BiggerPockets Real Estate Podcast - 941: Seeing Greene: Are Home Warranties Worth It & When to Pay Off Debt vs. Invest?

Starting point is 00:00:00 This is the Bigger Pockets podcast show 941. What's going on, everyone? Welcome to the Bigger Pockets Scene Green episode. I am your host, David Green, here today with my co-host, Rob Abas Solo. And as you can tell from that green light behind me, we are going to be answering your questions from the Bigger Pockets universe and helping everybody build wealth through real estate today. And boy, have we got an awesome show for you.

Starting point is 00:00:25 Rob, how you feeling? David, I'm feeling great, my friend. I'm on my second Coke Zero of the. the day, and I can't imagine this day getting any better. Well, it's about to, Rob, I got some news for you. We got some great stuff for everybody today. We're going to be covering home warranties and what you should know about them and if they're worth the investment. What to do when you inherit $1.3 million of property and how to scale a portfolio from there. Yeah, NBD. When improving your property makes sense versus when it's just a waste of your money, how to navigate $320,000 of student loan

Starting point is 00:00:56 debt when you're an aspiring real estate investor. And if robots, or other changes to the industry are going to crash home values in the future. All that and more on today's episode of Seeing Green. Oh, and most importantly, let's not forget, David, if anyone listening at home wants a chance to ask their question, head on over to biggerpockets.com slash David. The link is in the description down below, so go pause this, send us a quick little question. Let's jump right in. Our next question comes from Ruben Luddick in Seattle. Ruben writes. I'm originally from South Africa, but Living in the Seattle area, I have rentals in Washington, State, and Florida.

Starting point is 00:01:33 Oh, boy, he's got a covered job, like literally, criss-cross, right? Across the entire country. Did you know that that's the way that they measure TV screens, by the way? Yeah, it's actually diagonal, not from corner to corner. Exactly. Same way this person buys real estate. He's the best buy of real estate. The best buy.

Starting point is 00:01:50 Would you recommend purchasing a home warranty on every rental property that I get? We've been making decent cash flow, $500 a month per property on our units, but our appliances and ACs have been going out one after the other, and our CAPEX is eating up a good amount of our cash flow. Our idea is to pay approximately $500 per unit annually and have pretty much all of the appliance major components covered. We sacrifice about $40 a month per unit on cash flow, but then have a piece of mind knowing our CAPEX is minimal.

Starting point is 00:02:16 Appreciate all your content. This is a good question. I like this on Seeing Green. It is. It's a good question. I have thoughts. Let's hear these. I'm 50-50. I think most conventional thinking would tell you not to buy

Starting point is 00:02:28 a home warranty. I will say, I have home warranties on a few of my rental properties, short-term rental specifically, and it is nice, but it is sort of like a blessing and a curse, right? So on one end, if something breaks, let's say that it's your AC, you have the option of getting it covered. Now, where this really backfires on you is that typically the vendors that come with a home warranty company, like let's say your AC breaks, they're not sending you the best AC repair people ever. It's usually like a lower grade vendor, in my opinion. And then also it's not super fast. And so with the world of short-term rentals, it's all about hospitality and fixing a problem super fast. So sometimes you may not get that AC tech out to your property for two, three, four, five, six days. But if you

Starting point is 00:03:15 have a guest at your property at that moment, and let's say that guest paid you two, three, or four thousand for a vacation, they aren't going to be happy waiting. And so you sometimes have to bite the bullet and pay for just a random vendor not associated with your home warranty company regardless and pay a ton of money outside of the warranty. So it's kind of one of those things where most of the time you can use it, sometimes you can't. And the times that you can't ends up being really costly.

Starting point is 00:03:41 So it's like, you know, it's, I don't know, man. It's a hard one. I do it, though. I will say that. And I've used it and it's actually saved me a ton of money. It's one of those in theory or in practice things. It's kind of like our last guest. In theory, the cash flow should be coming in from the property,

Starting point is 00:03:55 and I should be able to structure my finances around it. In practice, it never works out. In theory, a home warranty would cover these things that break. But in practice, they find every single chance they can to say, we're not going to cover it. We're going to make you fight us on it. Now, Rob, I believe you have a story that you could share about our Scottsdale property with its big expensive custom water heater.

Starting point is 00:04:13 Remember that one? Oh, my gosh, yeah. Yeah, we had a Scottsdale property. We had a home warranty, but, oh, here's the other. things. Sometimes this stuff falls on a weekend when most people are closed. Certainly the vendors at a home warranty company will assign to you, they'll be closed. And so you have to call the emergency repair person, emergency electrician, whatever. And you just have to, you have to buck up for that one. But I believe in our instance at the Scottsdale property, it was over the weekend and the guests

