BiggerPockets Real Estate Podcast - 932: Seeing Greene: When NOT to Build an ADU and How to Invest $300K

Episode Date: April 9, 2024

How does a HELOC work? Can you use one to start investing in real estate when you’re low on cash? And, if you do decide to go the rental property investing route, how do you ensure you’ll retire a millionaire? If these questions have been keeping you up at night, worry not; David and Rob’s real estate wisdom is about to make those early retirement and financial freedom dreams a reality. Welcome back to another Seeing Greene. As always, your expert investor co-hosts, David Greene and Rob Abasolo, are here to answer any and every real estate investing question you have. First, we answer, "Is an ADU (accessory dwelling unit) EVER worth building?" With the sky-high construction and labor costs, do these tiny homes make more sense now than ever? Next, we’ll break down how a HELOC (home equity line of credit) works, then David and Rob explain how they’d invest $300K in TODAY’s market and counsel a landlord/broker on how to retire a millionaire with real estate. 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: When (and when NOT) to build an ADU (accessory dwelling unit) on your property HELOC (home equity line of credit) interest rates explained and when to open one How David and Rob would invest $300K in today’s housing market How to use home equity and a SMALL real estate portfolio to retire a millionaire  What to do when your long-term tenant NEVER signed a lease Portfolio architecture 101 and the huge benefit of paying off your rental properties  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 Listen to Our Sister Podcast, “On the Market” Forum Post: Buying a property where tenant does not have a lease Episode 919: How to Use Real Estate to Quit the 9-5 Grind Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-932 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 932. What's going on, everyone? This is David Green, your host of the Bigger Pockets podcast. Joined today by my partner in crime, Rob Abasolo, in a seeing green episode. That's right. If you're not watching on YouTube, you're not seeing the green light. So that's what we're telling you. We're here to army with the information that you need to start building long-term wealth

through real estate today. Rob and I have a great show for you. But before we get to that, Rob, how are you today? I'm doing well, man. I know this is going to sound cliche, but I had Chipotle right before this. And honestly, I feel alive, man. I feel better than I've ever felt in my life. And it shows in today's episode, I'm actually drinking a Red Bull as we're recording. Rob is fueled by Chipotle and we bring the heat. Today we're going to be talking about several topics, including how you get to $1 million

in equity before you retire. Should you build an ADU or not to build an ADU when it does and doesn't make sense? Helox, what they are, what they're not, how they work, and when you should take one out and more. It's a great episode. Rob is in a particularly good mood. You can almost see the chicken and guacamole coursing through his veins as we record. All right, let's get into our first question. Hey, David, my name's Kyle Holden.

I'm from Raleigh, North Carolina. And my question is pertaining to ADUs. I've heard on the show that you guys do not recommend ADUs, especially because a lot of times from a financing perspective, you can't get the type of financing that you code with a traditional rental. If there were options to get financing for an ADU to building your primary residence where you could put less than 20% down, let's say 10, 15% down to build the ADU, what are your thoughts on that type of opportunity versus going a traditional rental route, especially my wife and I are looking at building a one bedroom or really a studio apartment above a garage in the downtown Raleigh area. We estimate based on data and analytics that we can rent it for about $30,000 a year and that the build cost would be around the $200, $215,000 mark.

So looking forward to hearing from you. Thanks for your time. And we'll talk soon. All right. Thank you, Kyle. Before we get into this, my advice, your first son, make their middle name buy. So that if it was you, it would be Kyle, buy and Holden. Because I think that's the perfect name for a real estate investor.

It is. Okay. Well, let's unpack this a bit. First and foremost, an ADU accessory dwelling unit. It's usually a detached building on your property that can produce more rental income or just, you know, another living quarters, another dwelling, if you will. So he says that he knows that BP is often advising against ADUs. Do we advise against ADUs?

I feel like I sing the praises of ADUs. I think what he's saying is I have said in the past when people have asked this question, hey, I want to build an ADU. It's going to be $150,000. And I'm going to get a 400 square foot property. Like, look, for $150,000, that's a down payment on a 3,000 square foot property. If you can't finance it, it doesn't always make sense to just throw an ADU on something because you can use that same money for the ADU to be the down payment. Pay it all cash.

