BiggerPockets Real Estate Podcast - 855: Seeing Greene: Student Housing, Lease Options, and How to Buy with High DTI

Episode Date: December 11, 2023

Student housing investments can make you killer cash flow. If you invest in college towns, students will pay a premium to be close to campus and won’t mind living in a property with three, four, or five other roommates! This means you can squeeze six high-paying tenants into one single-family home. But more money means more problems, and your investment property could become a party house overnight. How do you keep the cash flow and avoid the headache? Let’s find out! David is back on Seeing Greene to answer your real estate investing questions, and his partner in crime, Rob Abasolo, joins in to add more investing firepower to this episode. This time, the dynamic duo will touch on student housing investments and whether fitting six (yes, six!) students under one roof is worth the risk. Then, how to invest when your DTI (debt-to-income) is too high. One investor asks whether a lease option is the best way to sell a property, and finally, we’ll finish with the great debate: pay down your mortgage early or save the money instead. 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 jump on a live Q&A and get your question answered on the spot! In This Episode We Cover Investing in student housing and whether the huge cash flow is worth the headaches How to make sure your short-term rental or student housing DOESN’T become a party house How to fund your real estate deals when your DTI (debt-to-income) is too high  Selling properties via lease options and what could go wrong during the deal  Paying off your mortgage early vs. keeping the cash and saving instead  And So Much More! Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-855 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, 855. What's going on, everyone? This is David Green, you are 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. Today's show is a seeing green episode.

That means that I am going to be answering your questions directly related to real estate, and I brought in some help. Rob Abas Solo will be joining me on today's show as we offer insight from our experience and the things that we've seen in real estate to help our question askers and you grow your wealth through real estate. We've got an amazing show, including a guest,

what we brought on to go back and forth live when we were recording, and you won't want to miss it. Definitely keep an eye out for when we discuss if you should use a lease option on a house hack or not. If you should pay down your mortgage or save more cash with the extra principle that's left over, what to do when DTI is stopping you from scaling your portfolio. And joining us live, Carl is asking about building student rentals and if he should add extra bedrooms to generate an additional $1,200 of income a month or if the headache is not worth the return. All that and more on today's show. Let's get into it.

And welcome Carl to seeing green. Carl has 30 years of real estate investing experience. He also has an incredible head of hair. I love it. You're not watching on YouTube. You need to go check it out. Carl is a real estate broker, a general contractor, and even an auctioneer, although he doesn't do a lot of that anymore. He's built hundreds of spec homes and then got into build to rent, which was similar to the Burr model before we called it Burr. Carl, you've also built a solar farm. I mean, this just gets better and better. And you've got some plans for leasing that out to an electric company and then possibly adjusting if they don't want to renew the lease, as well as a small mobile home. park that you own as well. So let us know, I mean, frankly, I'm wondering what it is that we

could answer that you don't already know to answer for us. But what's your question? Let's see if our audience could maybe benefit from this. How could we possibly help? I listen to you guys I listen to you guys religiously. So I appreciate y'all having me on. I'm kind of excited I get a two for one here. Both of you. We are happy to serve, sir. Well, my question is in the realm of David's favorite investment vehicle to promote newbies especially, and that's the house hack. Specifically, I'm talking about a house hack. We call it the OG of house hack. So we just college roommates back in the day. By the way, this is in an SEC college town, major SEC college town, and we have a business model of building four bedroom, four and a half bath houses. I have a partner.

I'm in Chattanooga, Tennessee. He's at the other location. And, you know, I'm looking at the David Green formula of more parking, more bedrooms. If four is good, six is better. And the land will hold six. But my partner, he's pushing back because he has some concerns. And he's not wrong. Concerns are students are more drama than the normal renter population. They get in fights. They don't get along. They want to change tenants or leases and add different occupants, stuff like that. And number two, they're more damage, more wear and tear, house parties, noise complaints. So my question is, am I exponentially adding to those problems by adding two bedrooms? What opinions do you have? What ideas have we not thought about that you two could share?

