BiggerPockets Real Estate Podcast - 828: Seeing Greene: How Long to Hold On to a BAD Rental Property

Episode Date: October 8, 2023

DON’T sell your low-cash flow rental property just yet—you could make it a cash cow with one quick strategy switch. At least that’s Rob Abasolo’s advice as he joins David this Sunday for a Seeing Greene episode, where they take questions directly from BiggerPockets listeners, commenters, and reviewers! And even if you don’t have your first rental in the bag, this episode will be worth tuning into. David and Rob discuss whether buying your first property with a fixed vs. adjustable-rate mortgage (ARM) makes more sense with today’s high interest rates. Then, we hear from an investor looking to sell their rentals and move that money into a bigger city with more appreciation potential. The problem? Their rentals are making some serious cash flow. Speaking of cash flow, we hear from an investor who’s got a townhouse that COULD become a rental but would have some meager returns. Is it worth keeping? Tune in to hear answers to all those questions and more! 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: How to turn your low-cash flow rental into a passive income machine  Partnering with family members on a rental and how to split the profits  Fixed-rate mortgages vs. adjustable-rate mortgages (ARMs) and whether the low rate is worth the risk  When to trade your stable, cash-flowing rentals for long-term appreciation in a better market  Why lenders DON’T want you to downgrade to a cheaper primary residence (and how to get around it) 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 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 Davids's BiggerPockets Profile David's Instagram Subscribe to David’s YouTube Channel Rob's BiggerPockets Profile Rob's Instagram Rob's TikTok Rob's Twitter Rob's YouTube Rental Property Calculator Rent Estimator BiggerPockets Podcast 798 with Alex and Leila Hormozi BiggerPockets Podcast 816 Ask David Your Real Estate Investing Question Fixed-Rate vs. Adjustable Rate Mortgages: What’s the Difference? Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-828 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 Pockets podcast show 828. Bigger Pockets has a rental property calculator that you can use to look into this and decide, would that townhome support that rent? You can also call local property managers, meet local real estate investors. You're living in L.A. One of the benefits other than the rattlesnake sausage is all the other people that are out there that are investing in real estate themselves. So take advantage of that.

Talk to people that own townhomes and ask what they're getting for rent. If it doesn't bring in what you need for it to make money and you can't afford to bleed money every month, the answer becomes pretty clear that you need to sell it. What's going on, everyone is David Green, your host of the Bigger Pockets Real Estate podcast, the biggest, the best, the baddest real estate podcast in the world here today with a seeing green episode. In today's shows, we take questions from you, the listener base, the future millionaires, the future financially free. And I do my best to answer them with the knowledge that I've gained with over a decade. of investing in real estate, serving people as a real estate agent, and a loan officer, and more. In today's show, we cover how to structure a short-term rental with a partner, when to go with an adjustable rate versus a fixed-rate mortgage, if you should keep what you got

or invest where it's hot, and more, and as a surprise, I'm joined by my partner today, sort of like Captain America with the Falcon. Rob, Abas Solo, Rob, welcome to seeing Green. Hello, hey, hello, listen, I was really offended there because you talked about the future real estate investors, the future millionaires, but you didn't hit on the most important group of people, the future farmers of America. You heard the word future and your mind went there right away, didn't it? Hey man, the FFA. There was a very popping group in my high school. I wasn't part of it, but I got to see the, I knew lots of good people that raised cows and stuff. That tells you about a

a lot about where Rob grew up, where the cool kids were the future farmers of America. If that is you, if you're in FFA. Keep an eye out on future shows. We may have something about a USDA loan. I know we've interviewed people before that do hog hacking, pig flipping. But in today's show, we are going to talk primarily about real estate, partnerships, structure, moving money around to make more sense and more. Rob, it's nice to have you on today's show, especially with those growing muscles that you've been working on.

Well, you know, David, I had a really great time today, and I appreciate the offer to come on to the show. Listen, if you ever need a day off, I've been kind of thinking maybe we brand this show. You know, we call it like quaffions and answers with Rob Abasolo and David Green or maybe Q&A Basolo. Just a couple of working titles. I'll let you sleep on it. But just wanted to tell you where my head's at, you know, feel free to take a breather here and there. Thank you for that, Rob. I appreciate your quaffidence in the matter. You'll be the first call if I ever need a day off. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate

investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Funrise flagship fund. Now, you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700 a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you.

Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise flagship fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. For decades, real estate has been a cornerstone of the world.

world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700 single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio,

check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. Did you know, your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late-night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now.

Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport, while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time

enjoying your trip. You can relax, knowing guests are taken care of and your place is in good hands. You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. All right, let's get into our first question with Rob and I. Hey, David, love the show. I would like to know your advice on how to structure a deal with family members that want to invest in a short-term rental with me. I'd like to purchase the property as a second home to put 10% down and use their investment for that deal. I'm looking for something in the Hudson Valley in New York for the property.