Yeah, exactly. Got it. So it's often a better investment to put that capital towards buying a property that's a full property as opposed to adding a little cute tumor to the current property that you have that we call the ADU because it doesn't always add as much equity or value to your current property. I mean, people would rather have an ADU than not, but when you're shopping for houses and you're looking at $400,000 properties, I don't see many people that are willing to pay $5.50 for a $400,000 property with an ADU. But you had to spend $150,000 to do it. Does that make sense? Yeah, it's not one-to-one on the appraisals oftentimes. I had a deal fall through in Destin, Florida, where there was a back house that was the exact same size as the main house, and it appraised for like half the square footage dollar amount,

tanked the deal I had to walk away. I was really bummed. I was like, what the heck? It's literally an identical house, but that's not going to be the case all the time. But all right, so let's jump into this. So now he's asking, what if I can finance it for less than 20% down, 10 to 15% down, would you advise taking the opportunity? First initial reaction is yes, but I see you steaming over there over the build price of this ADU. Yeah, he said that it's going to be $210,000. to build a 430 square foot ADU. My mind is, I cannot wrap myself around how that's the case. I mean, there's parts of the country where you can build an entire house for $230,000.

Yeah. Much more than 430 square feet. Yeah, I mean, well, first of all, he did say it is above a garage. So it's taller and two stories are definitely always more expensive to build than just like a single story ADU. But with that said, I ran some quick math here. his build cost for this thing is $488 a square foot. That's super high, man.

Like, that's like, we're talking California prices. You know what I mean? That's a house in California, Rob. Yeah. That's crazy to me. Okay, so let's just, let's just, aside from the fact that he should probably get quoted out from a few different contractors,

let's assume that the math holds true, and he is going to put 10 to 15% down on this $2,000, building, and he is going to rent it for about $30,000 a year. by his calculations, it's going to fit the 1% rule and it will be a 20% cash on cash return. So the math does somewhat check out, but it does feel expensive. Yeah, I'm normally seeing green today. I'm seeing red. I don't know how this builds could possibly be this expensive.

There's so many better uses for $210,000 than to get 430 square feet added on to a property. I mean, I would literally be looking at can I go buy a vacant lot and build a whole house? on that thing for $400,000 or something, get a hard money loan for half of it, use that $210, and build a property that also has an ADU that you're building on it, right? I typically lean towards the ADU style, which is something I do a lot. I have a ton of properties with ADUs.

I target them when it's already got the ADU on the property or when I can do a conversion for cheap. So, I mean, like I bought a cabin in Blue Ridge that had a, three-car garage with living quarters above it for like an out pair. So it had a full gourmet kitchen, a family room, a bedroom, a bathroom, and a dining room above a garage. I spent $65,000 and I converted the garage into a second cabin. So I added three bedrooms and a bathroom, a bar area like which you got in your pink pickle, Rob. And I ended up with two cabins on the same lot. And I spent $65,000 to get the second one. Okay. I'll spend that to get.

in ADU, but $210,000, I'm still, are we living in a world where it's this hard to find people to do labor anymore because everybody wants to be an internet influencer? I mean, yeah, I think the labor market hasn't really bounced back to the pre-COVID days where construction costs just went through the roof. I mean, dude, building tiny is expensive. The fact that it's 430 square feet makes this significantly more expensive than if it were $1,000 or $1,500 a square foot, because when you think about the cost to build, let's say an ADU or a tiny house, you have certain fixed costs that don't scale up

because you're building so tiny. So you have to, no matter what, you have to pour a driveway, you have to have electrical, you have to have a main panel, you need a water heater, permanent, you need a sink, you know, you need a lot of these different things.

You need toilets, and there aren't like tiny driveways or tiny main panels that you can install. And so it just makes the cost of construction on tiny places so expensive because you're not able to spread out that cost over, you know, a thousand or two thousand square feet. So I can understand the conundrum. However, I still feel like in North Carolina, you should be able to get something a little lower.

So I'm an advocate, though, with all that said, of an ADU. I know that you're saying go find another lot and build the house, but the reality is finding the lot, doing the due diligence, getting a new construction loan, it's all really hard to do that. And if he already owns the property, he already owns the lot and all he is doing is pulling a construction loan for the actual building itself. I think there's something to be said in how much easier that process will be. And I also love doubling up income off of one property as many times as possible. So I don't hate it. I just don't like the build price. All right, here's my advice to Kyle. Don't do it. I'd rather see you take a big chunk of that money and look for some fixer upper with value of potential, like the kind of properties

that I'm trying to buy today. So check out your MLS, put the word out there that you're looking for something with extra structures already on the property. These are usually garages, but it could be a basement that you could convert. It could be an attic or a property that has a concrete pad, maybe like roving already extended out

