BiggerPockets Real Estate Podcast - 853: How to Make a 120% Return by Buying “Negative” Cash Flow Real Estate

Starting point is 00:00:00 Welcome to the Bigger Pockets Podcast Show, 853. I was digging into forums and found an abundance of posts, as in hundreds of posts, dating as far back as 2008 surrounding the topic of negative cash flow, as in when is it okay to lose money on an investment property? So today we're going to unpack negative cash flow. I invited some great investors on the show today so we can discuss some real examples and share why investors may choose this investment strategy. After this episode, we hope you will understand who this is for, and

Starting point is 00:00:30 when to stay away, as well as some of the rules one of our panelists used to vet negative cash flow deals. I'm joined today by Mindy Jensen of the BP Money Podcast. Hello, Mindy. Hi, Rob. Thanks for having me. I'm super excited to talk to you today. Happy to have you. We're also joined here by former Red Robin waiter of the year turned on the market podcast panelist James Dainerd. Hello, my friend. How you doing, bud? I hope you're ready for this because we're going to get it. We think we're going to get into it in today's episode. Well, if we don't perform, I'm going to have to go back to Red Robin and start singing birthday songs again. So we'll try to avoid that. And we're also joined here by the beard formerly known as David Green. Hello, Dave.

Starting point is 00:01:06 Good evening, everyone. So is your head heavier now with the beard? Like, do you feel like there's like a weight at the bottom of it, you know? You do feel the wind rustling it. I noticed that. And little kids love pointing out that you don't have hair on top, but you do on bottom, which I think is hilarious. Like on the plane, when you're going somewhere at a restaurant, they'll be looking at you and they'll be like, how come your hair's down there, not up here? It's very funny. Well, awesome. Today we've got an amazing set of panelists on the Bigger Pockets real estate podcast where every week we are bringing you stories, how-toes, and answers that you need to make smart real estate decisions now in the current market. So we appreciate you listening. So getting into it, as I mentioned at the top of the show, I found hundreds of posts on the Bigger Pockets forums that all talked about negative cash flow. And I thought it was worth a conversation,

Starting point is 00:01:51 especially with today's market conditions. So first, let's define it so everyone is on the same page. And then we can get into some real world examples of why investors, choose this investment strategy, we will then think about this strategy and when to stay away. So negative cash flow to me means more money is going out of my pocket than I am making. And that is taking into account my mortgage payment, principal, interest, taxes, and insurance. That is taking into account cap X and property management and repairs and vacancy and all of the things that you have to take into account when you are looking at your numbers. You don't just look at the mortgage and say, oh, my mortgage payment is $1,000 and rent is

Starting point is 00:02:33 $1,100, therefore I'm making money. No, you're not. Yeah, Dave, what do you feel about that? Is that all kind of make sense with how you think of this type of thing, too? Yes, and what I hope we can get into today is that cash flow is one way that you make money in real estate is not the only way. And it's very important for certain purposes, but it's not for every purpose. And so hopefully our audience walks away with a much better understanding of the various ways you make money in real estate and how cash flow fits into that equation. Now, James, do you think you could break down very quickly why this could be a feasible strategy for newbies and how they should be looking at this? You know, as a new investor, it comes down, whether you want to look at cash flow or negative cash flow properties is where

Starting point is 00:03:11 you're at in your investing career today and what kind of starting liquidity that you have. And as you look at buying properties outside of the standard cash flow principles, you know, it really comes down to what is the growth anticipation that people are trying to. And it's the cost. You trying to implement into getting to financial freedom. And I always say it doesn't always come down to dollars and cents. It's what is your goals and whether you want to do this strategy or not. You know, it doesn't work for everybody. And if you want to do that more steady growth, the burr properties are great. But if you really want to step on this and get to financial freedom five times quicker, buying with negative cash flow can be a huge deal. Yeah. And we're not saying

Starting point is 00:03:53 that you should ever buy a bad deal. We're saying that maybe redefine what, deals are. For years, real estate investing has been preached from the perspective of look at the income, look at the expenses. If income is more than expenses, and you're getting a solid cash on cash return, you should buy the property. That's led a lot of people to buying in bad locations, bad asset classes, not looking at where the economy was going in general. There's a lot of people that chased after deals that looked like they would have great cash flow, maybe like buying a hotel when you don't understand how hotels work, or buying a short-term rental in an area where there's not a lot of people vacationing because it looked like it would cash flow. But they ended up losing their shirt