So one issue is if we build four bedroom, four and a half bathroom homes, but we're going to be running to students and then we make it a six bedroom home, we're effectively increasing the size of it by a third, but are we also increasing our headaches by a third? So that's one thing you're trying to figure out is if we're going to be renting to students, should we just keep it to four? And then was the other part, should we be renting to students at all because they're a headache? No, that's not the question. The students pay a premium because they are students and they're a headache. That is what it is. Right. And that's the market. Okay. I like the six bedroom idea. I mean, my thought would be if you didn't want to deal with students, you just shouldn't be renting in student housing. Like if you're going

to deal with four of them, dealing with six of them isn't going to really change functionally. how the thing operates. 100% agree. I thought you were going to say something like if we have to sell it, it's harder to sell a six bedroom house and a four bedroom house. So I was sort of formulating this plan that, well, what if you build,

you're building it so you get to decide the floor plan. You build the bedrooms next to each other. So you could just knock down the wall and turn it into two king suites or something like that. But my guess would be your cost of construction. The extra bedrooms and square footage will be minimal. The extra bathrooms might be a little bit more money. But still, if you're building it,

you're getting it at a much better price than if you're buying a six bedroom. I would definitely go for this and I would just put that energy where you're concerned about the students possibly messing up the house into just picking different students. What's your thought, Rob? Same thing. Basically, it's like you either rent to students or you don't. I don't think that the four bedroom to six bedroom situation is going to change your headaches. I mean, maybe, but I still think you can implement proper vetting techniques, right? Like if you get a, you know, a group of frat guys that say that they like to drink Coors Light every day, then yeah, you probably probably don't want to rent to them, right? So it's like, I think you want to figure out who your

avatar subset is within the student body, but I don't know. I mean, and granted, I'm not, I wasn't that crazy in college. And I split, I split a house with like 10 guys and it was like a four bedroom. So I don't think going to six bedrooms really would have tipped the skills. I think it's all about, you know, putting proper tenants in place ultimately. I think it's more of a vetting problem than a size of the house problem. Right. You know, one thought I was having, if I was building houses where the concern would be students, right? The upside is you get more students, they pay more. The downside is the parties.

Can you structure the floor plan to where there's just smaller common area? And so they basically, when they go to the house, they just kind of have to go to their room because there's not a whole lot of places to hang out at all. So, like, they can't have a party. Well, that is a concern. We were going to have to add a little bit to the common area. It's basically an open concept kitchen living area. That's where they put their TV and washing machine room is not far off that.

But yes, any way we can limit them from having house parties is great. But, you know, house parties are just part of the college experience. I'm not trying to paint a picture that students are just, you know, debauchery, but it is part of the experience and it's part of what goes with it. Well, I'll say this. Look, a lot of people that want to get into short-term rentals come to be, and they're like, but what about the parties and what about the crazy guests and what about this? and I actually just have like a pre-screening set of rules when people book my place.

I'm always like, absolutely no parties. There will be a $1,000 fine. If you steal my towel or charge you $100 bucks, if you lose my keys, it's a $500 fine. They're really crazy. It would make most people say, heck no, I'm not staying here. This host is crazy. But guess what? And fingers crossed, I've never had a huge party in my properties because anyone who would

throw a party reads my rules and they're like, heck no, we're not staying at this place. And normal people who read my rules are like, yeah, we're not going to do any of that. and they end up booking my place. So I feel like whenever you're actually putting your listings out there, like on Craigslist and all that kind of stuff, I feel like you could be pretty bold with your listing and very clearly paint that it's kind of like a no BS property, no parties whatsoever.

And then if you get a, you know, a group of squeaky guys in the math club, right? Like you probably don't have to worry too much about these guys throwing parties every week, right? I mean, listen, math guys party. They party. Nerds party. Not to the fullest extent. I was going to say I was one of those squeaky math guys, but unfortunately, I just looked nerdy.

I was not smart. Well, you know, I don't believe the part about you. You were not smart. How about that? Okay. I'll agree with you of that. We have that in common. Carl, what is your experience so far with renting out to student housing?

