BiggerPockets Real Estate Podcast - 949: Seeing Greene: Is Losing $800/Month in Cash Flow Worth $200K+ Equity?

Episode Date: May 7, 2024

Would you buy a rental property that loses money every month? What if, in a few years, that one property could make you hundreds of thousands of dollars? Would the negative cash flow be worth the massive appreciation upside? Today, we’re answering that exact question from an investor who could be sitting on a wealth-building opportunity but doesn’t know what decision to make. Should he buy the "bleeding" property at a steep discount or give up this needle in the housing market haystack to avoid a cash flow trap? Let’s find out! We’re back on Seeing Greene as David and Rob, your go-to real estate investing experts, answer questions directly from BiggerPockets Real Estate listeners like you! First, an investor has a rare opportunity to buy “Grandma’s house” with over $200K+ in potential equity upside. The problem? It will LOSE $800/month! Next, a new property manager wants to know how to raise rents on a twenty-year tenant. Do you pay capital gains on the profit of your home sale or the entire amount? We’ll show you how to know how much you owe. Then, an investor debates selling his C-class cash-flowing properties in exchange for appreciating assets, and we explain the “sneaky rental” tactic that’ll take you to ten rental properties in no time! 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 Negative cash flow and one of the ONLY times it makes sense to buy a “bleeding” rental How to raise rents (the right way) on a long-term tenant  Capital gains tax explained and how much YOU could owe on your next home sale Whether to trade cash flow for appreciation and selling your rentals that don’t have room to grow  The “sneaky” rental tactic that allows you to scale a real estate portfolio FAST  And So Much More! (00:00) Intro (01:23) Losing $800/Month to Make $200K? (11:59) Raising Rents On 20-Year Tenant (21:28) Comment Section & Capital Gains 101 (25:47) Trade Cash Flow Portfolio for Appreciation? (33:05) The "Sneaky Rental" Tactic (38:20) Ask Us Your Question! Check out more resources from this show on BiggerPockets.com and  https://www.biggerpockets.com/blog/real-estate-949 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 949. What's going on, everyone? This is David Green, you are host of the Bigger Pockets podcast. Today we have episode 949, and if you don't know what a palindrome is, go check out Google because you're in one right now. We've got a great show for you on seeing green episodes. We get into listener questions from you, our base. We're going to be talking about what you could do to build wealth through real estate with

Rob adding his little spice into the seasoning. Rob, how are you today? Oh, you know, sounding like a gremlin because I lose my voice so easily after I go to conferences, but I'm hanging in here, man. And I'm excited to answer some questions. Yeah, we got some really good one. So in today's show, we get into a lot of different things, including how to allocate capital when you've got a bunch of properties, but they're not performing super well. What asset classes you can consider moving into if the one that you're in right now is struggling. How capital gains work on how you can use a cash out refinance to sort of get money out of properties tax-free.

And we start to show off with a great question about if somebody should buy a property that they know is not going to cash flow when they first buy it. All that and more in today's scene green. And most importantly, if you want a chance to ask your question, please head on over to biggerpockets.com slash David. The link is in the description down below. Pause this. Send us your questions and let's jump back in. Hi, David. I'm Tony. I'm from San Jose, California. My wife and I have an opportunity to buy her grandmother's house off market for about 860, and it's worth about a million 50.

It does need about 190 repairs. We're looking at possibly making it a long-term investment due to the equity and appreciation value that it has gained in the last couple years. Unfortunately, the rents aren't going for what the mortgage will be. would be upside down about $6 to $800 a month, but long term, would it be a good investment for us to maybe take the hit now without cash flow and potentially have a good investment later? We would have to make it our primary home, so we will offset some rent, but it's not going to be the full mortgage payment. What do you think, David?

Thank you. Ooh, Tony, man. I love questions like this. We're going to get into some good real estate investing conversation right now. This is the age-old question of which has caused me to be labeled a heretic and blasphemer of real estate sound advice. Rob, I just want to thank you for always sticking by me, even as people have criticized me for saying there is more than just cash flow when it comes to investing in real estate. And questions like this highlight the age old question, Sith versus Jedi, orc versus elf, and cash flow versus equity.