Starting point is 00:04:41 needed hot water. These guests are paying between one to $2,000 a night to stay at our property. So, you know, obviously they're going to say, hey, I paid a lot of money. I expect. hot water, which is actually pretty fair. And so we had to just get an emergency plumber out there to go to Home Depot or Lowe's and get a water heater. And I think we ended up spending like $3,000. And I called you and I was like, oh, dude, we have to spend $3,000. And what do you think? And you're like, well, what are our options? I was like, well, option one is we refund this guest five grand or option two is we spend $3,000. And you're like, well, spend the $3,000. But you were like, can we wait until, you know, Monday or

Starting point is 00:05:20 whatever. And I was like, we'd have to refund them anyways. So in that instance, it was a bummer because we had to pay $3,000 out of pocket when our warranty company would have covered it had we just waited like two or three days. Which is a luxury you have with a long-term rental, but not a short-term rental. So let's factor this at also for Rubin. It sounds like he's operating traditional rentals, but if it's a short-term rental, you may not even be able to use that home warranty. So that may factor into the decision. What type of property is it? And do you have the luxury of waiting for someone to go out there and fix your pool heater or your HVAC or your hot water or do you have to get it fixed ASAP and you're going to pay top dollar for it so the home warranty is not going

Starting point is 00:05:57 to help you. Just remember when you get these things that they're not guaranteed, salesman will always sell it like, oh, it's great, we'll take care of everything. But there's always fine print. So there's a difference in theory than in practice. So with that said, are you anti or are you pro? I am pro home warranty, but not for the reasons that Rubin is. talking about. So he's saying, I just don't want this cap X. Like, you're still going to have that

Starting point is 00:06:22 cap X. Oh, yeah. But you may be able to take a dent out of it by getting a home warranty. And you may get a home warranty. Like, I don't know that it makes sense for a brand new house with a brand new AC and a brand new roof and like all the pieces that are typically going to wear down. You're not going to need the home warranty. But an older home, you're probably going to get your, uh, more bank for your buck, which is funny because the people who buy the new homes and get home warranties are sort of subsidizing the people that are getting them on the older homes. I guess that's the game, right? We got to get in the home warranty game. I mean, I will say this. One time my dryer broke, and I called the home warranty company. I was like, yeah, no problem,

Starting point is 00:06:56 because I've had them cut me checks just straight away, like no problem. And then my dryer broke, and I sent them out. And then they were like, we've declined your request. And I called. And I was like, hey, uh, what's going on? Because you have to pay a, like a fee if someone comes out, like a serviceman comes out. You have to pay $150, like, a, uh, you have to pay $150, like, deductible. So I paid the 150. They declined my request and I called. I was like, what's going on? My dryer's broken. And they're like, yes, the dryer repair man said that you broke the dryer intentionally. And so we're not going to pay you. I was like, what? I was like, how would I break my dryer? It was like, mind blowing to me and they declined it. So that was one instance where I was like,

Starting point is 00:07:34 I hate home warranties. Home warranty fraud is on the rise led by Rob I was solo. Breaking dryers like he's breaking hearts. Exactly. I mean, granted, I should. should not have tried to dry 18 clay bricks, but, you know, that's a lesson learned. All right. We hope that helps you, Rubin. We're going to hear a quick word from our show sponsors, and then we'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value in the best markets across the country without making real estate your second job. That's exactly what rent to retirement

Starting point is 00:08:15 does. They're a full service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with Bigger Pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit BiggerPockets.com slash retirement to learn more. We all joke that rentals are passive, but if you're spending nights matching receipts or guessing what a property earned last month, that's not passive at all. Baselaine fixes that part of landlording,

Starting point is 00:08:47 the financial chaos. Their banking and AI bookkeeping system automatically tags every transaction, updates cash flow insights in real time, and builds the reports you need for tax season. You can even automate transfers and move money around without paying wire fees. It's just cleaner.

Starting point is 00:09:00 Sign up at baselane.com slash BP and get a $100 bonus. Baselane is a financial technology company and not a bank. Banking services provided by Threadbank, member FDIC. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy.

Starting point is 00:09:14 Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed, sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than non-sponsored post. The best part, no monthly subscriptions or,

Starting point is 00:09:39 long-term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of the show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash rookie. Just go to Indeed.com slash rookie right now and support our show by saying you heard about Indeed on this podcast. That's Indeed. Debt.com slash rookie. Terms and conditions apply. Hiring, Indeed is all you need. Running your real estate business doesn't have to feel like juggling five different tools, and the tools are blades or flaming torches. With ReSimple, you can pull motivated seller lists, skip trace them instantly, for free, and reach out with calls or texts, all from one streamlined platform. The real magic? AI agents that answer inbound calls, follow up with prospects, and even grade your conversations so you know where you stand. That means less time on busy work and more time closing deals.

Starting point is 00:10:39 Start your free trial and lock in 50% off your first month at reSimply.com slash bigger pockets. That's R-E-S-I-M-P-L-I dot com slash bigger pockets. And we're back. You're listening to the Bigger Pockets Real Estate podcast. Let's get back into it. Our next question is from Evan Nelson in Santa Barbara. Hey, David. I'm Evan Nelson and I am from Santa Barbara, California.