from the property, a sunroom, anything with square footage that would be less costly to develop than this ADU that you're talking about. Use some of your 210 for the down payment on that property. Use the rest to develop it. and then move into that house and keep the one you've got as a rental or sell the one that you've got, avoid capital gains taxes and replenish that money that you spent on the new one by selling the property that you're living in right now. But we do want to know what you decide here. So make sure you keep us

updated by commenting on this YouTube video, Kyle. Let us know what you're thinking. All right. We're going to take a quick break and then we'll be right back to talk Helox and what to do with $300,000 soon. You ever head out on a trip, lock your door, and think, cool, my most valuable asset is now doing absolutely nothing. Because while you're off traveling, your home is just sitting there. Quiet, empty, not contributing, which feels like a missed opportunity, considering it has solid Wi-Fi and a very comfy bed. With Airbnb's co-host network, your place can earn money while you're away. You can hire a vetted local co-host with real hosting experience to handle guest messages, prep your space, and manage reservations so everything runs smoothly. Your home might be

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I have a lot of equity in my home and I've been looking for real estate deals in several different cities for some time now. I've also been wanting to do some home improvement jobs. Having access to that equity at a moment's notice would be great if something came up last minute. However, I'm confused as to how HELOC rates are determined. Because rates are starting to change and I don't necessarily need the money in this moment, would you suggest waiting a bit?

When rates go down, I am assuming HELOC rates would go down. as well, is that correct? I've heard helic rates are variable and they change. Is it possible if I open a heloc and they give me a specific rate that it could go down as well, or would I be stuck at that higher rate? Thank you again for your time and expertise. Lilo, this is a great question and we are going to have no problem clearing this up for you and everyone else. So first off, thank you for asking it. Rob, would you like to start? Yeah, I think the answer is it kind of depends on the actual helock product itself, doesn't it? Because I mean, I'll say this. I like the idea of having your helock ready. I have a helock that I pulled many years ago. It's about a $120,000 line of credit.

And it's nice that I can just go pull. I have my helot card right here, right next to me. If I wanted to, I could use that for any type of home renovation or anything in that world. So I like that general concept. With that said, this specific helock that I have, if I remember correctly, is the first six months of the life of this helock was like a 3% fixed interest rate. and then every month after that it turns into a variable. So if you want to save on that first six month, like really great rate that they give you, I guess I would say wait, but I would cautiously advise that you are very careful about when you actually apply because you're basically getting underwritten for like a mortgage.

It feels like they ask you for a ton of documents, a ton of tax returns, like every document imaginable. It's not like you can just say, hey, I'd like a Helock fellow banker. and they're like, here you go, David Green. Like, you still have to go through like a pretty vigorous underwriting process. So with that said, I guess I would be very methodical about how you're parallel pathing applying for this and scoping out the next project that you're working on. All right.

Good point there, Rob. You are correct. When you apply for a HELOC, you're going to go through an underwriting process similar to getting a mortgage because you're applying for a second mortgage. That's what a HELOC is. It's a second position lien on your property at a higher interest rate than your first position and lean because it's a little bit riskier to lender. The cool thing about Helux is their flexibility. You don't have to spend the money. You don't have to pull the money out. You can have it available

without actually paying on it. So even though you're applying for a second mortgage, you don't actually have to pay that mortgage. And when you do, you only have to pay as much as you're using, unlike your first position mortgage, which you borrow all of it at one time to buy the house. Now, as to the question of, are the rates adjustable? Usually they are. Like Rob said, sometimes the offer you some kind of promo package or introductory deal where they'll say for the first six months, for the first nine months, your rate is fixed and after that it adjusts with the market. Just something to keep in mind in most countries, in most situations, interest rates are adjustable.

It is a unique trend that we have in America where you get a fixed rate for 30 freaking years. That only happens because the government sponsors loans through Fannie Mae, Freddie Mac, and other government sponsored enterprises where they're giving you this cool, treat. This is like, hey, you're an American citizen. Here's a bonus to you. We're going to give you a 30-year fixed-rate mortgages at really low-down payments. We get used to this. This is not normal. If you go want to buy a property in some other country, you're not getting 3% down. You're not getting a 30-year fixed-rate mortgage. You're usually putting 50% down and you got to pay the whole thing back in two years or three years. Very few countries are as developed as we are that

allow you to buy real estate this way, which is why so much money floods to American real estate, and we're sort of the bell of the ball at an international level when it comes to housing. Now, Lila, I think part of your question, you may be a little confused. We want you to open the line of credit, but you don't have to pay on the money until you use it. So rates are going to go up, rates are going to go down, but you don't pay the rate unless you actually borrow the money. So having a HELOC open doesn't cost you anything until you pull the money out just like a credit card. Yep. You only pay money on your credit card for money that you have spent, not money you have available

to yourself to spend. Side note, you want to sound cool at a cocktail party with bigger pockets knowledge. There are some lending institutions that will charge you a little bit of money for money that is available for you to spend. That is called Dutch interest. But that is not the case on HELOCs. You don't pay any of that Dutch interest. So have the HELOC open, but just don't borrow the money until you need it.

