BiggerPockets Real Estate Podcast - 927: Seeing Greene: Refi vs. “Recast,” Tax-Free Equity, & When to Cut Your Losses

Episode Date: April 2, 2024

When is it NOT worth taking a capital gains tax exemption? Wouldn’t it ALWAYS be a good time to pay Uncle Sam less? Not exactly…and today, we’re going to get into why. But there’s much more coming up in this Seeing Greene. If you’ve had trouble with an overbudget home renovation or are a real estate agent looking for new ways to find leads, stick around—we’ve got just what you need. BRRRRman and Rob-in are back as our housing heroes, answering any and every question you have about real estate investing. First, Ronnie, a new real estate agent and full-time law enforcement officer, wants to know how to get more leads in his small market. David gives one piece of advice EVERY real estate agent must hear to help explode their businesses. Next, we discuss refinancing vs. recasting your mortgage and when each is worth it. A house hacker debates reinvesting in his backyard tiny home or buying a house in cash. Then, we talk about why selling your former primary residence, even with a capital gains exemption, might not make sense. And finally, a rehab gone wrong causes an investor to question whether it’s time to hold ’em or fold ’em. 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: How to get more real estate leads as an agent no matter the size of your market “Recasting” your mortgage and how it can save you hundreds or thousands every month Reinvesting in a rental or buying a new one in cash using a cash-out refinance Avoiding capital gains taxes when selling your primary and whether to move that cash into a new rental OR keep the property Home renovations gone wrong and when to sell a property you’ve gone over budget on And So Much More! Links from the Show Find an Agent Find a Lender BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch Join BiggerPockets for FREE Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area Expand Your Investing Knowledge With the BiggerPockets Books Be a Guest on the BiggerPockets Podcast Ask David Your Real Estate Investing Question David's BiggerPockets Profile David's Instagram Rob's BiggerPockets Profile Rob's Instagram Rob's TikTok Rob's X/Twitter Rob's YouTube BiggerPockets' Instagram Meet Investors in Your Area on the BiggerPockets Forums or at a BiggerPockets Meetup: Forums Meetups Grab David’s Book, “SCALE” Check out more resources from this show on https://www.biggerpockets.com/blog/real-estate-927 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. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate Podcast, the show where we arm you with the information that you need to start building long-term wealth through real estate today. We've got a Seeing Green episode with you, and I brought back up. I got Robbie Abasolo here joining me today. We've got an amazing show.

We're going to be covering several topics, including if you should invest extra capital in a house hack or save the money to get additional properties, when to sell your primary residents to take advantage of the tax exceptions for it and when to keep it. And we're also going to be talking recasting and how that could be a significant play for you if you have the option. That's right. If you've ever wondered what happened to Judy and Family Matters, we've got the answers for you along with some real estate stuff today on seeing green. Up first we have Ronnie from Napa, My Hood, joining us live with his question about how to generate leads for his real estate business while working a full-time job. And as all,

Always please remember, we would love your comments. We want you to be featured on an episode of Seeing Green. So head over to biggerpox.com slash David and submit your questions there. Let's jump into it with Ronnie. All right. Our next question comes from Ronnie Galindo. Ronnie like me and one of the realtors on my team. Robert Reynolds, funny enough, is a real estate agent and a law enforcement officer.

So Ronnie, thank you for your service. Tell us what's on your mind. Yeah. Thank you, David. And hey, Rob, nice to meet you both. Nice to meet you. just trying to kind of get ahead of the curve because I have dabbled a little bit in real estate and being a full-time W-2 employee, it's challenging to find a little extra living here in California,

even though we get paid decently. So got my license for real estate and trying to get deals, but my sphere of influence is small. And so just looking to kind of get some advice on and how you kind of build up your real estate business and start selling houses so that you can buy some additional real estate for yourself on the side. Well, Ronnie, you came to the right place because I don't think that, I don't think there's a better person to answer this than former police officer, realtor himself, David Green. Yes, yes. I am happy to help, Ronnie.

All right, first off, let's get into it. Do you own real estate yourself? I did. Had to sell it. It wasn't making the numbers I needed it to. and so I just have my primary right now. All right. Are you house hacking?

No. Unfortunately, I got a wife and two little ones. And so basically all the rooms are full up. That's one thing that would help. If you could find a way to get a property that had more than one unit, that had something that could be rented out, it gives you something to talk about to your coworkers, right? If you can't, that's still what I would do as I would still talk about house hacking. I'd be like, man, I have this other client make it up.