I currently have a two-unit and a three-unit property in New York with a W-2 job that don't plan on leaving anytime soon. So I want to purchase the short-term rental in my next property to help offset tax liability from my W-2, which my CPA is kind of recommended as the best way to accomplish that. So mainly I wanted to offset taxes from my W2, and they want a place to park their money that will appreciate over time and have a nice rate of return that a short-term render can offer. So outside of investing money in the deal, they don't want to necessarily be involved in any of the

day-to-day management and would like to really just invest their money. So how would you structure a deal to be able to accomplish that and still use that process? I'm already hearing for you. Thanks. Thank you, Ben. This is a very good question. you are thinking the right things and you're asking the right questions. This falls right into your wheelhouse, Rob. Probably not the tax planning part, but definitely the short-term rental part.

So what advice do you have for Ben? Let's start off with your perspective here. Well, it sounds like he's looking for the tax benefits, and the family members aren't looking for the tax benefits. So there are a lot of different ways you could structure this. You could almost structure it to where they get all the appreciation, so all the upside, you get all the tax benefits, and then you split the cash flow down the middle.

That would be the first way to do it. You could also just split everything across the board. And I think you get really interesting territory here when you're working with family because so many things can go wrong. So I think you should almost work harder to make sure that the family member is getting paid back. So I would probably suggest like a waterfall here. They get paid back 75% of the profits and you get paid 25% of it. And then once they get paid back their initial contribution,

then you waterfall the cash flow to be 50-50, all while giving you as much of the tax benefits as you can negotiate. So again, not enough context to know if that's important to the family member. I'm going to say it's probably not because they're not going to be actively managing that short-term rental themselves. So they won't get to take advantage of the cost segregation or the bonus depreciation. So I almost feel like if he's going to be sacrificing 75% of the profits out the gate to pay back that family member, maybe he could negotiate or maybe you Ben can negotiate. keeping 100% of the bonus depreciation. Did you keep up with all that, Dave?

Or was that a bunch of mumbo-jumbo? No, that was really good. And I always love sitting in the position where I get to talk after you do, like Alex said when we interviewed Alex Hormosey and Layla. He likes to let Layla talk first because then he can sum up what she said and add something that maybe she missed.

You always sound smarter. But the real work is done by the person who speaks first. There's basically several benefits to real estate. We typically only talk about cash flow. but there is some tax benefits in this case, there is appreciation, and there is cash. So these are the main three that we see in this deal. So if the person that you're partnering with doesn't care about the tax benefits, then take all of them. They probably care about the cash on cash return.

I think that you could probably structure this where you split the equity 50-50, you split the cash flow 50-50. You keep 100% of the tax benefits for yourself because they don't want it anyways. They're happy to be getting a good return on their money. The only question you didn't ask is how, are you going to split up the management of this asset? Are you going to be doing that work? Are you hiring a third-party company to do it? If you're thinking about hiring a third-party company so that neither of you is doing the work, because your partner has already said they don't want to,

I would caution you to look very closely at the service that you're getting. Sometimes you find a great property manager. Most of the time, the deals don't make sense when you have a third-party person managing it unless you're doing it in-house. I think he has to self-manage because he's doing the bonus depreciation. So he has to materially participate in the management. So I think Ben will be self-managing. And it kind of has to be that way, just for the sake of his invent, like, why would they need him? Good point there. Thank you, Rob, for catching that. I'm a real estate professional because of all the work that I do in the real estate brokerage and the mortgages. So I sometimes forget other people are not in that position, but thank you for bringing that up. He's

going to have to manage it if he wants to get the hours in that he needs to qualify for the short-term mental loophole. So there you go, Ben. You got a really good plan there. I don't think you have to give anything up. I think you go back to your partner and just say, hey, there's some tax benefits that I'm going to get out of this, but that's because I'm running the show. Doesn't hurt you because you can't use them anyways. You're going to get half the equity. You're going to get half the cash flow. And then they're going to contribute the down payment. So fingers crossed for you. I think that's a good resolution. I do think he should do. I think he should have 25% of the cash flow. So he gets a little bit. Investor gets the cash flow. Since Ben is getting the majority.

or all of the tax benefits. That's a very tangible benefit to him. I think that'd be a better way to strike that deal personally. Yeah, Rob, that's a good point. That's an option too. I'd probably go there myself if the partner didn't like the 50-50 split. I'd maybe say, okay, then fine. I'll take 25. You take 75. Definitely a good backup plan. That tends to be how you negotiate, though. You start with what you want. And then if they agree to it, great. And if they don't, then you, okay, here's plan B. Here's plan C. And you keep working down so you find something that works for both of you. The last piece to consider is how you're going to structure. this agreement. You could buy a property and put both of you on title. You could form an entity

