BiggerPockets Real Estate Podcast - 852: Seeing Greene: Subto “Speculation,” Airbnb Automation, & New Build Financing

Episode Date: December 4, 2023

Is “subject to” real estate investing a mistake? Why is cash flow SO hard to find? And what do you do when you overpay for a property? With so many ways to build wealth with real estate, you’ll also need to be aware of the pitfalls. If you don’t know what you’re doing, you could end up with a property you paid too much for, with no cash flow and empty pockets. Thankfully, this is BiggerPockets, so we’re going to give you all the tactics you need to make your next investment a home run. Put on your green-tinted goggles because David does NOT have a green light for this Seeing Greene episode. Due to this unforgivable offense, we brought another expert investor, Rob Abasolo, on to help David answer some of YOUR real estate investing questions. First, we hear from an investor who makes some great cash flow from her short-term rental but wonders if it’s worth all the work. Next, an investor finds out that his new build property is selling for a significant discount—can he get out of the deal? Similarly, an ADU (accessory dwelling unit) investor is looking to develop but doesn’t know the best way to finance his new construction. David also answers some questions from the comment section about why investors stopped chasing cash flow so much. And finally, a realtor is concerned about the amount of subto (subject to) “speculation” in today’s industry. Are his concerns legit? Stick around; we’ll get into it all in this episode! In This Episode We Cover: How to automate your short-term rental so you do less work What to do when you realize you’ve overpaid for a property How to fund a new development with equity, construction loans, or both  Why cash flow is NOT the only thing to focus on anymore  Subject to speculation and whether overpaying to lock in a low rate is EVER worth 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 Be a Guest on the BiggerPockets Podcast Ask David Your Question David's BiggerPockets Profile David's Instagram Rob's BiggerPockets Profile Rob's Instagram Rob's TikTok Rob's Twitter Rob's YouTube How to Fund Real Estate Deals Right Now w/Zach Lemaster Don’t Chase Cash Flow! Use THIS Metric to Analyze Your Deals Subject To Real Estate: Why Investors Should Add This Tool to Their Arsenals Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-852 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 852. What's going on, everyone? This is David Green, your host of the Bigger Pockets podcast, where we arm you with the information that you need to start building long-term wealth through real estate today. In an ever-changing and even more complex market, we're here for you. Today, we cover several different topics, including if a short-term rental is more headache than you wanted and if you should pivot strategies to switch. What to do when you've locked in a new-billed property but overpaying?

and the contract is not working in your favor, if you should chase after sub two deals, bird deals, or if there's a different way to look at real estate investing as a whole, as well as your comments, which you definitely want to stick around for because we've got some spicy ones from YouTube that we talk about in today's show. And to help me cover these spicy topics, I've brought in the resident expert on spiciness, cooking like Curry himself, Rob Obisola, to join me on today's Seeing Green. And then we also get into the philosophical debate on if Chalula is actually spicy. So you're going to want to stick around to find out the answer to that.

Spoiler alert. It's not. I got Mexican food last night. And they had Tapatio here in Maui, and I was so happy. Tapatio, that's what it was. I mean, Tapatio is delicious. I put it on everything. I just don't think it's that spicy.

That's a bit of a lightweight flex, isn't it? This is like when people don't want to tell you they're skinny. So they just say they're cold or when people don't want to say they're rich. So they're just like, oh, I owe so much in taxes this year. Rob's over here like, Tapatio, you consider that spicy. Oh my gosh, I put it on my ice cream. Well, you know, I am Mexican, so I can't handle spice a little bit more than probably the average person. You certainly are. You, my friend, are a Mexican, not a Mexican. And that is why I have you on today's show. All right, before we get into our first question, and I promise you guys are going to love today's show.

It is funny. It is entertaining. And we tackle the things that, quite frankly, other podcasts are afraid to venture into. I've got a quick tip for you. Are you doing something that you haven't heard on this podcast before? I want to hear about your tips and tricks that are working in today's market that you don't hear other people talking about. Apply to be a guest on the show at biggerpockets.com slash guest and let us know what you're doing and how it's working. All right, let's get into our first question.