And we bought them a house and he lives in the master bedroom and rents out the other three bedrooms and he basically comes out of pocket $400 a month or $600 a month and has all of his roommates paying his mortgage off for him and like you guys he's a police officer so he's never even home doesn't even bother him at all and he's going to do this every year and he's going to have five houses in five years and he's not going to pay for any of them right like i would tell stories like that to the other guys i was working with because telling people a strategy this is the burr method this is house hacking it makes them think about it oh that that makes them say Ronnie sounds smart. He knows good stuff, right? But telling them a story makes them think I could do that. I could rent out bedrooms. That doesn't sound so hard. I could live in one unit and rent out the other two. I could live in a basement. Shoot, I'm already doing something like that. Now they start to get that feeling like they could. And the natural next question would be, what do I have to do? Well, we're going to get you pre-approved. We're going to run some numbers. I want to make sure you're not paying too much for a house. Then I'm going to look for houses that would work for that. We're going to make sure that it's

enough to where you report to that your drive isn't too long. This is what we're going to do to look for tenants. You start like painting a picture for people because the more clear they are on what it will look like when they're done, the more likely they're going to be to move forward. A lot of the time, realtors make the mistake of just telling people like what they should do, but not explaining to them what it would look like when they do it. So that's one thing. The other thing I would say is if you're not working, you need to be hanging out with your wife at social events. You need to be meeting all of the other parent friends that you know, the people at your church. You need to know all the people at your kid's school. My buddy Kyle,

he would just at an event for his kids. They go to an acting academy in the Sacramento area. And he went to like a father-daughter dance and came home with four leads of people that, two of them that have houses to sell and two of them that want to buy. So every time he goes to a social event, it's not time off. He's actually making money when he's there. You got to be thinking that way when you're a real estate agent. Okay. Like you're not on the clock or off the clock. You are always on the clock, but you're also really never on the clock because you're getting to make money at social events. Getting yourself in front of people is the most important thing.

Good advice. Rob, you want to weigh in on anything there? Ronnie, how many real estate meetups have you gone to in the past year? Around here, I haven't gone to any. I've been meaning, I joined one in Sacramento. That's like the closest one I could find. And I've actually been meaning to start one here in Napa because I'm in Napa, which is a small little market here that I don't really have a RIA that I can attend

but been in talks with some of the other agents that are around me, just haven't done a meetup. There you go. I mean, that to me is step one. And I think there's an actionable way to do that. You can go to different Facebook groups, different real estate Facebook groups in Northern California. You can go to the Bigger Pockets forums, talk about who you are, what you're looking to do. And look, you're not going to start a meetup and have 100 people show up on day one, but maybe on month three, you might have 10, 15, 20 people and it snowballs from there. The reason I say this is that if you're new into the real estate game in terms of being a realtor, getting someone to take a chance on you as a newbie realtor is always really hard.

And this is why new realtors have such a hard time building up their roster in the first year because no, they're just, they don't know how to market themselves and no one wants to take that chance. But you know who I will take a chance on is a guy that I meet at a real estate meetup that's a new realtor that I like. maybe we're at a brewery together. Maybe we're at a Napa winery together. Uh, and we're having wine and I'm talking, oh, what do you do? Oh, I'm a police officer and I actually just started, you know, being a realtor, blah, blah, blah. And if I like you, that's, that's what this business is all about.

It's all about networking. It's all about building rapport. So I think the most important skill a realtor can have is learning how to talk to people in as much quantity as possible their first year, because that's how you're going to build your book of business in your one, two, in my opinion. And then it snowballs from there. Year two, year three, year four, you're going to have so many clients from word of mouth. I think that's a typical trajectory for a realtor. So that's my advice for you is get started on that real estate meetup. The second one, this is just a bonus. I'm not going to charge you for this one, but you can always pull people over and say, hey, I'm going to let you off with a warning, but you have to use me as a realtor next time

you're considering buying a house and then drop them your card and go back to your car. Sounds like a solid plan. It's the greatest. I'd be so really, have my like, oh, I'm not getting a ticket? I'll definitely use you as a realtor. And we're going to take a quick break, but right after that, I'm going to share what I think is the real job of a real estate agent, so don't miss it. What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky DTI restrictions. They focus on your property's income potential. No tax returns or personal income statements

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and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise flagship fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and owners confident. One delay can throw everything off, and suddenly your day is all clean up, no progress. That's why hundreds of property managers rely on bill to streamline their finances.

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He's looking for creative ways to grow his network and increase his business. And Rob is going to help him with just that. Yeah, this is really good advice for real estate agents, not just a police officer real estate agent. Okay. Like, I'm at a real estate conference right now for Keller Williams and I'm teaching real estate agents what to do to make money. This is something they all need to understand. Your job as a real estate agent is not to know what forms to fill out, what the laws are, what the fair housing process is like your job is to make everyone fall in love with real estate.