So let's break this down. Tony's got an opportunity to buy his grandmother's property in San Jose, which is a high appreciation market in the Silicon Valley area of California, where all the tech companies are. If you have an iPhone, it was probably made down there. He could buy it for significantly under market value, which I call buying equity. So he's going to be in for 860.

worth about a million 50 needs $190,000 worth of work, but I am assuming if he spends the money to fix it up, that will also increase the ARV by at least that same amount. Otherwise, when it makes sense to do the work. Not really. The problem is it's not going to cash flow. He's going to be bleeding $600 to $800 a month when he first buys this property. So I've got a way of looking at deals like this. And we're going to get into that in a second here. But we're going be talking about if someone should ever do something like this. A few other details to include if he buys it from her according to California's Prop 19, he won't have the value, the property's taxes readjusted. He'll be able to take over whatever the property taxes are currently,

uh, if it's grandmother or grandfather or father mother to, do I say that wrong? You could say, no, I was going to say, you could say if he, if it's grandmothered in. That's probably exactly where that phrase came from. That's exactly right. So he'll go. get to keep those old property taxes, but he'll be bleeding $600 to $800 a month. All right, Rob, let's start with you. Is this a hard no? Well, I have questions. I have questions about this. So let me ask this clarifying question. He mentioned that he may move into it as a primary residence. And so if he moves into it as a primary residence, do we know how much his monthly, I don't know, his monthly rent or his monthly situation would change? He didn't say anything about

that. He just mentioned he'll be bleeding 600, 800 a month. So let's take this question from the perspective of it would be a pure rental because that's how most of our listeners are going to be assuming. Okay. So generally, I'm very anti-cash flow. I'm sorry, I'm very anti-cash flow, meaning I don't really like inheriting properties that are going to lose me money every single month. But I would say considering this isn't like the one most prime market in existence, which is San Jose in terms of appreciation, this is a very rare scenario in which I'm like, okay,

I do actually think there's an appreciation play there because historically San Jose has paid off really, really, really big for anyone that inherited or ever got property at any point in the past. So I think as long as he feels like he can afford it, you know, bleeding kind of gives the impression that maybe he can't afford it. And so if that $6 to $800 is going to be detrimental

to his financial situation, absolutely not. I would probably just sell it, take the money and go. But if it's an expense that he's willing to put up with for two, three, four, five years, then it's definitely up for consideration. How do you look at it? I have a framework that I look at these deals through involving 10 ways you make money in real estate. We've already talked about buying equity.

That's one of them. He's buying a buttload of equity here. So that's a really good deal. I don't love buying a property that's going to bleed money if it's always going to bleed money. So I wouldn't want to do this in like, you know, the minimum. West, $70,000 house, rents are not going up. That's a different story. But I talk about something called market appreciation cash flow, which is buying into a market where rents are likely to continue appreciating every year more than the national average, as well as market appreciation

equity, which is buying into market where the value of the property is likely to continue increasing over the years at more than the national average. San Jose is very strong in both of those. So barring any unforeseen circumstances, those rents are going to be going up a lot. And after a couple years, he's not going to be bleeding money. And after a couple more, he's going to be making money. And after a lot more, he's going to be making a lot of money and have a lot of equity. So this is really a question of delayed gratification versus immediate gratification. He's going to feel some pain in the immediateness because he's going to be not covering the mortgage. But he's probably going to make an insane amount of money over

the long term. So now we move into how do you do this wisely if you're going to do it? Well, there's a couple ways. We talk about portfolio architecture. Do you have other properties in your portfolio that are cash flowing solid, maybe something you bought years ago that also benefited from market appreciation cash flow that provide cash flow that would cover the money that you're losing on this one? Now you're balancing your portfolio. I'm taking some cash flow away from these houses to get a long-term equity play with this one. So I'm getting all the benefits of long-term equity without the risk of losing the property foreclosure because I'm pulling cash flow from somewhere else. Do you have a great job and you live beneath your means? Well, you've got cash flow

coming in from work, even if it's not coming in from your portfolio, in which case this becomes less risky to someone who is living beneath their means versus someone who's living paycheck to paycheck. And it's these details that stop you from being able to just tell people always buy cash flow or always buy equity. You have to look at your specific scenario. And my advice is to construct your life in a way that you can buy amazing deals like this one that he's being offered without having to turn them down because you're in a financially strong position. Yeah. Okay.

So something else to consider it here is that he said that he's losing $600 every single month. I mean, I'd imagine that he's probably not exactly losing that because of debt paydown too. Do we think that he's buying this like with a brand new 30 year mortgage or do we think he's kind of walking into, I don't know, like a subject to or something like that? No, I think he's probably going to be getting a new mortgage from the way he described it. Okay.