Starting point is 00:04:29 on that deal. And unless you're James Dainert, it's never a good idea to lose your shirt. So I like to focus on three things when I'm trying to analyze a deal, which are market fundamentals. What does the market itself look like? Is this a time to be buying real estate? What is the location for the property? Because the location is the only thing about a deal that you can't change. You can always change the floor plan of the deal. You can change the aesthetics of the deal. You can even change the purpose of how you're using the deal, but you can't just pick up the house and move it somewhere else, at least not for a reasonable price. And then look for the opportunity to buy equity, which is the phrase that I use in the book that I have coming out next, which is also commonly referred to as value at. How can you take that property and make it worth more?

Starting point is 00:05:09 So for investors who have their fundamentals in place, can a negative cash flow deal ever be the right move? And if it is, what should you do to make sure it ends up paying off? To answer these questions, we will hold a cash flow court right after the break. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims.

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Starting point is 00:06:14 Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr-builder's risk policy, or midterm holiday guests. You get fast quotes, flexible coverage and protection for property damage, liability, and even loss of rental income.

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Starting point is 00:07:48 All right. We are here to figure out the. answer to a hot button question. Should you ever do a cash flow negative deal? I can see all the TikToks and all the haters in the comments now saying, I can't believe they would ever talk about doing this. But I do want to say that not all cash flow losses are created equal, right? So I want to hold a cash flow court for offenders of cash flow as we know it. Each offender will make the case for the cash flow negative deal. I will be the judge. And the BP listeners will be the jury. Court is now in session. And James Dainard, can you please come up to the stand, my friend? Am I doing one of these?

Starting point is 00:08:19 Eight minutes later, and we're like finishing the oath. Okay, so let's talk about a deal that you have in mind here. Can you tell us what type of property was this that you're going to bring to the court? Okay, so this is a duplex that I just purchased in Bellevue, Washington, which is a very, it's probably one of the nicest areas all in Washington. And it's a 1031 exchange deal where I sold a property, made a $250,000 gain on it, and I 1031ed it into a more expensive market at this point. And one of the things I think that is going to drive a lot of people nuts is I sold a property

Starting point is 00:08:54 that I had $0 in. I had $250,000 in equity and I had a $4.25 rate and I was cash flowing it at over $1,500 a month and I traded it for a property that I'm losing $800 a month on. Okay, that's interesting. Yeah, that definitely gets some ears perk. Okay, so you were making about $18,000 a year a little bit more, sounds like, on this property, you sold it, and then you were losing $800 a month. So what was your goal with this deal? So is it the principal, so I'm a return on equity guy. And cash flow aside, and you know, the principle of buying cash flow and getting into financial freedom, it's a real thing. Buy assets, leverage them correctly, pay you income. It's going to offset your income and be able to live off

Starting point is 00:09:40 of your assets. That is a real thing. The one issue with that is you need a certain amount of capital to buy into property and a certain amount of gum powder to get it to a certain amount of volume that will pay you real money. Because as you start in this game, and we all start there, like when I was first buying properties, we started with very cheap properties that we could buy, we could do the Burr's strategy, refinance, create the equity position, and then it would give us a couple hundred dollars a month in cash flow, and that was great. We got assets that were paying for themselves.

Starting point is 00:10:08 But where we saw the impact was the growth of the assets, not the $200 a month. And so what we did is I had a property in Seattle, Washington, I paid $350,000 for it, which is really cheap. It was a massive value-ad property, and this is why I liked it. I put $175,000 into it, rebuilt the whole thing, got it stabilized, permanent financed it, burnt it, got all my cash back out of it. And the value increase went up to $775,000 when I did this. So after I kept it for a year and a day, I sold that property. and I made a $250,000 gain. The reason I sold that property is because I was getting good cash flow,

Starting point is 00:10:50 but now the property had already had all the appreciation built into that deal. And we are going into, as rates have normalized out and gotten more expensive, it's going into slow, steady growth. So if I was making $1,500 a month on this property, which is going to be $18,000 for the year, but I have $250,000 in equity in that property. That's a 7% return. I want to do better because my job as an investor is to get to financial freedom.