You've got to be preaching it from the rooftops. They got to sense your passion. They got to know that you love it. And then they have to feel safe. Just like your job as a police officer is to make people feel safe. I want you to think about your first day on the force. You're with your field training officer. And you get a pretty like serious call that can be kind of scary.

and they look at you and they're like, what do you think we should do? Think about how that would feel. Okay, like, man with a knife running around stabbing people and he's like, oh, man, this is rough. What do you want to do? How many agents talk to their clients like that? They show the house and they say, well, what do you think we should do? Right? They get the inspection report and they say, what do you think we should do?

They want their client to lead them through the process. And it fills their client with terror and nobody can really articulate that's what's going on. So then the client never makes the decision what to do. Or you meet with them and say, I want to say, I want to say, I want to sell your house. Here's what I think it's worth. What do you want to do? You got to be telling them, here's what comes next. Here's what we're going to do. If you choose to work with me, this is what we're going to do. If you're going to have me be the one that trains you, Officer Galindo, this is what you do when this happens. Now, you're going to go do it and I'm going to be right behind

you to help you. That's the attitude that we have to have as real estate agents. And this is why so many agents are not good. This is why there's such a bad reputation amongst the agent community, especially with investors that are not happy with the service they're getting is because they're agents want the clients to lead. So think about it's your job to make everybody fall in love with real estate and then it is your job to lead them through the transaction and you got to know where they want to go to know where to lead them. You got to have clarity on what their goals are, what type of property they want, what strategies they have. And once you've given them that, they'll follow you. You'll put people in contract and they will spread the word for you.

That was great advice. And I definitely, I know I need to start that RIA. Yeah, I go do that, man. That's the answer to your problems. Thanks, man. Thanks for calling. We appreciate you. Thanks for coming on. Thank you. All right, great job, Ronnie. That was so good that Rob and I had to take a quick minute, jump on a plane and fly back to our studios where we could jump into recording this again after we debriefed on Ronnie's situation. We love it when you guys send us information about what you got going on, what struggles you're facing, and how we can help you. So please remember to continue to send us your questions of videos at biggerpockets.com slash David. In this segment of the show, I like to get into what some of your comments were on previous YouTube videos with some the questions were from the bigger pockets forums or what reviews were left for us. So please make sure that you like, comment, and subscribe to this video, and maybe you can be featured in this segment of a future episode of Seeing Green. Our first comment comes from YouTube, and it's from Narcist. Kind of funny, someone admitting that they're a narcissist.

Hi, David, I recently moved all of my properties from my name to individual LLCs. Unfortunately, the counties noticed the properties change hands, and they reappraised them. I lost the homestead exemption on my best cash flowing house. So I lost a lot of cash flow in the process. In the future, I will place properties into LLCs upon purchase, just a word for other investors. This is cool. And it's very un-narcissistic of narxist to share this information with everybody else.

You often hear people say, I'm going to move it into an LLC later as if there's no consequences. But in this case, there was. What do you think, Rob? Wow. Yeah, I have never considered that consequence. So it makes total sense because basically once the county notices a change, you know, everybody's just trying to make more money here. So county just wants to tax you. The one thing that seemed a little peculiar about what he said, though, is that he lost the homestead exemption on his best cash flowing house, which sounds a little fishy to me because you shouldn't have a homestead exemption unless you're living in it.

Yeah? Yeah, that's exactly right. And you can't be living in it if an LLC owns it in many cases. So what? Hold on. Wait, is that true? Well, if you buy the house as you are primary residence and you're telling the letter, I'm going to be living in it, and then you transfer it into an LLC, you can't get a primary

residence loan in an LLC. Oh, yeah, I see. So you got right off the bat, that's not the case. And then most of the time, if you're going to get a loan in an LLC, they'll tell you, you can't use it as a primary residence. It has to be something that's collecting income because they're making a loan to a business, not a person. So it's not like legally, I think that's what you heard.

Like, there's no police that are going to come and say, you're not here. But according to what you agreed to with your financing. Yeah, yeah, no, I just was more saying like, yeah, yeah, that makes sense. Thanks for the clarification. So yeah, just make sure people, when you're doing the homestead exemption, that is a tax break that you get when you live in that home because you're marking it as like your primary residence and you get like a tax cut. So you don't really want to do that when it's a investment property because I would imagine that's some version of mortgage fraud is my guess. That's exactly right. And as technology, increases, it becomes easier and easier for banks to find out that people are doing that.

