BiggerPockets Real Estate Podcast - 907: Seeing Greene: $100K In Equity But NO Cash Flow, Should I Sell?

Starting point is 00:00:00 This is the Bigger Pockets podcast show 907. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast, the show where we are with the information that you need to start building long-term wealth through real estate today. And today we have a Seeing Green episode.

Starting point is 00:00:18 If you're watching on YouTube, you see the green light behind me, and you know that that only means one thing. I'm filming this in front of a traffic stop at an intersection. Just kidding. It means that we are doing Seeing Green, and I brought some help. We start off the show with James Dainard,

Starting point is 00:00:32 who helps answer a question for me from one of the bigger pocket staff members, actually, which he does from his yacht. And then James realized in the middle of the interview that he did not want to be on the interview. He wanted to be yachting around. So I brought in Rob Little Yadi Abasolo to sort of support me with this,

Starting point is 00:00:48 and he's here to take over the second portion. In today's show, we get into some really good stuff, such as why expensive markets tend to appreciate more than cheaper markets. What to do about turning your primary property into a rental if it doesn't cash flow when your house hacking strategy doesn't go according to plan. When you can count expenses for a rental property and when you can't and more importantly what you have to do to make it eligible to count those expenses and more.

Starting point is 00:01:17 Up first, we've got a question from Noah Bacon in Colorado. So Rob, why don't you go check out the vacancy on our Scottsdale property and make sure we're getting that sucker filled and then be back, lickety split. Okay, but before I do, if anyone here is listening and you want to submit a question, remember, you can always go over to biggerpockets.com slash David to submit your questions for the next episode of Seeing Green. Noah Bacon, the Bigger Pocket's community manager. Noah representing BP, what you got for us today.

Starting point is 00:01:44 Hey, guys, thank you both for taking the time to answer some of my questions. It's really great to hang out with you guys here today. So I started house hacking in 2021 in Colorado Springs and it performed really well when I was house hacking. And since I've moved out, it hasn't really performed all that well. On paper, everything was great, like was going to cash flow about $300, $400 when I moved out. Turns out went through an eviction, rental rate dropped a little bit now that it's not in the summertime and insurance rates of like really skyrocketed here in Colorado. my HOA fees won up 100% this year alone. So just immediately from 2021 on paper, you know, everything looks great.

Starting point is 00:02:27 Now we're here in 2024. Breaking even. So it's not like it's a terrible asset at this point, but it's breaking even. And I'm seeing the next two to three years on the horizon. And then I'm like, do I take the equity in the property and deploy it elsewhere? Or do I kind of go along this path and potentially be at a negative cash flow in two to three years and let the equity build since a set of 3% room? rate. I know a lot of people are in this great problem to have with the 3% rate and equity building,

Starting point is 00:02:54 but the cash flow monthly is going to start to go on the downside. So one, when is a time do you guys think to scale, to start to think about different things? Should I ride this out? I guess what have you guys been hearing about things like this? I'm going to turn over to James. Before I do, I'm going to give you my two cents on why I think this is happening because more people than you think Noah are in the exact same position. I saw, 2023 was like the year of this. My opinion of why I think this is happening is we have really bad inflation. We printed up a whole bunch of money. Inflation doesn't come right away.

Starting point is 00:03:28 It's like if you have an earthquake in the middle of the ocean, it takes a while for that wave to build and actually hit the shore. But we're seeing it continually go up and up and up. And a lot of people measure inflation through the CPI, which I don't like because those things can be manipulated. But if you actually just look at your life, how much are you paying for steak at the grocery store? How much is milk costs? so much as gas costs. It's really high. And I'm seeing like homeowners insurance skyrocketing and no one's talking about it.

Starting point is 00:03:55 I mean, it's not like it went up 20%. It's like it's doubling or tripling on some of these properties in one moment or another one like you said, the HOA fees. It's like, oh, it was 150. Now they're coming back and saying $400. Okay. So rent can only go so high because rents are largely and loosely based on wage increases. Well, as inflation is making everything.