Starting point is 00:11:02 And my question is, I recently inherited a duplex here in Santa Barbara. the estimated value is about $1.3 million, and I would like to use the property as leverage to start a real estate investment portfolio. So my question is, if you were in my position today, what would be your strategy for beginning to invest in other real estate properties? I'm totally open to the idea of investing out of state. I'm really not sure if a helock option would be better than a traditional mortgage, but wanted to get your advice and I'm looking forward to hearing your response on the podcast. All right, Evan, thank you for your question. Robbie, what are you thinking? Okay, so little context. He's got no debt and the value is estimated at

Starting point is 00:11:48 $1.3 million. So he just owns this place free and clear. That's nuts. Inherit himself a Santa Barbara present, $1.3 million duplex, I believe it was. Well, I would say the temptation would be to get that money and go out and buy a bunch of stuff, but I would probably, I mean, if he's not really a seasoned real estate investor, I'd probably tell him to, you know, get a he lock and use that to maybe go do a smaller project to just cut his teeth a little bit in the real estate side of things. I think that could be a small flip, a small rehab, a small burr. But I would do something, he's got basically the access to cash to do any real estate project that he wants for a starter. I would probably start there versus going out and getting hard money and doing a flip and all that stuff. I would have used my my HELOC to basically as a gift. It's like amazing. I'd use that as a way to fund like a small flip or something probably. That's good. Okay. First question I ask when I'm in Evan's position here, when I own real estate like this, would I buy it like it is or would I not buy like it is? So for Evan, I think one of the questions he should ask is if I had $1.3 million, would I buy this exact duplex right now? Or would I not? If the answer is no, I would say, well, what would I buy instead with 1.3? Because that's maybe you sell it and put the money towards that. If you say, no, I like this duplex. I would buy it. Now that means you should keep it. Now we can move on to our other options with what you've got. Obviously, a duplex in Santa Barbara at $1.3 million is not very likely to cash flow very solid. Now it's paid for in cash, so it's. it's going to cash flow.

Starting point is 00:13:22 But if he puts leverage on it, that's a different story. If he was to borrow 80% of the value of this thing, I doubt it would cash flow. But it probably is going to appreciate over time. So we could work some portfolio architecture into this portfolio he's talking about right away. He keeps this property. He refies it. He pulls some money out. He's got a property that is going to experience what I call market appreciation equity.

Starting point is 00:13:43 It's going to appreciate faster than other properties in surrounding areas for the long term. Now he can balance his portfolio out by adding some cashling properties or using money to flip like what you said, Rob. The tricky thing is if he goes and he pulls 900 grand out of this thing or something like that, that's a lot of debt he's taking on. What does he do with that 900 grand? Is he going to go get himself into more trouble because he's a new investor? He doesn't know what he's doing. Well, that's what I'm saying.

Starting point is 00:14:09 That's why I like a he lock. Because a he lock, you don't really make payments on the helo. It's like a credit card. You don't make payments on it unless you use some amount of that credit line, if you will. So I like that. And I don't know if I said this, a home equity line of credit. That's what a HELOC is. It's basically borrowing against the equity of your property.

Starting point is 00:14:26 But I like that he has the option to basically have this big funding mechanism. And he can just take as much as he needs to start a project and see it through. Whereas if he goes and he does a refy like you're talking about, or like you just mentioned, 80%. He's in debt now and he has to make payments. And I think that's a tough treadmill to get started on, especially at the 900. $1,000 range. So I'd rather him just have the option to use his funds, but not necessarily use them until he's worthy. Right. So let's talk pros and cons he lock versus cash out refi. You do go to the cash out refi route. Pros lower interest rate. Cons, you have to use that money

Starting point is 00:15:05 for something because you're paying for it every single month. It's not flexible. Another pro, it is tax free. Well, and so will the he lock, but that is something to consider. Yeah, they're both going to be tax free. That's right. Now, the helock road, The pros are going to be, you have flexibility. You don't have to use that money because you put a HELOC on it for a million or 1.1 or whatever he can get. You don't actually pay a mortgage on that money until you use the money. The con is that you're getting an adjustable rate mortgage and the rate will be higher.

Starting point is 00:15:36 So because Evan is a newer investor, we're leaning towards HELOC because we don't want him to get stuck with all this money and not know what to do with it. But if this was Rob or me, it would make more sense for us to go the cash out refire. route because now we could go deploy a million dollars or 900,000 without as much risk because we're a little bit more experienced. So Evan, we think you should take the HELOC and learn how to play slowly, like Rob said. Try to flip a house at a lower price point, try to put money down on a vacation property and try your hand at short term rental investing or medium term rental investing. Maybe even take some money out to put the down payment on a primary residence. Get yourself a house hack or something like that. But don't go big. At the point that you feel like, I think I got this

Starting point is 00:16:17 real estate thing down. I know what I'm in for. Now you can talk about refinancing out of the HELOC into a cash out refinance, locking in a 30-year fixed rate, getting the lower interest rate, and then deploying the capital as you see fit. How does that sound, Rob? I love it. Yeah, that's good. Yeah, earn the right to use your 900K.