Have you done it yourself? I don't manage them. You know, my very first investment property was a house hack when I was in college at this very university studying real estate finance. I bought a place and rented it to other guys. But I never really considered it a viable ongoing vehicle until I started listening to you guys and kind of wish I'd maybe done some a little bit more of that. But I let a friend of mine, my business partner, handle the rental aspect since he's local. I just mainly hear his stories.

And like I said, he's pushed back and doesn't really want to do the six bedroom thing. So I'm trying to convince him otherwise. I'm trying to figure out why. He's got something in his mind that's causing him to literally vocalize you. He doesn't want to do it. Do you know what it is? The exponential increase in problems of just having that group living together. But then building a house does the same thing, right?

Like him managing another house exponentially increases his problems. He's willing to do that. So why do you think he's willing to do it for, but not six? I have an uncomfortable question for you. If your rent collection drop to 80% next month, how long would your cash flow hold up? What about 70% for the next three months? Would your cash reserves cover it?

I talk all the time. about scenario planning. Smart investors don't just model the upside. They also pressure test the downside. This is even more important in a down market. And that's why I like Stessa's stress test report. It lets you model different rent collection scenarios, adjust expense assumptions, and instantly compare the results to your real bank balances. It's one of 12 professional grade reports inside Stessa Pro. Try it for yourself. Visit stessa.com slash mkTG slash bigger pockets and get six months of Stessa Pro for free because it's better to discover your risk in a report than in a recession. Do you ever notice how every passive investment somehow turns into a very active lifestyle,

active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value in the best markets across the country, without making real estate your second job? That's exactly what rent to retirement does. They're a full service, turnkey investment company, handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit BiggerPockets.com slash retirement to learn more. Running your real estate business doesn't have to feel like juggling five different tools,

and the tools are blades or flaming torches. With ReSimply, you can pull motivated seller lists, skip trace them instantly for free and reach out with calls or texts all from one streamlined to platform. The real magic, AI agents that answer inbound calls, follow up with prospects, and even grade your conversations so you know where you stand. That means less time on busy work and more time closing deals. Start your free trial and lock in 50% off your first month at reSimple.com slash bigger pockets. That's R-E-S-I-M-P-L-I-com slash bigger pockets.

I can't specifically add any more to that because that's the reasons he's given me. Carl, what's his name? Michael. Michael. Okay, so Michael's probably listening right now. Michael, just do it. It's fine. The difference between a four bedroom to six bedroom is like, I just, I mean, of course, once

I say that, they're going to have parties every day. But it's fine. I think really the best thing y'all could do, to be honest, is just talk to like, find five other people who do student housing between four, five, and six bedrooms. and just talk to them about their experience, and they're all probably going to be like, oh, yeah, we've seen some things, but totally worth it because we make way more money.

I mean, that's usually the case with any amount of... I mean, look, higher money means more work. That is just the rules of the road, right? Long-term rentals, least amount of work, least amount of cash flow. Short-term rentals, most amount of work, most amount of cash flows, right? And so it's... The more work there is and the more maintenance there is,

the more money there is. The more volatility there is, the more money there is. So ultimately, if you guys are trying to make... a really good return and you're building this from scratch, I think you're going to get a bigger equity play out of a six-bedroom place than a four-bedroom place. I'm sure the demand for a six-bedroom place out there is pretty high too in a college area where there's probably, they're always, they're always in demand in any college town, I feel like, right? Right. And the students today have a higher standard of living demand where they want one bedroom and one unsweet bath per student.

Yeah. And, you know, there's a limit to that. And so I think this question is somewhat relevant to any college town that has a shortage of housing or a need for updated housing. I just think you make the floor plan inconvenient to having a party. Not a lot of common areas. I'd be designing a floor plan with a small loft on the top where they could, big enough to put a couch or two and a TV and that's it. Well, there's a backyard, a front yard, a street, a side yard. They find ways.

What I would do is, you know, at like, you know, like at the store, they have those little spiky things on the on the awnings on that. pigeons don't land on. Just install a bunch of the... My mind went to the same place in the backyard. That's the same thing. You got all your like patio furniture back there with those things on it, picnic tables with those things on it. You install some fire springs in the backyard that just on their own go off every 30 minutes or something for anyone standing back there. They get soaked. Yeah, I'm definitely, Carl, of the mindset that you advertise it heavily. This is not a party house.