Starting point is 00:04:18 everything more expensive. That doesn't mean that companies are just paying their employees more. They're actually kind of getting away with giving people pay cuts if you keep their wage the same, but everything becomes more expensive. So HOAs are going up because of inflation. Insurance is going up because of inflation. I bet the next thing you're going to see is municipalities start increasing property taxes because of inflation having it there. Yet rents are not going up because people are kind of already tapped out with what they can afford. And it's created this odd squeeze that I've never seen in real estate where rents are not going up with the same degree as the cost of goods and services because people couldn't afford to pay them. You'd have tenants to say,

Starting point is 00:04:55 well, I can't make my payment if you raise my rent because I'm already not getting to raise at work and everything else is becoming more expensive. So, James, what do you think? You see something similar or you have a different take on it? No, I mean, the rising costs are eroding cash flow. Insurance is a huge expense for us as landlords, also as construction, company. I mean, our builders risk policies, it's expensive. And what we all have to do is our performas, the great thing about our performance last two years is we would blow them up with way more income coming in. We did a lot better than we thought. Now what's happening is the expenses are starting to catch up. And honestly, people are starting to feel the real cash flow of real

Starting point is 00:05:37 estate. And a lot of investors are feeling this right now because as you buy real estate in your newer and real estate, I did the same thing. It's like buying me. you get a couple hundred dollars a month in cash flow. And then the economy starts leveling out or something bad happens, you have to maybe pay for that asset, right? Because these are investments. Investments go up and down. And what I would do for any investor, and no, especially you, is going, what is your long-term goal that, you know, when you're thinking about what to do with that property, you really need to know, what is your one year, what is your three-year, what is your five-year goal. And by doing that and listing down where you want to be with your passive income and your cash flow, that's going to kind of tell

Starting point is 00:06:17 you the direction you want to go. But personally, for me, everything's tradable and I can always increase my cash flow position. And the great thing is you made a very smart investment and you've made $100,000 in equity. Now you want to figure out what to do with that because equity is only good if you utilize it. And it's just sitting there. It's not even a real thing. And at the end of the day, I still factor that into my return. So every year I run return on equity on every one of my properties. Is my return still meeting what my expectations to be? Or what can I do with that equity and trade it out?

Starting point is 00:06:54 Because the great thing is you made that decision. You have $100,000 in gumpowder at that point. Your issue is you don't want to pay for your property every month, which is understandable. No one really does. I would trade that for another property that has a lot higher cash flow. You have $100,000. You don't need to add into any other.

Starting point is 00:07:11 property, that's your down payment, and you can take that $3 to $400 a month or even break even, and you can $3 to $4.x that by making the right trade and getting maybe some more doors, trading into a little bit cheaper market. But it has to be your goals. I want cash flow. If you want growth, I would take that property. I would 1031 exchange it into a value add property so I can double my equity position, right? If I'm buying it below market, improving with rehab, then all of a sudden my $100,000 in gum pattern might turn into $200,000. And then you're talking about trading that for some serious cash flow. But write down those goals, it's going to tell you your plan of action. But even if you have a 3% rate, who cares? It doesn't matter what your

Starting point is 00:07:52 rate is if you're not making money. I would rather pay 10% make money than 3% in break-even. And I don't really, capital is just a cost of the deal. And if the deal is worth it, pay whatever rate it is. And, you know, so I would just say write down your goals, where do you want to be cash flow, equity, do you want to expedite the process? Go value add. If you want steady cash flow, trade into a lower market, get more doors, and then if you can weather storms more because your cash flow is greater. Noah, we have to take a quick break, but I will give you a chance to react to James's advice right after we get back. For decades, real estate has been a cornerstone of the world's largest portfolios, but it's also historically been sort of complex, time-consuming,

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Starting point is 00:10:36 The portfolio features 4,700 single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought-after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes.