Starting point is 00:16:32 Don't come out swinging. The right way to use 900K with Rob Abbasso. There you go. You heard it here first. All right. Great question there, Evan. And congrats on the Santa Barbara Duplex. We hope that you're enjoying the shared conversation so far.

Starting point is 00:16:45 And thank you for spending your time with us. We love that the most. make sure to like, comment and subscribe if you're listening to this on YouTube and let us know what advice you would have given any of our guests today if you think that we missed something and let us know what your favorite part of the show is. Rob, so far, what's been your favorite part of the show? Well, I always like that every single question in, like on the surface sometimes feels like it could be similar, but it's just the really beautiful thing about seeing green specifically is how nuanced everything is in very basic categories. So,

Starting point is 00:17:18 allows us to actually give creative answers to like, hey, how would I spend $900,000? Like, you would think we have the same answer every single time, but genuinely, it's completely situational based on that person's circumstances, which is how this, I mean, this show always feels so fresh when we do it because of that. That's a great point. And I think it's better for people who are listening, because rather than hearing the story of what someone else did who may or may not have anything in common with you, the answers that we're giving here could be customized and fit for the individual situation that the listener is in. Some of them are experienced investors and they're like, got it, catch out refi. Here's the pros and cons.

Starting point is 00:17:52 Versus someone who's not an experienced investor who just got told, hey, don't listen to these stories of people that went and got 400 units in 14 minutes. It's much better to take this thing slow. I also really like not knowing the answer sometimes in like thinking through how I would think through this stuff personally because I know how I think about my basic philosophies and fundamentals in like the short term rental space or anything in my portfolio. But sometimes genuinely, these questions I'm like, all right, how would I approach this if I were in situation. It just, I don't know, keeps me sharp. All right, if you're enjoying this show, do me a huge favor. Please go and leave us a review wherever you listen to your podcast and make

Starting point is 00:18:28 sure that you subscribe to it. Apple recently redid their algorithm and a lot of our subscribes and listens went away. So if you go give us a comment, it will be super impactful and I'll heart you forever. All right, at this segment of the show, we like to go over comments that you have all left on previous YouTube episodes and you get to hear what other people are saying. Remember, if you would like to be featured on the show, you can either leave a comment on this YouTube, or you can head over to biggerpox.com slash David and submit your question there. Loose Smile says, I love this podcast. I listen to it every day while at the gym, and I've learned so much.

Starting point is 00:18:59 I'm truly grateful for everyone's knowledge that's being shared here. What a nice one. Rob, you're a gym going now. I see those muscles popping out of that shirt. What do you listen to when you're working out? So here's what I do. Okay. I can't always watch YouTube videos.

Starting point is 00:19:15 So what I'll do is I'll click them so that they're in my watch history and then I'll click out of them. That way when I go to the gym, I'll go to my YouTube history and start listening to all of the YouTube videos that I, like, wanted to get back to. And when you have YouTube premium, you can listen to it as a podcast. There we go. All right. Our next comment comes from Coach Anthony Burgos. Question, I'm currently paying 3% interest with my current mortgage and I have a lot of equity somewhere near 200 grand. would buying a property that already has a tenant that costs less than 200 grand be a smart way to invest?

Starting point is 00:19:49 And if not, why not? Okay, so the question is, is it a good idea to buy a property that already has a tenant in it so that you get cash flow right off the bat? Or do you think that's a bad idea, Rob? I think the real estate community in general agrees it's a bad idea. I don't think I know anyone that's ever been down. I think pretty much you sometimes you might, you'll read the only person that's down is the real estate agent who writes the description that says tenant already in place, like it's a benefit. But they're also the same agent that's like, location, don't walk, run.

Starting point is 00:20:22 So yeah, I would say, no, it's not a good idea. You want to screen your own tenant, meet your own tenant, build a rapport with your own tenant. Yeah, just because the previous owner slash landlord liked the tenant and had a good rapport, that doesn't mean that you're going to have that same relationship with them. and they always say buyers are liars, sellers are worse. So you can't necessarily trust the seller of the property when they say, oh, yeah. David, he's a great tenant.

Starting point is 00:20:49 He pays on time every month because it's probably a little inflated there. Here's a good rule of thumb. Very few people who have a car that's working really well think about selling it. And very few real estate investors that have a tenant that's a really good tenant want to get rid of the property with the tenant in it. You're usually inheriting a problem. Okay. That's a good way. So you're saying that every car on Craigslist, there's something wrong under the hood. There's a high percentage of people that are selling used cars that know the mechanic just said,

Starting point is 00:21:18 you're going to have to replace the whole thing. And they said, nope, just going to sell it and let somebody else take care of it. And I feel like it's very similar for real estate investors. Let me ask a bonus question. How about a leaseback? Whenever the owner that's selling the property says, hey, I would like to live there for three months at this predetermined rate. How do you feel about that? Different scenario. I'm okay with that. If the owner is going to lease the property back from you, that's different than inheriting a tenant. That's usually a person who just needs more time to find their next property. Okay. But that's like, that does kind of open up a can of worms on like the owner could technically, they could be an awful. I mean, they've already sold the house. There's no real repercussions there. So that could also be relatively risky, right? Well, you keep a deposit from them. We do this all the time on the David Green team. You get a deposit from the owner who is now a tenant because they're one of leasing it back from you for three months. So if they tear up their own house because you own it now, you take it out of their deposit. Okay. All right.

