes up. It's another source of income when everything becomes less affordable. I don't know. I have no idea if that's the way it's actually going to play out. Nobody does, but that's my take on it.

That's what my concern is, and that's why I'm out. out here sounding the alarm that if you can own a home instead of renting, you should. All right. Our next clip comes from Quadra in California. Hello, David. And thank you for taking my question. My main question was I recently received a $200,000 helock on a property that I currently rent out in Wildermar, California. I was thinking about taking that money and trying to invest it in properties in the Midwest. My main question is pretty much a two-part question is how should I go about that? One, should I use the money to buy a property cash or would it be better for me to purchase

properties with a 25% 20-25% down payment and go about acquiring properties that way? Thank you. All right, Quadra. Thank you for that. Congratulations on the HELOC. Let's break down your options. If you go pay cash for a property with the HELOC, I just want to differentiate because your mind will play tricks on you. You're not actually paying cash for a property.

The property still has debt associated with it, although the lien is not on it. The lien is on the investment property that you took the HELOC out on. Now, think about what rates are right now. Your HELOC rate could be 8, 9, 10, 11, 12%, depending on the situation because it is investment property. That's the equivalent of getting an adjustable rate mortgage on the new property at 10, 11, 12%. I don't know exactly where your rate is. And that means it can go up. Okay. So if you're going to go buy that property, it'd probably be very hard to find one that cash flows with a mortgage at above 10, 11, 12%. So don't get caught thinking that you're analyzing the second property as if it

doesn't have debt because they're going to look like they cash flow, but they're not actually going to cash flow if you add the debt. At least it's a great deal, okay? Everything I'm about to say, throw it out the window if it's a great deal. Okay, we're assuming this is just a standard basic deal we're talking about. If you go buy a property and you use the HELOC for 25% of it, you end up paying the higher rate interest, say 10, 11, 12% for 25% of the mortgage and get a lower interest rate, say something in the sixes or maybe low sevens, for 75% of it, which would make the property cheaper, but it will increase your risk. You're now going to have a lot more financing on this property, okay? I would have needed you to bring me a specific deal for me to be able to tell

you if you should use the HELOC or the loan or a hybrid. And we don't have that, so I can't give you that specific advice, but I can't give you general advice. In this market, for most people in most cases, I like using HELOCs for short-term purposes, much more than down payments on new property. I like flipping, starting a business, investing money in some way that's going to get you a return. I like a wholesaler using a HELOC to spend money, 10 grand, 20 grand to send letters that's going to turn into revenue when it comes back and they wholesale it much more than I like them using it to buy a cash flowing asset because those are very, very hard to acquire and find right now. So just something to keep in mind. And if you want me to give you more specific advice,

just submit another question and be like, here's, the deal I'm looking at. Do I want to do it this way or that way? I'd be able to give you better advice with that information. All right, in this segment of the show, we talk about YouTube comments from previous shows. I love getting into this because they get to hear directly from you, the audience. First off, if you'd like to be featured on the show, head to biggerpogs.com slash David. Submit your question, just like our other awesome guests have done. And if you don't want to do that, head over to YouTube and leave us a comment on today's show and I just might read it on a future episode.

Want to increase the likelihood that your comment or question will get featured on seeing green? Make it good. Make it funny. Make it engaging. Make it interesting. We look for the best ones to put on the show. These comments come from episode 750.

The first is from Zach Pate. Building the foundation is so crucial, something I try to put a lot of emphasis on prior to jumping into real estate. By skipping this, it's like trying to build a house on sand. It will never hold up. Wow. You just went full-blown Confucius on us right there, Zach. that's powerful.