So he'll have a little bit of debt pay down, but probably not in the amount of time. Yeah, it probably won't be that significant here in the first five years. I like where you went, though, because that's another one of the 10 is loan paydown. If he could take over a mortgage that's already 15 years into being paid off, he's paying off significant principal every single month, which makes, even though he might be losing $600 a month in cash flow, the principal reduction could be $2,000 or $3,000 a month, which means he's actually gaining wealth. Yep.

And then the other thing to keep in mind is that he does have the equities. So while he's quote unquote bleeding $6 to $800, when you think about what you're actually losing over the course of, let's say, three years. So if it's $600 times 12, what is that, David, you know? 600 times 12. Yeah. That would be $3,600 times two. There you go.

Okay. So he's going to lose $7,200 a year. And that's $7,200 times, let's say three. He's going to lose about $22,000 in the next three years, quote unquote. That's what he's going to bleed. However, he is walking into multiple six figures. of equity. So if he does kind of like that overarching math, he's actually not losing any money at all. Not at all. You know, he has, and it feels that way every month and maybe technically from

his bank account standpoint, he is. But from the net worth side of his entire life, he's not actually losing any money. He's walking into a pretty good situation. So if that's something he feels like he can weather for a few years, and that's definitely, that's definitely a deal I'd take. because it seems like if he can hold on to it until he's maybe even in a stronger financial situation, eventually maybe he can do a value ad. And he can put $180,000 into this property because that's how much he says it needs and repairs. And if he does that, then can he increase the equity from $300K to $4,000 or $600,000? And that's where the wealth really starts compounding.

Well said, Rob, you're actually speaking right out of the framework of my last book, pillars of wealth. People can pick that up at biggerpox.com slash pillars where I talk about how we typically only look at energy in our bank account or in our wallet, but there's actually energy in your stock portfolio and there's energy in your real estate. We just call it equity. And like you said, when you look at it from the big picture, you're like, all right, I'm going to be losing $21,000 over three years to gain $250,000 or so. Like, that's an incredibly good return. And that's not even considering the fact that rents are going to be going up over time. And real estate investing is this is what it's really like to do it. It is more complicated than purely a cash on cash

analysis, although that's very important. It's a fundamental. It's understanding it. It's not the only thing you have to be good at. Maybe like playing basketball. You got to build to dribble the ball, but it's not all about dribbling. There's other things you have to take into account to be good at basketball. Same thing for real estate investing. So well handled Rob. I really like your perspective there. Yeah. Well, good for you, Tony. Sounds like a great, great house. Keep us updated. Come back with another question when you have an update. Yeah, Tony. And if you're looking for some good Mexican, I recommend La Victoria in San Jose. Make sure you get that orange sauce.

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Ready to unlock your property's true potential? Visit hostfinancial.com. Don't let old school lending hold you back another day. That's hostfinancial.com. All right. Welcome back, everyone. We're going to be talking about how to handle my portfolio and a couch. capital gains question after that. All right, our first question comes from Lauren, who writes

in the real estate rookie Facebook group. I am a first time property manager for a long-term duplex. The first floor tenant has been living in the house for 20 years without any lease. As the former owner of the house was her sister and her rent is only $600, which is basically free. The new owner, my boss, has already told the tenant that there would be a lease incoming and the rent increase once I arrived. The market price for the apartment in its current state is about 950. I'm looking for advice as to how to best handle the rent increase. It seems unfair to me to ask someone to pay $300 more without a lot of notice, but it's also unfair to expect to pay so little, and I know she's expecting to pay more. How would you go about a timeline in rent increases and

creating the lease? Interesting. Yeah, so this one seems right up your alley. You've probably come across this a few times in your career, I'd imagine, huh? Oh, God, all the time. Like, one of the biggest mistake investors make is thinking that they're helping somebody by keeping the rent low. And then later on, they need to increase it or that person, maybe the property falls into disrepair and they realize I need to spend all this money to fix the place up. But I'm not getting rent. I have to charge more rent to make up for this. And the tenant is upset about it. So Rob, I know that you love conflict and you love hurting people's feelings. How would you go about handling this?

Oh, with the baseball bat in my hand. No, I'm just kidding. It's a tricky scenario, right? Yeah, I'm a softy, man. I am not good for this. This is why I go to short-term rentals. I don't have to deal with this ever. But typically, it kind of lands as a one-two punch.