Starting point is 00:22:12 Sold. Good question, though. All right. Up next, we have a new listener question about starting out in an expensive market and using robot labor. Should we be worried about real estate values? We're going to get into that right after this quick break. People love to call real estate passive income, which is interesting because most of the

Starting point is 00:22:30 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. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with BiggerPockets for over a decade, and if you want to learn more, visit BiggerPockets.com

Starting point is 00:23:05 slash retirement. When I bought my first rental, I thought collecting rent would be the hard part. Nope. The admin crushed me. Every night was receipts, tax forms, and checking who was late on rent. I kept thinking, if this is one unit, how do people run 10? Baselane changed that. It's BiggerPocket's official banking platform that handles expense tracking, financial reporting, rent collection, and even tenant screening, all in one place. It's the system I wish I had from day one. Sign up today at baselane.com slash bigger pockets and get a $100 bonus. Baseline is a financial technology company and is not an FDIC insured bank. Banking services provided by Threadbank, member FDIC.

Starting point is 00:23:40 What if your CRM actually did the hard work for you? I know, crazy. ReSimpley lets you pull seller lists, skip trace them at no cost, and contact your leads by caller text without bouncing between apps. Then it's AI agents takeover. Answering calls, following up automatically, even grading your conversations so you can focus on the deals that matter. Everything's under one roof.

Starting point is 00:24:00 Design to simplify your day and scale your business. Start your free trial today and lock in 50% off your first month at resimply. slash bigger pockets. That's R-E-S-I-M-P-L-I dot com slash bigger pockets. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters more than ever in this economy. That's why I like mine. Unlike other property managers, Mind manages your property like an investment.

Starting point is 00:24:43 They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score, and they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. All right, welcome back. Robot labor, the Tesla robot. Is it going to impact real estate? We're going to be talking about that and student loans right now. Our next question comes from Adam Zamorik.

Starting point is 00:25:10 Hi, David. My name is Adams-Zamoric out of Boston, Massachusetts. I'm looking into purchasing my first investment property and just had a few questions regarding my situation. I'm a medical professional recently out of training, making good money, but I do have about $320,000 in government student loans. And I do have about $40,000 currently saved up. So my first question is whether or not you think it would be a good idea to even start

Starting point is 00:25:33 investing right now, given my high loan situation. and with the high prices here in Boston and the high mortgage rates. My current monthly minimum payments are fairly low since all the interest is subsidized as well. But now would be a good time since I had the money saved up for a down payment. So just wondering what your recommendation would be on that. Second, regarding strategy, I think house hacking is something I'm definitely more interested in, especially since I'm spending about $3,200 per month here in Boston. So I think that would definitely cover my expenses.

Starting point is 00:26:07 I am also kind of interested in the Burr method after listening to a few of your podcasts regarding building value in homes. My goals are definitely more in the way of building long-term wealth with appreciation. I thought since I'm in such a good market here in Boston for that, that that would be a good method for me as well. So I just wondering your thoughts on that. And then lastly, I do have the option for a physician mortgage where I can put little or no money down for a down payment.

Starting point is 00:26:37 I know interest rates are generally a little higher in that situation. But just wondering if you guys had any thoughts on that, I thought that maybe if I could put a little less money down, that I'll have more money to use for maybe a better property or even to pay down my loan a little bit. But any advice is appreciated. Thank you. Oh, boy. All right, Adam.

Starting point is 00:26:58 $325K. Is that what I heard? Yeah, I think that's exactly what you heard. How do we get him out of this debt? I think is my first question. And my thought is more like, oh, man, he's got to take like larger swaths of, he's got to rip like, you know, a few flips to really knock that debt down, I feel like. And he's probably not able to do that if he's a doctor or of some kind of a physician. So here's how I'm looking at it. He's got 325K on one side of the ledger, but he's making 250 to 300,000 on the other.