And when you need it, ask yourself, what are the rates right now? Is it worth borrowing at this interest rate or is it not? but you're not going to hurt yourself other than, like Rob said, a little bit of time spent filling out applications and maybe the cost of an appraisal on your house to have the line of credit open and available. Does that make sense, Rob? It does. It does. So short answer, Lila, we would not suggest that you wait to open the helot, go ahead and open it, but just don't think because you have the money that you need to borrow the money or you need to spend the money. It's just like a credit card. You can walk around with a $10,000 limit on your credit card. That doesn't mean that you need to

spend $10,000. You should still only make purchasing decisions. as if it was cash that you have in the bank, or even maybe more conservative if you're using a line of credit because you're going to pay interest on that. But you do want it there in case a great opportunity comes your way. I will say last thing is I sort of like the idea of applying for the HELOC and just getting the timer going, because if there's a timer going, the chances of you taking action are much higher than if you're like, oh, I'll just apply for it when I find the deal. I think apply for it and then find the deal. There you go. That's exactly right. All right, moving on, Our next question is from V. Torado.

Hi, David. My name is Vittorado. I'm a local real estate investor from New Jersey. I'm also a realtor. House hacker. I have a three family that I'm house hacking. And I also have two single family home rentals. I'm house hacking.

Thanks to you and all your advice over the years and listening to your podcast. It's working out pretty well. I'm also preaching house hacking a little bit in my meetups. We have a local real estate meetup here. And we had an attendee that grew up. interesting question and maybe think what would David do? He was telling us that he was inheriting $300,000 and he was asking what would his next step be? He's also a house hacker and owns like three rentals. So I would just wonder what would your advice be for someone like that next step.

He wants to have a lot more income and he already is experiencing house hacking. He doesn't want to do stocks or anywhere. What would be your advice on where he would put that money to use right away. If you continue house hacking with another one or do something else like a syndications or anything like that.

Thank you, David. Thanks for all the advice. Bye. All right, V. Toronto, much like you, I live my life one quarter mile at a time. Let's break this thing down.

All right, someone's got $300,000. They're financially responsible. They're already house hacking. They're going to real estate meetups. They're in this game. They're not just talking about it. They be about it.

What do you think they should do, Rob? Well, I mean, I think if he's already okay with the premise of house hacking, maybe turn the current house that he has into a rental, because he's talking about quote-unquote passive. We all know that passive really exists in very few forms, but turning his current house into a long-term rental could be somewhat passive if he turns that over to a property manager. And then he could upgrade into a more, I don't want to say luxury house hack, but maybe just the next step up. Or try to find like a duplex or a triplex where he can get into a more expensive property, maybe make a little

bit more rental income. And if he's truly looking for passive income, I mean, I really feel like the only way you can be passive is by investing in a syndication or maybe even being a private money lender. But even then, it's not really passive, right? Because you still have to kind of monitor the people that you're lending money to. You still have to research on the syndications. But he's asking what we would do, David. So what would you do with $300,000? First thing I'd do is buy a 67 Dodge Charger, 750 horsepower of torque. Front wheels come off the line when you hit it so much that it scares me. Illinois.

All right. Let's talk about what I wouldn't do, Dominic Tureto. I wouldn't be in a rush to spend the money. I think a lot of people are like, I want to be a rost investor. Oh my gosh, I got this cash. I inherited it. I had a windfall. The company I work for IPO or whatever is burning a hole in my pocket.

In the past, I gave advice that had a higher sense of urgency when it came to getting in the game. I was watching a ton of economic stimulus that was creating rising rents and rising values. And so as that happens, risk goes down. So it was much easier for new investors to learn the ropes of real estate investing. It was a much more forgiving experience. Rob, I think you'd agree with me. It's not as forgiving now. You've got to be pretty dialed in before you jump into the game. Doesn't mean you can't do it, but we're not talking about jumping into a swimming pool. This is the Hawaiian Ocean, and it can get rough out there if you're not a solid swimmer.

That's why a lot of people are in groups. They're getting mentors. They're working with other people. It's not the same as you could just jump in and figure it out. So don't have that $300,000 burning a hole in your pocket. Now, there are still some really good options. I love the idea of setting aside a piece of this and buying a new house every year to house hack. I keep saying this.