And I'm going to step into the roll of broccoli, okay? It's staying green. I'm going to give you your green. No one likes it. No one likes vegetables. I don't like them either. In fact, you didn't ask,

but I'll tell you a little thing about me. When I do eat vegetables, I almost have to combine it with some kind of meat. Like I had asparagus today, I just don't like vegetables. So what I did was I mixed it with the protein that I was eating. Little quick tip about David Green there. Vegetables are not my favorite,

but if I eat them with something I do like, I can stomach them. So I'm trying to take that principle of how I eat vegetables and feed it to you guys in the podcast that I do. I'm trying to give you what you need to hear, but mix it in with something that you want to hear to make it a little more palatable. When it comes to building wealth, when it comes to becoming a millionaire, when it comes to whatever your goals are, it's not going to be what you see on people's social media reels. They are going to take the full dinner and they're going to highlight the ice cream Sunday and show you that to get you to come to the restaurant. They're not going to show you that in order to get the Sunday, you actually have to eat a lot of vegetables first. But wealthy people know this.

The people that are making really, really, really good money in real estate are not living passive lives. They are working a lot, a lot. And sometimes it's okay to say, I don't want that much money because I don't want that much work or risk associated with it. The foundation is everything. You're going to build a foundation by having the right habits. The book I'm working on for Bigger Pockets right now is called Pillars of Wealth. I'll give you guys a URL for that when we have a pre-order for it. and it basically breaks this down.

You have to be good at saving money and budgeting. You have to be good at making money. I call that offense. And then you have to be good at investing. You need to be good at all three. If you don't have all three, you don't have a foundation and you're going to build something very quickly

that's going to collapse when the market changes. So thank you for that, Zach. Our next comment comes from Lillian Luna Garcia. Hi, David. I have a question. I've listened to the Bigger Pockets episodes for over a year. And I've recently got my first deal. I closed at the end of January.

I wanted a fourplex, but was not penciling in. So I got a duplex in Riverside, California County. Hopefully you use one of our agents. I'd love that. I'm house hacking and I'm remodeling the first unit to rent it out. The backhouse has a large garage and I want to make it into an ADU of one bedroom, one bath.

Move into that, then fix the other unit to make it a two bedroom one bath. However, I have to use my credit card to pay for my investment. Do you have a better strategy I can be using to speed up my project? I'm currently doing one unit at a time, paying off my credit card, then doing the next unit. My goal is to make my duplex into the fourplex I originally wanted. Any advice helps. Thank you. All right, Lillian, first off, if you had used a David Green team agent,

tell your agent that you want to talk to me about this, and because you used us, I will answer this for you directly. But for everybody else to hear the advice that I would give you, I'm hoping you don't have to use a credit card. I'm not thrilled with that option unless it's your last, last, last resort. Or if you make really good money and have a really safe job, maybe you can take that risk. one thing you could do is finish the first part of it using private money.

So find a person out there who's getting no return on their money, offer them a 6% return, a 7% return, and make interest-only payments to them for a couple years and use their money to do these remodels. That's the first thing you could do. Then when the remodel is done, you could refinance it, get your money back out, pay off that note, or just keep paying the 6% or 8% interest, whatever you negotiated. that would be much cheaper than a credit card. It would be the first thing I'd look for.

Make sure you give yourself longer than a year. You're going to want a couple years in case something happens. Other than that, Lillian, you're thinking the right way. You couldn't find the fourplex, so you bought the duplex and you made it into a fourplex. This is not just looking for a great deal. This is making a great deal. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have.

Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered.

Have NREG review your insurance with someone who gets investing at NRE.com slash BP pod. That's N-R-E-I-G.com slash BPPod. What if your CRM actually did the hard work for you? I know, crazy. Reis simply lets you pull seller-reli. list, skip trace them at no cost, and contact your leads by caller text without bouncing between apps. Then it's AI agents takeover. Answering calls, following up automatically, even grading your conversations so you can focus on the deals that matter. Everything's under one roof,

designed to simplify your day and scale your business. Start your free trial today and lock in 50% off your first month at resimply.com slash bigger pockets. That's R-E-S-I-M-P-L-I-com slash bigger pockets. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters more than ever in this economy. That's why I like Mind. Unlike other property managers, Mind manages your property like an investment. They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score, and they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. And our next comment comes from Casey Brightwell. Awesome podcast. I've been listening now on and off for about a month