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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. Hi, David. Thank you for taking my question. My name is Emily, and I'm a realtorne investor in northern New Mexico. I currently own a duplex that is two short-term rentals and am finishing my first flip in the next two months. I self-manage the short-term rentals because they are in a rural area that does not have a property management company. After paying the cleaners and expenses, I net about $2,500 a month. I have $80,000 invested in the property and $200,000 of equity. When the flip is done after taxes, I will net about $2,500,000. $40,000. So my question to you is, what should I do with my portfolio? I enjoy hospitality and the

management side of short-term rentals, but it does feel like a lot of work for $2,500 a month. That being said, my ultimate goal is passive or more passive income than flipping and selling houses. I live in a very expensive area with high appreciation. So would you sell the short-term rental, take that money, combine it with the money after the floor? and continue to flip in the area I'm in with hard money loans, take the total sum and go to an area that is less expensive and I could fund the flips myself. Or should I keep my short-term rentals, take the money from the flip and try to get another short-term rental and keep growing that passive to somewhat passive income? Thank you so much. And Bigger Pockets has changed my life. I wouldn't be here asking this question otherwise.

Nice. All right. Thank you for that, Emily. Let me see if I can sum up your options here. You can continue flipping in the market that you live in and know well, which there's a pro to that because that market sounds like it is appreciating, which is always good when you're trying to flip. You want a market that's going up in value. You can move to a different market that is cheaper and you wouldn't need to borrow hard money and you could flip there. The challenge with that would be you don't know it as well and it's probably not an appreciating market, which will make flipping more difficult. You'll also put the exact same time in as the market you're in, but probably make less money. Or you could continue buying short-term rentals in a market that you also

know and manage, but you don't love that because the juice doesn't seem to be worth the squeeze. A lot of work for $2,500 a month. Did I miss anything there, Rob? No, I think that sums it up pretty nicely. All right. Well, there are some good principles for us to get into. And I see a theme here. and the theme that I'm noticing with you, Emily, is you're having success doing the strategies you are in a market that you know, but you're not getting massive returns on it. And I like that you're bringing this question up because it allows us to kind of expand on this. When you manage a short-term rental that you paid $150,000 for and you make $1,200 a month,

it is more or less the same or similar work to a million dollar property. that might make $5,000 a month or $7,000 a month if you can make it work. We often talk about the ROI only factoring in the money that went into the deal, not factoring into the time, the effort, or the risk. And that's because it's very difficult to quantify those on a spreadsheet. And everyone loves spreadsheets. It makes us feel safe. So you only enter the numbers into your analysis that can be quantified,

which are financially related. But life is more than that. There is a lot more to it. Rob, you are a bit of a connoisseur of short-term rentals. You've Rob built quite an impressive portfolio. I'm going to turn this over to you and give Emily some advice on if she should continue buying where she is or if she should look to get into a different way of investing. Well, I'm torn because it seems like her thing she says that she feels like she's working a lot

for $2,500 a month. And so in general, when I say a short-term rental is working, you should never sell it, right? If she's making $2,500, that's like pretty solid. $30,000 a year from one rental. That's like, that's like a salary to me. So I hesitate to tell her to sell it if it's working. On the flip side of that, no pun intended, if she feels like she's really good at flipping and that's where she's going to maximize her time the most and selling this property will enable her to flip more and make more money, then I suppose I might lean that way. But man, honestly, I think making $30,000 a year from one Airbnb is like really, really good. So I may say, I'd really want to ask her the question,

why is she working so much in her short-term rental? Like, I definitely don't feel like I'm working a lot in my short-term rentals. Granted, I've got a team and everything. So, you know, is she automating it? Does she have like a good team that's running it for her or she's the one that's cleaning it herself and all that type of stuff? But overall, I think making $2,500 a month from one short-term rentals kind of a success story, so I'd hate to touch that. that didn't sound as bad to me. When Emily, when you're describing what's going on, I am getting the vibe that you've heard other people's success stories that were embellished to sound like they're better than they probably really are. Those of us that are in real estate investing,

understand it is not passive. You mentioned you want a more passive income, a more passive approach. There's nothing passive about flips. There's nothing passive about short short rentals. There are methods that are passivor and there are methods that are, less passive. It's never completely passive, right? And $2,500 a month in today's short-term rental market for the price points that I think you're talking about is nothing to shake a stick at. That's, by the way, who goes around shaking sticks at things that are not impressive now that I'm thinking about it? Old people, old guys are like, hey, you stop that. When they can't shake their fist at a cloud, they shake a stick at something, right? At a dog. There you go. Back, you.

You have four of those things. You're making $10,000 a month. That's nothing to shake a stick at, right? I think, Rob, you're giving some good advice here. Maybe Emily could focus less on trying to get a higher ROI and more on building at a team. So she can get some of her time back. And definitely don't look into flipping houses if you're trying to get something passive. I kind of like this dual strategy of flipping homes for income and then buying short-term rentals for long-term investments. If I was in your situation, Emily, I would just be looking for ways to make it so that you don't hate doing it. Are you cleaning the houses yourself?