Starting point is 00:11:16 7% is not going to get me there, in my opinion. And so I 1031 exchange it and I bought a duplex for $1.125 million. I was able to use all of my proceeds, the $250,000 as my down payment and got a construction loan on this. Now, when you look at the core math of this duplex, my new payment on that is going to be $7,800 a month and I can only rent it for $7,000. So that's going to be an $800 loss every month. So I traded $1,500 for a negative $800. The reason I did this is this is a very versatile property with a huge equity play. That property, once I renovate it, is going to be worth $1.65 million as a multifamily,

Starting point is 00:12:02 but the big kicker is I can condo it off and also sell them on separate units. and the combined sale of those is going to be $900,000 a unit, which is $1.8 million. And so when I'm done with my stabilization and I rent this thing out, I'm going to increase my equity position again by over $350,000 on this property. So the reason I'm okay buying negative cash flow is I'm going to be losing at least $800 a month on this property for the next two years. So that is going to be a loss of $18,000 on this deal for the next two years. But the equity gain that I have on it is I $1031, $250,000 in equity. I'm losing basically $20,000 in cash flow over a two-year period. And then I'm going to 1031 exchange this property again for a higher cash flowing property.

Starting point is 00:12:58 And my overall gum powder is going to increase from $250,000 to, $625,000. So I'm making an over 120% return on my investment over a two-year period. Okay, so let me, let me, let me make sure that I'm following this deal right. So you had a deal that was making $1,500 a month, but then you sold it because you had a $250,000 equity gain in that. And you use that $250,000, $1031 it into another property that now gives you a 365,000. And you use that $250,000,000, thousand dollar equity play but in order to get that 365,000 equity play, you're losing $800 a month. And total, while you own and stabilize this asset, you will lose $20,000 in cash flow up front. But once you sell, once you stabilize and sell this property and 1031 into another property,

Starting point is 00:13:52 that's where the really big play is. Yeah, because the general principle is, you know, for cash flow, you're living off your savings, right? So if I want to make a 10% return and I have $250,000 there, that's going to pay me roughly two to $2,500 a month on that. Correct. If I have $625,000, the cash flow goes to $6,000 or more. And I can do that all in a 12 to 24 month period. So the principle is taking value at, increasing it, forcing the equity, and then once you maximize that deal and getting a steady growth,

Starting point is 00:14:24 then you optimize that deal by selling it and then not just exchanging it for a turnkey property, exchanging it for another value ad property where you can force, that equity up and double and triple your gumpowder, which is going to triple your cash flow in your purchasing power on that next deal. Makes total sense. Now, James, I think a lot of people are going to turn out and say, well, that only works if you keep the equity. What if the market drops? There's no guarantee that's going to happen. What's your rebuttal to the people who say that equity is a bit of a mirage that it can disappear, but cash flow is reliable. Well, I mean, it kind of goes in, you know, equity goes up and down. That is very true. And it, it,

Starting point is 00:15:03 is there is a part of timing in this and you're never going to time the market correctly. But what you can do is forecast what you think is going on in the market. And what I do know is today is the rates are at all-time highs or the highest they've been in the last 20 years. And we are starting to see rate relief where rates are starting to come down. And also I'm forecasting this deal over a two-year period, which I do believe rates will be lower in two years, which should increase the equity position and the gain. Okay. Okay.

Starting point is 00:15:31 And what would you say your rules are for vetting a deal? So my rules for these high equity growth deals is I always do them for 12 to 24 month terms. I don't want to be in this negative cash flow for five to 10 years. That's not the plan. The plan is to grow it quickly. So a 12 to 24 month deal always exit at that longest to 24 months. I always have 12 months of reserves in my bank. So no matter what, I know I am covered and I factor for that because that's where people get in trouble is when you're burning the candle on both ends.

