BiggerPockets Real Estate Podcast - 973: Seeing Greene: Retiring Early, ARMs vs. Fixed-Rate Mortgages, & When to Sell

Episode Date: June 18, 2024

Want to retire early? Real estate investing might be your best bet. Looking to boost your cash flow and expand your real estate portfolio, too? In today’s show, we’re sharing how to use home equity to build wealth the RIGHT way, plus the “portfolio architecture” secrets that enable you to retire earlier than you thought. Whether you’ve got one rental or a hundred or are just starting to dig into real estate investing, we’ve got the investing information you need on this Seeing Greene to reach true financial freedom. First, an investor sitting on $300,000 of equity asks what he should do: sell his current rental property and buy more OR convert the single-family home into a multifamily investment. The answer isn’t as clear-cut as you’d think. Next, we discuss whether ARMs (adjustable-rate mortgages) vs. fixed-rate mortgages are your best bet for a lower mortgage rate. Plus, we'll share the five BIG mistakes new real estate investors can make. Finally, David describes “portfolio architecture” to an investor who wants to retire by age fifty. He CAN get it done, and you can, too, IF you follow David’s massive passive income plan!  Want to ask David and Rob a question? If so, submit your question here so they can answer it on the next episode of Seeing Greene, or hop on the BiggerPockets forums and ask other investors their take! In This Episode We Cover How to retire earlier with rental properties by strategizing your “portfolio architecture” Using home equity to invest and whether you should renovate a property or sell it and buy more rentals  Adjustable-rate mortgages (ARMs) vs. fixed-rate mortgages and the “rate roulette” you could be playing Five real estate investing beginner mistakes you should avoid when using the BiggerPockets Forums  How to explode your cash flow by converting your long-term rental into a short or medium-term rental  And So Much More! (00:00) Intro (01:31) Buy More Rentals or Convert Current One? (07:33) ARM vs. Fixed- Rate Mortgages (16:43) 5 Mistakes New Investors Make (21:08) Portfolio Architecture (Retire Early!) (32:05) Moving “Lazy” Equity (42:09) Note Investing 101 (51:12) Starting a Business (53:50) Ask Us Your Question! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-973 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

Repositioning equity when it's worth converting a single family house into a multifamily property, or you should just buy more properties. What's going on, everyone? This is David Green, your host of the Bigger Pockets podcast. Join with my good friend and fellow co-host, Rob Obisolo on a Seeing Green episode. If you're listening to this podcast, you are part of the growing and thriving BP community, and this show is where we get to connect with community members like you directly. By answering listener questions that everyone can learn from, Rob and I will be sharing,

our years of real estate experience, knowledge, and know-how with all of you to help you build wealth through real estate. Rob, what can people expect out of today's show? All right, we're talking about some pretty cool things that we're talking about how to get the most out of the bigger pockets forums. This is just filled with five tips here that are going to help you really excel in your real estate career. We're also going to be talking about gambling with interest rates and when you should take an adjustable rate mortgage and when you should pass. That's right. And make sure you listen all the way to the end of the show where I jump in with Mindy Jensen answering questions from a gentleman who's trying to get to financial independence faster so we can quit his job. So Rob, good

news. You're only going to have to be here for a short period of time and then you'll be free to go get some Chipotle. Fantastic. Well, hey, one quick thing before we get started today, if anyone at home wants a chance to ask their question, feel free to head on over to biggerpockets.com slash David. The link is in the description, so be sure to pause this. Send us your questions and let's hop right into the show. What's up, David's Xavier from Boston, Massachusetts. I had a question about equity. I'm currently selling on about $300 to $400,000 to $1,000 of equity on a single family home, and it's this home right here.

Currently the process of doing a change in bankruptcy from a single family to a three-family home. Just kind of get the rental property going. I was curious what you would do, would you continue with that process to stay in the city while earning an income? Or would you take that equity, leave us a single family, take that equity, and you to invest in other properties. me know what you think. And let's go Celtics. All right. So Xavier here is faced with a dilemma. Does he keep his property worth

about $300,000 of equity in it, turn it into a three family or a triplex or basically a three unit property to increase cash flows, which I call forcing cash flow? Or does he sell the property and use the equity to buy additional properties outside the city limits of Boston? What say you, Robby? Oh, I got to give me a second. I got to park the car first before I can answer this question. Park it on Harvard Street. By the harbor. Yeah, I got a pocket car on Harvard Yard. Okay, you know, we've been faced with this question before. I think the hardest part about getting into real estate is picking the house,