that you each own 50% of and then buy the property in that entity. And then that entity has an operating agreement that dictates who's going to be doing what and what the splits are going to be. That might be the cleanest way. So I'd recommend reaching out to a lawyer and having them draw up the documents for you. I have someone that I use for that. If you'd like to DM me, I'd be happy to put you in touch with them. But in general, this doesn't have to be supercarriage. I think you're asking all the right questions and best wishes to you. Thanks for reaching out to seeing green. Before we move on to our next question, Rob, in your answer, you mentioned waterfalls. As a child, I was cautioned not to go chasing them. Can you share for everyone listening what a waterfall is in this context? Sure. Simple terms here. If you have a waterfall agreement, I talked about the 75-25 thing. It basically means that it changed, the terms change. So it goes from 75-25 to 50-50. It waterfalls into a

a different tier once you've returned the capital of that investor. There you go. And that's a principle that works in most partnerships, syndications or partnerships. So you'll often see the silent investors or the limited partners, also known as LPs, will tend to get a preferred return or a higher return that they get out of the cash flow before the sponsors or the general partners get any money. And then once their investment is paid back, the splits switch to something that's more equitable for both parties.

There's just a way of making sure the investors get their capital back out of the deal they put in. and then the returns are adjusted. So thanks, Rob, for helping provide a free education to our bigger pockets listeners. Our next question comes from Melissa N in SoCal. Rob, this is your hood. You spent quite a bit of time in Southern California. You know it well. You took us to a sausage restaurant when we were all there recently,

and I believe you ordered the rattlesnake sausage. Longest I've seen you go without talking, you are definitely into that thing. So I'm going to let you read this question since you might know, Melissa, since you guys grew up in the same area. It's true. Los Angeles is a very small city, so I've probably run into her. So a little bit of background here. Husband is interested in getting me on board with real estate for the last five years, but he's not very convincing. Fun fact, she's saying nice things about us. You made it very easy for me to understand, follow along and stay motivated in this industry. I hope he isn't listening to this episode. Anyways, thank you so much for all the motivation. I'm a big fan of your analogies. We listen to you on our LA commute to work every day. You make the drive something to look forward to. That's very nice. Yeah, before you continue here, uh, every husband. loves for his wife to compliment other men and tell them how they did a much better job than he did. So Melissa, and thank you for that. And to Melissa and's husband who probably is listening to this, I feel you, man. Okay, so the issue, we purchased a townhome house hack in Lakewood, California.

We're in a dilemma because we realize after using bigger pockets rental property calculator, our purchase wasn't as great as we thought it was when we initially bought it for a future rental. So for the pros for keeping, the pros for keeping the property are we want to keep this property as an investment because the area is great for families. It's safe, has great schools, and is within walking distance to so many shops and restaurants, grocery stores, and even a mall. The cons. The problem is we looked at rent in our area, and it doesn't make up for even a small amount of cash flow unless we hike the rent price up. We think part of the problem is that it's a town home, which means we can't expand and there's an HOA. Ew. So the needs. We want to purchase

another property, but we're just not sure if we want to keep this house or house as a long-term investment. If we hike our rent prices up, $500 or more, we could make about $100 in cash flow. We're just not so sure if anyone would pay $3,500 to live in the town home. We're considered in Section 8, but we would have to do more research. My question to you, David and Rob, what would you do in our situation? Would you keep this property and try to rent it out to a family who could afford it for $3,500? Or would you sell it and purchase a single family where we can build an So first off, Ms. Melissa, you've already noticed that the time to use tools to analyze properties like the Bigger Pockets Calculator, which is great, is before you buy the property, not after.

No need to beat that dead horse. You learned that one the hard way. That's okay. It's all about learning. I think what happened is you looked at a town home and you assume that the comps would be the same as the single family homes. They're not comps. Learn that lesson the hard way, too.

That's okay. That's a part of real estate investing. That's one of the reasons that we say everybody should house hack, first because you sort of get some of these little errors or misunderstandings of how the whole thing works out of the way at a relatively low risk experience. Rob got into house hacking when he lived in Los Angeles. I started house hacking. It's how a lot of us sort of learned how to ride a bike. We put the training wheels on before we took them off. So no shame in your game there. I don't think you should look at it like should we raise the rent to 3,500. I think you should look at it as the

question being, can we raise the rent to 3,500? Bigger Pockets has a. rental property calculator that you can use to look into this and decide would that townhome support that rent. You can also call local property managers, meet local real estate investors. You're living in L.A. One of the benefits other than the rattlesnakes sausage is all the other people that are out there that are investing in real estate themselves. So take advantage of that. Talk to people that own townhomes and ask what they're getting for rent. If it doesn't bring in what you need for it to make money and you can't afford to bleed money every month, the answer becomes it's pretty clear that you need to sell it. You sell the property, you reinvest into something

else. That's something that we at the David Green team help people with all the time, how to make good financial decisions with their real estate, reinvest the money into somewhere better. So we'd be happy to help you with that. And then moving forward, I would, my last piece of advice, say, you need to get other people involved in these decisions before you make them. That's one of the things that when we're helping clients with, we're looking into this stuff for you. Your real estate agent really should have known what you were attempting to do with this. And they should have told you a townhome isn't going to cash flow as much. You don't have the right team. This shouldn't be a mistake that you're having to learn the hard way. There should have been other people involved. And if it's not your

agent, if it's not your loan officer, although it should be them, you should have other investors involved in the process. This is something that if you had bounced off of Robber I, we would have known in two seconds. Hey, hey, hey, hang on here. Town homes have HOAs and they also get less rent. Let's slow your role. Let's look into something that's better. But when you're flying solo, you could easily make these mistakes. Rob, what are your thoughts? couple things here. I don't know what the bed bath count of the property is. So that is going to, you know, take what I'm about to say as a grain of salt. Los Angeles County, you cannot really Airbnb there. And even if you could, she's in an HOA. The HOA may not allow it.