Are you the one checking in with every single question a guest has? Are there things in your system that can be delegated to somebody else that would not end your business? And then what things do you need to keep yourself? This is what I found after having started multiple businesses. There are certain things that I have to get right. There are other things that if we mess it up, it's not going to make a very big difference. If somebody checks into an Airbnb and the cleaner didn't replace the salt and there's no salt there, you can have somebody figure that problem out.

The person's not going to have a cow. If the cleaner didn't show up, if they didn't, Rob, was there some common things that people just, you can't get this wrong with a short-term rental stay? Yeah, cleanliness is definitely going to be number one. And then, like, a stocked house is also like another one. You do have to have, like, towels and the right amount of toilet paper and plates and forks and all that kind of stuff.

There you go. Somebody goes to use a toilet. There's no toilet paper. You're in trouble. someone wants salt and the salt's running low, you're okay. So what I always do with every business I have is I do the job myself. I make a list of everything that needs to be done. And then I put all the stuff that has to be done correctly in one color,

the stuff that can be gotten wrong and we'll have a chance to fix it later in a different color. I delegate all the stuff to somebody else that doesn't have to be done right. And I do the stuff myself that does until I find another team member. That would be a great place for you to start, Emily. You may be able to get 70% of this stuff off of your plate and realize that other people could be sending the checkout instructions or there's a way to automate that. And you're there to make sure that you get the five-star review from the guest or you ask for a referral from that person or you look at your listing every day and make sure it's priced

correctly, whatever the case may be. So I don't think you need to make any huge changes here. Probably just tweak what you're doing and don't stop something that works. Any other advice, Rob? No, that's good. I like it. Wonderful. Our next question comes from Matt Hahn in Colorado. Matt says, I love the positivity and the information. Thanks for the guys. guidance you bring with each show. We're contracted to buy a new build townhome in Naples, Florida that we signed for in March. We plan to move there this year and rent our current home out. Our current home is newer. At the time, we had to bid on the property and one with a bid of $380,000, which was good as resell homes of the same model went for around $400,000.

Now we could go out and buy the same home from the builder for $354,000 without bidding. We put 10% down so it makes no sense to walk away, but wondering how we might approach the builder and lower the price. We're considering an FHA loan or conventional with 10% down, but not sure if the home would appraise at the $380,000 level. And Lenar's contract didn't allow for an appraisal contingency. I appreciate the help and the community. Ooh, this is one of those ones where you buy from a builder and you're going in without protections. Let's see if we could do any damage control. What are your thoughts so far, Rob?

So to recap here, they got a property with a new builder at 380. It's now going for 354 and they want to approach them and say, hey, you know, it's kind of like 30K less now. Can we lower the price? That's exactly right. But they don't have the typical leverage they would in a deal because they put 10% down. So $38,000 when normally you put somewhere between 1% and 3% as earnest money. And they don't have contingencies in the contract to back out. and get their earnest money back. Right. Unfortunately, it's a bit of a lose-lose on that one because even if they walked away

and bought the house at the 354, it's like the same amount of money, right? That $30,000 savings is not going to be worth it. And so I don't, I mean, I don't know what advice we can give. If they're in a contract and they want it, like, I think they're just kind of stuck in, I think they're just, you know, they're going to be a little upside down on the equity for a while. But if they own it for five, 10, 15 years, it will come out in the wash. If they try to sell it in the next couple years, I think that's where they're going to be in a little bit of trouble. Yeah, this happens when you don't understand the contract. Or maybe you did understand the contract.

It just seemed like it was a good deal because it was. At the time, houses were selling for 400,000. So 380 seemed like a pretty good price. But when rates go up as significantly as quickly as they do, that can decrease demand. And it sounds like that's what happened out there in Naples, Florida. There's just less people that are buying in that area. So your property is theoretically worth less. when you're buying from a builder, it is always wise to have a real estate agent who you trust negotiate for you and they can go to the builder and say, well, we're going to need an appraisal contingency

or we're going to need an inspection contingency, something that would protect you. But if there's a lot of other people that want to buy that property, you're in that position where you just have to pay what they want. Looks like the builder is in a position of strength here. And you putting 10% down really eliminated a lot of your options to walk away. Because I was doing the math at my head. If you just tell the builder,

screw it, go sell to somebody else because you're going to sell for less, the $38,000 they would get to keep from you is still more than the difference in the loss they would take if they sold the house for less. So they're probably not going to let you out of this one. In episode 847, Rob and I interview Zach Lamaster, who gives some financing strategies, and one of them when working with the builder, is to ask for a lower interest rate. It doesn't hurt you to ask in this case. You can go to the builder and say, hey, I'm buying this thing for significantly more than what it's worth right now. I don't feel super great about that. What can you do? Can you give me some kind of financing help on this? Like, can you kick in to buy my rate down

or maybe get me a better rate? The problem with that is when Zach gave that advice, that was when the builder wants to get you into contract. And so they have to offer you a lower rate to help sweeten the deal. You're already in contract. If you're locked in. Yeah, it's going to be a little harder. It's worth asking. Yes. It doesn't hurt to ask, but I'm just tempering your expectations here. I think you're going to be better off if you go and you say, we're not happy about this to get them to throw in some upgrades. They're probably going to give you better cabinets if the house isn't already built, better flooring.