getting over your analysis paralysis, and then buying the home. He already owns the home, and he said in his own question, should I keep the home where I could earn higher cash flows because it's in Boston, or should I sell it and then go buy a property outside of Boston? Well, he already owns it. And if you can get higher cash flows as a result, he should just do that for a couple of reasons. If he was coming to me and saying, hey, should I buy a house in Boston where it's really expensive in 2024 when interest rates are 7,8 percent, I'd be like, yeah, you're probably not going to cash flow. But if he bought this property in the last, you know, say five to seven years, he's got a three or four percent interest rate. And as a result, he's going to cash flow a ton. Then I think he's going to have a really great equity play here in the future. I think he should hold on to it. cash flow what he can. What do you think? I think if I gave him $300,000 and said, Xavier,

do you want to use this $300,000 to buy this property and turn it into a three family? Or do you want to use it to invest outside of Boston and buy several properties? Which one would you do? So let me say I'm asking you the same question, Rob. How would you consider that? I would just, I think it's so much trouble to go out and buy property. I mean, I don't know how much he's going to cash flow on this, but he said higher cash flows. So if he's going to, have a higher cash flow as a result of having this house. I don't see why he would sell it to then maybe go get maybe a slightly better return, but less cash flow in a random market. Yeah, you got to ask yourself which of the two markets are going to appreciate more.

And we don't know this market particularly, but typically inside the city limits is going to appreciate more than outside the city limits and the suburbs because that's why they build outside of city limits is they ran out a room inside the city. And so they're going out. So usually keep Keeping a property inside is better for long-term appreciation. And do you want to have one property with three units where you get more cash flow? Or do you want to buy more, but you take on more debt? So if you're trying to grow, you can take that $300,000 and put $100,000 down on three different properties. And you could be borrowing like $400,000. So you actually could end up with $1.2 million worth of debt and three properties if you can find properties that will cash flow. And I think

that's the rub is you and I look at a lot of properties. It's very difficult to find anything right now that's going to cash flow anything near a big city. So what you end up with is the same problem you have with this one. It doesn't cash flow much and I want to increase the cash flow. I don't know. He says right here, should I keep it as three units where I could earn higher cash flows? Yeah. So he can keep it and convert it and do the work and make it cash flow better than it is, but he's not adding to his portfolio. He's not taking on more debt. He's not growing the portfolio nearly as much with one property that has three units versus three properties that he may be able to add units to those ones too. So it's really about do you want to go bigger? More leverage.

Yes. Or do you want to keep it tighter and have a little bit less management, but more work to convert the properties? Yeah. Okay. So scenario A, keep it cash flow higher, I think. Scenario B, leverage, leverage, leverage, get into more real estate, possibly cash flow less. Yeah. Yeah. You know, in this market, I'm going to go cash flow always. I think I change back and forth. I waffle on the situation. I don't know if he wants to grow. If he does, go do that. Go leverage. But if he's like, hey, I just want to make money, which it seems like that's important to him, I take the higher cash flow route pretty much in most scenarios. Yeah, I think that's a safer route in today's environment. I would rather see you get the highest and best use out of the property that you have and keep saving money.

and as you save up money, you can go buy more properties outside the city limits. Yeah. And then if you can convert this from a single to a triplex effectively and get significantly more cash flow as a result, that to me is still less work, in my opinion, than going out and buying three properties, setting up the property managers,

finding the handyman, finding all the pest control, all of the CAPEX team, the core four, if you will, assuming that they're in different markets and everything, even if it's the same market, I still think that's a lot more,

work. Buying three properties versus just converting one, I'll do that one 10 times out of 10, I think. Yeah, the only variable we haven't discussed here is how much money and time he's going to have to put into the renovation. We're assuming converting this into three different units is not that expensive. But if you're going to drop $200,000 to do this, that's a different story, in which case you might be better off redeploying. Yeah, he didn't mention it. So it makes me believe it's maybe easier. Minimal. Yeah, exactly. If he was like, hey, it's going to cost me half a million. I'd be like, Don't do that. That'll be a lot. Great point. Yep. That's what we think.

All right, Xavier, thanks for the question. It's nice to be in a situation where you have a good decision or a better decision and you just have to pick between the two of them. So good luck with that. And like you said, go Boston. Up next, new investor contemplates which rate options make sense for the short term. You ever head out on a trip, lock your door and think, cool, my most valuable asset is now doing absolutely nothing. because while you're off traveling, your home is just sitting there. Quiet, empty, not contributing, which feels like a missed opportunity, considering it has solid Wi-Fi and a very comfy bed.

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BP and get a $100 bonus. Base lane is a financial technology company and not a bank. Banking services provided by Threadbank member FDIC. And we're back with our next question from Kayla in Rhode Island. Rob, first question to you. Does Rhode Island have an accent? I don't think so. Have we stumped Rob? Let us know in the comments on YouTube if you think Rhode Island does indeed have an accent. If you'd like to replace Rob on the podcast. All right. So the background here, Kayla has been going crazy over the last year and a half reading all the BP books listening to every single podcast, network getting events and starting her future in real estate investing. So she's doing all the things that we tell people to do.