So I would have the conversation over the phone. I would let them know that there's going to be an increase, which sounds like Lauren did. And I'd say, hey, just so you know, the new property manager, the new boss, new management, whoever you want to call it, they're in place. We will be increasing rents.

I'm not sure what that is right now. I'm going to get you an answer at the end of the day. I'm going to send you an email and then we can check in afterwards. That way they kind of understand and you can sort of have time for them to sort of process it. You can process it. Then send it in writing formally that same day so that you can kind of get all the numbers out there. Let them digest it. You can digest it because I think what you don't want, in my opinion, you tell me if I'm wrong here,

but you don't want to be like, hey, I know you're in 600. We're going to actually increase it to 900. And then it becomes an instant tense negotiation. where someone's going to back down or it's going to end very poorly, whereas I think if you send it in an email, it's in writing, at least people can both like process it on both ends and then you can discuss it. What do you think? I love it. And it has nothing to do with the fact that an email allows you to avoid the discomfort of this conversation at all, right? No, no, because I think you can still have it. I think you can still have it. But it at least gives them their opportunity to come up with maybe more non-emotional. rebuttals that you're probably already going to be prepared for. So it's like drop the bomb and let everything kind of settle before you actually have the

conversation. Yeah. Say, hey, just checking in. I wanted to talk. I know it's a lot, but let's let's get into it. And then you can kind of explain it a bunch. All right. Lauren, here's what I'm going to break it down. First off, Lauren and anyone listening who finds themselves in similar situations, even if you're not a real estate agent, check out my book at biggerpox.com slash skill. There's something that I call baseline adjustment. And it has everything to do with. what we consider fair. So if you think about what makes you happy in life, it's when you got something better than what you expected or what you thought was fair.

You go to La Victoria, a Mexican restaurant, and you order a burrito, and they put in a little street taco. Cost them 45 cents, but you're like, that is so cool. I was not expecting that.

But if you happen to go and buy a burrito that you thought came with two tacos, and they only gave you one free taco, you feel like you just got ripped off. Even though objectively, that's not the case. Expectations determine how happy where if you can exceed expectations, you will be happy. And if you fall short of them, the person won't be. Rather than fighting with someone over a free taco, it's so much easier to just adjust expectations. Here's what that would look like. I would go to the tenant and I would say, hey, here is a list of other units in similar

condition in your area and what they're renting for. And I would use the best cases with the highest rent. So I'd probably be showing she said it's around 950-ish. I'd find the ones around around 975. And I'd say, this is what current market rent is. However, you've been a great tenant. So we are willing to rent to you for only $900. You've set a baseline at 975, and then you said, I will give it to you at 900, which looks like a win for them. But the person who's receiving this is thinking 600 is fair market rent. Maybe they were expecting to go to 650. So the 900 looks like a big jump if the baseline is 600. You start by moving the baseline up to 975. Then you give them your number, which is significantly less than the baseline, making it look like it's a better deal for them.

And it is still $50 less than the $9.50 she thought she was going to get. Now if the tenant says, I cannot afford it. It's not a matter of them thinking that they were ripped off because they see what fair market rent is. It's them of their own volition choosing. I don't want to pay that higher rent and I'm going to move out on my own. Much better than just saying, hey, here's what the rent is. is now the tenant has to figure out is 900 fair is 950 fair am i being ripped off can they even increase rent by 50% at one time all of that makes them think they're the victim and they're being ripped off versus if you start with setting the baseline where you want it and adjust from there so i got a question so do you think it is better to show properties that are more expensive like you said

like a thousand bucks nine 75 or do you think it would be better to show what they could actually get for $600 and say, hey, by the way, $600 apartments in this area, this is what they look like. I think you do both. That's a great point. That's a great point. I mean, you've sort of set the ceiling and the floor by bringing in what you did. I like that, Rob. Drapping a little bit of that orange sauce salsa on my on my taco. I'd imagine that there's the benefit of doing something like that would be that you're kind of showing them not necessarily like, hey, you've got nowhere to go. But like, hey, if you decide to not move forward. with us, if you want to stay in the same budget, you're going to be taking a pretty drastic

dip in quality. And so it's best to kind of like work with us through this. That's exactly right. You're showing them, hey, this is market rent. And so I'm giving you a discount. And then you're also saying, but if you don't want that discount, here's what you can expect to be walking into. You've now set two very good baselines for that person to see. The obvious right choice is to pay that $900 and be grateful that it's still $50 to $75 under fair market rent. All right, Lauren, so cutting to the chase, I say you go right for fair market rent right away. I don't like the idea of building up to what fair market rent is. And if she can't afford to pay it, then like Rob said, she just looks at what apartments you can get for $600. And I don't think you need to feel bad