You can probably get them to do some extra work on the property to make you happy about it. Builders tend to give that away because they claim it's an $8,000 value, but it's really only going to cost them like $1,500 or something to do it. So it's relatively efficient for them to give you something like that. other than that, though, this is the risk you take when you go by directly new home construction. You don't have the typical protections that you get with the contract that is from the state association realtors. Rob, have you thought of anything else? No, I think, yeah, see if you can get a lower interest rate, I think if you're locked in at an interest rate, I think it's possible that they are locked in at an interest rate.

Then consider, yeah, maybe the creative finance route. But other than that, you know, unfortunately, I think you'll just have to be in that home in way to out for the equity to kind of to go up. Yep. So there you go. If your rate is locked, that is some extra value that you could consider selling the contract to somebody else because they may be happy to pay that price if they're getting a much lower rate. But interest rates usually don't float for that long. So you're probably going to have to buy it whatever today's rate is. But still, it does not hurt to go back to the builder and say, I'm not happy about this. What can you do to make me happy and see if they come

up with some solutions? Doesn't hurt to ask in this case. Yeah. And for what it's worth, I mean, I'm building a house here in Houston. It won't be done for like another year. And I locked in the rate when I closed on that one-time construction loan. Different kind of loan product, though, but we did lock in the rate at 4.75. Congrats, Rob. That's awesome news, man. Thank you.

All right. Our next question comes from Mike Apple in the San Francisco Bay Area. Hey, David, what's going on? My name is Mike. I'm here in the Bay Area of California and love your guys' show. I think you should hang on to Rob on your seeing green episodes. You're still contemplating that. You always talk about leaning into your strengths, and we felt pretty strong after just recently

finishing this detached ADU here at our primary home in the Bay Area. We've gathered up about $500,000 to $600,000 worth of equity here, and we want to lean into that a little bit more on the next property that we just purchased up in the foothills. We want to try to build at least five or six additional single-family homes up there. The laws allow it. The space allows it. We think it's feasible from our construction experience standpoint and much more affordable than hiring it out. Really just want to know what you think the best way is to finance a property like that.

Would you go with your own equity or would you just try to catch this property out, sell it, use the cash and build it one house at a time up there? Anyway, love your guys' show. Good luck. All right, Mike. Thank you for the question there. It sounds like you've got a plan of build to own. and you want to either cash out some of the equity in your house and use that to build the properties or get a construction loan to do so. And then the other part of your question is, do I want to build

all six at the same time or do I want to go one by one? You mentioned that you have some construction background, but it sounds like that is just in the ADU that you built for your own property, which is not extensive construction background, and most likely did not involve development, which is a completely different idea. We're talking about putting in the plumbing, the sewer, the water, the electricity. There's a lot that goes into building a new construction home from the ground up. If you're tapping into existing infrastructure, it can be a lot easier than if you have to try to figure out. If you don't have that and you're going to put in a septic tank and dig a well. So right up the bat, this probably sounds a little more complicated than you may be

thinking in the beginning, which leads me to believe you would be better off to do one if you're going to do this at all and see what goes wrong. Don't go do six of these at the same time. Yeah, I wouldn't do that. Look, you've built one, but building five at the same time is a whole another level of builder and kind of skill set. I think I'd prove your concept out wherever you're going. And then once you have one that's like working super well, and I know that's not the sexiest answer because you want to scale and I know you want another five or six units. I'd rather you just go and crush out your next unit and really prove that this is something that you can do and that the business model works. And if it does and if there's a demand for whatever it is you're building, go build

those other four or five afterwards. But I probably wouldn't take a huge swing like that right out the gate. Yeah, that is a way that you could get in trouble because you usually don't know what you don't know until you get started. Now, Rob, what do you think about if he should use construction loans or the equity from his own place? Well, if he doesn't have any cash saved up, David, then I think he has to cash out the property that he has because he has $550,000 of equity. So let's say he can take a percentage of that and then use that as the down payment towards his other first bill that we're talking, the first out of five or six. And then he has to keep rolling his equity over for all the new ones. But I also don't think he should cash out everything.