Typically, townhome HOAs aren't going to be quite as strict as like neighborhood ones, but you never really know. I actually think it's a perfect play for a midterm rental. I mean, $3,500, if that's what she's trying to lock down, assuming it's at least a $22, I think she'd be able to get the $3,500. But if it's a 3-2 or a 4-3 or anything like that, I think all day she's going to get at a minimum $3,500 in Lakewood, California, which is, you know, I think it's north of Long Beach, east of Los Angeles, I want to say. Never eat slimy warm.

Yeah, east of Los Angeles. And so I really do think as a midterm rental, I mean, she could possibly be making $4,000 to $5,000 a month in rent. It's not like you just list that as a midterm rental and you like rock it, right? Like she has to go and she has to list it on Airbnb for 30 days at a time. She has to build relationships with, you know, health agencies and relocation agencies. I mean, she has to hustle a little bit. But if she wants to not be in this predicament where she's losing money, she's going to have to work for it.

So $3,500 doesn't really scare me. I think it's totally prime for a midterm rental or she was already house hacking before. Just rent out all the rooms. If it's a three bedroom, I think she could probably get, you know, $1,200 or something like that for each room. I don't know enough about the bed bath count for that to be an informed decision, though. Yeah, but if they bought it recently in Los Angeles, even $3,600 is probably not going to be enough to cover the mortgage with where today's rates are. It'd probably need to be like five to six bedrooms before they could expect to make a decent amount there.

Again, we don't know the details of the purchase price, but from what I've seen, most of those properties are going to have a higher mortgage. I agree, but isn't $3,500 the number that she cited? Like, I assume that that's her mortgage. Great point there, Rob, and that's some creative thinking. If you got to get to the 3,500 a month, if you can get 1,200 a room, you're there. It's a little more work. Just like if it's a medium-term rental, it's a little more work. But like you mentioned, Rob, you're going to have to work for it. So go to Craigslist, look up what rooms rent for in that neighborhood. And if it's $800 a room,

this isn't going to work. But if it's close to $1,200, you can get there. Last piece, I'll say, you mentioned should we do Section 8, I forgot to address this earlier. You don't control the rents on section 8. There's actually government regulations and guidelines that tell you for the size of the property, the bedroom, and the bathroom count what you will be paid by section 8. And then how much the tenant is responsible for is something that the HUD program themselves will determine not you. So I wouldn't look at Section 8 like that's going to be your saving grace necessarily because you can't determine the rent there. I would look up what the guidelines are and see how much a property like that could bring in on Section 8 or even call the HUD program that stands for housing and urban

in development and ask them what your property would rent for. And if it's not $3,500, throw that out as an option. If you decide you're going to sell it, remember that there is a capital gain exception for those that have lived in a property for two years out of a five-year period. For most people, that means it lived in it for two years in a row. But that doesn't have to be the case. If you've rented it out and you've lived there as long as over a five-year period, you've bet in it for two years as your primary residence, you can sell it and have up to

$250,000 of your capital gains wiped out. thousand dollars if you are married so selling that property and reinvesting into something that you analyze a little better and you get some more supporters on your side going into it is probably where this one's going to end up send me a DM if you'd like to talk about that more and thank you for sending this question to seeing green i will say that sounds a lot harder than just trying to make it work though like selling and then buying i think you should try to make it work if you can i don't know if it's worth the the riguma role of getting into a new property because she's so close $3,500, I think that's like super achievable in the midterm rental pad split space,

you know, co-living area. So I would really leave no stone unturn on this before selling it, I think. Thank you for that, Rob. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Funrise Flagship Fund. Now, you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10.10. The portfolio features 4,700 single-family rental homes spread across the booming

sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. at Fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at Fundrise.com slash

flagship. This is a paid advertisement. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy. all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise Flagship Fund. Now, you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10.

The portfolio features 4,700 a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought-after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes.

Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action. the footsteps, the late night fridge raids, yeah, when you're gone, your place is basically on unpaid leave.

It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property,

you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taken care of, and your place is in good hands. You travel, your house works.

Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. Tired of traditional lenders holding you back. Host Financial is here to change the game. They've ditched the DTI restrictions and they zero in on what really matters, your property's income potential. So no more chasing papers for tax returns or personal income statements. Think about it. A lender that values your property's worth over your paycheck, that's the host financial difference. Approved in 47 states, they are ready to help you make your next big move. if you qualify, just head over to hostfinancial.com and find out. Stop letting outdated lending practices hold you back. That's hostfinancial.com where your property's potential meets unlimited financing.