I'm going to keep saying it. It's boring advice. So nobody listens to me because it's not sexy or exciting. But that doesn't mean it's bad. You got to buy a house every single year. the best neighborhood, the best locations, the best property, and put three to five percent down on that sucker and find some way to make a cash flow when you move out. Buy a small multifamily, buy a big property with a lot of bedrooms and rents them out,

buy something that's got an ADU that you can live in, an Airbnb, the main house. You got all these options, but do something like that where you consistently buy a new property every single year for 10 years. You will never regret listening to this. If you just only do this thing, the Bigger Pocket's podcast will make you a millionaire from that one piece of advice. So make sure you've got money set aside to do it. Now here's the cool thing with doing that.

When you house hack and you eliminate or reduce your own housing expense, the money you save that you used to spend on your mortgage becomes the down payment for your next property. And the property you bought this year buys the one that you're getting next year because it's so easy to hit that hurdle of only 3% down with a conventional loan. Now, with the rest of the money, I kind of like the idea of buying something for cash in a semi-forgiving market and just learning how to be a short-term rental operator. or maybe a medium-term rental operator. Something where you can kind of get your chops wet here,

learning something new without a mortgage so that if you screw it up, it's not as risky that you got this 7, 8% interest rate, taken away all your profits or making you pay for the mistakes of learning the new asset class. What do you think, Rob? Yeah, I like that. I was going to say I do like the idea of buying a short-term rental,

but I'm torn because he says he's looking to put his money to use for some passive income. So the caveat there is that no matter what people say, short-term rentals are not passive. So it's like if you're trying to make the best return, I think if you adequately, I think if you're very good about your analysis, you can find a property that you then hire a property manager for and they manage it for you and it's somewhat passive and you'll make a better return than with a long-term rental. But that's not that easy either.

You still need to research and you need to vet the proper property manager. but that would be probably the highest yield from a cash flow perspective other than doing what you said, which is like, I call this a supercharged house hack where you basically house hack, but then one room maybe you rent as a short-term rental and the other room you have like a long-term tenant in there and you kind of do both. And you get high cash flow and low tenants throughout the year. Yeah, I am not going to tell you to go invest your money in a syndication right now. If you know the operator, you are very confident with what they're doing, different story. But too many people threw money into syndications with someone that had no business raising it,

but the market was so forgiving that even though the operator wasn't great, they exited and they got their money back because cap rates kept compressing and values kept going up. That came to a grinding halt when interest rates went up. And a lot of syndicators that were good operators still lost those properties because when they needed to exit and sell and pay all the investors back, rates were two or three times what they were when they got in. Nobody could see it coming. but that scares me about syndications.

There's too many things that are outside of your control, and that's the price you pay for wanting passive income. Passive, yeah. Is you're going to be taking a risk, right? So I understand everybody wants passive income. Let's just understand that that doesn't come without a cost. It is going to be riskier. It's going to have a much lower return.

If you really want truly passive income, go buy some bonds. Not a whole lot of risk, not going to lose your money. The problem is the return you make doesn't really keep pace with inflation. Yeah, but I was going to say that, like going, I mean, he's already down for a house hack. So I would try to do one level above a house hack, maybe go into a multifamily, like a duplex, triplex, obviously on the smaller end, he could use 30 to 50% of his 300K to do that, depending on where he lives. But let's just say the other 150 to $200,000 that he keeps in his pocket, put that in a high yield interest savings account, figure out what you want to do from there.

You know, people are getting 5% right now. That's not bad. Actually, it's pretty good. It's honestly better than what you'll probably get on long-term rentals right now. Yeah, if that's what you're looking for is passive income, do that. And occasionally you can get real estate that works passively, but do not depend on your investment being passive. It will be passiv-er. It's probably not going to be truly passive. Pass-ish, we call it. Paschish, there you go. Pashish, as they say in France. Yeah. But she's congrats on inheriting $300,000. I mean, this is awesome. Congrats on being a house hacker. Congrats on being a financially,

responsible. Don't be that 16-year-old that just learn to drive and go buy a Ferrari. I get it. Keep rocking your 50-c motorcycle. You don't need to go crazy with this thing and get yourself killed. Get a 75-cc, you know, moped. You know, you don't have to go, you don't have to go to the Harley. Upgrade a little, try to figure out how to monetize that, make the most money possible. And, yeah, chill on the other money until you figure out exactly what you want with real estate. But do that with the high-yield interest savings account because it's free. That's exactly right. If there's anyone that understand mopeds, it's right. Rob Abassoilo. I did you so own one, a Yamaha-Zuma. And I miss it. I do. It was fun. You get on a