I don't think he should take all of his equity out, right? I think he should pilot this and do a small cash out enough for him to be able to execute on a construction loan, which should be roughly about 20% as a down payment of whatever cost it is. it will be to build this thing. All right, Mike, that is the theme of our answer to you. Don't go huge on this one. Cut this into small bite-sized chunks and only start to cut off more when you've proven that you can do this and you know what's going to be coming. Very easy to get yourself in trouble and you do too much at one time. All right, we hope that you're enjoying the shared conversation so far. And thank you for spending your time with us. Make sure that you like, comment and subscribe to today's video and get those questions in for us to answer at Bigger

com slash David. In this segment of the show, we like to read comments from the YouTube channel as well as reviews from you are listener base. Our first one comes from Giovanni Alvarez 807. The David Green, a show dedicated to the cash flow versus appreciation debate would be awesome. I have these discussions often and I'm not sure what the right thing to do is, specifically with our short-term rental in the Miramar Beach slash Destin area, which we purchased in

2021. We were negative, $2,000 for the year. and in year two we were negative for $8,000. We did take advantage of the short-term rental loophole and bonus appreciation, so got a great amount back, which was around $20,000 to $30,000. I love the location. It's walking distance to the beach, and I love that we were able to use it in the slow season.

I hope that the area appreciates, but I'm unsure how long is too long to hold onto a negative cash-filling property. Am I crazy for wanting to hold onto it? Oh, that's a good one. He's got a little bit of emotions involved in this deal. What are you thinking on that, Rob? Well, the short-term rental loophole definitely helps on this because it sounds like they were able to get a $20,000 to $30,000 refund back on their taxes. So that helps offset some of the losses that they're wanting. And one of the things that they said is that they love, even though that they're losing money every month or every year on this, they get to have a beach house that they get to use with their family. Just same thing for me. I've got a beach house in Crystal Beach that's going to pretty much break even, I think. It might turn a small profit. But I knew that going in, right? And I do get the tax advantage. I get to use it with my family, and that's an intangible aspect of the ROI of this property.

So I guess you'd have to ask yourself, is your love for using this property with your family for personal use greater than the negative cash flow on it? Usually the answer is no, I think. And I don't think anyone ever really likes to lose $800 a month. But I don't know. They could be high-income earners. It may not hurt all that much. Am I crazy for wanting to hold on to it?

No, if you use it a lot, then hold on. to it. But if you're talking about using it like one weekend every year, because Miramar Beach and the Destin area, it's a really nice area, right? And you're going to make a ton of money in the beach season. So if you're only going to use it once a year, then no, you should not hold on to it. But if your family's there for half the year, then, you know, I could see the case being made. He does have to consider, though, if he sells it, he's going to have to have a depreciation recapture where you have to pay back, right? So he's up 20 to 30. He's down about 10. He's still up $10,000 to $20,000 in the savings. This is a perfect example of why we were talking about having a

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Terms and conditions apply. Hiring Indeed is all you need. All right. Our next comment comes from Aaron Murphy. I'd enjoy it if you all made another show that has a focus on investing for cash flow. This show is great for the focus of people that want to do short-term rentals, equity-centric investing and who want to keep working jobs, etc. But there's obviously a large contingent of listeners who liked the previous focus of the show

and want to hear about cash flow-centric investing. Instead of this being a conflict, maybe you could all just add another show. A lot of people are doing cash flow-centric investing in less expensive markets. I understand David doesn't agree with that as the main strategy, but I feel like you all are missing what a substantial demographic of viewers want. That is a great comment. Oh, we've got a comment to the comment. Kate Babino says there is no cash opportunity in the market and they know that. They can't sell their products to people who realize this is a terrible time to buy real estate for cash flow.

So now they have to convince you cash flow isn't important anymore. This just got even spicier. All right, Rob, before I throw. a complicated one to you, I will say this. Of course there is a contingent of people who want cash flow centric investing, especially if it is passive. Who is ever going to be upset about you mean that I can buy a property without a whole lot of work that's going to passively replace the income? And I went from having to work to not having to work. Yes, I would love that. Does it also slice and dice and make Julian fries? Can I get it in black? Like, yeah, of course we all want

cash flow right now. Everybody is looking for that. Of course, there's a contingency of that. I mean, that, yes, obviously, we're trying to explain to people that whether you would like to have it does not mean that it is there and that it is very easy to tell you, oh, we know how to get cash flow, so come listen to us. And then you go spend money to join that group or you spend attention and time listening to that content and then you realize that it doesn't happen that way. Or you're forced to buy in D-class areas that are terrible for the hope of cash flow, and then it doesn't actually cash flow and you can't get rid of it and you lose even more money. The reason that I'm telling people not to stop looking for cash flow, but to look for more than cash flow is that's