Starting point is 00:27:28 So that debt is going to be taken care of by the money he's making. It just means the next couple years of his life he should plan on making no money because it's mostly going to go towards the. debt. So I would put some of that 20 to 25k a month that he's making towards his savings, build up that 40K. The rest of it, I would put towards paying off that debt. And I'd be living on mac and cheese. I mean, not literally mac and cheese, but I'd be living a very frugal lifestyle, like you said, Rob, and so that debt was paid down significantly. But with the money that I was saving, I would just do the house hack. I'd buy a property. Yeah. I'd figure out a way to rent rooms out. You're probably not at home a whole lot. If you're,

Starting point is 00:28:07 you're a physician, you're going to be working a lot, and we're working overtime. So having roommates isn't going to crush you. And you have people at the hospital that are going to need places to stay to. People that work shift work are the perfect rent by the room tenants because you're never all at the house at the same time. And if there's a shared bathroom, you don't run into it with you need to poop when somebody else has to poop. That's always the danger when you're working the pad split model is the shared pooping situation. So he's in an advantage, I think, with some of the things that are going on here. And I still think he can house hack. He can also buy in some of the better neighborhoods in Boston. And he can focus on triplexes, fourplexes, really big properties that have

Starting point is 00:28:41 lots of bedrooms, properties that have basements that can be converted. There's a lot of flexibility and that physician loan allows him to keep more of that money in savings or put it towards fixing up the property because he doesn't have to put much down. That's where I'm thinking he starts. What about you, Rob? No, I think that's good. And he's open to house hacking. He's not going to be there. It's actually a pretty ideal scenario for both him and honestly, because he's in the medical world, he could probably march straight down to his HR department or the staffing department and maybe even work out like a midterm rental type of contract where he's actually housing people in his property for like a month or two at a time. And that would bring much higher cash flow

Starting point is 00:29:20 than a typical long-term rental. It requires a little bit more maintenance, a little bit more schmoozing, but he works at the hospital anyways. So perhaps he could do that. And he only works four days a week. So I think he could feasibly do something like that. He did mention that his interest rate on that debt is 1%. That makes me feel a little bit better. Dang, that's not bad. Yeah. Yeah. So that does take away some of the urgency of paying it down. And that his current rent is $3,250 a month. So house hacking can knock out three grand right off the bat. That's $36 grand a year. That could be like a significant chunk of the down payment

Starting point is 00:29:54 for a $36K. Yeah. Yeah. He could save $36,000 a year and knock out like some serious principal on that debt. Absolutely. and save some money for future houses. So if you play your cars right here, Adam, you can get out of this debt much faster than people who don't use real estate investing. So let's sum this up. You're definitely going to house hack. You're going to use that physician loan and you're going to buy in the best neighborhoods that you can and get your housing expense as close to zero as possible.

Starting point is 00:30:23 We'd like to see at $250 a month or less for what you're coming out of pocket. You're going to buy another house the next year and you're going to do the same thing. You're going to repeat this. You don't need to worry about burying right. now because there's no point of pulling money out of a property if you're not putting much money down. These physician loans give you a very low down payment option. So don't worry about a complicated burr and refinancing when you can just put low money down on the property. After doing this for several years, you should have three, four, five properties in great areas. You should have no or low

Starting point is 00:30:53 housing expenses yourself. And you should be making good money that you're putting towards paying this debt off. And there is a possibility that five years from now you've got $500,000 of equity in real estate and $300,000 paid off and you are 80% of the way to make yourself a millionaire. Yeah, then it really starts stacking up. When you got no debt and you're making that much money, yeah, you can become a millionaire in real estate. I'm not going to say pretty quickly, but much easier than most. It's a good salary. That's a great point. Yeah, so thanks for listening, Adam. Thanks for your question and make sure you're listening to our podcast while you're working those hospital shifts. All right. Our next question comes from Colin Smith in Colorado Springs.

Starting point is 00:31:29 This question is in regards to the seeing green episode talking about theoretical downfall of real estate values. Instead of population decline, another potential risk is testless human bot. If these bots could reduce the cost of construction and remove the human labor and error factors, plus construction could occur around the clock. Track home neighborhoods can be developed in lightning speed. This would not only apply to new construction, but home maintenance, repairs, remodels, make-readies, and cleaning. What are your thoughts on the downfall of real estate values, including rental rates,

Starting point is 00:31:59 If this idea comes to fruition, well, okay, let's talk about it. So he's basically saying if we can fix the housing crisis, does that squash home values? I mean, maybe, but I guess the flip side of that would be home values are lower so we can get in at a more affordable price, and thus cash flow might be more obtainable. But then there's another problem. The people that used to rent our properties were cleaners and handymen and blue collar workers, whose jobs were replaced by robots. So now they're not making money, so now they can't pay their rent.

Starting point is 00:32:33 Is that going to lead to more foreclosures? Hmm. Okay, well, that's interesting. Well, what do robots typically pay in rent? I think we need to know that first. How much are they willing to pay? We need to get all the criteria out there. Oh, I don't know.