Starting point is 00:16:00 So when you're going for this strategy, there's some sacrifice because you've got to put some money on the sideline. But remember, you're hitting 130 to 200% growth on that. I'm always looking for at least an 80% to 100% cash on cash return. So in this deal, I'm putting in 250 and I'm getting 360 back. That's a win. As long as I'm making around 200 to 250 in growth, I'm going to be doing that. And the property has to be tradable. I don't want to buy something that's not going to appease to the masses.

Starting point is 00:16:29 This deal I can condo off. I can sell to the biggest demographic in this whole area. $900,000 in the city is in the affordable price point for this area. So I'm going to be marketing my units to the biggest masses of people that are going to be buying it. And then we always make sure before we buy these deals that we've qualified for our permanent financing because many times we're taking these down heavy value add with hard money, setting it up with the right leverage with the construction component. and we have to be able to refinance that into permanent financing or at least a portfolio

Starting point is 00:17:03 loan because you've got to make sure that your money is there and ready to pull the trigger with. And lastly, when we're looking at buying negative cash flow properties, you want to make sure that you can operate inside of your income, right? You know, this is a monthly investment for me. And so I always like to make sure when I'm having a negative cash flow deal that it is not going to be any greater than 3% of my net income every month. Because that just means if I'm going into a slow times, I can spend a low.

Starting point is 00:17:28 less money at the grocery store. I can spend less money going out to dinners and I can feed my investment that's going to give me a long-term play. So you want to make sure that you're not getting outside your skis on your income as well. So basically if you're making $10,000 a month, you don't want it to be more than $300 a month of negative cash flow. Is that right? Correct. And everyone has their different threshold, but I might have numerous properties like this so I don't want to get too outside my skis. Totally. Totally. Okay. So Mindy, what say you to our cash flow offender? First of all, James, thank you so much for bringing up money. My money heart loves the fact that you have a huge reserve.

Starting point is 00:18:07 So this is not James's first deal. Everybody listening who is like, oh, maybe I could buy a negative cash flowing property. James has done like a betrillion deal. So this isn't even remotely his first deal. He knows his market like the back of his hand. He's kept up to date with zoning changes and real estate changes and updates and all the local stuff. He's not buying all over the place, or maybe he is, but this deal is in his backyard. He knows what's going on in this spot. And he has, my money heart sings, a huge reserve fund

Starting point is 00:18:41 accessible to cover his expenses. I am also in the bigger pockets forbs all the time, and I see people talking about buying negative cash flow properties who also are talking about buying their first deal and they don't have any money. They're barely making ends meet. but they have to get into the real estate game, so they're just going to jump into this one really crappy deal. It's a negative cash flow deal because they haven't done all of this research and they don't know what's going on. So they're like, oh, well, I'll just get in.

Starting point is 00:19:09 What's the harm? The harm is you can lose your butt. That's the harm. So James has done research. He's got reserves and he knows his market. He said something else. He said it has to be tradable. You know what?

Starting point is 00:19:23 Unique is a four-letter word in real estate. I bet you drive past. as duplex and you're either like, huh, there's a property or you drive by and you're like, oh, that's nice. But it's not like, ooh, that's the most interesting house I've ever seen. Interesting is also a four-letter word in real estate. What is the four-letter word? Sorry. Meaning it's a bad word. Interesting. A four-letter word is a bad word. I was like, I was like, there's got to be, did I miss this? Have I not been paying attention? It went over my quaff. I'm sure there's a percentage of people that didn't know. I'm just asking for

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Starting point is 00:20:45 than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily.

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Starting point is 00:23:08 Again, that's biggerpockets.com slash dominion. One of the interesting things that you said, James, was your whole philosophy here, it's interesting because you're clearly two steps ahead, right? You're saying, oh, I'm going to lose money on this deal because I'm already planning the next one, right? There's a little bit of a delicate dance that you have to dance here whenever you know you're going to lose money. And David, I know this sort of floats into some of your philosophies with portfolio architecture, right? Yeah, that's exactly right. And I talk about this in pillars of wealth because it's becoming a necessary part of the conversation and investing when it never was before.