what the market's providing right now. There are so many investors that want these assets. We've had so much inflation. There's so much demand for real estate because of the mess that our economy's been put in. It's incredibly difficult to find that. So it's either do nothing and let inflation eat it your money or think differently until we get to a market where cash flow could come back. Rob, is there anything that you want to add to that? No, that's good. I think that's a good nice answer. There is to Kayla who says there is no cash flow opportunity in the market and they know that. I disagree with that. Obviously, there's a asset class that I like for that, but, you know, I'm not going to talk about that right now. Well, they mentioned that. They said they're trying to tell us

to get into short term rentals because they don't want us to know about where the cash flow is with traditional rentals. Well, yeah, that's what Aaron says. I'm talking to Kayla or whatever. And then it's also like they sell their products to people who realize this is a terrible time. It's like, I don't know, most of our education is free. I would say like nearly 99% of it is all free. And then there's BP Pro, which is, I don't know, a product that is actually useful for investors. Like I think we give out like a lease to every state and there's like calculators and all that kind of stuff. So it's always a little bit baffling whenever someone's like getting mad about our BP Pro membership, which is really low. It's like a very small price point.

It's not even expensive. Yeah, it's around $300, $350 a year to be able to analyze properties. Super cheap. And by the way, it's analyzed properties to see if they cash flow. So we still do want you to cash flow. We still look for properties ourselves that cash flow. It's just that cash flow isn't the only metric that we're looking for. 25% of the pie. Yes. My advice is to let go of the dream that you're going to buy some properties and not have to work anymore. That's been what motivated most people to want to find that passive income. I think that they were sold a bill of goods. It was a bright, shiny object that didn't actually work out that way. I'd rather see people embrace having a workout that can find a job they like. Work really hard is something that you enjoy doing

and invest your money into real estate. And over time, it will cash flow because rents go up. It's just about delaying gratification rather than immediate gratification. But I promise you, if I do find a market where people can all just go and they can cash flow, I'll tell you about it. It'll last for about 14 minutes. All the other investors will ascend upon it like locust and then it will be gone before you can get there. All right. Our next comment is a review from Apple Podcasts from K Demski. Keeps me informed and motivated.

I love this show. It's so informative and inspiring and is delivered in a way that is entertaining, accessible, and truly motivating. The topics and variety of guests keep me coming back. David Green is 24-carat gold. All right, that is very cool. By the way, Aaron Murphy, for the comment that we just read, I appreciate you saying that. I don't want people to not say those things. I like that it gives us the opportunity to explain. We all are trying to find cash flow. It's just incredibly difficult to find in the market that we're in. And thank you, K Dembski, for acknowledging the work we're trying to do here to get people the information that they need to make smart investing decisions. Nope. We're just trying to help people. You know, that's all we do and give people advice. I understand that in a hard market like this, there are going to be some frustrations from people like Kela and stuff like that.

It's a hard market. It's frustrating for everybody. All we're trying to do is provide insight as to how you can be successful in this market. But it doesn't mean it's going to be easy. No one ever said real estate was going to be easy. Yeah, I'm thinking about starting another bigger pocket spin-off podcast about how to plant a money tree. And then you don't have to worry about all this real estate investing stuff.

You just go out in the morning and you pick your money off of the money tree and you don't have to worry about it anymore. So keep an eye out for that. The Money Tree podcast. And if that's successful, I'm going to start one on the Fountain of Youth. All right, we so love and we appreciate your engagement. Please continue to like, comment and subscribe on YouTube as well. And if you're listening on a podcast app, take some time to give us a rating and an honest review. Our next question comes from Sean Cleary. Hey, what's up, David? My name is Sean Cleary from Charleston, South Carolina. Thank you so much for taking my question. I started listening to Bear Pockets in 2020. It's absolutely changed the trajectory of my life. I've since acquired 10 rental units across six properties

all here in the Charleston Metro and have even stepped into the industry full-time as a realtor. So how I've always viewed real estate investing is you buy a property under market value and your rehab for less than the after repair value. The difference between your cash in and the ARV is the equity that you've gained. This is investing 101. You're building equity through the acquisition and the improvement of real estate. I believe Brandon Turner used to call this stair stepping your net worth and you call it buying equity or a forcing appreciation. I'm totally sold on that. My question lies into what some of my investor clients are trying to do recently with subject to financing. It seems to me that folks who are