We see that with my loan company. More and more frequently, we get contacted about, hey, one of those people you did a loan for, they were naughty. They said they were going to do this and they didn't do it. Now you're going to have to buy this loan back or they're going to have to fix it. So keep an eye out, everybody. Next comment comes from, oh boy, Masha Hurim Fundishi, 5826. Rob, how do you feel I did on that first take? I think it's great. Honestly, I was impressed, and I just can't believe there is 5,825 other Masah Rumi Fundishis. Yeah, that's a funny point there. But you never know.

There's a lot of people in this world, and apparently this is a popular name. Yeah. Masha Hirim Fundishi 5826 says, what is the issue with recast? I only hear about refis. Have you heard about this, Rob? I have not. Is this a thing? It's kind of a thing.

It's not really the same as a refi. a recast is when, let's say that you've paid, I'm trying to how to describe this, you get a loan for a property, you take out a certain amount of money, you have principal and interest that equals a payment on said loan. If you go in there and say, hey, I want to put an extra 50 grand towards my loan balance and I want to pay off what I was paying principal and interest on and at $50,000 less, $100,000 less. You can get them to basically restart the clock on your loan with principal and interest that are calculated on the new loan balance, so it's less. In a sense, it's almost like buying cash flow. Maybe you could look at it like that. You go in there and you put money towards your loan balance and now your principal and interest are less than what they were. A refinance is like you literally get a whole new loan on the house and you use the money from that loan to pay off your own loan. People typically do that when they're getting a lower rate. So that's why their price is dropping, but you don't have to bring cash into the deal. So a recap, a recap,

is not as good as a refi when you're getting a lower rate. Got it. Okay. So I thought this was whenever in Friends season one, Ross Geller's ex-wife, Carol, whenever they recast her. But now I know that it's actually, I'm doing this right now on a new construction loan. This is basically, this is actually really great because what they said is, I did a one-time

close. I got a 4.75% interest rate on this, like right before the big interest rate hike. Oh, I remember, you were all, you were mad about that rate. Now you're like, that's so bad now. I was like, I was like, how dare them give me a better rate than the market? And then, um, basically they said that I can, it's a one time closed. So as soon as they nail that last nail in the house, it's mine. But what I can do is come in with whatever size down payment that I want and they will reamortize the balance and keep the same interest rate. And I was like, I wish that this was a thing across the board. Is this ever an option? Like, is this normal? Do you have to seek out special lenders? Because this is like the greatest thing ever. It's in your loan documents that you, you you can or can't do it. Most lenders will let you do it. Sometimes they have a window when you're allowed to.

They may not let you do it four years after you get the loan. But in almost scenario within like six months, maybe six to 12 months, you can come in and do exactly like you said. Interesting. Yeah. Okay. So that to me is a very powerful tool. So we're going to be doing that hot take.

We're actually considering selling a couple of properties that I've purchased over the last seven years, taking all that equity and dumping it into this house and just trying to my mortgage balance as close to zero as possible, something that is unheard of in the real estate world. But, you know, I like the idea of this. So recasting, I'm all about it. So Rob is all about shrinking his portfolio. If you want to learn about scalage, get my book scale. And if you want to learn about shrinkage, follow Rob Belt. All right. Next comment comes from Havans Armiento, 7151. Bigger pockets. Can you start saying FHA has PMI for life of loan, unless you put down 10% PMI goes away after 11 years.

Correct me if I'm wrong. Just would be helpful piece to add. Thanks. All right, Havins, me and toe. Let's see if we can bring some clarity to the FHA loan. A couple common misnomer's that maybe some of you listening could be ill-informed about. FHA does not stand for first homeowner. That's not with the F and the H.R.

It actually stands for federal housing administration. It is a loan that was created for people that were going to have a harder time buying real estate. So if you didn't have 5% to put down, they let you put 3.5% down. If your credit scores were lower than what the conventional loans were requiring, you could go get an FHA loan with a less than ideal credit score. So oftentimes FHA loans will allow you to put, will allow you to have a lower interest score to get the loan. Now, this comes at a cost. PMI since for private mortgage insurance, and on a conventional loan, this is a amount of money you have to pay a lender to compensate them for the risk they're taking if you did not put 20% down because if they have to foreclose

and you put 5% down, you put 10% down, they have more risk. They may not get their money back, so they make you pay for that. Well, on a FHA loan, there is mortgage insurance, but it's actually called MIP. It's the same thing. It's just the name that the federal housing administration uses for their PMI. And it doesn't go away. For as long as you have an FHA loan, it always will have that MIP, even when you pay it down to the 80% loan to value or 70% loan to value. Another thing that they won't tell you, and I know this because I am a mortgage broker and I often steer clients away from FHA loans and into conventional loans where you can put 5% down instead of three and a half is that they collect that first year's MIP up front when you