Strict lights off policy will be enforced at 10 o'clock at night or something like that. This is a house for students that want a safe, friendly place to live where they can focus on their studies. I don't know. It's been a while since I've been in college. I wasn't a partier. I was not drawn to partying. I felt like there was a lot of us that were in college that weren't partying. And I would have not wanted to live in a place where other people are making a lot of noise.

It was like I was working every night. I came back. I just wanted to go to sleep because I had to wake up in the morning to go to school. I think about my partner, Christian. He went to UC Berkeley and he said he said chemical engineering. It just probably wasn't a whole lot of fun being. had because they were studying all the time. You're going to get those students and those are the ones you're going to want to market to. And the manager might just not have great systems set up to

screen those people out. But you can be picky. If you got a bedroom that has its own bathroom, you can be picky about who you let stay there. I agree with you when you look at the additional investment and the two and a half year payback. It's a slam dunk. Yeah, not to mention if you decide you want to sell. You got two extra bathrooms. You got two extra bedrooms. You got the, extra square footage that could be combined to make bigger bedrooms. Like, there's some flexibility there. It's just the objectively right move to make from a real estate perspective. It's the management perspective where we're really having the problems. So rather than altering the real estate itself to make it fit the problem or avoid the problem, let's just focus on the management

element of it to try to solve that problem instead. Sounds great. All right. Well, Carl, thank you. I appreciated that you brought the one question that we actually probably could help you with with the background and of experience that you have. Very impressive person. Glad to hear that you're a fan of the podcast. We are definitely a fan of yours. So thanks for being here and let us know how it goes. Thanks, guys.

Appreciate it. Well, thank you for that, Carl. What did you guys think about Carl's situation? Was this interesting? Have you ever considered building to rent yourself? Are you afraid of student housing or do you think it's a good play? Let us know in the comments on YouTube. And while we're there at this segment of the show,

I like to read comments that y'all have left on previous episodes. to see what you're thinking and what your questions may be. Our first question comes from nano. Hands down, the BP platform has revolutionized REI for a generation of Americans. And it's been done with the spirit of generosity. Anybody could pay pennies on a dollar for intellectual capital that will pay big dividends if he or she is willing to put the work in. I don't know what Josh Dorkin's vision was when he started this machine,

but it continues to create and inspire shared value that you seldom see in business and industry. Cheers to BP, Dave Green, and all the BP, Cs. stakeholders. Well, thank you. What a sweet comment. Next comment comes from Aaron H. 96660. In my opinion, building is the only way to achieve a reasonable return in this current state. Thank you for that. That comes from our question of if building to rent makes sense or if we should stick to buying. And a few shared tips in the comments as well. From Kyle Strickland, a multi-screwdriver and an Allen key set must be at your short-term rental in the supply closet. Also a little bottle of locktile. These are must-haves.

Tammy Russell chimes in and light bulbs. Every time I step foot in one of my properties, I can expect to be changing out spent bulbs. That's funny because I met one of my properties in Maui right now. And last night, as I was laying on the couch, I looked up and realized there was like five light bulbs that are all worn out. And I don't have any here to change them. So I will be finding some hardware store in Maui to do that myself.

And our last comment comes from Cabin King, Lamp King. The beard is licking fire. A helock has helped me to double my portfolio in the last five years. I'm going to assume the beard is looking fire comment is bent towards me, which is probably why we pick this comment, if we're being honest, because I am not above flattery. So thank you. If you would like to be featured on Seeing Green or have your comment answered in a future show,

just remember, flattery won't hurt. But more than that, let me know what have you thought about today's show so far, would have been your favorite parts of it, and what do you want to see us cover on future Seeing Green episodes? And before we move on to the next segment, we've got a comment that someone left on Apple podcast that said, simply life-changing. I discovered BP in late 2020. Shortly after discovering the world of REI, I've been hooked ever since.

The show continues to deliver real-time, relevant, actionable advice. Over the past two and a half years, my wife and I have worked together to acquire one long-term rental and two short-term rentals. We wouldn't be building the portfolio we are today. Have I not educated myself? And BP was a huge part of that. Love the content. Rob, you guys are rock stars. Keep up the strong work. That's from Mortavius via the Apple podcast app.