moped and you tell me you didn't have a good time. I'll tell you you, will. All right, thanks to everyone for submitting your questions and making it work in today's market. Remember, we want you to be on a future episode of Seeing Green and you want it to. Don't lie. Head over to bigapox.com slash David, where you can submit your question and be featured on a show with Rob and I. Also, we hope you're enjoying this conversation. And if so, please make sure to like, comment and subscribe on YouTube. Also, even more important, subscribe to this show wherever you listen to your podcast. You don't want to get busy in life, riding your moped, putting together your house hack, or trying to find those high yield bonds and miss new content of the bigger podcast podcast

that could change your life. So make sure you subscribe so you get notified every time a new episode drops. All right, Rob, I'm going to throw a rapid response question directly at you, fresh from the forums. This comes from Shreeney Murthy in Georgia. What are your thoughts on a tenant who lives in a property long term but does not have an active lease? She does pay rent. Well, an estoppel work here. I think that entering any property without a proper lease is just asking for trouble. No matter how amazing that tenant is, they've got the tenant rights. And if you don't have any documents to protect yourself, you are barking up the wrong tree. So I'm going to go no. Wise advice, Rob, there was a case, I believe in Santa Monica, but it was definitely somewhere in

Southern California where I think it was a doctor or a dentist let somebody move into an ADU that they had on their property, but it was never permitted. It was like they converted the garage into an ADU and the person moved in. Then that person decided I'm no longer going to pay rent. I'm also no longer going to leave. And for over a year, I think up to two years, this person has been living rent free in this person's property and they cannot get them out because the judge said there was never a certificate of occupancy issued. So even though I recognize that this is a crappy thing they're doing, I don't have legal grounds to a victim. You don't want to find yourself in a similar situation. So make sure you have a lease that clearly shows when they're allowed to live there,

when they have to move out, and how much they have to pay you in rent so that if they violate it, it's easy to get them evicted. Unfortunately, we live in a world now where even though people do the wrong things, the legal system cannot always take action. By the way, David, for everyone at home that doesn't know what an estoppel is. What is that? My understanding, Rob, is an estoppel certificate. This comes up sometimes when you're buying a property that already has a tenant in it as a real estate agent, I would see this, where the landlord and the tenant are both telling the buyer of the property, hey, even though we don't have official leases in place, we are both admitting this is the agreement we've been working underneath. These are the rent. These are the terms. This is the agreement that

we have in place so that the new person buying the property understands everybody's on the same page. A lease is better, but I believe we use estoppels when there isn't a lease in place. So the short answer to your question, miss, is no. And estoppel will not work. You need to get yourself a lease. At least that's what I think. Estoppel, man. Estoppel with the puns. All right. And our next comment comes out of YouTube and it's from Mary Louise One. Referencing this podcast being free. Actually, it's beyond free. It's priceless. My real estate IQ has increased immensely ever since I started listening to your podcast regularly. Thank you. Well, thank you, Mary. Seeing green can do that for you. Just like eating your greens will make you healthy.

Seeing your greens will make you smarter. Oh, look at that. And even James commented and he said, thanks for tapping in. We love that you take so much value from it. Thank you. James Danard, you're a stand-up BP community member. And if you guys don't know who James is, he's actually the stunt double for Jimmy Neutron. And he's one of the hosts on the Bigger Pockets on the Market podcast. Our next comment comes from Andrews 379. I love that Rob just called his CPA on the phone and we got to hear a CPA's professional opinion and thought process on the situation. Pretty cool. High value content for show. Fire emoji. I love it. That made it in. I was hoping it did. Matt Bontranger for the win. Yes, yes. Everyone, we love you and we appreciate your engagement.

So please don't stop. Like, comment and subscribe on YouTube. And if you're listening on a podcast app, make sure that you hit the subscribe and then DM Rob Abasolo and tell him you did it. He needs it because his DMs are being overwhelmed by 20 year olds who are looking to avoid real work by offering to write copy for him or edit short form videos. It's so true. I am doing stuff with my email. I am. I don't need the DMs anymore.

We'll be right back after this quick break and then we will hear a few more investor situations and what we would do if we were in their shoes, sneakers, flip flops. Zapatos. Zabatos, as many people would say. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details so you don't have to be.