Starting point is 00:32:50 I mean, first of all, I don't think this would happen all that quickly. There's all these YouTube videos that are like, this 3D printed house was printed in two days. And then it's like, oh, cool, how much is it? And it's like, $150,000 for this 10 square foot box. And it's like, okay. So we got a ways to go. I also don't think it's going to be around the clock because you still have to factor in neighbors and people being annoyed at construction noise and all that stuff. So I definitely think it's something that's going to enhance construction, but it's not going to take the place. I mean, you still need operators for all that stuff. So personally, I think that the best companies will just figure out how to utilize this type of of stuff to make better product more efficiently. It might create more margins, honestly, for the real estate community. But it's just a guess on my end. I've thought about this myself quite a bit. I was worried about 3D printed housing becoming super cheap and then the value

Starting point is 00:33:44 of the real estate going down. What I came up with was they're only going to be able to create 3D houses that are super cheap in the areas where you don't already have houses built. And we always build in the best areas first. So it's not like anyone's leaving that beachfront property. wide open while they're going and building houses the middle of nothing. So when they do put these houses up, they're not going to be in the best location. So if this is a concern of yours, prioritize location over the gratification of quick cash flow or cheap real estate, because that's the stuff I think that'll be most exposed if we do see disruption in the industry from these types of methods. Yeah, it's always going to be in the outskirts of city is like new suburbs and everything

Starting point is 00:34:22 like that. I mean, location, location, location, people, not to sound like a realtor here, but regardless, like you still want to be in the heart of a city. that will always carry the best real estate values. And you're not going to see, you know, you're not going to see a neighborhood of 3D printed houses in L.A. Because there's no land. There's all the land is taken. All the good land is taken in cities.

Starting point is 00:34:41 So you'll see this more on the outskirts. It might affect those areas. But yeah, I don't know if it's going to be like Joshua Tree. You might see people putting up a lot of these kind of properties on the desert. There's a lot of land, though. That's exactly right. So take that into consideration when making your decisions on what to buy, which is why I'm frequently saying stop looking at year one when buying real estate.

Starting point is 00:34:59 and start looking at your 5, 10, 15, and 20. Think about where the puck is going, not where it is. All right. Our next question comes from Nick Papadicus in New Jersey. I think it's Papa Dockeys. Papa Docis. So this is the person that Eminem battled in 8 Mile. Nick Papadocis.

Starting point is 00:35:16 Maybe. And Clarence parents had a real nice marriage. All right. Nick says, you often talk about one of the better strategies for investing in today's markets as looking for value-out opportunities through adding more bedrooms, bathrooms, ADUs, etc. How easy is it to add value to a property? Do you need to get building permits? Check with the zoning board. Get architects involved. If you have the score footage, when would you not want to add another bedroom? What's a good benchmark for payback period on the investment versus rent increase?

Starting point is 00:35:43 Separately, you often talk about one of the best ways to start out is by house hacking and renting rooms. Is it legal to rent by rooms and does it make the eviction process more complicated, sincerely yours, Papa Doc? Rob, what do you think about this? Is this? Is this legal? It isn't really your wheelhouse as much as mine. Yeah. Well, let's start with this first question. He says, how easy is it to add value to a property? Do you need to get building permits, check with zoning board, get architects involved?

Starting point is 00:36:09 Maybe. I guess it really depends on the jurisdiction. And it also depends on what level of renovation that you're going to do to a property. So for me, I added an ADU. If you're talking about adding square footage, especially on a detached property, it could be pretty expensive. You do need to get building permits. You definitely need some type of engineer to stand.

Starting point is 00:36:27 up your plans. You might need a draftsman or an architect to do it. So when you're talking about building an entirely new structure, don't really think there's a way to skirt around the red tape. Now, you could possibly add square footage to a property. Like, David, whenever you're doing your burrs, let's say you find a garage and you want to turn that into like a bedroom. Does that require permits or does it depend on the municipality? You know, funny question, everything requires permits. And I'm not exaggerating that. Okay. In Contra Costa County, where I live, in California, if you change the faucet on your sink, if you change the light structure and your house, if you take out the carpet and you put in linoleum, it's almost everything other than paint

Starting point is 00:37:09 will require a building permit. No, in L.A., you need a permit to paint the outside of your house. There you go, right? Yeah. The governments find ways to government, right? They find ways to give themselves more power and more control. And so they're going to come in and say, yes, you need permit. So the answer is almost always going to be yes.

Starting point is 00:37:27 But the real question is if I don't get the permits, will there be a problem? Now, that's a more nuanced issue there. A lot of people make home improvements on their homes and they don't get permits and no one ever cares. I don't think I've ever sold a home ever that had permits for every single thing that was ever done. Because when people change out their light fixtures or they change out their sink faucets, they don't go get permits. If you're going to be doing electrical work, plumbing work, adding existing square footage, it's almost always the better route to check with the city and say, what's your process look like? Am I going to have to go through an architect and an engineer?

Starting point is 00:38:02 Sometimes the answer is, yes, I've flipped houses before where they literally said, draw it out on a napkin. Give us something. Put it on a piece of paper, a little picture of what you're going to do, and our planning department will approve it. Yeah, so he's wanting to know now, like, when would you not want to add another bedroom? If you have the square footage, is there a moment where you're like, oh, let's not add another bedroom? I suppose it would come down to the comps, right? If you're looking at four bedrooms versus three bedrooms and there's like a pretty significant delta between both, you'd want to add that fourth bedroom.