about that because she was getting a discount the entire time. theoretically, she's been saving $300 a month for God knows how long off this rent. And so that's a win for her. There's some gratitude that should be there if the person understands what fair market rent actually is. I think there's a little tricky kind of thing that we sort of glazed over. Maybe it's not as big of a deal as I'm thinking, but I feel like it is. She said that this tenant doesn't have a lease and has been in this property for like 20 years. Yeah. So they're a tenant. I'm sure if they were like, hey, I'm going to stop paying. It wouldn't be that easy to just get them out of there. So there's something to be said about how can you diplomatically approach this in a way that's going to basically not make them

squat, right? Well, I think you have to treat them like a new tenant. Can this person afford the rent? Do they make enough money to build to pay that rent, right? Like, you still have to screen them if you want to take them on as the tenant moving forward the same way you would if it was any other tenant. You're not going to treat them any differently than your next tenant. Their debt to income ratio can't afford that rent. You're going to have to come up with a plan for how they can move out and get somewhere else before you put a lease together. But Lauren also did ask about how could I put a lease together because this person hasn't paid one at all. Start with an estoppel certificate where the tenant's basically going to say, hey, here's,

what I've been paying for rent and here's what is an apartment is mine and here's what belongs to the owner as far as appliances or other things like that. Once you've got that in place, you can construct a new lease. But again, screen this tenant the same way you would, a new tenant that you'd be putting in there. Use the same standards for everyone. Make sure you're biting by fair housing laws. You don't want to get yourself into a situation where you're expecting more from this person than you you would from a different tenant. But I mean, are they buying this house and they get to keep the tenant or not keep the tenant? Yeah, if they don't have a lease, then like they don't have a right to be there. Yes. I guess I feel like that depends on the state. There could be some, like, there could be some

laws that don't apply to contract law. There could be like some specific protections, which Lauren didn't mention, which state there is in or how that would go. So I usually talk to property managers to get a background on that. We're having to assume that there's not additional protections outside of what would fall under standard contract law. Fair, fair, fair, fair. And if you want to know more about ways to use, what we call the binder strategy. We talked to old Dion McNeely. Great head of hair on that guy. Head over to Bigger Pockets episode 448

or the Bigger Pockets rookie podcast, episode 369 to learn how Dion handles situations just like this. All right, thanks for sticking with us. We're going to get into some capital gains questions in just a moment. But first, let's get into some of your comments. And remember, as always,

make sure to like, comment, and subscribe to our channel. Let us know in the comments what you think about today's show. if you've ever been to La Victoria in San Jose and like their food, and if you want to be featured on an episode of Seeing Green, head to biggerpox.com slash David. All right, our first comment comes from episode 941 where Hardy K-H said, I love your shows. It's hard to know what to do in the current real estate environment, and I always appreciate your wisdom and guidance. Clearly Hardy was

referring to Rob on this one. Thank you, Hardy. I appreciate that. Next, we've got Shibi 189. I feel like I sound like a DJ at 97.9 because I've got my conference voice. Great content. I really enjoyed the comedic portions of the show. Good balance of education and light comedy. I about died when David quoted, 8 Mile. Laffy cry emoji. I've never heard a person say out loud, laughing cry emoji.

Is that like when Siri reads your text back to you? Yes. Laughing cry emoji. I wonder who at Apple names the emojis. We're going to call this one the Yas. We're going to call this one dancing ballerator. Like, who has that job? Someone has it, which is interesting, like emoji namer.

If anyone works at Apple and knows how this happens, we want to know. All right. Up next, we have Mitchell Blodgett 239. Quick question, do you pay capital gains on your net profit or the sales price of an investment property? And second, if the answer is net, why don't you cash out refinance prior to sale? Thanks. Ooh, this is a great question.

And our producer Eric crushed it here. What do you think, Rob? Okay, so you are going to pay capital gains on your net profit, not on the sales price. And the reason that you don't want to do a cash out refi prior to the sale, because it's not about being in debt. It's about the cost basis of the property, meaning like what is your actual cost to get into that property? And what is the profit on it, regardless of if you took out like cash out and you took out debt. Because I know a lot of people say, well, if you have debt, you don't pay taxes on debt. I know that's like what Kiss Hockey's main thing. He always kind of emphasizes that point.