Her question is, we're currently waiting to close on our first single family primary residence purchase in the next few weeks. We plan to live in it for the next one to two years and then turn it into a short or a midterm rental as we move into another primary residence and repeat every two years over the next 10 years. We're high income earners. So we plan to save money at higher rates and acquiring other investment vacation properties in that 10-year mix to every other year.

Our question is about financing terms. We currently have a 6.8 30-year fixed rate without points. We are anticipating rates to come down in the next year or two, in which case we would refinance. Is it a good idea to get into a lower rate at a 5- or 7-1 arm and refinance out of it before the end of the 5-year rates should rates lower? Since we would most likely be refinancing of rates decrease anyway, should we go with the lower rate arm right now?

Thank you so much. All right, Rob, because you have huge arms. You've been in the weight room a lot. In fact, the last time I saw you, I actually felt like incredibly intimidated by this. My arms are just horizontal at this point because I can't put them down any further. So. Rob hasn't been able to scratch his own back since 2017. Define for our audience what an arm is. An adjustable rate mortgage, meaning if it's a five arm, they will keep this rate for five years, at which point it adjusts after the fifth year. If it's a seven, one arm, same type of thing. It changes after seven years. Right. That's all Mr. Mr. Mortgage. That's correct. The first number is how long it stays fixed for and the second number is how often it can readjust. So a 5-1 stays fixed for five years and then every one year it can adjust. So they're trying to figure out should we play mortgage roulette. What do you think? Okay. So I think five years, I, you know, and this goes, even my philosophy with a lot of creative finance deals and stuff, I think five years is a little risky.

Younger me would do it. Younger me has done it because in most circumstances back in the day, I refied out before that fifth year ever came up. So it wasn't a big deal. I start to feel a little better when it's a seven arm or when it's anything higher than that. I don't know if there's a 10 arm, but seven is when I'm more like, okay, I think a lot's going to happen in seven years. I'd like to think there's a window of opportunity that rates will come down in those seven years. All right. So you think if you can get the seven one or a ten one or something like that, it's worth getting the lower rate and then refinancing into a lower fixed rate mortgage if rates come down.

That is my thought. Yeah. A little, again, a little bit more probably on the conservative side. You know, probably you're, I don't know. I'm not going to advise a five year. Do you do a lot of these? Do a lot of people take you up on these over at one brokerage? Yeah, I do, I did them at one point because, um, basically like rates were really high and the arm was significantly less than the base rate. And I was like, man, that's a huge spread. I normally don't do this, but like, like, I don't buy that brand, but it's on sale. So I'm going to go for it today type of a deal. Here's what I don't like about this, especially at the five year thing like you said. Your upside is you get a slightly better rate. Your downside is rates just, keep going up and up and up in the future, which we can't predict her control. And every year, your mortgage gets worse than it was the year before for an indefinite period of time. Like, you could lose a property like this, but the gain of just getting a couple hundred bucks a month better or something doesn't seem like it's really worth it. Now, I do like what you said about

getting into the seven or 10 year period because what you're doing is hedging your bet. You're giving yourself an extra two to five years that rates to could come down. I think the reason that Kayla's looking at it this way is we feel like we have high mortgage rates right now. And so if you feel like they're high, it would reason to believe they will come back to normal, right? Because everything kind of reverts to the mean. But I don't know that they're high. What if this is normal? They were just stupid low before.

And we keep assuming they're going to come back down, but they're not going to come back down. What if 7% and a half percent becomes on the lower side and they climb into the nine, 11% range because inflation is just a stubborn problem for the next decade. Sure. Well, hey, but they did say they are anticipating rates to come down in the next two years. Bro, you told me this on an episode in the past. Do you know that I just saw an article today where Jerome Powell said we have to change our mind about rate cuts for the rest of the year.

We're not going to, but everyone's been saying, oh, they got rate cuts coming. Rate cuts are coming. But because inflation is high and the consumer price index is high, they don't want to bring rates down. And I'm nervous that that's going to just become like standard operating procedure. Yeah. I have been a little, I'm like, I don't know. I do feel like a lot of people, they're typically realtors. They say, yeah, rates are coming down. You could just refi out whenever. I don't think I'm, I am not a believer of that. I'm just like make it work with today's rate. I would say if getting a seven arm is significantly cheaper than just a 30 year, then sure. Like if we're

talking a 30 year is like, let's say a 6.75 and a seven arm's going to get you like, I don't know, a five, then I'd be like, okay, I'd think about it. But if we're talking like going from a 6.75 for a 30 year down to like a 6.5, absolutely not worth the risk. Not worth the risk at all. So make sure it's substantial if you're going to go down this road. Otherwise, I'd probably take the 30. I mean, if you can get, I even know with primaries right now, someone told me they just got like a six and a half. And I was like, that's good. Got to keep that thing. It was like a local credit union or whatever. Yeah. That's not normal. So if someone else got hired, don't feel bad. That's super low. The other thing that I is influencing my decision in the