close, but they don't get the cash from you because you don't have the cash. That's why you're using an FHA loan. They tack it onto your loan balance. So you're putting three and a half percent down, but then they take that year's MIP say it's like $10,000, they add it to what you borrowed from them. So even though it's not cash in clothes, you're still end up paying for it. And most people using FHA loans have no idea this is happening. This does not mean FHA loans are bad. It just means that there are more costs associated with them that people don't always know about. And in most cases, you're better off

to use a conventional loan, which you can get 5% down or 3% down, assuming that your credit score is eligible. So thank you, Havins Armi, Into, for allowing us to bring this up. I do have a flip side to this, though. On a second home loan that I I have. We actually just got the PMI removed because I believe on that specific loan, it was once we had equity of 20% or more, we could apply to get it removed. And so basically, we called the mortgage company. They sent out an appraiser. I'm not sure if we paid for the appraisal, but my guess is, yes, appraiser came out, appraised it for, you know, I think we have $300,000 of equity in that specific home. And yeah, they took it off. So now we save $200 a month in PMI, which is a beautiful

thing. That's a great example. That was a conventional loan. That was not an FHA loan that you did that on. Yeah. So that's exactly how it should work is you pay PMI until you hit usually 80% loan to value, 78% loan to value. And then if you get an appraisal, which you probably did pay for, but it's like 400, 500 bucks. And yeah, now you don't have PMI anymore. And that's how it should work. That's the life cycle of how PMI should be. And in a market where prices are appreciating as much as they have been, some people was like two or three years and it was gone. But if you get the FHA loan, it doesn't go away. So never say we did nothing for you here at Seeing Green. Thanks, everybody. We love the engagement. We love the questions. Thank you. Please leave us a comment as you're listening to this. Like and share and subscribe to the channel.

All right. Our last piece of this segment is a review from Apple Podcast from Greg Verge Say, brought to you by Rob Abbasolo. Okay. So he says, great all around knowledge as the title, five stars. And he's I've been listening for about six months, and I love the show. From success stories to educational podcast, every episode has been something you can take away to build and grow your real estate portfolio. Isn't that just heartwarming? That makes this day for me, David. Yeah, nice job rhyming there.

Build, grow, real estate portfolio. Rap and Rob, rap built. You know, I just looked at it. He said your real estate. I added portfolio, maybe because I just felt like we needed. I know you did. That's what I was saying. Yeah, we needed the,

closure. Or maybe you just like Eminem, you think and rhymes. Very nicely done. Let us know in the comments what you think about Rob's rap skills. He drops hammers, he drops knowledge, and now he's dropping bars. All right. Let's take a question about investing extra capital into your house hack 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. The portfolio features $4,700, a single-family

rental home 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 funds prospectus at fundrise.com slash flagship. This is a paid advertisement. Tax season reminder for all the real

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right. The question comes from Connor Castillo. in Georgia. Hey guys, this is Connor Castillo from Atlanta, Georgia. I live here with my wife and four kids. We have a two part question for you. One is about our two rental properties. One is low interest rate and cash flow is just over $1,000. The other has a high interest rate, but also cash flows for just over $1,000. We're thinking about taking the $3,000 to $400,000 of equity out and putting a cash offer on a house so that we could cash flow close to that $4,000 range, not have to worry about a mortgage. And then our other question, is we have this tiny house in our backyard as electricity.

We flip the inside. Obviously, we need some pressure washing. But we were wondering if maybe it would be a good house hack to bring out water here, put in a kitchen, put in a bathroom, spend about $40,000 to $60,000 to get it to where somebody could potentially rent it out as a short-term or long-term rental and help us with our overall mortgage payment of $3,200. We think we could get anywhere from two to $2,500 a month in this good neighborhood. Thanks.

Bye. All right, Rob, what are you thinking? Okay, we know what I'm going to say here. Listen, he's already got a structure in his backyard. He needs to bring out the water, which that part is easy. I think it's the sewage and then making sure that there's a proper slope and making sure that the sewage water can leave the tiny house and go to the street. That all, you know, there's some permitting there.

You have to go to the Environmental Health Services Department and the building and safety department. By no means, is this an easy project, but I think it's a really obtainable one. And I think that, you know, when you're getting started in the world of real estate, it's pretty important. It doesn't seem like he's got a ton of experience in the world of real estate. And so because of that, he isn't privy enough to understand that this is a bad idea, but I think he should do it. I think he should do it. I think he should learn the skills involved with project managing. I think he should do some of the work himself. And if he invests $40,000 to $60,000, Let's just go in the middle there, $50,000 so that he can make between two to $2,500 a month.