But cost basis is the thing to keep in mind whenever you're selling a property. Very great. I actually had a client who ran into the same exact problem. We were trying to sell her property in Oakland and she had done a cash out refinance first. Mitchell, you're mixing up the net profit with the equity in the property. They are often the same thing. So that's a normal thing to get wrong, but they're not the same. So let's say someone buys a property for $500,000, sells it for a million. That's a $500,000 profit, assuming there weren't realtor expenses and closing costs because you could write those off as well as improvements that you made.

Okay. But if you paid the property down to $400,000 before you did it, you'd actually have $600,000 in equity, but you'd only have a $500,000 gain. They just look at what you bought the asset for and what you sold the asset for. The cash flows that it made have already been taxed. The loan paydown is not included in the game here. They're just looking at the sale price and the price that you paid for it. The cash out refinance confuses things because if you took out a loan and now you owe $800,000

on the property and you sell it for a million, what Mitchell's thinking is, is you're only going to get taxed on $200,000, but you won't. You'll get taxed on the full $500,000 and the government will say, well, you already got that money out of the property, right? you don't get to avoid paying taxes on it. Okay, let me just clarify that you're right. I was wrong. I said it's net, but I did eventually correct myself and say it's more on cost basis.

So we got there in the end. We know what you meant net after all of the expenses. Those are included in your net. Yeah, good job, Rob. Thank you, thank you. All right. Up next, we're going to be talking about how to get up to 10 conventionally finance homes and what to do with a situation involving portfolio architecture and asset management,

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seeing green repeat guest, Tommy. about steps to take to get 10 finance properties. Hey, David. My name is Brad Huntin from Granbury, Texas, and my question is, what do I do with my current portfolio? I currently own 16 long-term rentals across Texas and Louisiana, with 11 of them being Class C properties in West Texas. While on paper, the cash flow looks amazing. I rarely hit the projected numbers. I have an opportunity to sell the C properties for a substantial profit, and I'm seeking advice on what to do. I have private money loans totaling around $100,000 at 10% interest for the next four years. So my two-part question is, do I keep these properties now that most have been renovated

and use the cash flow to pay back the private money loans? Or do I sell and pay these loans back with the profits and use the remainder to buy into class A or B properties in the Dallas-Fort Worth area? A third option is do I keep the loans and roll them into a higher-class property with little to no cash flow but substantial appreciation with a plan to cash out refine four years to settle the debts. Thank you. Well, thank you, Brad. You got yourself in a pretty good scenario here. You've got a lot of equity.

You've got a lot of cash flow. And you've got plans to grow your portfolio in the future. So, Rob, what was jumping out at you when you were listening? Okay, so I guess here's my thought. He kind of answered it pretty beautifully himself when he was giving his options. But he said that he's buying in C class properties. he's rarely hitting the projections, but it does sound like maybe he's cash flowing. Maybe there's a lot of expenses that come along with these houses that are unexpected,

and that's why he's not hitting his cash flows. And then he said, well, I could sell them out of substantial profit and then get into more A or B class properties. I think that's probably what he should do, because he may get into less properties, but given that he is kind of interested in the whole high appreciation thing, I think he's going to see more appreciation in the A to B class properties and neighborhoods. And lastly, he also mentioned that he has a lot of private money debt at 10%. And, you know, it seems like he's maybe in the mid-middle slash backside of his like investing career.

I don't want to be too presumptuous here. But I feel like at this point, the faster he can get out of some of his high-inch's debt, the better. And he can start kind of, I don't know, rounding third base on his investment structure. Did you play baseball? I quote unquote played football in the ninth grade. Well, apparently you watched Sports Center before we recorded today. So well done. That was me, man.

I used to work for Gatorade. And when they interviewed me, they were like, so how much do you love sports? I was like, love them. And then when they hired me, they're like, this guy lied. Didn't you come up with names for professional athletes like Peyton Manning, like nicknames? I mean, yeah, occasionally. That was part of your job. What was his name, the sheriff for the marshal or something like that?

Yeah, the sheriff. I didn't come up with that. Someone else did. But I came up with the cartography. For who? For Peyton Manning because he makes maps. He's a map maker, routes. I don't know.

It didn't really work. It didn't get picked. You found your place hosting the Bigger Pock's podcast. I guess so. Say that. Our win, Gatorade's loss. All right. Getting to Brad here.