Thank you, Mortavius. All right. We love you guys and we appreciate your engagement. Please continue to like, comment, subscribe to our channel and submit your questions at biggerpockets.com slash David. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the right. wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates

as low as 3.75%. They've been trusted partners with Bigger Pockets for over a decade, and if you want to learn more, visit biggerpockets.com slash retirement. What if your CRM actually did the hard work for you? I know, crazy. ReSimply lets you pull seller lists, skip trace them at no cost, and contact your leads by caller text without bouncing between apps. Then it's AI agents take over. Answering calls, following up automatically, even grading your conversations, so you can

focus on the deals that matter. Everything's under one roof. Design to simplify your day and scale your business. Start your free trial today and lock in 50% off your first month. at Resimpley.com slash bigger pockets. That's R-E-S-I-M-P-L-I-D-com slash bigger pockets. New Year, clean slate,

and maybe a vacancy that needs to get filled fast? That's where a veil comes in. With Avail, rental listings can be published to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, apartments.com, redfin, and more.

No copying and pasting. No juggling multiple platforms, just one listing that shows up everywhere. If getting rentals organized and filled fast is on the list this year, start with Avail. Sign up for free at avail.co slash bigger pockets. That's AVAIL.com slash bigger pockets. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation.

It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means your pay. paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy, just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites.

Indeed, sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than non-sponsored post. The best part, no monthly subscriptions or long-term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed worldwide. There's no need to wait any longer.

Speed up your hiring right now with Indeed. And listeners of the show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash rookie. Just go to Indeed.com slash rookie right now and support our show by saying you heard about Indeed on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. All right, let's get into the next question. Hey, David. My name is Danny Gibson. Absolutely love the show and always appreciate the advice that you and the rest of the crew dish out.

My question is in regards to how to continue to scale once I've maxed out my debt to income, such that I'm unable to buy another property conventionally. I own a couple of duplexes and a single family in the Tampa Bay area. And I'm trying to assess the options available to me. A few that come to mind are increasing my income, although I just moved into a new job which actually helped me increase my income enough that I could buy the single family. Second would be to lower my debts. And then a few other options are like partnerships, DSCR loans, although I'm unsure whether

properties would cash flow or even break even with the SCR loans, just knowing how high interest rates are right now. And then the final piece is credit financing, something like seller. financing, but broadly, are there any other options I could consider? And is there a quote-unquote typical path that investors typically pursue once their debt-to-income has become too high? Appreciate and looking forward to the answer. Keep it with a great work. Thanks. All right. Thank you, Danny. First off, congratulations on buying so much investment property that you can't buy anymore. That's really great. Yeah, it's not a bad problem to have.

It's a good problem to have. Debt to income ratio. Good problem I have. Support it. you should get like some kind of bigger pocket sticker for like achievement unlocked. I feel like we should reward people like him because I was just at a conference that was about raising money. And what was really cool about it was that everyone in that room was a seasoned real estate investor who ran out of money because they bought so much real estate. And so they were just there to learn how to raise money. And I was like, that's kind of as cool. It's like a different vibe that I'm used to. So he's in this very special place where he's killed it. He's used all his money.

And he's like, now what? It's like the hardest corner to turn when you're when you're in real estate, I think. Well, there are some options here to turn that corner. So the first you mentioned it, Danny, it will be the easiest and that's just using a DSCR loan. These are loans that stand for debt service coverage ratio. They're new in residential real estate, but they're not a new way to underwrite real estate at all. This is really how we've underwritten commercial real estate for as long as I've been around, where the lender will say, all right, the expenses on the property are X,

as long as the income is the same or greater than that or greater. than that to a certain percentage. We will let you borrow based on the income that the property is going to produce, not the property that you produce. So debt to income ratios is a way of measuring a human being's ability to repay something. And DSCR ratios are ways of measuring the property's ability to repay something. Now, the cool thing with these is they're usually 30-year fixed rate loans, which you don't get in commercial.