algorithm of my brain is she's talking about building a big portfolio. So as you just keep adding, what she's saying is she wants to buy a primary every year and then an investment property every other year. No, a primary every two years and investment property every other year. So it would be primary investment, primary investment. That is potentially 10 properties all on adjustable rate mortgages. I get nervous about a normal person with a W-2 job having that much exposure to interest rates going up on you. If it's like one or two properties, if it goes badly, okay, it's a bummer. But if it's 10, that could tank you. I think that also weighed into where I was like, I don't really like this adjust for a mortgage gambling when you're doing it at that level. Other things to keep in mind on

this is how much are you putting down? How much equity will you have? have at the end of this like seven year term. It's going to be a little riskier, in my opinion, if you're only doing like three, three and a half percent. They're saying they want to do this for a primary. If they're putting 20, 25 percent down, then I do think you could always refy out, I suppose pretty safely. But if it's little leverage, then I just, I feel a little iffy about it. All right. So I was also trying to figure out where does that we're going to buy a primary every two years. That didn't make sense because you can get a new loan every one year. I think they're saying that they're going to buy it every one to two years, then turn it into a short or midterm rental as they move into another primary residence.

All right. So Rob says, if the juice is worth the squeeze, go ahead and drink. David says maybe just sip a little bit. Do some adjustory mortgages, but don't make that something you do every single time. Stick with the fixed rates for the majority of your portfolio. Wait, I think that's what I said. I think I said take a little sip too. Oh, I thought you were saying that you're okay with it if it's a big rate. difference, as long as it's a seven or a 10-year arm. Yeah. Yeah. I did say that. So Rob says, hey, drink the wine if the wine is good. And David says, sip on the juice box. But don't drink boxed wine. If it ain't a big, if it's not worth it, don't take that risk. But make sure you're 21 and older and that's like you can handle the wine and you're not going to get so tipsy that, you know, taking one sip is going to knock you out, you know, by the financial wins.

We are significantly testing our audience's ability to read into our analogies at a very high level right now. So if you've been following Rob and I, congratulations. You are smarter than the average bear. Let us know in the comments that you follow that entire thing. Well, we sure hope you guys are enjoying today's show. We love that you're with us. Rob and I have a blast doing this and we couldn't do it without you. Remember to head to BiggerPockets.com slash David to submit your questions to be on the show. Coming up next, I'm joined by Mindy Jensen of the BP Money Podcast to help with a BP community member who has six properties. and is looking to shave off 24 years to his retirement,

but he's not sure if he can get there with the current portfolio. Up next, we're getting into sharing straight from the starting out forum on BP.com. At this part of the show, Rob and I like to go through former YouTube comments of past shows or answer questions directly out of the Bigger Pockets forums. All right, Jonathan Green, who shared five big mistakes that new investors make in the forums. If you'd like to see the full forum, check out the show notes, but let's get into it. Number one, Rob, why don't you go ahead? Writing too much or too little, give enough info or details and what you have done to this point. I think this is really big. We answer a lot of questions

here on the show and half the times we're kind of piecing together, you know, using whatever context clues we have. So the more context, the better. Number two. Asking for a mentor without giving anything in return. Ooh, this is important. Yeah, big faux pa. You would not give your phone number to some stranger this walked right up to you and said, hey, you have something I want. Give it to me. Don't do that in the world of real estate investing. It gives people, as the kids say, the ick. Yeah, I think this was something that's how Brandon found one of the people that worked from him. Brandon talked about how he, Brandon Turner, I would imagine everyone knows who he is if they're listening to this. He said he wanted to surf. Some guy reached out to him was like, hey, I'll teach you

how to surf. And then they became friends, worker, they worked together stuff, right? Something like that, yeah. But Brandon loves surfing. That's right. Right. So for me, if you're like, hey, Rob, I heard that you need someone to follow you around and buy you Chipotle burritos every day. I'd be like, that's value. That I could use you on my team. Really smart. If someone came into me and said, hey, David, I'm willing to cut your hair every day, probably wouldn't get them too far. Number three. Being fragile when you don't get the responses you want. How do you feel about that? If someone answers your question and you don't like you. the way they did it, don't be a baby because then people aren't going to want to respond in the future. Yep, yep. Number four, asking questions without researching how often same question has been asked. There's a very important little icon, little feature on the BP forums. It's a little magnifying glass. If you're saying, if you want to know, hey, what property management software should I use for my rental, maybe type that in the search form first and see how many people have answered that because the answer is probably dozens. So,