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this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. All right. Let's get into our next question. This comes from Joel Unick in Des Moines, Iowa. Hey, David.

I'm Joel Unick. I've been listening to the show for about five years now, huge fan. So thank you for all the years. of knowledge that you've been able to give to this audience. So I just graduated college and have my first house hack under contract. So my question is when it comes to financing. So there's, with the increasing rates, I'm sure it's on everybody's minds right now. I'm kind of looking at a 30-year fixed versus a adjust rate mortgage,

probably a seven- or 10-year fixed rate before it's able to adjust. So I know there's some risk there with the adjuster rate. It kind of seems like a 10-year period is a long period of time to figure out what is the next stage, whether it's selling, refinancing, or just assessing where the interest rate environment is in a decade. So with the fixed rate, you get the security of locking that in for 30 years, but while I'm investing with a long-term horizon, what did the odds they hold on to the same property for 30 years? So my question is when it comes to balancing the options of a adjustable rate and the fixed rate. So what do you recommend to kind of get the security with the locked in 30 year versus kind of the money saved and the compounding effect of that over the course of the decade with the adjustable rate? Yeah, thanks David. Appreciate all the knowledge of the years.

Okay. I think I get this one. So he's basically wanting to know should he get a 30 year or should he risk it for the biscuit and get a seven or 10 year arm? Which personally, I mean, that's a big difference between seven and 10 years. I don't really think either one is particularly risky. I would say seven years is so far from now. I think he'd certainly be able to refy out pretty close to the five to seven year mark. Chances of him keeping that mortgage for 10 years, that exact mortgage at the current interest rate, I feel as low.

But what do you think? It's hard to know where interest rates are going to be in 10 years. My gut says whoever the next president is probably going to lower rates, much like when someone's elected class president. They immediately want to throw a party to reward everyone for. electing them and establish goodwill. We're probably going to see rates come down with a new president but in place, but we don't know that. And you can't bet on that happening, although every decision that you make is some form of a bet. And what we're talking about here is hedging your bets to put yourself in the best position. So Joel, if you're really good at managing money, if you live

beneath your means, if you save a lot of money, if you don't mind working overtime, working side hustles, working two jobs, it's okay to err on the side of taking a little bit more of a risk with that seven a 10-year arm much better than a three-year arm or something like that. If you know you're not that person, you're not a Rob Obisolo who's going to work 18-hour days or a David Green who's going to just sleep in his office chair and get right back to it, you're probably better off taking the safe bet going with the fixed rate mortgage. And neither decision is going to create a huge difference in the portfolio you have. We're splitting hairs here. What you really want to do is accumulate more assets in great locations where rents are going to be increasing and values are

going to be increasing and over time you're going to build some big wealth. So don't get too caught up in these decisions. But as a general rule, I'm a fan of being more aggressive with your strategy if you're more conservative with your finances and more conservative with your strategy if you're more aggressive with your personal spending. Rob, what do you think? Yeah, I think that makes sense. And for everybody at home, do you think you could just clarify what an arm mortgage is for those of us at home that don't know what it is. I mean, for those that I know what it is, but. Yeah, so a fixed rate mortgage is one where for the life of the loan, the rate stays the same. And an adjustable rate mortgage is for a period of time, you get a certain interest rate and

then it can adjust. Now, I will also say most of us look at adjustment rate mortgages like they are evil and bad and risky. It's like gambling. But that's how most loans are made across the world. Most people do not lock in on a 30-year rate, especially when it's really low, like three or four percent. Rob, you and I would never lend our money at three percent for 30 years. The only reason those exist is because the government sponsors these loans through Fannie Mae and Freddie Mac. It's a kind of a cool little option that we get in America, but it doesn't exist everywhere. Well, you'd be surprised, man. I just got a seller finance deal locked down about five-minute walk from my house here at 3%. They wanted five, knocked them down to 3%. So you'd be surprised.

I mean, they're still out there. They're few and far in between, but... But that's not you loaning out your money, that's you buying an asset from somebody who they're giving you a loan, but they're not doing it because it's a pure loan. It's attached to a real estate transaction where they probably got something in return. They got a better price for the house, right? No, not really. I really, I really knocked them down. No, it was a very equitable transaction, but I agree. I mean, I think, well, and to go to your point about the president changing the rates and all that stuff, I mean, 10 years from now, that's what I say, the difference between a 7 and a 10, pretty drastic because 10 years from now is

technically like two and a half presidents from now, possibly three different presidents. No, probably not three, but definitely two different ones, right? So you're tripling your odds of seeing rates come down, right? I think so. Seven, take it or leave it, but 10, I'm like, yeah, I mean, I did a five-year arm, didn't really know. I took the risk when I was like first getting into real estate. It was a really good deal at that time. And I refied out of it before it mattered, but, you know, I was pretty aggressive with how I did things. So I think you're right. It all comes down to investing preference. There it is. And just keep that in mind. If you're more aggressive investor, you've got to be more conservative with your finances, with your reserves, and with your work ethic.