great advice. Thank you for that, Casey. And from EJC. David, you speak often about the need to increase the velocity of money to build wealth. I'm starting to look at my 401k a stored energy that I'd like to put into motion to accelerate my wealth building journey. Wow, this is a disciple of David right here. Way to go. I love the way you're talking. I took a loan out on my 401k when I bought my primary residence years ago. So an additional loan is not an option. I actually looked into an in-service withdrawal, which I've heard some plans allow for an investor to roll into real estate. My retirement plan does not allow me to do this. I'm curious what your thoughts would be on taking a withdrawal that would result in penalties and an increased tax burden for the given year in which the

woods were all is taken. I've gotten hundreds of thousands of dollars locked into my 401k and that money doesn't seem to be performing as well compared to my real estate portfolio. I'd like to continue to build my real estate empire and I almost think that the penalties will be a wash in the long run. What are your thoughts? This is a super good question. All right. So first off, if the penalties are evened out by the gains you make in real estate. Yes, that can be something to be done, but there's not a guarantee they will be. So we're going to tread really lightly when it comes to doing anything that would incur penalties or a tax burden or involve you risking retirement funds. Something that I was thinking when you were describing this is, are you able to take this

retirement plan and roll it over into a self-directed IRA? We have a show coming up with an expert in this area, be in lookout for Karen Hall and the power of investing in real estate and alternative assets with your retirement account should be episode 770. That could change everything. If you could just take it from the form of energy it's in, turn it into a self-directed IRA, which is a different storage of energy that has more flexibility for getting the energy in and out of it, otherwise the money in and out of it. That could answer your question there. If you can't, and you're going to do it with penalties, only do it for a scream and deal. I'm going to say that again, only do it for a screaming deal. Do not do this for a base hit or a decent deal.

When we say it's okay to get base hits or we want to look for base hits, that's assuming we have cash that we're putting into them that is useless as far as increasing its value. Just sitting in the bank losing money to inflation, you're better off to put that into a deal. If you're putting money into a deal that's going to cost you money because you're taking it out of your retirement account, it needs to be better than a single, right? Maybe it has to be a double, triple, double and a half, something like that. All right, I hope you're liking today's show. If so, please go into YouTube and leave me a comment and tell me what you've liked about it, what you like about seeing green, what you think about my vegetable eating confession that I just gave you guys and what you'd like to see more of on the show. Also, if you're listening to this on Spotify, be lookout for the polls.

If you're listening to the show, head over to Spotify and leave us a comment. We want to get better and stay relevant. So drop us a line and share your thoughts and fill out the polls that Spotify asks you about what you like about the show. Our next question is a video question from Harold Blanco in Springfield, Massachusetts. Hey, David. How are you? My name is Harold Blanco. I'm calling from Springfield, Massachusetts. And I have a couple of questions about lending, actually. The first one is the lending requirements, where are the lending requirements for a person that is a self-employed or has an owner of a small business? As you can see behind me, that's Paula's Barn, Inc. Childcare.

My wife and I, we run a child care business out of our house. And I'm looking into buy another house to house to house hack because this house is child care. It's not a business more than anything else. But both my wife and I, we work here full time and this is our business. is how we get our income. And I would like to know what are the requirements, especially for this time that it's so difficult when the interest rate is so high,

and maybe banks are not lending as comfortable as they used to. Also, I have another question about lending. It's, does the, having an IRS debt, or dead with an IRS, have any influence on getting a mortgage loan. Thank you. And I hope you have a wonderful day. Thank you, Harold.

This is a good question. And it also is a good opportunity for me to make a teaching point. Questions on the specifics of a certain trade, like tax questions, mortgage questions, contract questions for real estate, sometimes even construction questions or bookkeeping questions. we do want you bringing those to me here, but I just want you to know I will never be able to give a solid of an answer as a good person in that trade. Now, part of the value I can bring you guys is if you reach out to me, I can connect you with the person who is going to be good. I can connect you with my CPA. I can connect you with a loan officer that I know is good at this because I can give an answer, but it will never be as good as the person who's swinging a hammer every single day when you want to ask about floor choice.

right i sound like i know more about construction than someone who doesn't get into it i don't know anything about construction compared to the people that are in it every day very similar to jihitsu you guys are waiting for a jiu jitsu analogy wait no longer i am really really really good at jihitsu and fighting against people who don't know jiu jitsu and don't know how to fight the minute that i get against somebody who does train i'm terrible okay like 15 year olds could could whip me and there's something to be learned about that in life we're often comparing the people that we look at to ourselves who know nothing, you're like, well, that person's great. But in their world, are they great? Are they one of the better people at their academy?