engaged in buying sub two deals are paying premiums because the interest rate and the long-term debt obligation, not the equity stake in the property. The sub-two argument seems to be steeped in the prospect of long-term appreciation, but I kind of view this as speculative. There are gurus out there who I won't name, by the way, that are telling folks to pay top dollar for Turinkey homes just because of an interest rate. In other words, they're spending capital on the interest rate, not the equity in the home. This seems to not align with the underlying principles of real estate investing, especially folks who are looking to grow and scale a portfolio and would probably want to offload those properties in the next three to 10 years anyway. I want to know your thoughts on sub two from an

investor standpoint. Do you think it's a viable strategy, especially in the current market? While the interest rates are obviously great, do you think banking on the appreciation of these homes and the marginal cash flow is capital well spent, or would you prefer to see people deploy capital in a traditional bird yield? Thanks so much and looking forward to hearing your thoughts. Well, keeping in line with today's spicy topic, we've got some top of teal for you all. Shots are fired right across the bow.

I don't know if I would consider that spicy. It's a little bit spicy. He's bringing up the subject to thing, and this is a controversial time to be investing in real estate. I think a lot of this is due to the fact that people are describing one strategy is better than other strategies. And you're just getting a perspective that isn't always 360 degrees, right? So are there, is it speculative to buy a interest rate and pay a premium for the property? Yes. Is it speculative to assume that the equity force in a property is always going

to be there? That is just a speculative. Is it speculative to assume that the property is going to go up in value over time? Yes, it is all speculative. And that just makes people uncomfortable when we mention that reality. So regarding Sean's comments here, which I thought were well articulated and do express a pretty legitimate concern, what are you thinking so far, Rob? It's very fair. I guess that is sort of the one of the underlying issues with sub two is that people are willing to pay a premium. I think you want to try to find the happy balance of not paying. Because this time I was talking to Avery Carl about too, where she saw someone that got so excited that they were presented as sub two deal and they bought it for like $850,000 or something like that.

And the comp next door, after they closed on it, closed for like $650 or $675. And so the people got so excited about the premise of getting their first sub two deal that they paid like $150K over what the market was worth. And she was like, I didn't have time to jump in and stop them from making that mistake. And so I think sub two in creative financing is an amazing strategy. It's something that I'm doing like as much as I can. but certainly agree that you shouldn't really get so excited at the premise that you're like, yeah, I'll just be upside down walking into it. I don't think you should really ever be upside down,

right? I think you should be at least break even with what the market value is. And I would even say Pace doesn't, like, you know, I talked to him about this and he doesn't really feel, like he doesn't ever pay too much over market value as well. I think he told me, like, the most he's ever paid is like 5% over. But the terms were so good. It was an amortized over like 50 years. The interest rate was like zero percent. And so he was willing to do it in that specific instance. But I still think it's like kind of even rare for him. So I don't know. I think I would say I would caution people that it is this new shiny object syndrome. We're all excited. But it still has to be a good deal. You still have to inherit and take over a good deal.

This is a case where it's not a problem with the strategy. It is a problem with people's understanding of the strategy. So for a long time, we would talk about Burr. And we would explain Burr, you put in X amount of money, you do X amount of rehab, you're left with an ARV of why you can pull out 100% of the money in the deal. And people would run an analysis or at the end of their burr, 3% of their money was left in the deal. But they have an insane amount of equity they've created and they would say it's a failure, Burr doesn't work. I left 3% of my capital in there. And like, but if they were putting 3% down on a property, they would have thought that was an incredibly good deal, even if they didn't also get extra

equity in it. It's just your understanding of how you're supposed to execute on this. Pace is sort of the sub to frontrunner here. And from what you're saying is he doesn't tell people to overpay for properties. But it's very easy when you're hearing it from someone that heard it from someone that heard it from Pace to get really caught up in this idea that it's okay to overpay. And why do they do that? Because they're focused on cash flow. This comes back to the comment we just got on the YouTube and why we're giving the perspective that we do. When you zoom in and you only look at cash flow, Why not pay a million dollars over what a property is worth if you can make it cash flow? It very quickly gets out of hand and you get away from the fundamentals when you're only focused on one element of real estate investing instead of all of it together, which is really how you should be looking at it.