don't make someone spend 20 minutes answering your question if they've already been answered. And number five, posting the same question in multiple forums. Rob, why is this a bad idea? Oh, because it's annoying? I don't know. Can I say that? No, it is annoying. That's why we're trying to avoid people from doing it. We don't want you to be labeled as an annoying Andrew or a fragile franny. We want you to have a good experience in the forums. Yeah, I see this often. Okay, here's why it annoys me. Let me just give some context. I see this on Facebook all the time because I'm part of all the Facebook groups like the BP ones, rookie, all the Airbnb groups. And sometimes I'll see that first person answer it. And sometimes I'll see someone ask the same question in like five of these groups. And the reason I get

frustrated by this is because a lot of people in the forums and the community and these Facebook groups want to help you. And they will spend 15, 20 minutes answering the question. And if you post this to five different places and you make 20 people answer the same question, it just isn't really respectful of people's time. So it pretty much goes into bullet point number four asking questions without researching how often it's been answered. Right. It's really just about respecting other people's time because we'll help you, but just don't make us help you if someone else already has helped you. Make sense? And that's what Jonathan does best. He is one of the best commenters in the forums. He kind of runs that ship. And he finishes the post by saying, if you're an experienced commenter here, let everyone know what you think of

these to help them even more and add some of your own. And if you're new here, please use these pieces of advice to help yourself get better answers. I don't know. I don't want Scott to be like, he said what? He said people are annoying for using the forums, you know? Rob, I'm going to jump in with Mindy here. You are free to leave. Okay. Bye. And as promised, Mindy and I are going to be joined by Derek who wants to cut 24 years off his retirement trajectory. Let's see how we can help him reach financial independence with his current portfolio, you are not going to want to miss this deep, dark, and mysterious dive into the mind of David Green. If you own a large or complex rental property, congrats, and I'm also sorry.

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And you have a small amount of your net worth in a 401k. You've got a little bit in a Roth IRA, some cash, which is awesome. But the bulk of your retirement plan or your assets is in real estate. So let's start off. Derek, your first question was, what are my best options to get to $80,000 a year in passive income by age 50 or sooner. So my first thought is, well, buy more rental properties. But we are in a market where prices have gone up, interest rates have gone up, and finding a great cash flowing deal can be difficult. And with cash flow being your primary driver, I want to go in

and look at your portfolio itself to see if there's anything that maybe not be the best use of your money. David, what do you think about his portfolio? He has six properties with 13 total units, including one short-term rental. First question, Derek. Well, actually, my first question before my first question, I see you have a family of six. We could tackle these expenses first. Are you willing to auction off any of these children because they're expensive? Oh, at times, yes, but I think I'll hold on to them. That's going to make things a little tougher, but that's okay. That's why you got Mindy here.

All right. Your short-term rental, do you enjoy managing it? Do you hate managing it? Are you willing to have more of those? I'm still getting into that process. We kind of rushed to get it up and running for like the eclipse because it was kind of right in line for the eclipse of a popular weekend, very in demand.

But now it's the slow season in Vermont. So I'm kind of waiting to see how things pick up once, when ski season starts here for Vermont. Okay. The reason I ask is you can increase cash flow by moving equity from traditional rentals to short-term rentals in most cases, but you're increasing workload also. So if the goal is to have zero work, we don't want to take that road. If the goal is to have more flexible work where you don't want to be commuting to an office,

you want to be able to stay home, you can manage a short-term rental from your house. So when you first, when we, when we tackle it from that perspective, are you open? to managing short-term rentals or hiring an assistant who could help you manage short-term rentals? Yeah, I think that's something that I'm open to. I mean, I'm not looking to retire and do nothing, but some more flexibility in my life is kind of what I'm getting at. And I'm thinking that more cash flow would be the obvious answer. But yeah, another STR could be another option. Okay, but the STR you have now, it's newer, so you don't have a lot of experience with it, right? Right, yeah. It's new to me. I'm used to long-term rentals for small multifamilies.

And are you managing those yourself as well? Managed in the one in Vermont. We used to live there. It has like an in-law apartment. So I managed that one myself using Ham Lane, which has been great so far. And then I've got four rental properties in Connecticut that I grew that portfolio when I used to live there. And I put that under property management. Here's what we're looking to do.

We want to take your property that has the most equity or the properties that have the most equity and look at your return on equity and compare that to a return on investment. Have you done that yet? Not specifically, but I have been looking at possibly in like a he lock on the STR that I recently bought since we bought that with cash. And so that has no mortgage on it right now. But you are familiar with the concept of return on equity. Right. Yeah. Definitely. Okay. So for the audience, when we want to figure out how efficient an investment opportunity looks like, we calculate the return on investment.

So we take the cash flow that it would make it a year. We divide that by the money we'd have to put into it, which is usually the down payment, the closing cost and rehab or furniture or whatever you're going to do. And the number that you get is a percentage of the total number you put in. And obviously, the higher that percentage is, the better. So if you get a 10% cash on cash return, we use that metric to compare this investment versus another one that might produce a 14% cash on cash return. So we know the money will be more efficiently used with the higher number in most, from a cash flow perspective.