Are they one of the better people in their world? So, Harold, when it comes to self-employed lending, it is a completely different set of rules, just like you mentioned. Some income counts. Some income doesn't count. Some debt, like the stuff that goes to the government counts. Sometimes it doesn't. You're going to have sometimes child support or alimony payments or back taxes. Most of the time, our loan officers will check with the individual lender and say in your loan program, can they use this income? How many years of income do you need to see from their child care business before you feel good crediting them that income and how much of it will you credit? How many years of taxes does this need to be claimed on? And the reason I can't tell you right

off the bat, this is the way it works, is every lender has different requirements. Now, a good mortgage broker's job is to go do what you're asking for for you. You tell them, here's what I got. They take what you got and they go look for the person that will accept it. We call this like 1099 approvals or self-employed. They're definitely trickier. They take more time. This is why especially if you're self-employed, you don't want to wait until you get a deal on contract and then run to a lender and be like, can you get me a loan?

You don't understand what you're asking for. It's very difficult. W-2 loans tend to be much easier to give. So reach out to me directly. I'll put you in touch with one of the one brokerage guys. They can answer these questions. and for everybody else who's thinking the same thing, it feels safe to get the information like,

how does this work? But the answers change. Just like if you learn construction codes, those codes change. The rules change. The way that things are done often change. You actually have to have a contractor that's aware of what the shifting regulations are.

So a little quick tip for everybody that's listening here, send me your questions, but know that it's better to be directed to the expert in this field that can tell you, like a CPA that knows the tax code that's changing, then make decisions based off information you heard on a podcast two years ago. Things like bonus depreciation changes with what can be taken. Things like the full-time real estate professional status change. You might have been listening to a podcast from a year ago.

And we said if you're W-2, you can't take bonus depreciation against other forms of income. But now there's the short-term rental loophole, they call it, that you could use. So you always want to talk to the person directly. Just let us a bigger pocket to put you in touch with who those people are. Thank you, Harold. and fingers crossed for you and your wife's business man i love love love small business owners way to go all right now i was going to move on from this question but i actually took a minute to talk to my partner in the one brokerage the company broker christian bashholder and got his take on this as if

we had contacted him ourselves and i will tell you guys what christian said first and foremost it's important to understand there are multiple ways to qualify i kind of mention that to you guys as well If this is specifically referring to conforming guidelines, which I'm assuming it is, which means if this is for a Fannie Mae, Freddie Mac conventional type of loan, any self-employed or business income typically needs to be seasoned for two years on tax return. For conforming loans, that's the general rule, which is why you hear people say you need to show two years of income, two years of income. You'll hear that a lot. That's because that's one of the conforming loan rules. We take the average of the net income, not the gross, and add back depreciation. then divide that number by 12 to get monthly income. Many of you, your heads are already, I don't understand all that. He's using a bunch of big words, which is why I tell you to contact a mortgage broker

and let us figure it out for you. That's what we used to calculate a debt to income ratio, which is what we used to get the pre-approval. If the borrower has been in the business for more than five years, it's possible to qualify with only one year of tax returns instead of averaging out the two years. So if you have five years of experience in the industry, sometimes you can use last year's income, not two years of income. There's also non-conforming products that you can qualify it based on deposits in your bank account. These are called bank statement financing. I've used these loans myself