What's the property worth? Is there a value ad play? Is it in an area that's going to appreciate? Is it going to cash flow? Can you force cash flow? Can you add units to it? That's really in the book I have coming out that talks about all the ways you make money in real estate, the way that I think you should be analyzing it, much like when we bought our Scottsill property,

we had a matrix of five things that we were looking at. We kind of all balance it together. So I think that's some pretty solid advice that it doesn't make sense to overpay for a property and then just talk about the interest rate. But it also could make sense in some cases to pay a little bit over to get the better terms. Rob, it looks like your brain is working over there. It's just a hard one, man. It really is because like let's say a house is worth 100K, just simple numbers here. And you take over something. that's like, you know, the mortgage is 1005K, right? Let's say you pay that 5% in that 5% premium, but the interest payment on that property is like 3% versus going out and buying the same

property at 8%. You're paying significantly more anyway. So I don't, it's a hard one and I wish we did a whole episode on like the downside of this because I agree that fundamentally it is kind of against like real estate investing. But if we're talking, about cash flow, it's like why, why, I feel like there's this, this high horse mentality of like, I would never do that. Instead, I'm going to pay 8% interest. And it's like, how is that better? I don't know. I don't know. Well, there's pros and cons to each, which is what we're getting at here. When you get more equity in a deal, there's value because theoretically, if you had to get out from underneath that, you could sell it easier. Yeah. When you overpay for a deal and you get a

better interest rate, if you have to move the property, if it ends up being in a bad location, even though theoretically it cash flows, what if you have a ton of capex that you didn't account for? And you got to get rid of it. But you can't because what you owe on the property is too much. And now the only person that you can sell to is another sub two person who wants to go in there and they're willing to pay more to get it. But what I'm trying to say is there is no strategy that does not involve some element of that.

You give something up to get something no matter how you're buying the real estate. So we need to get away from saying what's the right way to do it and get into having an overall understanding of, of the pros and cons of each. It's very similar to if you said, well, we want a really fast football player on our team. And then you looked at all the fast players and you said, but you know what?

They're not very big. I also want one who's really big. And then you looked at all the big ones and said, but they're not very fast. Right. Nobody would actually look at that and think that that makes sense to analyze things from that perspective.

You have to ask what's more important, a big person or a fast person for this position or for the team that we have. So I think this is going to open us up to a lot more opportunities to just explain, how real estate investing works at a fundamental level so people can have a better understanding of how to underwrite these deals, which is really what you have to know in today's market.

This is the hardest market I've ever seen to invest in real estate. It has been overly simple for a long time and those days are over. We are now moving into a time that owning real estate is much more like running a business. You don't buy a business and just say, well, am I buying a business for equity or for cash flow? There's a lot of fundamentals that go into running a business. You actually skilled at doing it, which is, is why shows like this one, podcast like this one, content like this is more important than ever before because you used to get away with being able to be ignorant and today you can't. Yeah, I agree. I think you could be a little sloppy back in the day and now it's like

we're all tightening the bolts here, right? And so we just have to be on our game more. And so I understand the debate. I'm all for it. I just, yeah, I would ultimately always say nothing is black or white in real estate investing. There's always like a if this, then what rabbit hole you can take. And yeah, no wrong or right, just what's right for you. Yeah. And you know that someone's an inexperienced investor when they say something like, I just bought a house. Why do you buy it? Because I got a 3% rate. Nobody that's actually good at doing sub two is going to say that. That's a piece of the puzzle. It is not the reason that they bought the property. Just like I don't think it makes sense to say I bought a rental. Why? Because I have $300,000 of equity. Well,

is it losing money every single month? Is it something somebody else would buy? Like, what good is $300,000 of equity if there's only four people in the world that would buy it from you. So these are things to keep in mind why we love you guys listening to the show with us. And we have to take these deals on a case-by-case basis, which is why we have seen green. So you can bring us your deals and we can dissect and analyze them for you. All right. I really hope that we were able to help some of you brave souls who took action to ask your questions.

And I look forward to answering more of them later. Head over to biggerpockse.com slash David and submit your question. and thanks for everyone who asked a question today. I really like the comments we got on YouTube. I really like that last question that we got. In today's show, we covered how to think through the tasks involved in managing a short-term rental or a flip, how you can create a system and delegate work to make it so that you like owning real estate. If you have any options after locking in a new build and how to approach a deal where you feel like you're not super thrilled about it,

how to use equity to build five new rental properties and how quickly that should happen as well as questions about sub-toe financing equity and speculation overall in our market. Check out the show notes if you'd like to connect with Rob or I and let us know what you thought of today's show and please consider leaving a comment on YouTube to let us know what you thought. This is David Green for Rob playing chess like Bobby Fisher-Op Solo, signing off. Pretty good. Pretty good.

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. On the host, an executive producer of the show, Dave Meyer, the show is produced by E.N.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. www.com. The content of this podcast is for informational purposes only. All host and and participant opinions are their own.

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