That's a grand slam of an investment because he's looking at a 40 or 50% return to get there. Yeah. I think there were two parts of the question. Should I refinance existing real estate to buy new real estate with cash? And then I've got this structure in my property that I could turn into a tiny house, $40,000 to $60,000 to make that a rental property was the second part. Answer to part two, like you said, Rob, is absolutely to be able to get a return of $2,000 to $2,500 a month on a 40 to $60,000 investment, it's crazy good. It's quacy. Yeah.

Yeah, we're talking like 60, 70% there. So that's definitely that should happen. And that's one of the things I look for in houses I want to buy is do they have a structure like that that I can convert pretty easily? That's how I make Burr's work in 2024 is I'm buying properties that I can add square footage to that way. Now, the other part is a little bit trickier. Should I cash out refinance a property to buy another property in cash? To my mind, it's almost a confusing way to look at this question because even though you're buying something with cash, so you're saying I won't have a mortgage on it, you're taking out another mortgage on another property. That will be higher.

Yeah. And really, if you do a cash out refinance on your other property, your rate will be higher than if you got a new loan to buy this property if it's a primary. residents. If they're both rentals, then it'll be a wash. But you're not actually gaining anything here. You're just taking on more debt on a different property as that. And that's why you kind of have to look at portfolio architecture. Because when you look at every property like its own unique individual thing, this can be confusing. It feels safer to buy something with cash. But if you look at your portfolio as a whole, it's not safer. You're adding extra debt onto something else that would have been paid off. So am I missing something there? You think, Rob, with that question?

No, no, you're not. Yeah, I honestly, I get this dilemma. I think so many people are in this dilemma right now in 2024. Like, they've got six figures of equity, but they've got this 2.75% interest rate, and they're like, should I get out of this and use it to expand? I find that I don't want to be as aggressive like this in 2024. I think it's a gift to have a 2.75% interest rate. Now, with all that said, if he can take,

300k, I'd imagine he can get like 75% of that. So let's say $250,000. If he can take that $250,000 and invest it into another property, whether it's buying cash or leveraging it, and it can get him a greater return than what he's getting right now, then I guess the answer is yes. But I would also raise the question of how much work will it take to do that and how much more is that return? because let's say that he's getting a 20% return right now. And this is arbitrary, of course. But let's say he's getting a 20% return. And he's like, all right, I'm going to do it.

I'm going to refy or sell this property, take my equity, go and buy this house, do this, do that. And then he's going to make like a 25% return. Yes, he's making 5% more, but I don't think it was worth the hustle and bustle. So I'm kind of in the mindset of like, you know, I don't think there's anything wrong with coasting right now on a 2.75% interest rate. Am I crazy? I feel like it's so counterintuitive to like the real estate. community. I don't know that I would care what the interest rate was as much as I would think like

you're just, you're losing your cash flow when you go from a 2.75 to 7 and a half or whatever it's going to be, right? And now you have to have a significant delta to make up on the next property in a market where it's very hard to find cash flow. So I think the low hanging fruit here is convert that property in your backyard and don't let the equity burn a hole in your pocket. It's okay to be sitting on equity. You don't have to deploy all your capital. The only other thing, the only thing I'm going to ask is does he need to use that $300,000 of equity or part of it to do his tiny house house hack conversion that will cost him $40 to $60,000? Yeah, so Connor, if you don't have the $40 to $60 grand in the bank and you have to get that

from the equity in the property, don't do a cash out refinance and lose that good rate. Do a HELOC on your investment property, which they have products for those now. We do them all the time. Use the $60,000 from your HELOC to make that into a cash-filling property. take the cash flow from the property and put it back towards paying the he lock down. And when you've paid it all back, it's basically like you got a free property. Yep. And you could do that.

Sounds like in two, maybe three years. So if you can give up a little bit of instant gratification, be diligent about paying that down, and then you got some pretty good cash flow, my friend. Yep. And you did it smartly. Connor, best luck to you. Next question here comes from Todd Lawrence in Jackson, Wyoming. My question is, what factors do you?