because it's a pain in the butt to show them all my different income streams and sources and have it all verified that are very forgiving to self-employed borrowers who do not report their taxes perfectly. Second, regarding IRS having the debt you have influenced your debt's income, it does the monthly payments if you're on an assolment plan that has more than 10 months remaining will be added to your debt to income ratio just as any other liability would be. So we would factor that into it for you, give you a pre-approval based on that. Now, had you contacted us, what we would have probably said is, or you can skip all of that, not worry about qualifying off of your income at all, use a debt service coverage ratio loan

that we can qualify you based up the income the property makes, and you can skip all your debt to the IRS and all of the income and all of the taxes. and all the things Harold that I think you don't want coming up, which supports the fact that I'm saying you should contact the person directly and let them solve your problem for you. That's what a good person does, is they solve your problem for you. All right, our next question comes from Jesse Dillon in central Massachusetts. Hi, David, I'm about to sell one of my properties for the first time.

I've owned it for less than a year, but it isn't performing nearly as well as I expected it to, despite tons of analysis and pivoting. Can't say that I've never been there. It's a single family house that I bought as a short-term rental. and it doesn't work as a long-term rental or a medium-term rental rookie mistake. Yeah, but way to go, taking ownership of that, Jesse. It's far from breaking even.

Otherwise, I just write it out as it's in a fine, high-cost, high-appreciation state. Not a good feeling to have made a bad investment, but I'll at least be breaking even, and I learned a lot. Good attitude about this so far. I should walk away with 95K, but I'd have to buy something for 525K plus to do a 1031 exchange, finding a good deal that'll work with less than 20% down on a time current she was possible right now, especially because I'd want to get into a two or three family close by so I couldn't use a vacation home loan again. I'm considering not doing the 1031, using the

money how I want, then figuring out how to offset the $14,000 tax burden. I can add another unit to another property and cash at refi when rates are lower. By another two or three family with 20% down around 400k nearby. Invest passively in someone else's deal by a camper to medium-term rental on my house hack property. The options are overwhelming. If cash flow is my primary goal, what are your thoughts? All right, let's break this down into different components of your question. First off, if you're selling it and you're going to have a gain after everything that's going wrong, that's pretty good. But I thought you said you're breaking even. So you may not, I don't know where the $14,000 tax burden comes from if you're breaking even on this. You might not have a

tax burden unless you 1031 into this deal from a previous deal. And when you say $14,000 burden, does that mean your gain is $14,000 because you'd only be paying a percentage of the gain, which would be insignificant? Or does that mean your gain is like 80,000, 70,000? And so the percentage you have to pay is $14,000. I need a little clarity there because even paying $14,000 in taxes isn't the end of the world if you're getting $95,000 back. Another thing you could consider when we interviewed or when we had Tom Willwright on a previous seeing green episode who helped me out here, we talked about how you don't always have to do a 1031 to shelter the gains.

Sometimes you can take the gains under 1031 by real estate, do a cost segregation study, get bonus depreciation that you take up front. And that is enough to offset the gain that you made when you sold the property so you don't owe taxes. So that's another thing you could look into if you have a CPA you can talk to. If you don't let me know, I'll connect you with one of my folks. Now, if assuming we're past the tax issue and now we're talking about what do I do with the money, you brought up a lot of good options.

But here's it I'm picking up from your question. There seems to be, and I'm totally reading into this because you just wrote it out on, you know, a document, but there seems to be a lot of urgency in what you're saying here. You have all these different options. Do I want to invest passively in someone else's deal, buy another property, you do a cash out refi when rates are lower, buy another multifamily property, buy a camper to put in the back of a deal I already have

to get a little bit more money coming in. I don't think you need to be feeling any urgency at all right now, Jesse. You're good. You got into a deal. You realized it was harder than you thought. You bought it right, which is super important. So now you can get out without a loss

or with a very minimal loss. You got a good education. Don't feel like you got to jump back into something and run full ahead of steam into this. Now, if I break down why people do that, Why I've done that, why this happens in life. It's almost always because we are unhappy with our life right now. We don't like our job.

We don't like our relationship status. We don't like our car. We don't like something about our lives. And we think real estate is going to fix it. And so we get into this irrational exuberance. Just I have to get in there and I have to go buy another property to make everything better. You don't. Take stock of your life as a whole.