Starting point is 00:23:42 Oh, look at Mindy. She's got a copy there. That's awesome. It realton investing was so simple because nobody else was doing it. And so if you could get the loan and you had the money, it was really as simple as just go out there and find something that cash flows, buying a good area, and you will make money. Now we've done such a good job of sharing the information, the masses are all hearing it, that unfortunately, everybody is fighting over these assets like Mindy just said, there is still more demand than supply. So you have to kind of start thinking in three dimensions instead of just two dimensions. And the idea of portfolio architecture is to stop looking at every single property and only comparing it to itself. It needs to fit into a bigger puzzle. So if you,

Starting point is 00:24:21 you have a property that's got a lot of equity, but it's not cash flow. And you can offset that with another property that maybe cash flows a lot, but isn't going to grow in equity. Or you can keep a W-2 job, which allows money to keep coming in, or you can start a business and have money coming in, or you can save money on your own housing by house hacking or by not taking expensive vacations, right? You can make decisions in the rest of your life that free you up to go after these deals like what James is talking about without being bankrupted. Whenever someone says, but what if it doesn't cash flow, I'm going to lose it. The next thing we should all say is,

Starting point is 00:24:54 are you that bad with money that you couldn't lose $800 a month or it would torpedo you? Now, if $800 a month is a little bit of a bigger chunk, but for James, that's not because he's running several businesses. And to Mindy's point, the better you do with your personal finances, the more room that you have with the individual property you're getting and the bigger swings that you can start to take.

Starting point is 00:25:15 So I would just like to encourage everybody to stop only asking, does it cash flow or not, and start asking, how does it fit into my overall portfolio? And can I make up for the lack of cash flow with something else? Sure. And I mean, James, you obviously have a very developed portfolio. You're very skilled for this. But I think the question that everyone wants to know is, is this a deal that you would have done when you were starting out?

Starting point is 00:25:37 No, I would not have. When we were restarting, you know, because I, you know, and the reason I can say a hard know is because I did do these deals from 2005 to 2008. I over leveraged. I was paying negatives every month, and I was doing it to get equity so I could go buy more properties. That's a bad recipe, and I learned that in 2008. And so in 2008 to 2012, we used a similar concept, and we would go for high equity

Starting point is 00:26:04 positions, but we wanted to make sure they at least broke even with a buffer in there. Because as you start to build, you know, our income has changed dramatically from 2008, 9, and 10. There's no way negative $800 a month would have hit. inside my one to three percent rule. And that's also why I make that role. We have to have a certain amount of income coming in. But I would still do the same principle of trading minimal cash flow for higher equity as long as they can break even or pay for itself because that equity growth is what moves the needle, not $100 or $200 a month. Great. Well, you've built a really great case here, James.

Starting point is 00:26:38 We are going to take a quick recess for the jury to discuss. Mindy, will you please approach the bench and build your case. Okay. This is a story of creative financing gone wrong meets great house on the market at the wrong time. So this is a property. It's a single family home. It has a killer location on the golf course with a horrible execution. I don't know if you guys know, but I love a good, ugly house built in the 70s with the rock solid bones. But boy, the 70s architecture. They were, I don't know what they were smoking, but it was not pretty. This house, you walk in, and it's one big room. It's like a studio house, but with three bedrooms, like, slapped onto the side of the main room.

Starting point is 00:27:25 There's, like, no hallway or anything. It's just rooms out there. Instead of having solid doors on the bedrooms, they had sliding glass doors on every bedroom. Sliding glass doors, like literally like an outside patio doors, how you would get into the bedroom? Okay. Three of them for the three bedrooms. And then inside the kitchen, my neighbor calls it a one-butt kitchen because it was so tiny that only one person could fit in there. So I changed the floor plan.

Starting point is 00:27:55 I changed the interior. I changed the exterior. And I turned it into a midterm rental. So I'm not locked into a long-term lease because eventually I'm going to move into this property. It's a ranch house. And once my children leave the nest, the house that we're in doesn't work for a house. us anymore. It's a work. Our current house is a split level. This is in the same neighborhood that we live in. But as you get older, you don't want to walk upstairs all the time. Our purchase price was