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Starting point is 00:11:40 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. And we're back with Noah Bacon, the investor and house hacker in Colorado who is struggling with increased costs and the handcuffs of a low interest rate. Should he sell to tap the equity or keep the deal? What do you think of Noah? Yeah, that's really well said. And I think I'm at a point. two where it's like, you know, one property that I have if it goes wrong, like we were just talking that James, it's like two months of paying two mortgages now. How can I potentially mitigate that risk? And I think like you're saying, it's time to stop looking at that 3% and the equity build over,

Starting point is 00:12:18 you know, the 30 years of that 3% rate. I've been hanging on to that since the day I bought the property. And it's like, it's time to let that that fantasy and reality go and start to scale. And it's just now that the environment's different, you know, I wasn't expecting expenses to go so much more rapidly than what income was. I'm just like, okay, new year, really got to think about these things. So I really appreciate that because I really do think I need to start looking in potentially different market because I've seen on the forums, places that I'm in Colorado specifically with natural disasters are having massive increases on insurance. So I think I just really need to start looking more macroly instead of my own localized market now. And maybe get ahead

Starting point is 00:12:55 of what the competition is going to be doing. So my guess would be in the next five years or so, more people are going to have a similar experience with their HOA jacked up rates a proportionally very high amount. Insurance went up because of natural disasters in that area at a disproportionate amount. Some of the other like costs that you can't control are going to go up more than what they did in the past. So it's not just HOA fees, but let's say you own a condo and it needs to have the roof replaced. Well, roofs are like three times more expensive than they were, you know, five years ago or so. because like James just said, the cost of construction is super high, and the wages that they're paying these employees are high.

Starting point is 00:13:33 And so those special assessments used to be like kind of a mosquito bite, and now they're a dragon flame. It's killing you, right? So if you can, you can avoid this by looking for properties that don't have the danger of having these costs go up. Single family homes, a set of condos. Properties that are not in an HOA, but they're still in a decent area. And even if they don't cash flow right away,

Starting point is 00:13:57 if you pick the right location over the next five years, the rents are going to go up in those areas more than the others. And the values are going to go up in those areas more than the others. Because as other investors and homeowners start to realize how bad it is to be in an HOA if you can't control the cost going up or an area where insurance is really high, they're going to move into the areas that I think you should be looking for right now. So, Noah, you house hacked this house, correct? Like you lived in it for a certain amount of time? You know, and if you lived in that property for two years and talk to your accountant, you can take that. that home, the homeowner exemption, and your $100,000 could be completely tax-free.

Starting point is 00:14:34 Because if you live there for two years, you're going to qualify up to $250,000 of tax deferment at that point. And actually, after one year, your $100,000 might be totally tax-free. And if you look at that, right, your 3% rate, yeah, you're saving something right now because you're going to have to pay six and a half, seven percent, pretty solid. But you're going to make $100,000 with no tax on that. And then what you can do. is you can take that portion of your taxes, go reinvest that into your new multi. And you might be able to buy two properties and you only have to defer it. You know, you have a clean tax basis.

Starting point is 00:15:08 You're saving on 100 grand. You're saving on 100 grand. You're saving it. You can roll it into a new property to increase your portfolio. So, you know, utilize the tax credits to, if you got to trade up your rate, at least you're getting a big benefit on the taxes. With my first property, I only lived there for a year. and then I purchased my second house hack 12 months after.

Starting point is 00:15:28 So I'm coming up on two years on the house hack I'm currently living in. And it's also townhouse in an HOA. I'm just like expecting the same rainy day that I had on the rental property that I turned into. So I'm like probably when it comes to two years at the property I'm living in currently, I'll think about that, deploy the capital and take the tax exemption. But with the property that I lived in previously, I only had one year. So I'm not going to be able to hit that tax exemption, unfortunately.

Starting point is 00:15:53 Yeah, but you can take a portion of it. I would talk to your accountant on it. And then that might tell you, you know, so again, going back to your goals, like one year, three, or five year, you know, you might be really comfortable in your house that you're in now and you want to stay there and that's perfectly normal, right? You got a low rate. You want to stay there for a long time.