First off, Brad highlights a very important point. The properties that look great on a spreadsheet often don't work out that way in real life. And this happens more often than not in the bad areas. Brad referred to these as sea areas. it sounds like they might be more C-minus type properties. And this is especially true when your properties are lower priced. And you have to think about the fact that things break in real estate whether they're cheaper expensive.

But a new roof, a new air conditioner, a new water heater are a small portion of the overall value of the property and rent when it's an expensive property. They're a big portion of it when it's a cheap property. And this is one of the reasons that people think that they're going to go get cash flow. and then they find out that it's more like cash, no. It doesn't actually come in. So I'm inclined to think that Brad should sell those properties and 1031 them into some of the areas where he's going to experience higher growth.

That's not only in equity. This is also cash flow growth, right? So I'm working on a book right now that talks about how you identify those areas. And if I'm going to sum it up, it's basically a function of tenants that are willing and able to pay higher prices. So if you buy in markets where jobs with higher, wages are being introduced and there is constricted rental supply, rents have nowhere to go but up and your tenants can still afford to pay them. So identifying those markets and moving

your portfolio there basically guarantees that you're going to see increased rents every single year and with that increased cash flows, if he leaves a portfolio where it's at and there's no reason for rents to go up, he's going to have the same problems in 10 years that he's got right now. What do you think, Rob? Yeah, yeah, that sounds, that's exactly right. What are your thoughts on the high interest debt? Do you feel like he should get out of that? he close with him cruising on that for now. I was wondering why he's got 10% debt if he could just catch out refinance some of the houses at like 7% or 8% and paid off that way. Maybe he's not showing income so he's not able to do that and if the properties aren't cash flowing. I was wondering

why he had debt at 10% when he could get a mortgage that would be less than that. My thoughts would probably be move the properties into an area because they're not cash flowing anyway, meaning his expenses, sorry, his maintenance and his capax and his vacancy are probably too high. You move it into an area where you have less of that. And even though your mortgage could be higher, I'd rather be paying money towards a mortgage than I would be just thrown it away to maintenance and vacancy. And then you start taking the cash flow and paying off the debt. Maybe you take some of the properties that you moved over.

You do a cash out refinance then, and you pay off half of that $100,000. And then you tackle the other half with the cash flows from the properties that you bought. Yeah, I like that. I think I'm a little bit more in favor here of just consolidation. If he's got a lot of long-term properties that aren't really killing it for him. I mean, it sounds like he's got some cash flow. But yeah, I'd say triage and get into something that's going to treat you better over the course of like the next few years from an appreciation standpoint. I mean, it'd be wonderful if he could sell 16 properties and buy two fourplexes in a really good area or two short-term rental.

in a good area, and then he could just manage those short-term rentals and get a lot more cashful with a lot less time and then use the money from that to pay off the $100,000 and find himself into new asset class. So, Brad, let us know, are you open to the idea of a new asset class like short-term rentals, medium-term rentals, small multifamily, or even an apartment complex, right? What if you sold 16 single-family homes, bought one 24-un apartment complex or something with the money and manage that? I bet you that would be less of a headache than having 16 individual homes.

man, I remember my single family portfolio, got to like 50, 60 properties, and you would think that it was passive income. It was anything but it was very frustrating. Pretty much every two to three days, it was another maintenance request coming in, another problem happening with the property, another thing that I had to try to figure out. And I realized it was very inefficient to scale with that asset class. Well, as we often say on the pod, the cheapest houses are the most expensive. That's really good.

Thank you. Our next video question comes from our old pal Tommy. Hey, David. This is Tommy from San Antonio again. Following the steps as you laid them out, love house hacking. We close on the duplex. So now I have two properties on my VA loan. Going forward, trying to stack up to 10, I was wondering, can you give me three actionable

steps to make sure that I can fill up using conventional loans multiple times over and over, ideally moving out every year. Is it just bringing in the most income that I can in each year or what particular guidelines, any suggestions you have would be appreciated? Keep rocking it. Okay, so I think I know what he's saying here. Basically, we always talk about on the show how house hacking is the ultimate catalyst for wealth.

And you often talk about how, hey, you can buy a property for three and a half percent down and then you can live in it for a year. And then after that year, you can put three and a half percent down again. on another property and move into that one. So I think he's looking for more of like a bulleted action plan on how someone would actually achieve that. Yeah, and I'm going to recommend the sneaky rental tactic to our old buddy Tommy from San Antonio.