Well, one thing investors don't do once they've owned a property for five, six, seven, eight years is they don't think about the fact that the equity might have grown at a faster rate than what the cash flow did. So rents go up, but they may not be going up at the same speed or pace that the equity in the property is. So you buy a property for $200,000, it gets you a 10% cash on cash return. Five years of rent increases later, you're at a 20% cash on cash return and you think you're crushing it. But the property went from $200,000 to $500,000. You've got $300,000 of equity. If you divided that same amount of cash flow, you make it a year by the equity in the property, not by your initial investment, you often find you're sitting at a one, two, three percent

return on the equity, which means your current equity is lazy. It's not working very hard for you. And Mindy, I know you like it too, the richest band of Babylon, one of our favorite books, talks all the time. You want those little soldiers of yours working hard. You don't want lazy equity that just sitting on your couch eating your Cheetos and drinking your Mountain Dew without getting out there and putting in a solid eight hours of work, right? So if we looked at your portfolio right now, do you have an idea which of your assets have the most equity in the lease return? Yeah, I have a general idea.

I know some of them are currently have like rents that are below market, which some raising rents might get a better return, but I'm not sure if it'll bring me all the way there to having an adequate return on equity. But it's definitely a great point that you're mentioning. It's something to reevaluate. Yeah, and it will also change the way that you look at your point. portfolio. So we all have our favorites. Okay. I don't have any kids. I'm sure parents, maybe they have that favorite kid, right? This one gives me the least headache. But when you start to look at the

return on equity, you start to get an idea of what property was your favorite. Now maybe it's not. You're like, oh, I love this charming little bungalow mid-century modern property. And you have these memories that you made in that house. And then you're like, this little lazy son of a gun isn't doing anything, right? Like, I need to sell this one and move that $300,000 into other properties. Now, We do traditionally talk on this podcast about increasing cash flow by increasing the properties. However, in practical terms, sometimes that does the opposite for your cash flow. And here's why I say that. When you first buy a property, you tend to also be buying a lot of deferred maintenance.

Nobody sells their car when it's running amazing and it's giving them no problems. Think about every time that you've ever had the thought, I want to sell this car. Okay? Taking out the fact, maybe you had a kid, you need a bigger one. when's the time that we think, hey, I think I need to sell this car. Mindy? Oh, I am not the right person to ask because I have the same car since 2003. Your car's awesome, by the way.

You gave me a ride of that car and it's super bitching. I really liked it. All right, Derek, have you ever had the thought I need to sell this car? What was going on? I think it was just getting too much maintenance and the cost was just too high. It's a natural human response. Homes can work the same way. So when you first buy a house, you are often buying all the previous

owners deferred maintenance. And then there's some weird rule of real estate where that air conditioner that was on its last legs that they were barely hanging on, you get in the house, you start using it more than it was used to being used. And boom, the thing craps out, right? Or that roof leak becomes a bigger problem. And now two, three years of cash flow is gone as you have to dump it into stabilizing the asset. This is even worse if you buy a property that has tenants in it. Okay. So I just made it a rule in my own investing. The first year I own a property, if I break even, I'm happy. That's a win. I accept. I'm going to lose money the first year that I own a property because you're just going to see all the stuff that slip through the cracks of your due diligence. Even the best due diligence, you can't account for everything that can go wrong with a property. So scaling your portfolio in the short term will usually make you less cash flow, but in the long term, it will make you more cash flow and it will make you more equity, which is why it's going to build you well. So part of what we're also going to talk about is what's your timeline like. So are we talking about trying to get you like out of not working in the next year, the next five years, the next 10 years, the next 10 years.

what's your thoughts? Well, my thoughts, like conservatively, I think like seven years, 50 songs, like a good number to reach for. I'm 43 right now. But I'm sure my wife would say now. But I'd rather try and find somewhere in the middle, you know. Okay. If you could find a way, and what's the current job you have right now?

Right now I do SEO. SEO works. So I see a SEO specialist. All right. So I don't know if you're open to this advice, but the advice I give a lot of people in your situation is sometimes when we say I don't want to work what we're actually. saying is I don't want to work this job. I don't want to work under these circumstances. I don't want to commute. I don't like this boss. This is mind-numbing, soul draining work. But we're not saying I don't

want to labor. I don't want to spend energy. It's more just I would rather do it with something else. Okay. And I say this for you and everybody who's listening. I am not a proponent of get a couple rentals and quit your W-2 and just, you know, throw a middle finger to the world and say, look at me. I am a proponent of get a couple rentals, get some stability, get a little bit of a buffer, and move your energy, just like we're talking about moving your equity from a job you hate to a career, a job, a business, a something that you would enjoy. Or at least doesn't suck super bad. Okay. And then maybe you do it again into something else, right? So for real estate investors that love real estate, I'm frequently telling them, like, do you love people?