Starting point is 00:28:22 $510,000. The next lowest priced property in this neighborhood on the golf course was $710,000. So there's already a huge amount of opportunity. But first, you have to take out those weird things like sliding glass doors into the bedrooms. Important. Important. So your goal was to try. turn this to rehab it a little bit and turn it into a midterm rental? Rehab it a lot and turn it into a midterm rental for a few years. So my youngest daughter's in eighth grade. So we have five more years with her at home. And then we will move into it. We originally purchased it, creative financing. We took out a line of credit against our after tax stock portfolio because it has a 1% interest rate. So our interest only loan on this

Starting point is 00:29:11 property was $425 a month. Renting it for $3,500 a month, that's some killer cash flow. I mean, it doesn't take it to, you know, I do okay. But 1% rates didn't stick around very long. We could have taken out a 5% mortgage. And in hindsight, maybe that would have been a good idea. But the mortgage payment was going to be 2150 principal and interest. Taxes insurance are always going to be the same, so it doesn't matter. But the difference between $425 and $21.50 is a lot. Rates went up. I don't know if you guys caught that very tiny news, but rates went up and now we are paying $3,000 a month interest only on this line of credit.

Starting point is 00:29:59 And so we went from $5,000 a year to $35,000 a year paying for this property. We put $50,000 into it, new kitchen, new floors, new walls, new doors, decorating for the midterm rental, new appliances, new bathroom, new paint. We zerescape the outside so we didn't have to take care of it. We didn't have to have the tenants take care of it. We purchased it in June of 2022 and it went into service in April of 2023. As we were working on the property, there was no income coming in. The line of credit started to shrink. So the line of credit is you have this much money in your stock portfolio, they will lend you approximately half, except it's not approximately half depending on what kind of stocks are in your portfolio. The line of credit started to shrink

Starting point is 00:30:50 due to the volatility of the stock market at the end of last year. And as we were watching it fall, we decided we would open up a HELOC on our primary residence just as a backup. We didn't take anything out. A HELOC doesn't cost you anything unless you take money out, unless you borrow. at a home equity line of credit. When we took out the portfolio loan, we had a line of credit of $1.5 million. We borrowed $500,000 giving us a buffer of $1 million. But tech crashed, and our stock portfolio is tech heavy. So we went from a $1 million buffer all the way down to zero and into negative.

Starting point is 00:31:31 So we ended up taking money out of the HELOC and putting it into our portfolio loan because when the buffer goes away, they start selling your stocks. And they don't ask you what stocks you want to sell. They sell what they feel like selling. And we didn't want them to do that. So we put money into the HELOC, but that costs money too. So we are now back to a roughly $500,000 buffer. But it was a bit of a touch and go there for a while.

Starting point is 00:32:01 We did rent it out for $3,500 a month from April until just last weekend. when our tenants moved out and now we have it on the market. If anybody needs a place in Longmont, we now have it on the market for $3,900 a month. And it will cover the interest-only loans. Once interest rates go down, our payment will go back down and life will get a little easier. But we bought it because eventually we want to move in. And when this house comes on the market, again, if somebody else were to have bought it when we bought it, and rehabbed it. They wouldn't have rehabbed it the way we did. They wouldn't have done many of the

Starting point is 00:32:41 things that we did. And they may not, it might have been somebody who bought it and moved in and like doesn't put it back on the market for years. So we bought it because of timing. And we have a lot of reserves to pull from that we can cover any negative cash flow. So is the idea here, is it like a long term equity player? Or you just kind of waiting it out until interest rates drop down and that's sort of when the cash flow goes back up? The cash flow will go back up when the interest rates drop. And we are going to have it as a rental for about five years until we move into it when our kids move out of the house. Got it. So you're just kind of waiting it out until you can move in, basically.

Starting point is 00:33:20 Yeah, yeah. Okay. That makes sense. So is this a deal that you would have done starting out? No. I would never have done this deal starting out because starting out, I didn't have the line of credit to pull from. James, you look in like you want to jump in over there. What say you? Well, the reason I love this is because what, you know, I definitely don't think this is for the brand new investor, but this is all about planning your goals and where do you want to be and in your real estate and your investments are going to kind of shift you there. Many have had a really good deal with some good equity position, but the big benefit of this deal is when she moves into it in five years, she's already created this massive equity gain. And when she sells her other properties, she's going to get the first $500,000 in equity tax-free. and so when she moves into this property, she's probably going to have a very similar $500,000 in tax-free equity in this property with the appreciation.