So you kind of get the best of both worlds. You can buy a residential property and you get a 30-year fixed-rate loans and you don't have to use your debt to income ratio. The downside is the properties have the cash flow, otherwise you can't use a debt service coverage ratio, as well as the rates are usually right around a point or so higher than conventional financing. So that's one option. You mentioned a couple others, Rob. Of what he said, what were your favorite options? Partnerships, for sure. When I ran out of money, my passion didn't run out. My money ran out, right? And so if you're very viciously attacking this real estate thing, it is a very lonely road in general, is my

feeling. And so if you're the kind of person that thinks you would thrive on a partnership, if you like working with someone else or with other people, if you feel like you're kind of alone in this, I think partnerships can really unlock a lot for you because at the end of the day, based on what we've heard, you've done really cool stuff. You've got experience doing this and you have knowledge that other people want, right? So I think it's very plausible to go out there and raise money from an investor and say, hey, you be a passive partner and I'll go and be the sweat equity and the boots on the ground, or find someone who does have the cash but no time, but, you know, willing to split some of the workload with you. And maybe you can bring a little bit of money,

like $10,000, $20,000. So you have skin in the game, partner up and buy a property. I think that's a very, very, I mean, that's what I did at the beginning of my career. I'm so thankful I did. I've built a massive real estate portfolio with other people. And they're still all, you know, great partners to this day. All right. As sound advice, I've got two more options for you. The first would be to wait because even though your debt to income ratio is maxed out right now, as you wait, the money that comes in from those properties will show up on your taxes and you will be able to include it as income, which will improve your debt to income ratio. And the second is to check out pillars of wealth, how to make save an investor rate of financial freedom,

because if you focus on saving more money, which will reduce your debt and making more money, which will increase your income, you will naturally improve your debt to income ratio. So I'd love to see your desire to buy more real estate become the, incentive or the carrot that you use to chase making more money in life as well as saving more money. So thank you, Danny for that question. Moving on to our next question, also from a Danny in Las Vegas. Danny says, my question is whether you think this lease to own or lease option is a legitimate and solid strategy for real estate investing. A little bit of a background. I bought my first house, a five-bed, four bath in a B-class neighborhood in Las Vegas two years ago. And I'm in house hacking

it by renting out the extra rooms in the house to start my real estate investing journey. I would like to purchase my second property soon, and I've been thinking I would like to keep my first for a few more years. This rent-to-own strategy seems like it could be a good option in my situation, as I could get paid an option fee and monthly rent without being responsible for maintenance and repairs. If the renter isn't able to purchase the house by the end of the lease, then I figure out just put it on the market. Some of the pros. It looks like it would reduce the amount of time that I have to spend managing the house and the money I have to spend on maintenance and repairs. while collecting extra cash flow in the form of the option payment and monthly rent. I think the option fee plus the rent would be higher than renting the entire house out, but saving on a real estate agent commissions of up to 6% if the renter ends up buying the house is nice too.

Cons. Lower than renting out all the rooms and potentially paying up to 6% to sell if the deal falls through. All right. So the lease option road, not talked about as often as it was in the past, but it's still around. What do you think? You know, this is not my area of expertise. but you know, Joe and Jen Delafave, we had them on the show not too long ago and they do a lot of lease to own. And honestly, it is one of those things that I really like because you do get like a big

option fee or like a down payment fee, if you will. And it basically, like he said, it gets you out of the maintenance doghouse. And then at the end of it, like let's say in 12 or 24 months, they decide to walk away, you get to keep that option fee or that down payment or whatever it is and then you can still go and resell it. And so at the end of the day, you're not totally, down even if someone walks away, although that's not the ideal scenario. So I haven't done it myself. I'm super interested in doing it. I would definitely just consult you to like go and talk to people that have done it. Go listen to that episode with Joe and Jen Delafave. They kind of break down that process a little bit and how they approach it. I think it's a perfectly viable

path, but it's probably, you know, it'll probably be some paperwork for you that you're not used to on the first go. So just make sure you do a little bit of research. By the way, episode 794 is what you want to catch. If you want to hear about Joe and Jen Delafay, and keep in mind, this can work against you in certain scenarios. If the market, for some reason, explodes and the house becomes worth a lot more money, you're going to end up selling it to them for less than what you could sell it on the open market.