Starting point is 00:16:10 That meets your goals. Or you don't really care. Like for me, I'll trade any house. I have no emotional attachments for housing anymore. Then I would utilize both. And then you can go maybe pick up a new primary on a value ad, start creating that equity again for another, tax-free gain, take the portion and go buy one or two more rentals and get better cash flow out of those.

Starting point is 00:16:31 And you're going to really, over a three-year period, you're going to two-x your return right now because you're going to pick up the value add on your property that will be tax-free over two years. And then if you're increasing your cash flow, it's helping your monthly expenses. And if you buy on value ad, you can increase that equity even further. And so it's that it's that domino effect, right? Every time you make a trade, pick up another trade. I never trade like for like. I want to improve my equity position every time because the equity position and the equity is how we really get financial freedom.

Starting point is 00:17:04 It doesn't have to be cash flow or equity, which is how the argument often gets phrased. I think it should be cash flow after equity. So if you think about how much control you have over cash flow, it's very little. You can't control what rents are. They're going to be what they are. You can try to control expenses, but there's only so much you could do. mortgage isn't going away, your taxes aren't going away. And when the insurance goes up or the HOA go up, you don't have a choice. Like the only expenses you really have any measure of influence over

Starting point is 00:17:31 our vacancy, maybe how much you pay for maintenance if you can figure how to get some kind of handyman to be good. And like even CAPX, you can't really control, right? So it's incredibly difficult to build cash flow because you don't have as much control over it. But equity, you have a lot of control over. You control how much you pay for the property. You control what area you buy in and where they're going to be going up. You control what value add you do to the property. You control the whole project if you pay attention to it and how cheap the expenses are kept for the rehab. So if you have more control over something, you are more likely to be successful in it. My advice for most real estate investors, especially when they're younger, is not to just race to cash flow and quit their job and then say,

Starting point is 00:18:11 hey, I made it because those people end up getting back into the same rat race that they claim they quit unless they sell courses and they live off of that and pretend like they're living off of the rent. My advice is just sort of. snowball equity like what James said. Every deal you pick up, you buy it under market value, you add value to it, you sell it, you go into another one and you build up the snowball and then near the end, you convert all of that equity that you've built into cash-selling property, which is going to give you a lot more cash flow than if you take the approach of I'm going to keep acquiring your properties at $200 a month. If we lived to be 900 years old like Methuselah,

Starting point is 00:18:45 that would be a good strategy. Unfortunately, life is too short for that to work out. I'm thinking about this with a small mind until today, and I think it's time to really start expanding the portfolio a little bit more and see what other options are out there. But I can't thank you guys enough for your time today and helping me think about where my portfolio will head into the next year. All right, Noah. Thanks for coming on. And I hope you're enjoying the shared conversation that we have so far.

Starting point is 00:19:08 And thank you for spending your time with me. Make sure that you like, comment, and subscribe to this video. Let us know in the comments what you think. In this segment of the show, I like to take questions. from the forums and answer those, since it's an awesome forum on biggerpox.com. We also read some of the YouTube comments or address any of the reviews that were left where you can leave a review where you listen to podcasts. So go leave us a review and let's talk about what y'all have been saying.

Starting point is 00:19:33 Our first question comes right out of the forums and it was a topic that was labeled WTF is wrong with investors these days. Rob, this is some good stuff. So basically, this was from Angelo Romero and he has. a turnkey company that also helps manage properties in Toledo, Ohio. And he has people that reach out to him and say, hey, I don't want to buy any of your product, but I was hoping that you could help me to find a deal. Also, do you have any contractor, lender, or agent referrals?

Starting point is 00:20:04 Oh, and by the way, I'd love to have you manage properties that I bought with somebody else, but not from your company. And he was a little peeved about this. And he says, it seems to me that everyone wants something for nothing nowadays, and nobody is willing to put in the work or pay the margin for the person who, did put in the work. Now, I can relate to this a little bit because people come to me as an agent and they say, hey, can you help me get an off market deal or do you have any off market deals? And agents only get paid when the deal is indeed on the market. So it doesn't really make sense

Starting point is 00:20:35 to ask a real estate agent to represent you, but then they don't get paid. So I'm in this situation all the time. I just kind of wanted to get your two cents before we dive into this, Rob. Well, first of all, he caps this one what says, folks want to own a monkey. They want to play with the monkey, but not carry the monkey or clean its S word when it does one. He he's. That's pretty funny. Well, first of all, let me ask you, when you're getting an off market deal, I assumed if you're brokering that deal, there's still some kind of finder's fee, right?