The sneaky rental tactic, it's really, I mean, a lot of these strategies are really simple, but we give them cool names like Burr and house hack. It basically just means you buy a house with a primary residence loan, which is incredibly powerful. You get a slightly better interest rate, but you get way lower of a down payment. I mean, if you just think about the difference between putting 3% down and 20% down,

you can buy almost seven houses with 3% down, then you could buy one with 20% down. It's crazy. You don't even have to save that much money. And often if you're house hacking and saving on your mortgage, that is going to provide the 3% in savings that you would need to buy the next house. So you house hack one time, keep your mortgage lower. That provides your down payment for the next one.

And you just move every single year. That's why people don't do it. They just don't want the discomfort of having to move. Instead, they'd rather have the discomfort of working a job that they hate for 40 or 50 years and going into retirement broke. But if you can live like no one else now, you can live like no one else later to quote her old buddy, Davy Ramsey. So that's what I say is you buy the house of the primary residence loan. You live in it for a year. Then you move out and buy another one and make the one that you bought into a rental, just like Tommy did with this duplex.

And we just called the sneaky rental strategy because you bought a rental property, but you did it completely. legally with a primary residence loan being sneaky. Yeah, I mean, and I think, you know, I wonder if there's anything to say about like, obviously three and a half percent, the reason that this is such a good strategy is because it really, you know, on most houses, let's say they're between two to 400,000 bucks. I mean, on the high end of that, let me do that math really fast. On the high end of that, it's like 12,000 bucks, right? So that means you have to figure out how to save an extra $1,000 every single month for the

next year to save up enough money to put down on the next property. So figure out what kind of side hustle, can you take extra shifts, can you work an extra job? Is there something you can do? Can you sell your time? Obviously, that's not the best approach when you're trying to scale, but considering you're closer to the beginning of this, maybe your only option. But what can you do on an hourly basis? What can you build? What can you sell? Can you consult to make an extra $1,000 every single month so that you actually have enough runway to buy a new house every single year. A lot of people know they should budget money, but they don't. Well, you know it makes it easier to budget money when you have a goal. And for those of us that love real estate investing, that next house is a powerful motivator.

So if you couldn't get yourself to budget your money before, now that you know you want to get into real estate investing, it can make it easier. You'll build better financial habits. And ultimately, I think you'll live a better life when you're not using retail therapy to solve your problems. Now, that's one of the reasons that I don't share the whole use other people's money, do something creative for every single time. There's nothing wrong with doing those things, but don't make them your bread and butter. Don't build your entire foundation on, I just want to go around the obstacle, go through the obstacle, and then once you've got a good amount of equity and you're someone like Rob Avis Solo,

who knows how to manage real estate, you can use some of these creative strategies to accelerate your gains, but not to get yourself started. So, tell me, you're on the right path, my man. Like, just buy a house every single year and ask yourself, what do you have to do to buy it and what type of property do you need to buy so that we'll cash flow when you move out in a year. Hey, one final question as we wrap this up, Dave. So obviously he's trying to acquire 10 properties here. And if he's buying a property every single year, is that debt stacking up against his DTI? Is he going to actually be able to qualify for 10 houses in 10 years if he's got,

you know, a lot of debt from all these houses that he's accruing? It is a good question. He'll be able to use the income that he's getting from his renters and also the debt that he's taking off. And The problem is that first year. So when he's living in the house, he's not going to be able to use any income that he's receiving to help qualify for the next one. But once he moves out of it, if the mortgage is $2,000 and he's collecting $2,000 from the tenants, they basically offset themselves. And so your debt to income stays relatively the same. Got it. And as Eminem said in the sequel to 8 Mile, I believe it was called 9 Mile, house hack to house stack and avoid anything.

that's house whack. All right, everyone, that wraps up our show for today. Thank you so much for joining us and let us know in the comments what you thought about today's show. And if there's anything you think that we didn't cover as well as what you think we should cover in future episodes. And remember, you can head over to biggerpox.com slash David and submit your question there. If you like seeing green, make sure you subscribe wherever you listen to podcasts. You need Apple or Spotify or Stitcher to tell you when new episodes come so that you don't miss anything because you never know what type of education, wisdom, and lighthearted comedy you're going to get, especially now that we got Rob Avis Solo joining me. And we really appreciate all of your patronage. And if you'd

like to know more about Rob or I, we sure hope you do. Head over to the show notes where you can find our information and follow us on the socials. This is David Green for Rob Taco Sauce Abasolo. Signing on. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoke content.

And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose.

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