So I think the reason lease options have become less popular as of late is because values of real estate have gone up so much. It hasn't made as much sense to give up on the potential upside to secure a little bit of the safety of not having the maintenance and the X-ray. expenses. So yeah, if you're going to take that option, not a bad option at all, just know you may lose some money if the market goes up. And if the market doesn't go up and actually goes down, well, then your tenant's probably not going to buy the house. They're not going to exercise their options. So you're still going to be left with it, although hopefully you got an option fee that

makes it worth your while. Just know that even though we're explaining it very simply, it's not always as simple in execution. That's what I was going to say. I was going to say, if you do this, I would not cash in your option fee and spend that money as if it's yours because if your tenant decides to walk away and not exercise the option as David is talking about, there could very easily be some deferred maintenance that built up over the last year or two. And you just want to make sure to have some reserves to address those things if there were some pretty serious deferred maintenance issues that popped up throughout the couple years. Great point. Just because you're not responsible for the maintenance doesn't mean it's actually getting done. Yeah, totally. We've all seen what

some people live like and not everyone's going to be fixing things that go wrong. Solid, solid point there, Rob. I'm glad I brought you along for this one. Thank you very much. I appreciate you. All right. Moving on to our next question. This one comes from Tommy Odo Coya. Hey, David. This is Tommy from San Antonio, Texas. Following up from episode 777, we're about to close on the duplex we talked about. New construction is taking a little while. I was able to negotiate with my lender a 2-1 rate buy-down. Thanks to watching Bigger Pockets. I love you guys.

My question is, during the first two years when my interest rate is going to be 2% lower and then 1% lower subsequent, do you feel like it's a good idea to make extra payments as much as possible during those first two years just so I can try to better position myself for that next mortgage coming up? Appreciate any insights. And as always, keep dropping the gems. Thanks, guys. That's a pretty good question.

So basically, should he try to get ahead? of his higher interest rate by paying the mortgage down. My initial gut is, I like the idea, but paying more extra payments, unless he's paying like a lot, I feel like we'll have a pretty minimal effect on the interest that he's paying. But I guess it kind of depends on how much he's thinking about doing. I don't know. What do you think? That's a tough one. I mean, it's hard to say without knowing how much he's planning on putting down. Well, he doesn't have to make extra payments towards the principal. He could save the money and then make one lump sum towards the principal later. most of the time lenders will let you recast your loan if you make a significant down payment.

So maybe instead of just putting it towards the mortgage every month, Tommy, yeah, put it aside. And then if the rate does go up and it hurts, you could just say, well, I've saved $30,000 or $40,000. I'm going to put that all towards the principal and have them recast the loan. So it comes down a little bit. If they don't let you do that and your only option is to pay the principal down, I don't think that's actually going to make the money that you pay every month less. you're going to have the same principle in interest payment. It's just a higher percentage of it is going towards the principle rather than the interest. So it sounds like because you have a good relationship with your current lender,

you should ask them if recasting the loan is a possibility. And if so, no need to pay the mortgage down right now. But if not, that would be something to look into. Good question, Tomey. Let us know how that goes. All right. I hope you have enjoyed the show. Remember, if you want to be featured on Seeing Green yourself, head over to biggerpocket.com

slash David, where you can submit your question and hopefully we answer it on one of our shows. And again, thank you to Rob for being here with me today and helping shoulder the load of the good work of educating you fine real estate investors. In today's show, we covered if you should use a lease option or not, when to pay down your mortgage versus when to save that cash, when your debt to income is the culprit to future financing. And if building student rentals makes more sense when you add two rooms or keeping it to four, please leave us a comment on YouTube and let us know what you thought of today's show as well as leaving us an honest review wherever you listen to your podcast like Spotify or Apple Podcasts.

If you got a second, check out another Bigger Pockets episode. If you want to learn more about me, you can find out my information in the show notes. And if you've got a second, watch another Bigger Pockets video. If not, we'll see you next week. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoke 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 Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.