Starting point is 00:38:32 But if you find that the property values are pretty consistent regardless, then I suppose that'd be an instance in which you wouldn't want to do it. But I feel like that probably is more on the rare side, right? Yeah, it is more rare. A lot of the times the city's like, look, if you tell me what you're doing, we're going to be okay with it. We just want to know ahead of time. And sometimes they say, nope, it's going to be all this work.

Starting point is 00:38:51 and then you get to make the decision on if it's worth doing it for you or not. So the work itself is usually not that complicated, but different government municipalities have different regulations for how difficult they're going to make this for you. Yeah, yeah, but in reference to his question about he was mentioning, when is it not right to do it? Like, when would be an idea, when would be a situation in which it's not worth it to add an extra bedroom? That would pretty much just come down to the comps, right? If that extra bedroom produces a great enough, to make the investment worth it. Yeah, and you got to remember that adding value to real estate typically comes in two main categories, equity and revenue, cash flow. So you may add an extra bedroom and it might add equity or it might not based on the comps. But if you're renting up out of the rooms, even if it didn't add equity, it might make sense for you because you might spend $1,500 to create a bedroom that rents for another $900

Starting point is 00:39:42 a month and you've made your money back in a month and a half, right? So when we're asking these questions, we need a three-dimensional view of what we're doing with real estate and that often doesn't fit in a spreadsheet. And I'm kind of getting the feeling from Nick here who's asking about this that he's a spreadsheet guy. He likes to say like, how do I put this into a formula to decide if it's going to make sense for me? So if you're going to be adding bedrooms or bathrooms, ask yourself how much cash will this add and how much equity is this likely to add. If you're going to be converting a garage into space, ask yourself, how hard is the city going to make it on me or how easy is the city going to make it on me? And is it going to add equity? Is it going to

Starting point is 00:40:19 add cash flow? Is it going to add a little bit of both? And you kind of put the whole thing together to make the decision. So you really need to look holistically at these decisions. Do the due diligence like talking to the city, looking up how much rent you're going to get for the room and looking at comps to decide how much value it's going to add to your property before you make your decision. Now, Nick's last question here said, is it legal to rent by rooms and does it make the eviction process more complicated? Rob, do you have any experience with rent by the room evictions? No, thank goodness. And I plan to keep it. it that way. I mean, I guess it depends on what state you're in. Actually, I'm pretty sure Florida

Starting point is 00:40:53 just, like yesterday, signed a bill that allows you to immediately evict a squatter. But that's not the case in most other states. I think regardless, if someone is staying at your property for longer than 30 days, the eviction process gets a little muddy. One of the ways that I've gone to like sort of prepare for this with my rent by the room properties is we put people on a month by month lease instead of the year lease so that if there's something that we don't like about the tenant, they're not getting along with the other roommates. They listen to music too loud. They don't follow the house rules or whatever. You don't have to like go through as big of a process to get them out of that property is when they're in the rent by the room system. And that is definitely a question that I would

Starting point is 00:41:32 run by either an attorney or a property management company that's had to do these before. Because it's tough for us to answer until we've done one. But I know there's so many people out there to have done this. You could easily put this in the bigger pockets forums and you get a ton of people that have handled rent by the room evictions that will tell you exactly where it went wrong, what they learned, and how they're avoiding that in the future. Yeah, I had a friend they were house hacking and they said, the person that was renting their room was like, yeah, I'm not going to pay. And they're like, all right, well, get out of here. And they're like, yeah, I'm not going to do that. And they had a squatter for like six months or

Starting point is 00:42:02 something. And they had to like coexist in the same house under the same roof for like longer than they should have because they couldn't get them out of there. So it does happen. It just, it's pretty rare. All right. In today's show, we had some great stuff. We talked about home. warranties, when to use them, when not to use them, and what you probably didn't know about them, what to do when you inherit $1.3 million of Santa Barbara goodness. When improving your property makes sense, when it doesn't make sense, and what you should know before you jump into it and commit, how to navigate $320,000 of student loan debt when you're an aspiring investor and, and most importantly, if real estate robots will change the industry as a whole. If you'd like to be

Starting point is 00:42:43 featured on a future episode of Seeing Green, go to BiggerPox.com. com slash David and you can submit your question there. If you like these shows, please go subscribe to the Bigger Pockets podcast and leave us a review on Seeing Green and what you love about it. Rob, thanks for joining me. You did a great job as always and I had a blast with you. I'm let you get out of here. This is David Green for Rob, my partner in Studs SUDs cleaning services Abys Solo. Signing off. Do you ever notice how every passive investment somehow turns into a very active lifestyle. Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10% below market value, and the best markets

Starting point is 00:43:43 across the country, without making real estate your second job? That's exactly what rent-to-retirement does. They're a full-service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with Bigger Pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit BiggerPockets.com slash retirement to learn more.

BiggerPockets Real Estate Podcast - 941: Seeing Greene: Are Home Warranties Worth It & When to Pay Off Debt vs. Invest?

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.