Get your real estate agent sales license. We need better agents. the world. There's not very many. Do you like numbers? Become a CPA. Do you like solving problems? Become a loan officer. Do you like design? Do you like construction? Do you like bookkeeping? There are so many needs within the world of real estate that you can get a 1099 position, start your own business, work for a real estate investor. It's not full-blown W-2. I'm a slave to someone else, but it's also not complete lack of any stability at all. It's a more happy medium that exposes you to the things that you enjoy doing, which I'm assuming is real estate if we're talking on bigger pockets. So that's a

another thing that doesn't have anything to do with moving your equity around that I'd like for you to think about. What if you started your own business and did SEO work for other people once we got you to that $80,000 a year, right? Now, if it fails, that's okay. You've still got money coming in, but if you enjoy it, it could actually turn into where you make an $80,000 a year in your business and $80,000 a year from your rentals and now we're having better, cooler conversations. But again, going to your portfolio, what we're really looking at is what's your laziest equity. So if you were to Call out a couple properties. Which ones do you think have the most equity that's making you the lease cash flow?

Let's say the property number two, perhaps, and that's a two family. And let's see, what else? And property number four. Okay, so property two has about $110,000 in equity, property for $186. Is that right? Right. Yep. Okay.

And so we could sell those. That would give you around $250,000 of equity to redeploy. I'm trying to see what the cash flow is on those combined right now. Those are the ones that are below markets. So I could probably get another 500, 700 month for each one of those if that changes anything. Do you have a market that you like where you could buy a fourplex or a small multifamily? The place where I bought those first four properties in Connecticut has been pretty good. I mean, it's uncomfortable with it.

But I just don't know what the way things are with the market and rates, how to approach things. you send you differently than what it was like. Have you been looking at listings? Not really in that area now. Not lately anyways. If you have a real estate agent that you like in that area, I would reach out to them and just ask them to send you listings broad spectrum, like give them the very bare minimum requirements so you get the most listings in your inbox and then just start looking and

seeing, oh, I didn't know properties were now $4 million, never mind. or hey, properties are still $70,000, I can get in on this. Or, you know, something in between, obviously I'm making those numbers up. But having an idea of that market and then you can say, yes, I want to sell these properties where my equity is just sitting there kind of doing nothing. Or, you know, have you considered raising the rent? And why are they so far below market? You said you could get another $5 or $700 for each of these properties.

There's two units in each of these properties. So is it raising the rent 250 on each tenant? Is that realistic? Yeah, that's kind of the route. I'm going with one of the properties. Maybe not as high as that. But I'm going to see if I can raise rents. And if it forces some tenants to leave, then maybe I'll do a turnover and get potentially more.

But what's the reason they felt so low, Derek? Because you have a property manager in Connecticut, right? Just a long-term tenant that I have. Yeah, I don't think they've been raising rents like every year. Bro, I just found out in Arizona. I have five properties being managed by one person. I thought they were great because I never hear about it. He hasn't raised the rent in five years.

Right. And it's been a lot in Arizona of rents going up. So I found that out. He's now fired. I hired a person to work for me to manage my own properties. She's going to be managing those now and we're going to make sure that that doesn't happen again. But what I was just thinking with you is if you fired your property managers, hired an in-house

person to help oversee those and potential short-term rentals that you could be taking on, have you looked at the management fees that you'd be saving and if that would offset like a virtual assistant or a part-time assistant that you could hire to help you manage your properties and then you could also take on more short-term rentals with this additional help yeah that's something like someone else mentioned in the in the comments in the in the forum but I think uh yeah I mean it's like a lot 11 or 12,000 maybe 10,000 potentially and that's not including um leasing fees and that sort of thing so that's something I should definitely look at. say that you go at like with leasing fees those are expensive let's say you're at like 15,000

dollars for management and you bring someone on part time that you could pay like 35 40,000 or something half their salary almost is covered just by that now if you move that 250,000 in equity that we talked about into two or three short term rentals and you have this person screening calls from tenants before they get to you. You have this person helping to coordinate with the cleaners. You're not taken on a ton of the work. Right. We, We were just talking about this on seeing green the other day. It's not necessarily the time spent that I think makes people not like work. It's the type of work you make them do.

I've noticed this. Like my employees that really like to do deep work on complicated problems, if you ask them to take phone calls from a person that can't find the TV control in a short term rental, they lose their mind. But then there's other people that only want to help them find TV controls. If you're like, can you put something in a spreadsheet, then they lose their mind, right? If we find the thing that we like doing, you often can find that work is enjoyable and you like doing it.