Starting point is 00:21:02 You actually can't do that. So when you're a real estate agent and you're a licensed person, if somebody wants to help put something together that's off market like wholesale, almost every brokerage is going to tell you that you can't do that. Because when you're licensed, you have a fiduciary duty to the people you're working with and they expect that. And it's a massive liability to help somebody that when you're not covered by your license or the insurance that goes under your license.

Starting point is 00:21:25 Yeah. So I guess the problem here is that people are asking for quite a bit. There's a little bit of entitlement in that they expect you to do a lot of things for them, but they're not providing the value up front. So I probably try to go out of my way and see how I could provide value. And we're not trying to sit here and be negative on the show, but I do think that there's a lot of people that are in the BP world. that just don't understand that the podcast is free and the blogs are free and the forum is free

Starting point is 00:21:52 and the books are cheap. There's so many things that are free, but the people that make their living from this that are on here sharing free advice, that doesn't mean that they're going to work for free. One of the comments in the forums here said, I guess we've gone from how do I invest with no or low money down to how do I get other people to do all the work for me and I benefit from the deal without paying them. And we're only bringing this up because there's a very good chance that people don't realize that's how they're coming across. I don't think anyone is conscious of the fact that when you go to a turnkey provider who's basically like digging in the streets trying to find that deal and putting blood and sweat and tears into getting it. And then you say, hey, can you just give me

Starting point is 00:22:29 one of those so that I don't have to do the work that it's going to be offensive to them? Provide value in a way that's like a clear need that someone has and try to make a win-win out the gate. Instead of saying, hey, come in and teach me your ways and I'll work for you, that's really hard because then you have to kind of show someone how to do that thing and that's work for us. It's very different to then come in and say, hey, the thing that I am a master at is communication. I will come in and handle all of your communication with your vendors, with your guests, with your contractors, everything. That's what I'm good at.

Starting point is 00:22:59 In return, I'd like for you to do X for me. And then there's an actual value exchange there that doesn't put so much pressure on the other person to, I don't know, teach and mentor and provide the value. I want this to be an insightful question. I'm just, this guy is right. What's in it for me? And you have to understand that you have to try to answer what's in it for them. If there's no actual value or any kind of monetary compensation,

Starting point is 00:23:25 then you really have to figure out how you can lead with value and make it a no-brainer a win-win for them to actually help you. Otherwise, you know, as nice as many, many people are, you'll just never get the time of day asking for something without offering something very clearly valuable in return. And then you'll be frustrating because you keep reaching out of people asking for help and they kind of blow you off or they just ignore you or they very politely misdirect what you just said and you're like man how come no one's out here to help me well

Starting point is 00:23:51 that's what we're here to tell you this is why they're not helping you i tend to look at real estate like uh you got a bone with a lot of meat on it and that meat is equity so there's some seller out there that has a property and everyone's trying to find how they can get it under contract for less than what it would sell for on the open market it's after repair value Well, if you go find that seller yourself, it's a lot of work, it's a lot of rejection, it's a lot of pain, it's a lot of risk, but you get all of that equity. Now, what people do in the real estate space is they slowly start to slice off chunks of that equity to pay themselves to help you with that process. So just think about what are the things I don't want to do and how am I willing to pay someone and who do I want to pay for those things? As long as your expectation isn't, I want all the meat and I don't want to have to pay somebody else for it and I don't want to do the work myself.