consider when taking a homeowner's tax exclusion if you've leveraged a former primary residence to fund the purchase of a new primary. I bought a duplex and house act using the equity in the duplex to put a down payment on my new primary. The duplex is currently cash flowing and appreciating. Should I still take advantage of the tax exclusion and realize the gains tax free? The market here is very tight and there are not many alternatives apart from investing outside of the Jackson area. I have about 500,000 in equity. Okay. So I think what he's asking is, should he sell the property now and take advantage of the $250,000 like tax exclusion where he won't have to pay capital gains on it? Or should he keep it and forego that? Because I think you are in

that window like two out of the last five years if you lived in it. I think if he has plans on using this money personally, then like whether it's for real estate or whatever, then I guess I would say sell it if you know you want to use it to do more real estate so that you can avoid the capital gains question in the future. But if you like this house and you don't really have a plan of action and you don't plan on buying more real estate, then I don't know. My answer might change there. So I mean, it's a little situational. What do you think? Well, he mentioned the market here is very tight and there's not much to buy outside of the Jackson area. That makes me think if he sells it and he gets that equity, he doesn't have anywhere else to put it. And he's sort of acknowledging

that. I think that Todd's dilemma here is he, he's, He wants to take advantage of the tax exclusion, but he doesn't know where to put the money if he does. So, Todd, let's reframe this for you a little bit. Before we even talk about the tax exclusion, do you want to sell this first house that you've already pulled equity out of to buy your next house? So you don't need it to buy another property because you already bought a duplex with money that you got from this first one. So is there debt on this first house that's drowning you that you're like, man, I want to get out from underneath it because once I refinanced it, it and I bought the new property, it's hurting and I want to get rid of it. If that's the case, yeah, sell it, get out from underneath it, wait to buy another primary when you see one. But if there's

no current pain that that first house is causing you and you believe it will continue to appreciate and you believe the rents will continue to go up, the house is in good shape, it doesn't have any big capital expenditures coming up that you're trying to avoid, I don't think there's any pressing need to sell it because there's not much else to buy according to what you're saying. So let me ask you this. Let me pose a question because this, this I think I could go both ways on as well. Why not, if he's like in this conundrum and he's on a timeline, why not sell the house right now, take his equity, however much that is, and then just dump it into the primary residence that he currently has and just stack his equity into that one house. Maybe even recast it. He could.

Yeah. But then he's going to be in the same problem as he is now where he says, I got this equity. if I should I capture it tax free and then what do I do? So if he moves the equity out of the first house and puts it into the second one, he goes from having two loans he's paying down to one loan he owes much less on. He may gain some cash flow doing that, but he loses future upside with rent increases and appreciation. Yeah, yeah, I don't disagree with that, but I think it's more just about buying him time. Like it sounds like he really wants this $250K, you know, capital gains free, which I understand. I'm actually in a very similar position with my Los Angeles house where I'm like,

if I sold it right now, I wouldn't have to pay any capital gains taxes. But in about six months, I'm going to have to. And so there is something to be said about he tosses it in this. And now kind of that clock restarts. He's going to have to live in it for two years. And now if he's married, he has half a million dollars that he can claim tax free if he were to sell this primary. So I think it's more about like, I guess what I'm getting at is more about how Presti is. Does he want to make a decision right now? That's kind of what you were alluding to, or does he just want to kind of let it ride? And if so, I would say maybe just dump it into the current primary. But again, that probably goes against most real estate investing philosophies.

I'm going to say this. If you think that Jackson, Wyoming is a crazy good market that's appreciating very fast, keep it. If it's stalled, if it's not crazy good, I would lean towards sell it and buy something in a market that you think is stronger than Jackson, Wyoming. Go to where the population is increasing. Go to the southeast. Go to the places that you see everybody moving into. Put that $500,000 of equity into an asset where rents are going to go up. Maybe you do a short-term rental so you get more cash flow where values are going to go up and let it grow faster than it would have in Jackson. Can I toss out one more idea? I don't want to derail this too much. Going back to the idea from the last person that we just answered, what if he took the capital?

the gains on this, and he bought an investment property cash so that if he ever wanted to sell that property, he could at least 10.30 want it into more real estate. How do we feel about that? That would work because he's got the exclusion of the primary residence. And normally that wouldn't work because if he sold it and he 1031ed into another property, he would have to keep debt. That's what I was originally thinking. He wouldn't be able to own it debt-free. But because he's got this exclusion, he can sell it, take the cash. He can buy something without a mortgage in cash. And then he has flexibility.

He can refinance it later. He can put a HELOC on it later. He could sell it later and buy something else without having to take on debt. Or it will cash flow in the meantime. So that's not a bad plan at all, actually. It'd probably be your best bet to improve your cash flow while keeping your options open for the future. Yeah. This is what I love about real estate because initially I was like, oh, it's dumb to buy a house cash.

but that actually makes a lot of sense for this specific situation. And real estate's all about getting creative and getting creative in tight timelines is probably the most important skill you can learn in real estate. All right. Our next question comes from Josh Parrat, who has his first investment property in Huntsville, Alabama. Have you had a rehab budget increase unexpectedly on a project? And have you ever had to cut your losses on a property due to unforeseen expenses coming up during the rehab? How did you decide that it was better to take a loss and sell a property rather than continue putting more money into a bad deal?