And if you're someone who doesn't love work and you're not out there trying to set the world on fire, just invest a little bit more conservatively to balance it out. Thank you, Joel, for giving us the opportunity to highlight this. Good luck with your investing endeavors. And my final piece of advice will be don't get too caught up in the financing of real estate. It's really not the foundational wealth building piece. It's just fun to talk about. Definitely don't get too, you know, caught up in the spelling of rigamarole. And our production team has had Rob's back. He spelled it incorrectly. However, it would apply in the situation that he used it. The definition is a mid-18th century word, apparently an alteration of ragman role, originally denoting a legal document recording a list

of offenses. You are welcome for this completely useless, but still entertaining piece of knowledge on today's Seeing Green episode. It's also considered a long and complicated process that is annoying and seems unnecessary, which is exactly how Rob meant for it to sound. Yeah, and then I looked it up on Urban Dictionary, and it's just a picture of my quaff. Moving on to the next section, at this part, we like to get into the comments that y'all have left for us on YouTube, as well as wherever you listen to your podcast. So today's comments, from episode 816. The first comes from Hennie Holmes 1852. Rob, I'd also like you to note that I'm not the only person that puts a number at the

end of my name as much as you make fun of me for that. Apparently, it's a trendy thing. Maybe I made it trendy. Henny Holmes 1852 says, luxury house hacking, in quotes. We've been there, done that a couple of times, made tons of equity over $600,000 on each, allowing us to stay in upscale neighborhoods, paying less than half the mortgage every month, saving. Saving, lots of cash and being easy to rent out. And yes, rent went up every year. This comes from a question that I answered on the Seeing Green episode 816 where someone was asking, is it okay? Is it allowed financially to splurge a little bit? Instead of house hacking and having 100% of my mortgage paid,

what if I want a house hack in a really nice neighborhood where my family would love to live? But I'm going to be covering part of my mortgage. And my answer was, if you're financially in a good position, hell yeah, that's absolutely okay. And as we're seeing from Henny homes, you actually can make more money when you're paying part of your own mortgage because the rents go up every year. It's very easy to find tenants. The equity grows faster in the best areas. Look, the three rules of real estate are and always have been location, location, location. I recommend starting off with the best locations and then figuring out the strategy, whether it's short-term rental, house hacking, burr, whatever, in that area to make it work.

So I thought this is a great testimony, Rob. You had a similar experience, right? Didn't you do a house hacking where you rented out an ADU at your luxury property? And maybe it wasn't luxury, but it was expensive real estate in Los Angeles, right? Yeah, house was $624,000 and the mortgage was $4,400, which was, I mean, a lot of money, a lot of money. But we had a little studio apartment underneath, and that was going to make about $2,000 to $3,000 on Airbnb. So really, it did end up being that. We were paying $1,400 out of pocket on our business.

best months, which is most of them on that particular property. And that was still less than the rent that we would have paid at the apartment that we lived in right before that house. And then we built the tiny house ADU in the backyard and that completely covered all the mortgage. So I think it's better to do what he's saying where you can splurge a little bit and pay a little bit out of pocket because ultimately that's still probably going to be cheaper than just living on your own without house hacking. And B, if you could have like a plan for expansion or a plan to eventually get that all subsidized. I think that'd be great too. That's what I did in LA. I knew one day maybe I could build a tiny house. I didn't do it initially. It took about a year, year and a half. But once I did,

mortgage was completely subsidized and that house is now worth twice as much. Great point. If you wait long enough, especially in the best areas, the rents will go up and it will eventually subsidize your mortgage and then you get even more upside. Moving on, the ongoing Cali, California, California, and Hela usage debate continues. This was a big part of episode 816. And if you haven't heard of this before go check it out we have lots of great comments from fellow californians that we're about to read here geography and age may be the reasons for the hella differences we can call on the great usa and first amendment and put this one to rest freedom of speech remember that we have a first amendment and we can all use the language that we want but in reference to that

show calvette 2018 says i love the show listen to it on spotify and it got me into real state. I live in the Central Valley of California. I've been here my whole life. I've never heard anyone in this state call it Cali. Unironically, I say hella. Boom. This was in reference to my perspective that no one in California actually calls it Cali. It's only people outside of California that say that there was a few people that disagreed and CalVet is taking my side. They also used the phrase, Hela, which funny story, I grew up in Northern California. I didn't know other people didn't say that word until I had a conversation with my aunt in Washington who did not know why I was saying hecka. And as a kid, I was like, well, I'm not allowed to say

hella. And she still did not understand what that meant. And it was not until the no doubt song hella good came out that I realized, oh, other people don't say that word. Funny story that. Rob, did you have an experience like that? It's not really a Southern California thing, right? No, no. I've always heard it was a Northern California thing. So we, we in the southern part of California, the cool peeps, we didn't say that stuff. Rob, why don't you go ahead and take the next comment here from Javon Music Group. All right. Jevon Music Group says, Biggie had to say, Callie. You try rapping with California in its place. That's funny. Yeah, it is a very long word, I suppose. Great episode, by the way, answered some questions I had with my current situation.