Starting point is 00:24:40 Once you find your lane, that's where you get good at that lane. You'll build up some experience and you start building the momentum, acquiring the properties. And you'll get to be like Rob Obis Solo here and show up wearing a G-shock watch with a printed tea and a perfectly teased quaff talking to the masses. And by the way, on top of the forum, just being a really great place to get answers to your questions. It's also a very therapeutic place to go and find other people that might be able to relate to your personal situation. So definitely everyone take advantage of the bigger pockets forums. It's free and it's a very easy way to level up. And we've got more in store for you.

Starting point is 00:25:17 So stay tuned right after this quick break. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship. fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10.10. The portfolio features 4,700 single-family rental homes spread across the booming

Starting point is 00:25:50 sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio. Check out historical returns and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash

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Starting point is 00:27:27 starting with as little as $10. The portfolio features $4,700, a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought-after industrial facilities thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid

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Starting point is 00:28:55 and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to costsegregation.com before April 15th. Welcome back to the Bigger Pockets real estate podcast. Let's jump back in. All right, moving on. Our next review comes from Apple Podcasts. This one is labeled inspirational. I've been listening to Bigger Pockets for years and they offer stories, different ideas on how to approach a journey to get to a real estate investment level. I would say that you get what you give as far as my personal investment on time and effort that you put into finding deals and resources. I've found three. And I found Bigger Pockets played a role in that from Dave Scruff on the Apple Podcast. Apple, thank you for the five-star review, Dave.

Starting point is 00:29:35 People like you keep this episode reaching the masses. All right, we love your guys' engagement, and we appreciate you listening to us. Please continue to like, comment and subscribe on our YouTube page as well as leaving us your five-star review wherever you listen to podcasts, Apple Podcast, Spotify, Stitcher, whatever it is. All right, let's get into our next question. This comes from Joe Edemic in Boston. Hi, David. Thanks for all the great content you've been producing.

Starting point is 00:30:01 I found it really educational and I've learned a ton. My name is Joe and I'm located in the Boston area and I'm just getting into real estate investing and looking for a house hack soon. So my question is really, a couple episodes ago, you kind of mentioned that a higher priced area like San Francisco will appreciate more than a lower priced area.

Starting point is 00:30:21 And I was kind of curious and the logic behind that because I feel like a higher priced area, the prices are so high that they won't be able to grow as much. and I'm just kind of curious if you're suggesting that, well, the gap between like a higher priced area and a lower price area would just widen kind of thing in the future. And I guess any more tips on how to house hack your first property? And thank you.

Starting point is 00:30:45 Solid question. Basically, he wants to know what's the logic as to why we would say a higher priced area will appreciate more? What do you think? Yeah, that's a great question. I mean, I love this stuff. We get to talk about the fundamentals of real estate. And personally, I think you and I, Rob, put the fun

Starting point is 00:30:59 in fundamentals. Everybody else is boring, but we make it cool. I'll put the mental brough. All right. So the reason that they are priced higher in the first place is because there is more demand than supply. So think about it like people have to be willing and able to pay the price of a home or rent for that matter. Same goes for short term rentals, right? How much are they going to pay per night? They have to be willing and able. Willingness is a function of supply and demand. Is there other options? Well, I'm not willing to pay you 500 bucks a night if I could get something similar for 200 bucks a night. I'm not willing to pay $500,000 for that house if someone else is selling one for 300,000. Pretty sensible. Now, the other part is able. If wages have not increased in the area,

Starting point is 00:31:41 even if someone was willing to pay that price for the house, they're just not able to. The same goes for if they were willing to pay you that much for their Airbnb, but the economy's really bad or they don't make enough money, then they're just not able to. So people have to have both. The areas with the highest price homes have people that are willing and able to pay that price. and then you just let the free market do what it does. So he was saying, why did those areas appreciate more? It's because the people that have the money that are willing to pay for the homes are always going to drive the prices up more than the people that do not have the money or are not willing to pay for it. Does that make sense? It does. Let me ask you this because just from a basic math fundamental question, if the average appreciation on a city is, let's say, 3%, well, that's going to compound faster on an $800,000 median price point than let's say, say a $200,000 median price point. So just from the sheer value of a property, the more expensive

Starting point is 00:32:34 it is, the greater that appreciation ends up being at an average appreciation rate of whatever the national average is, right? Yeah, that's a great point. If a $800,000 house goes up by 3%, that's 24,000, if a $2,000 house goes up by 3%, that's 6,000. And you compound that over five years, right? The cheap house went up by 30 ground. The other one was like $120,000 or so. So Yeah, I think there's a lot more to that, to all of this statement with the whole like, yeah, you know, a more expensive house appreciates more. I think all the economic factors that you talked about before I said that all play into it as well.