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Tampa Bay area. I've got a couple questions for you. I'm chasing that million dollar number, and I'm hoping that I can hit that prior term retirement. Here's my play. I've got a couple rental properties now that are completely paid off. They're worth about $560,000. What I'd like to do is I'm paying on my primary residence right now here. With the help from those rentals, I'm really knocking this down. I want to get my mortgage payment on my primary down to about $150,000 so I can recast this loan. The mortgage company said they do it for free, which would drop my payment significantly on maybe $15, $1,600 a month. So those three properties, the primary and the two rentals are certainly going to profit when I move out of here. I should be making over $4,000

dollars a month. That's the numbers that I'm running. My plan is to move into a fourth property, which is going to be my final primary residence. By the time I pay this house off, I should definitely be in the million dollar range. But this is what I'm doing. I hope I'm on the right track. And I'll keep watching your show for any advice you can give and have a great day. All right. So I like it. He's on the right track. I love it. He seems like a consistent saver, a consistent investor. One thing I'd say, I think maybe he's putting too much emphasis on the $1 million. I don't think he should stop. He's like, hey, once at $1 million, it all changes. But, you know, the assumption here is if he retired, then he would basically sell everything, have a million

dollars in the bank account, and then what? Then he just lives off of that. I like that he's already built so much momentum. And I think if he's just trying to get another $300,000 of net worth, I feel like so long as he has some cash available to him, he could do this through a few burrs. And honestly, probably relatively quickly. What do you think? All right. I see what you're saying there, Rob. And yeah, that could work because every time you burr, you do tend to add equity to your net worth. But not all equity is the same. And here's what I mean by that. If you've got a property that's worth $500,000 and you've got $400,000 in debt, you have $100,000 in equity. But it's very hard to get that $100,000 out.

because other than selling, the ways that we typically get equity out of properties is through a he lock or a cash out refinance, but you have to have a solid loan to value ratio to get the money out at all. Correct. So if you've got $400,000 of debt on $500,000 of real estate, you're at 80% loan to value. There really isn't a financial vehicle that will let you get that money out very easily. So it's kind of like debt equity. So you could have five properties like that, which is $500,000 in equity, or you could have one

property paid off, which is worth $500,000. the property that's paid off has much more options of how you get the money out of it to go do something with that money, which is what the question was here. So I'm kind of splitting hairs here. I understand that I just want people to be aware that on your spreadsheet, it might show you have a million dollars of equity. But if you have that over 10 different properties that you owe $900,000 on that are worth a million, you're not able to get it out versus if you have it over $500,000 properties that are paid off. Now, when you're building your real estate earlier in your career, you want more properties with more debt because you have more time to pay it off.

When you're moving closer to retirement like Eric, you actually want less debt because you have more flexibility and more options. So for you, Eric, to get to that million dollar number, I don't know that Burrs are going to be the best bet. I would rather see you go bonkers on your real estate broker business that you mentioned. Can you hire more agents to hang their license with you? Can you sell more houses? Can you go big?

hiring assistance so that you can scale this thing up. Can you make more money because there's flexibility in the cash in the bank even more than equity and paid off rentals? Get there that way because now when you hit retirement age, you've got options of what you can do with that equity as opposed to you have it, but it's stuck in a property. The only way to get it out is to sell it. And maybe you don't want to sell the property or if you have to sell the property, you're going to have closing costs that are going to eat into that number. Yeah, okay. I agree with most of that. I mean, I guess I did, don't know how far he is from retirement. And I also don't know is his grand plan to sell everything and have a million dollars in the bank? Or is it to sell one off triage one at a time anytime he needs

cash? You know, um, I mean, I like the idea. You're basically saying make more money at your job. Yeah. And use that to possibly pay down your rentals. Right. Get as much equity as you can in those rentals. That way, whenever you retire, you can either sell and not have the fees eat into it or refi and take some of that money out. Tax-free. That's exactly right. It's smart to build equity to later convert to cash flow. And you and I recently discussed this exact topic on episode 9-19 of the Bigger Pockets podcast where we talked about building up cash flow is hard. Building up equity is less hard. And then you have flexibility when you move that equity into cash-flowing options. This is a great example of how building up equity is not equal no matter how you do it.

There's different ways they're going to work better for you. I like the idea of paying down the loan and recasting it because it sounds like what Eric's looking to do is get his expenses lower going into retirement so he can work less hard. Yeah. So if you're coming up near the end of the race, that's where you give it everything you got. Put your head down, go into a dead sprint, try to leave it all on the floor. And then when you cross that finish line, you can settle back and start walking, go to a light job or just stop completely if you've got enough momentum. Yeah. I guess I'm torn because I feel like it's going to be, if he's asking the question, I mean, he may already be capped at his job. And my conundrum is,

is, is it easier to build equity from a burr versus being a real estate broker in 2024, which you might have a little bit more insight there? But it feels like to me, tangibly, he's got the skills to maneuver himself to kind of make a few more. I think he's got a few more real estate plays in him before he retires. Maybe flip then, as opposed to keeping it as a burr and refinancing it. You just sell it and then you made a bunch of money there and you put that back into the bank account and you build it up that way. There you go. Burrs make more sense when you're going to hold it for a long period of time. Yeah, but he may not be, right?