Just wanted to hear about some experiences you may have had that were similar to mine with unexpected costs arising. It's a pretty cool question here. Yeah, okay, I'm in this exact scenario right now. I may have mentioned it on the show, but I've got a house that was supposed to be a whole tail, which is basically like a very quick, a microflip, if you will. and I was, you know, I bought it for $75,000. I was supposed to put in $25K and make like $20,000 somewhere in there. And long story short, that's not the case. So it's actually going to be more like a $5,000 loss if I were to sell it based on the offers I've been coming in. So my other option is instead of taking a $5,000 loss, I could invest $60,000 into the same property and make $20, but it would take me six months to do it.

and I've never lost money on a deal before, not like this. And so I keep wanting to go that route, but pretty much every successful real estate investor, talk to a lot of the bigger pockets host, a lot of them are all like, yeah, just take the $5,000 loss, man. Just get the $100,000 that you invested, put that back in your bank account and move on. So yeah, I guess I might cut my losses, but gosh, I'm so stubborn. That's the reason we don't is because the ego does not like to say that I lost. Like, really hardly any real estate will, ever lose money if you wait long enough. Worse still ever, if you wait 20 years, you're going to get your money back, right?

So when we're talking about taking a loss on a property, if you can move yourself away from thinking of it as money and move yourself into thinking of it as time makes the decision a lot easier, right? Does Rob want to wait X amount of time, six months, to be able to not lose 5,000? How much can Rob make every month for the next six months if he doesn't have to have this thing hanging over his head? Significantly more than the five grand. So it's an obvious answer.

Now, somebody else in the situation, like we have in our background notes here that he said, I think the deal is still going to work for me. It's just going to increase the payback period and slow me down on getting the next property. That's the real question here. The deal will make sense. If you wait long enough, it's going to appreciate you're going to get your money back out of it. It'll be good. Do you want to wait a couple years to be able to say you didn't lose money?

Or do you want to get out of the deal and get into the next one and hopefully make money there? Part of that answer is, well, what opportunities is the market offering you? In today's market, I don't see tons of deals everywhere where if you get out of this deal and you get your capital back, you could go make money on another one really easy. You may be waiting a long time to find another deal you can make money on. You may not find another deal to make money on. You may run into another problem with a similar house because everybody's looking at these properties and they're picked over pretty good.

So in this case, I'd probably be inclined to just stick it out, take it as a learning lesson. This is part of the tuition you pay to get into Real State University. Have a great story and do better on the next one. Oh, fine. I'll take the $5,000 lost. Golly. Yeah, the whole time, I'm just like, why have I been doing this? And here's the dumbest part. And I'm going to admit this on national TV, aka the Bigger Pockets podcast. Yeah, I've been putting this decision off for like two months. So, like, I could have had $100,000 back in my pocket like two months ago. And I keep thinking, like, I have contractors lined up. We've been doing things. I'll just say I could have been a little bit. faster to like make moves here but I just am so caught up on not losing on a deal whereas now I've realized that I've already lost because of the amount of time loss so thanks for the advice I'm going to sell it I'm going to sell it I'll take the $5,000 loss and I'll take the 100k that I have and figure out how to make more than $5,000 that I lost yeah growing up right before our eyes on

the bigger pocket podcast it could be worse my man it could be much worse yeah I guess you bought a bad deal and you lost. No, the people are going to hear this. Rob, I love you humility. Yeah, it's, uh, you're, you, you had a deal go bad, which happens. And the consequences, you lost five grand. That's like, almost doesn't even count. I know. Could be so much worse. The only person that didn't lose was the wholesaler, but that's fine. That's often the way it goes. In Josh's case, the only person that didn't lose is the contractor. They made more money on this deal because there was a kitchen issue and a bathroom issue that he didn't see going into it. So the contractor's going to do great. The wholesaler's going to do great. So what's the lesson here?

If you're somebody who's trying to make money in real estate, stop trying to do it without work. Consider getting into the trades of real estate. I like people that say, I'm handy. I'm going to get my contractor's license. I'm going to get into doing remodels. I like people that say, I have a good business mind. I'm going to get into generating leads for other people. I'm going to be a real estate agent. I'm going to be a loan officer. I'm going to be a property manager. If you got skills, put them to you serving real estate investors and you can decrease some of your risks that way. All right. Thank you so much, everybody, for joining us today. We love you and we will see you on the next episode, just like Dr. Dre. This is David Green for Rob, willing to get double guacca on his burrito,

but can't stand the thought of losing $5,000 episode. Signing out. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday. and Friday. I'm the host and executive producer of the show, Dave Meyer. 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 LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.