Starting point is 00:34:14 So she may be taking a little bit of loss for the next couple years on this. Rates will settle down. She's going to break even. That's a short-term pain. But when she moves in, you know, if you are not paying taxes even 30% on 500 grand, she's instantly making more money by walking into a property that has the equity, has already been created. So if she sells that in two years, she's making that money tax-free. So it all kind of works out. The only thing I'd always watch out for, especially with newer

Starting point is 00:34:42 investors, is stay away from floating debt. Floating debt makes it really hard to perform a deals because you only, you don't know what's going to happen in the next 12 to 18 months. And unless you have a huge padding and huge buffer in there, I would stay away from floating debt. I am so glad you brought that up, James, because yes, that is absolutely a great point. Do not just jump into floating debt. I have been investing since God was a boy, and I didn't even realize that rates could go up that fast. Do you remember last June? I had the opportunity to get a 5% loan.

Starting point is 00:35:17 I'm like, 5%. Why would I ever pay that much? I have a 1% right here. Any last comments before we close this court? Yes, I have a point I'd like to make about the floating debt, some of the more risky instruments that people, thank you, Your Honor. My question for both James is Mindy, when you think about the avatar of investor that is most likely to say, how can I use floating debt, how can I get a helot to try to buy a property, how can I borrow money, how do I use OPM to buy this property, how do I find someone to partner with? all of these things that increase the likelihood that you're going to lose money in real estate. When you think about the type of person that's typically asking those questions,

Starting point is 00:36:01 what's their financial position usually like? They don't have money. Yes, that's exactly right. So the point of living a life that's financially frugal and focusing on making money, the stuff I talk about in Pillars of wealth, the stuff we're talking about now, is to help you avoid that risk zone that you fall into. When you don't have the money, you start stretching,

Starting point is 00:36:21 you start exposing yourself, you're overreaching to try to make things happen. When the market's going up, up, up, up, up, you can get away with those moves more than when the market is like it is right now. Yeah, people have been listening to podcasts and hearing for seven, eight years now, oh, I just, you know, borrow that person's money, or I just got a helock, or I just got floating rate dead at a very low rate, and they were able to get in and out, and luckily it worked out for them, and I'm happy it did. But I'd rather see people not get into the point where they're so desperate for money that

Starting point is 00:36:50 they're going to Vegas and they're putting it all on black and crossing their fingers hoping that it works out. So we've heard the cases. We leave it to you at home to judge our offenders, but there is some good rules to vet deals like these and never do a bad deal. So thank you to all of my defendants slash plaintiffs at this point. I don't know which one you are. I never finish law school, but I appreciate you all coming on to the pod today. Rob, thank you for having me. This is always fun to talk to you. And James and David too. Nothing from you, James. You're like, eh. I want to challenge. anybody that wants to make the challenge of cash flow versus equity gains, I think we have a great debate about this. We want the cash flow equity rumble. Let's break down the math and see where it

Starting point is 00:37:31 goes. Oh, okay. Are this somewhat of a challenge here? You're trying to challenge people at home? I challenge any listener that wants to challenge equity growth versus cash flow to a cash flow rumble. Cash flow cage match right here on bigger pockets. All right. This is great. Okay, so if you think you can go toe to toe and head to get head against James Dainerd in a cash flow cage match. Please comment on the YouTube video down below, reach out to us on social media, and we will arrange it for an amazing episode on Bigger Pockets. If you'd like to connect with any of the panelists from today, by the way, check out the show notes for this episode.

Starting point is 00:38:08 We will leave links to all of our social media down below. And be sure to tune in on Friday to hear Dave Meyer, David Green, and James Dainerd break down the state of real estate investing, including strategies that are working and what to watch out for. you're not going to want to miss that. Thank you to everyone for listening and we will catch you on the next episode of BiggerPockets. To apply to be on the cashflow cage match, go to BiggerPockets.com slash guest and put cash flow after your name in the application. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on

Starting point is 00:39:01 YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pockets

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BiggerPockets Real Estate Podcast - 853: How to Make a 120% Return by Buying “Negative” Cash Flow Real Estate

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