They even got four likes and a reply. What that reply was, I'll never know. But I'm sure it was a great one. Go give Javon Music Group's comment on episode 816 on YouTube a couple more likes. let's reward him for that great insight. And Jen Paul G. 1037 says, Hi, David. Thank you for all your knowledge sharing. Question, my lender said that I would not be able to buy a cheaper house than my current one and make it a primary residence. Is there any merit to what he's saying?

That means I would need to buy a more expensive home every year if I was going to continue buying new ones. Thanks in advance for your great support. You're great. Great question there, Jean-Paul. First off, you should have came to us because we're better than that and we would have got it to get accepted. Here's what's going on. When you try to buy a primary residence in the same area where you have one, you're trying to put a smaller down payment down.

Lenders look at that and go, uh, you're trying to get an investment property using a primary residence loan because nobody would downgrade their house unless they were trying to be sneaky and they deny it. You can overcome this. Our company, the one broker says this all the time. We go back and fight and say,

no, this person's actually financially smart. They're making good decisions. They're a bigger pockets listener. and they are going to be moving into it as a primary residence and we get these exceptions covered. Your lender's not fighting hard enough for you. I don't like this. I don't like it when anyone in my world comes back and goes, sorry, we can't do it. What they should be coming back and saying is we can't do it.

Here's what we need to change so that we can do it. Rob has had some experiences like that with properties that we bought where insurance goes up and they say, we can't insure it and we just say, great, tell me what you have to do so that you could. Or different issues like that, that's what you're looking for. when you're building your core for and you're picking your lender. Not a person who comes back and says no. But now all of you know how the lending world works. And when you get this, nope, you can't buy that house.

It's because it's in the same area as the one you have. And they believe you're trying to buy an investment property with three and a half or five percent down. You want to read the Apple review, Rob? Yeah. So let's get into this five-star Apple review from HGD-TNVK. See, now that right there, that's a complicated username. The best place to learn.

Been listening for over a year now and every episode has something to teach. There are so many strategies discussed and so many stories that prove every person can become an investor. Listen, absorb, apply the knowledge. I have unlocked deals I never thought I would. I have unlocked deals I never would have known to look for if I hadn't listened to the show religiously. Five stars, baby. Wow, thank you very much, HG, D, T, NVK. I'm going to tattoo that on my arm.

That's awesome. We would love it if you'd leave us a five-star review. you wherever you listen to your podcast, whether that's Apple Podcasts, Spotify, Stitcher, whatever your fancy, please consider doing that. It helps the show quite a bit. And they're making a good point. With the one brokerage, we were having a meeting and I realized people tend to learn from watching other people do it. So when I had agents that were joining the David Green team, they would sit in the office and listen to me, talk to clients, listen to me, talk to agents. Then we would debrief and I'd say, here's what they said that let me think this. This is the strategy I use.

I've put it into a book. This is the approach you should take, and they got good. Well, as we grew and I stopped selling houses myself, the new agents that joined didn't get that same ability to watch me do it. And it was much harder for them to build confidence having these conversations. Podcasts like this are a really cool substitute where you don't have to be in Rob's attic, where he's recording right now or in my studio. You can listen to us from the comfort of your own home, car, or gym, and learn from what

we're doing. This is a great perspective that if you just listen to the show, you absorb the perspective that people that have experience investing have and will slowly start to develop your own confidence. And like they said, seeing opportunities and deals they never would have known to look for. So thank you for listening to us. Thank you for your attention. And we are going to be getting right back into the show. We love and we appreciate the engagement. Please continue to like, comment, subscribe on YouTube. And like we said, if you're listening to this on your podcast app, Take some time to give us a rating and an honest review. Helps the show a lot.

And I'll possibly get your username tattooed on my arm. That's bigger than Dave's. Our next question comes from Christopher Dye, who says, I am in the Air Force, active duty, and moving from Little Rock to San Antonio. I have three long-term rentals in Little Rock that cash flow $1,500 combined every month, with two properties having sub-3% interest rates and one property with the 5.375 rate. There's roughly $200,000 worth of equity trapped in these properties, and they are all in neighborhoods that will continue to appreciate. I'm considering a 1031 exchange for a small multifamily property in Texas.

I'm seeking advice on the best way to move forward. Should I hold on and sell in five to seven years or capitalize on this opportunity to take the 70K that I have invested that's been turned into 200K in two years and use it to propel into the San Antonio multifamily market? Rob, what say you? Okay, so this is a very tough one because, I mean, it sounds like he hit, you know, he hit the jackpot, right? He invested 70,000 and it's turned into $200,000 in two years. It feels like maybe he feels like he's on top of the world a little bit, right? He's like, wow, if I can just do that again, then I can turn 200,000 into 600,000. But he purchased at a time where that was possible. So I don't want to necessarily steer him away from using that

money and reinvesting it. But we are in a tougher time. right now. And I think he's got something that a lot of people want, $1,500 of cash flow and sub 3% interest rates. Going into a multifamily, as long as he can, at a minimum, get that $1,500 cash flow, I think I'd be okay with it. But, you know, I think he's just got such a good situation. I don't think there's anything wrong with holding onto it. He's got three. He's really at the beginning of this. I think patience would really serve him well in this particular situation. But I don't know. What do you think? I would try to make this as logical of a decision as possible. So first thing, people talk about interest rates a lot.