Yeah, okay. Yeah, because he's just trying to get debt paid down on his mortgage now. He's trying to get from 275 to 150. A couple flips, he could do that pretty easily and then recast the loan. Which, again, why don't we talk about recasting more? What a brilliant, brilliant vehicle. Is it just not that available to people? No, it's not so much that.

I think that when you recast the loan, you're just knocking your payment down, but you're putting a lot of money into the loan and you're not really adding equity to your net worth when you do it. Totally. Right? You're taking $100,000 of money that you could have bought more real estate with and you're putting it into a loan you already have to pay the debt down. That's probably more popular on Dave Ramsey style shows, the F5 movement. Most people are listening to us are like, I want more. I want to scale. I want to go big. I want to go great. So recasting is kind of anti-productive if that's your goal, yeah. Yeah, but you know these days. But for someone like you, Robbie, yeah, go ahead. I'd like to hear what you have to say about this one. I am. I'm building a house right now down the road and I get to recast at. the end of the construction if I want to. And man, I know it's so anti-real estate, but I kind of want that mortgage to be as close to $0 as possible because I'm doing all of this for financial

freedom, but I think the true financial freedom is never worrying about having a mortgage, even if I lost everything. There you go. So it depends on your goals. It depends on your strategy. Yeah, stuff we've talked about there. I don't know. Is Rob turning into Dave Ramsey right in front of Do you think a stupid for talking about recasting alone or do you think that there's some wisdom here? Let us know in the comments what you think. All right. Now, to cast, to recast or not to cast, let's wrap up today's show by going into this. Something that I talk about more frequently these days is portfolio architecture.

This is not just how to get more properties, but how to get the right kind of properties to function in your portfolio like a team. You don't want a baseball team full of center fielders. You don't want a basketball team full of nothing but point guards. You want a mix of different strengths and weaknesses to give you the best possible outcome. One of the risks in growing big is that you have more debt and more mortgages. One of the risks in not growing big is that your tenants are not paying off your mortgages and you're leaving money on the table. So how do you combine these two?

For someone like Rob, maybe you're in that position yourselves, it can be smart to have a couple paid off properties in a portfolio that has other properties that have debt. Here's why. Your properties that have debt are usually going to provide more wealth. for you in the future, but there's some short-term risk associated with that. Your paid-off properties are going to give you less future benefit, but more safety right now. So if you're someone that can pay off two, three, heck, even four properties, you can scale bigger, more safely. Because if something goes wrong with your properties that have mortgages, you can sell one of the

ones that's paid off, you can refinance one of the ones that's paid off, or you can use the extra cash flow for your paid-off properties to offset the risk of the ones that have higher-rate debt. looking at how you combine all these pieces together allows you to scale bigger, faster, and better with a proportionate amount of safety that helps balance that out. I love that. I'm glad you gave that context because I'm always like when I say that I want to be as close to zero as possible, I know some people are like, that's so dumb leverage, blah, blah, blah, with all that set, I'm really happy with the cash flow that I have for my real estate portfolio

and equity is way more important to me now because that's just like what I'm trying to build up for when I retire. So at this point, my portfolio architecture tends to lean to. towards how can I build equity in, you know, marginally increased cash flow along the way. There you go. If you've got a property or two that's completely paid off, it's going to cash flow better. For some people, that can actually function as your reserve. So let's say you've got two $800,000 properties that are paid off, but you only have $100,000 in the bank. I don't feel as bad about that person's situation because in case of emergency, they can break the glass, sell

the property and they're going to be okay versus someone else that just been scaling, putting 3% down on every property. That person needs to have more cash in the bank. It's fun when you turn checkers into chess with your real estate investing and we're here for you to help you do it. Thanks everybody for joining us on today's show. Keep an eye out for your next seeing green episode. Make sure you subscribe to this podcast so you get notified when it comes. If you want to reach out to Rob or I or follow us, you can find our information in the show notes. And if you love Bigger Pockets, make sure you like this video. This is David Green for Rob. Needs a grandma to feed him a Mabas Solo. Signing off.

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