Starting point is 00:33:10 But yeah, typically the more expensive a home is, the greater that appreciation is just in the way that compounding appreciation works. All right. Thank you, Joe. Hope we helped you there. And you didn't ask this question, but I'll just throw this in for everybody listening here. When you're looking at rental properties that you want to cash flow, you will typically

Starting point is 00:33:28 be looking at the $200,000 houses that Rob described. So the lower price points tend to make better rental properties because the price to rent ratio is more favorable on cheaper houses. Once you get into more expensive homes, they get further and further away from the 1% rule as they go up in price because there are less tenants that want to rent a million dollar house than there are that want to rent a $2,000 house. Yeah, bonus answer here because he did ask for house hacking tip. I'm just going to say this, house hacking is great. I would say if you can expect your expectations to not necessarily have to be to offset your entire mortgage payment with the house hack, then you'll have way more options on the table.

Starting point is 00:34:05 Too many times people are trying to make money on a house hack or have no mortgage at all as a result to all the money that they make from renting out rooms. It doesn't have to be that. I think paying half of your mortgage through a house hack is a perfectly beautiful way to enter that game. All right. And our next question comes from Joseph Chavier in North Carolina. Hello, Coach Green.

Starting point is 00:34:24 My fiance and I are 23 years old and purchased our first primary residence. about six months ago with an FHA loan. Our plan was to save money to purchase another primary residence in two years. We underestimated ourselves drastically and have saved more in the past six months than we thought we could in two years. Way to go, Joe. The only problem with this is that the rental values of our current home has not gone up enough and we would be breaking even or even losing money if we include the vacancy

Starting point is 00:34:49 rates and the maintenance. We have a long-term mindset and are thinking about retirement. While cash will be great, we're more concerned about setting ourselves up for success in 10, 20, or even 40 years from now. My question is, should we stay put and keep saving and wait for rents to go up, eat the $200 loss and purchase another primary residence, purchase another property as an investment property, or something else that we aren't thinking of. Yeah, this one seems right in your wheelhouse. I mean, first of all, congrats on saving more in six months and you thought you could in two years. That's amazing. I've never heard anyone say that before.

Starting point is 00:35:23 So that's a really, really great thing. As to whether you should lose money or not, we've on episodes on if the appreciation will ultimately make up for it. My question back to them would be like, are there ways to increase rents? Like are there, is there a forced appreciation or forced equity play? Could they convert a basement or a garage into an extra room? Is there something they can do to try to get their rents to catch up with market value? I would probably explore that route first and try to maximize the income on one property before going out and buying another investment property. Great point there. I think the problem is he was saying, hey, we plan to leave our house and get the next one, but rents didn't go up enough that it would cash flow if we left it. So is it okay to buy our second house if the first one isn't cash flowing like everybody talks about. So this is a good problem to have, frankly, because you're going to have some equity there. If you don't want to lose that cash flow and you can't do what Rob said, which is bump the rents up somewhere else or add another unit to it or use it as a short term rental or whatever options that you have there, you can just sell it. Sell it and take it. the equity out and put it into the next one. If you don't want to sell it because you think it's

Starting point is 00:36:29 going to keep going up in value, well, then, hey, keep it and lose a little bit of money there because you're gaining more equity than what you're losing in the cash flow. That's why you wanted to keep it. And if you don't like either of those options, you could just keep saving money and staying where you are and delaying finding the next property. But you're not in a rush to move, and that's what I love about this. You can really look for the best possible house hack to buy for your next deal. And if the next one is going to save you even more money a month than this one, because it's so good, maybe it has a lot more bedrooms or the rents are a lot higher for different reasons. Well, then if you're losing a little bit when you move out of this one, that's covered