If you're not happy with certain parts of it, they might have nothing to do with real estate. And fixing those problems will help. you not make emotional decisions when it comes to real estate and instead you make financially sound decisions when it comes to real estate. So with that $95,000, I would consider looking for a different house hack, a second one. Okay, can you buy another property in a better area that's a better property that has more units, put 5% down and take the house you're living in right now and rent that out with the numbers work there? That'd be the first option. I'd also keep some money in the bank. It's not the end of the world to have some reserves when we don't really know what's going on

with our economy, with our country, with where America sits as a whole, with the next election that's coming up. This is the most uncertainty I've ever seen in the market. I like the idea of sitting on some cash right now and waiting for a great, great deal. All right, I hope that helps. If my answer has got you thinking of new things, Jesse, please submit another question. Let me follow up with this on a future episode. I'd love for us all to be tracking your journey. And if you want to know more about Jesse's story and see the cool person behind the question on seeing green please check out the real estate rookie show episode 231 but don't listen until you're done with this one okay you're in class right now and you're not excused all right our next question

comes from derrick in knoxville tennessee an exploding market hi david i'm 24 years old that's a good number right there i like 24 and i just moved to the west knoxville area i'm trying to invest in a house hack in west knoxville which is the nicest neighborhood and i have a full-time job in marketing i like it and it pays decent i also picked up a part-time job on the weekends and an apart complex as a leasing agent, but it doesn't pay very well. What are some of their fields related to real estate that I can venture into without a high barrier to entry while still working my full-time marketing job? Okay, let's see here. You got a thing for marketing, which is always confusing to me when people say that they work in marketing. I never know what marketing means. Does that mean that you make

flyers? Does that mean that you come up with SEO? Side note, for everybody who's in marketing or everyone who says I'm in marketing, make sure your next statement is telling everyone what that actually means. This is just one of my pet peeves because I can't give you a great answer because I don't know what skills you have, right? If you told me you were an electrician or that you were a bookkeeper, I'd have a very good understanding of what advice I could give you, but marketing is just so vague and mean so many things. Let's work under the assumption that Derek here is very good at getting eyeballs on whatever he's responsible for. I'm guessing that's why he's working in the apartment complex as a leasing agent because he's good with people. He's a very charismatic person. He's friendly.

He likes human beings. That's also why he likes marketing. Look for people that need marketing. And that's going to be a real estate wholesaler or a person who's looking for creative financing or even a flipper. All of those people in real estate need marketing skills to find them off market opportunities. They can't just go to the MLS and look for the deal. They have to go out into the world and get deals to find them. So if you have solid marketing skills and you want to work in real estate, that'd be a great opportunity is find a person who's already flipping a lot of houses, a person who's doing wholesaling deals because you're going to learn from being around them and you're also going to actually have value that you can bring to their company by getting motivated sellers on the hook

to hand it off to them. I want to ask you, seeing green listeners, do you like the topic that we just covered? Are you interested in hearing more about real estate adjacent opportunities? He's not a full-time investor, but not a different W-2 job. Do you want to hear more about ways you can make money in real estate that don't just involve owning the property? If so, leave me a comment on YouTube, and we will work that into future seeing green episodes. All right, we have time for one more question. This one comes from Anthony Wilson in the D.C. area.

Hey, David, Anthony here. I live in the D.C. area. I recently bought a quadplex in the Detroit area, is my home area. As an investment, I'm having a hard time renting out a few of the other. units because they're two bedrooms, but the rooms are very small. So I'm wondering, should I take the wall down and make it a one bedroom that will be a decent size and maybe with that or try a better quality tenant or should I keep fighting through with the two small rooms? One of them can probably just be a nursery or an office. I love to hear your feedback.