It's not that they don't matter. It's that they themselves don't matter. They matter in the sense of they influence cash flow. So your cash flow is what it is. Getting rid of a good rate isn't a bad thing if you're getting more cash flow. I'd rather have higher cash flow at a higher rate than lower cash flow at a lower rate. The rate just has an impact on how the cash flow works. So I wouldn't worry too much about giving up those rates. I'd worry more about, well, how much money are the other one's going to make. So to simplify this, there's two ways that we typically look at making money in real estate equity and cash flow. Can you sell these properties and buy another one that will earn you more than the $1,500 a month you're getting now? If the answer is yes, we're heading in a good

direction. And the other equation would be if you sell them over the next five to seven years, will San Antonio appreciate more or will Arkansas appreciate more? Odds are San Antonio is probably going to be the better bet. The next thing I'd look at would be, well, how much more? Because there's an inefficiency every time you sell and buy. There's closing costs when you buy and there's closing costs when you sell. So you're going to lose some water out of that bucket. What you want to be asking is, in five to seven years, will I replace more water than I lost during that transaction? And the last piece I would say is you also can walk into a transaction with water in your equity bucket if you buy it below market value. Do you have an opportunity to go get a really good deal

on San Antonio real estate, where the rents are going to appreciate faster than Arkansas, and the values are going to appreciate faster than Arkansas. My gut would say probably so. San Antonio is likely to grow faster than Arkansas would, so I'm leaning towards you should sell and reinvest that money somewhere else. Rob, what do you think about that? I think it's fine. I don't think there's a wrong or right on that. I think makes sense, like looking at the appreciating market, which I totally agree. San Antonio is a very, very fast-growing city right now. I think you can confidently buy in San Antonio and know historically that it will probably outperform Little Rock. I just think he's got a good situation. Sometimes if it ain't broke,

don't fix it. I think $1,500 off of three long-term rentals is a lot of money. I don't know. I just, I personally wouldn't mess with it. But, you know, sometimes I understand there's a little bit of impatience of like, I got to make more, right? And if he needs this to, if his dream is to become a full-on real estate investor and he wants to make a ton of money and he's, like, this is going to be my thing, then he kind of has to make some big moves to make that happen. But if he's just trying to play the slow and steady route, I think you should hang on to it. But, you know, that's a bit more conservative than I would typically advise, probably. Great point. Christopher, how aggressive do you want to build a portfolio?

If you want to go big, selling and buying in San Antonio makes more sense. But what if you don't? What if you just want slow and steady wins the race because your job at the Air Force keeps you super busy? And you're not going to have time to manage this somewhat complicated. process full of as Rob loves to say, rigamorole. When Rob deals with it, we call it Roba Morole. Is that something that you can take on right now? Or is that going to be too much? If you've got tons of time on your hand and you want to jump into this, I'd move towards selling and reinvesting. If your plates are a little full, there's nothing wrong with keeping what you got, saving up money

and just buying a new property in San Antonio with a three and a half or five percent down, low down payment option and house hack. Either way, you've got some good options. Both of them look good, so don't overthink this one. All right, we covered a lot today. And Rob, thank you so much for joining me. We got into structuring a partnership when the partner wants no part of the day-to-day operations, hanging on to a potential bad rental deal that may not reach market rents and what options you have when you're not cash-filling using a 7-10 arm or a fixed-rate mortgage as well as other things. Thanks for joining me again on this, Rob. Anything you want to say before we let you get out of here? No, thanks for letting me infiltrate seeing green. I hope to be invited back.

If you think I did okay, I'll happily do it because I'll do anything for you, bud. What do you guys think? Let me know in the comments if you want to see more Rob on seeing Green. Do you feel you've been robbed of his presence when he's not here? Let us know. We read those and we incorporate them into our shows. All right, that was our show for today. Thank you, everyone for joining us for seeing Green.

And Rob, thank you for joining us. It was so nice to have a little bit of backup here, bringing a different perspective and even pushing back a little bit on some of the perspectives I had. If you enjoyed hearing these dual opinions and different perspectives, please go to YouTube where this is hosted and leave us something in the comments. Rob just might get your username tattooed onto his ever-growing arms. And remember to leave us a review wherever you listen to these shows. If you've got, if you would like to submit your own question to seeing green, just head to biggerpocket.com slash David, where you can upload your question and have it

answered on the show. You've got a little bit of time. Check out another one of our videos. If you don't, We'll see you next week on another episode of Seeing Green. This is David Green for Rabamoro-A-Mabasolo. Signing out. 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.

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