Starting point is 00:37:06 by the savings that you're getting of the next one, so it's still a net game. Yeah, I would, you know, I'm very anti-losing cash flow on a rental in general. And if we know that you're going to lose money on this, like if you can't force appreciation, force equity, all that stuff, and increase your rents. I think there's absolutely nothing wrong with selling it, taking the money that you make and putting it into a new primary and then just build your nest egg of equity. And one day, that equity will be great. You know, you'll be able to retire on that equity if you keep it until you retire. All right. Our next question comes from Taylor White in Atlanta. We're moving our primary residence to another primary residence and we will keep and rent out our previous home.

Starting point is 00:37:46 At what point can we start counting expenses against the revenue that the rental will bring? Do we need to wait until closing in our new home before buying things for the rental. Do we have to wait until the rental is available for rent before we can expense? If so, when does it technically become available for rent? Thanks for all you do for the BP community. My thought would be the minute you move out of it, you call it a rental property and it's available for rent. You just haven't advertised it yet because it's not like pretty, but it's still a rental when you move out of it. But we'll just have to clarify that they need to verify that with a CPA. So I basically want to know if they list their property on the first, but they don't actually get it rented as a long-term

Starting point is 00:38:26 rental until the 15th, can they start marking expenses on the first of that month? Now, that sounds like a tax question, and you should always talk to your CPA for these types of things, but I happen to be friends with the best CPA in the world, Matt Bontragger, so let me give them a call really fast. Yes, they will be able to take those expenses, but it'll just be capitalized either to the cost of the property or they will be able to just take those as expenses against the income. It's just you can't start to deduct those expenses, at least in that year, until that property is placed in service. So the fact that they're, we're really talking about a two-week lag, that's totally fine. But yes, they need to end up getting it placed into service,

Starting point is 00:39:06 which is actually, if it's a long-term rental, just has to be available rent. If it's a short-term rental, they actually have to get it rented. So that's the question. When is it actually available for rent? Does it have to be advertised on websites like Craigslist? Yeah, it's a long-term rental. Once they start to advertise it and see tenants. All right. Thank you very much. You heard it here first, everybody. Sue Matt Bonchager. Thanks, man. Okay, so we just talked to Matt Bonchager over at TrueBooks. He says that it just has to be available for rent. And that means that the moment you listed on a website like Craigslist or whatever, that would count as being available for rent. So there you have it. So there you go. Put your property up for rent as soon as possible.

Starting point is 00:39:45 If you don't have pictures ready, well, then just don't put those in the Craigslist ad and just describe the property and then collect the emails of the people that are interested in it. And then when it is ready to be shown, that's when you can arrange for the showing. And then when you get the pictures and they're all nice and pretty, you can up those to the Craigslist ad. And make sure you verify this with the CPA. It's just to make sure this is all up and proper. Wait, one note worthy thing here, though. He did say that it's different between a long-term rental and a short-term rental.

Starting point is 00:40:15 rental. So if it's a long-term rental, it just has to be like placed into, it just has to be made available. So say on Craigslist, if it's a short-term rental, it actually has to be rented for that to start counting. So there is a small difference there depending on which route you take. All right, everybody, thank you all for being here with us on seeing green. We love doing these and we love being able to help you all. As a reminder, head to bigopox.com slash David and submit your question that we can answer on seeing green. And thank you, Rob, for being here with me today. It's what I do best, my friend. Good to be here. If you're listening to this on YouTube, make sure you leave us a comment, let us know what you thought about today's show and what you

Starting point is 00:40:53 didn't get answered. And if you'd like to know more information about Rob or I are, information and social medias are in the show notes. This is David Green for Rob putting the R in the Burr Method Aba Solo. Signing on. 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.

Starting point is 00:41:43 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.biggerpockets.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 rarrow. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose.

Starting point is 00:42:05 And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 907: Seeing Greene: $100K In Equity But NO Cash Flow, Should I Sell?

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