Also, I'm looking at a house hack for myself within the next year to get a place. I wasn't sure about staying in the D.C. market, but I might be here for a while now, so I'm going to go ahead and do it. Love to hear your insight on both of these issues. Thanks. Wow, that's a really good question, Anthony. We don't get this very often. Should I convert my two small bedrooms into one big one? First question I would want to ask, where are you getting the intel that the bedrooms are too small so tenants don't like it? Is that from a property manager? Is that your intuition or the tenants are up saying, I won't rent your house because the units are too small? Let's assume that the intel is legit, that it's coming directly from tenants. One thing I would consider before tearing down the wall is renting out as a medium-term rental or a short-term rental,

where people aren't as likely to care about the bedroom being small because they don't live there. They're just needing it to sleep in, basically. If you rent this out to traveling nurses or traveling professionals, they're there to work. They're there to work as much as they can, make as much money as they can. They just need a place to sleep, and this is better than a hotel room. those people won't care about a small bedroom. The person that cares about a small bedroom is going to be the family who is going to be using this for a living and they have all their stuff that they want to put somewhere. Their kids need a place to play.

So understanding your tenant base will really help make the decision on if you should tear down that wall or not. Assuming that you can't do the medium term rental or short term rental and you're going to have to tear down that wall, I would still look for a way to use the space more creatively. If I was going to make one bigger bedroom, I would include. include a nook in there for an office space or a play area, something that was more than just a place to put a bed, right? Like the nursery that you mentioned, I like that. Now, regarding the second part of your question is house hacking in the D.C. area, I would recommend you to look into Section 8 housing.

Dr. Joe Awesomewa has been featured on the Bigger Pocket podcast several times. He's also popular in the forums. He is known for doing very good with his Section 8 method because rents in D.C. for the Section 8 tenants are portionally higher than what the cost of the home is or disproportionately higher. So you get a very solid price-to-rent ratio using that strategy in your area. So if I was going to HouseHack, I would look for a property as many bedrooms as I could possibly get that fit within the guidelines of the Section 8 program. I would live in one unit bedroom. I would rent out the others, however going to do it. After a year, I would now have a

great Section 8 property that I can move out of that I only had to put 5% down or 3.5. half percent down to get. You see where I'm getting at here. Don't just look at the first year you own the property. Buy it for the long term and take advantage of that. It's the best advice I can give you in the DC area when it comes to house hacking. Sorry to hear about the problem of the bedroom being too small. I'd love to see you just to recap. Try to rent it out as a medium or a short term rental before you tear the wall down and lose the bedroom. All right, everybody, that is our show for today. This has been seeing green. I remember to turn the green light on. I wore a green colored shirt here or a green themed shirt.

I talked about broccoli. I talked about vegetables, a lot of green, and hopefully I taught you all how to make a little bit more green through real estate. If you're listening to this on a podcast app, please take a second to give us a five-star review. Those help a ton. And if you want to know more about me,

follow me, see what the heck I'm up to. You can check me out at David Green24.com or your favorite social media at David Green 24. I recently posted a very short video on my Instagram that showed my legs. And I got quite a few DMs of people saying, I did not know you had legs. And I definitely didn't know that they looked like that. So if you want to see what my legs look like or decide like, does David even wear pants? Because we've never seen anything from the waist down on any of these shows.

You could do it on my social media. Lastly, keep in mind that not only do we do the podcast, but we also have videos on the Bigger Pockets YouTube channel. So subscribe to that. that, leave us some comments when you watch them. And keep it out for Bigger Pocket's webinars. We do those from time to time where we teach you guys information for free on specific topics like how to get your first, second or third rental property, how to use the Burr method to grow and scale your portfolio, long distance real estate investing, how to get your next

property in the next 90 days, how to make this next coming up year the best year you've ever had. We have a lot of different topics on these webinars, analyzing properties. We show you exactly how to run the numbers on them. when we take real estate from being scary and make it much more simple. So keep an eye out on actually biggerpockets.com to see when those would be and sign up for those. And if you have a minute, watch another Bigger Pockets video. I'd love to teach you some more.

If not, I will see you guys next week. Thank you so much for watching. Please share this episode with someone that you love and know that I love you guys. Thanks for giving us your attention. I will see you on the next one. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday.

I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Any asset, real estate included, involves risk.

So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.