So for you, I'm assuming if you're working in SEO, you're a deep work person. You like to look at complicated problems. You like to see the big picture. And you like to really drill down on like what's going to make this whole thing move. Do you need to hire somebody that does shallow stuff? Like you go an inch wide and a mile deep. You need to find someone that goes a mile wide and an inch deep. They can handle all kinds of stuff going on.

They're answering emails. they're taking phone calls. They're shielding you from the little paper cuts that make you bothered. And then twice a day, you check in with them and say, hey, what's going on? Here's what I want you to do. They go back to work. They do it. You could probably move this equity and get three or four more short-term rentals.

Triple your cash flow from what they're making right now. And you might find that you really enjoy doing short-term rentals as long as you're doing it with leverage. Right. Yeah, that's definitely a good point. I mean, I want to see how this short-term rental business goes. and see if I can find a way to leverage it and earn more money without having to take up all of my time. But like you said, maybe hiring someone might be a good idea. Because you don't need a full-time hire. I don't think you have enough to need a full-time person. No, definitely not.

So the main ways that you increase cash flow is going to be moving inefficient equity. So we've already talked about that. Where's your return on equity the lowest and what could you buy? Moving from an inefficient asset class like long-term rentals where, again, it's only inefficient for cash flow. Long-term rentals may make you more money in the long-term if you buy in the right market, but in the short-term, they're going to make less cash flow than a short-term rental. So you want to move into more efficient way there and then paying off debt. That's the other way you can increase cash flow. So another option we just haven't talked about was what if you sold and you bought something in all cash? The reason I didn't go there first is you're going to have

capital gains hits if you do that. And that is an inefficient way. You're going to actually be losing some of the equity that we've talked about that you can't read a employ into more real estate. And since they are long-term rentals, you have a depreciation recapture on top of your capital gains, and you've made a lot of money on these properties. But I also agree that property number two and property number four are my least favorite of your portfolio just by looking at these numbers. So David is a fan of the short-term rental. Looking at the numbers, you've got a fourplex, four units, kicking off approximately the same cash as one unit that's a short-term rental. So I'm going to send you this book by Avery Carl, Short-Term Rental Genius. It's called

Short-Term Rental Long-Term Wealth. It's by BiggerPockets Publishing. And we're going to send a copy of this so you can read through this book and get some tips on how you can make your short-term rental even better. I'm also going to encourage you to go into the BiggerPockets forums, biggerpockets.com slash forums, to talk to other short-term rental operators and see what's working for them. Another option could be midterm rentals, medium-term rentals. I unfortunately don't have that book at my fingertips to just show you, but it was written by Zeanna McIntyre and Sarah Weaver, and it talks about the 30-day stays. A mid-term rental can help you get around the short-term rental laws that some cities are starting to enforce more and more, as well as,

you know, generate more income than a long-term rental. So perhaps property two and property four could be reviewed to see if you could make more money as a mid-term rental. Is there any opportunity for mid-term rental? Is there any desire for mid-term rental? So these are digital nomads. These are people who are traveling around in, but staying in a long time. Travel nurses was a big one for a while. Corporate rentals. Some people really like to be in a house instead of in a hotel room. If there's no market for them in where property two and property four are, I really like the

idea of potentially finding another property and 1031 exchanging into that one. So you're kicking the tax can down the road. With the 1031, David, do you still have depreciation recapture? No. If you do the 1031, you basically just take what you would have had to pay back and move it into the next property and it rolls over. Awesome. Okay. So now that is like the best of all worlds. You have rules around your 1031. First, get a qualified intermediary. That's the official name of the person who does the 1031 for you and talk to them and follow every rule. There's what is it, 45 days to identify three properties and 180 days to buy clothes on that one of those three properties. within that time frame. And if you don't, then your whole 1031 is blown. So you definitely want to be confident in your ability to close before you sell your other

property. But I think that's a really great option for you because cash flow is what you are looking for. You could wrap both of these strategies in, take these two properties 1031 into a small multifamily or even a medium-sized multifamily and then turn that whole thing into a short-term rental property that, you know, of course, it's got to be near something where people want to go. But that could be a really interesting option as well. That is, but that's the reason I didn't immediately go into, yeah, pay off some debt because

those taxes can be so painful that it eliminates a lot of the benefit of paying off your debt. Another thing I thought of that I didn't mention was some of the money that you have that's not in real estate. So you've got some money in your 401K. I would look into seeing if you can take that money and buy discounted notes with it without getting a tax penalty. Now, you're not going to be able to touch that money. It's probably going to go back into the 401K. I'm guessing you can pull that out at like, what's the age?

Mindy, you would know. You can pull it out at any time, but you can pay no taxes if your plan allows you to pull out at age 55. You could roll it all over to an IRA and then, you know, kind of do whatever you want with it. The self-directed IRA does allow you to a age 55. invest in rental properties, although I do believe you're subject to U-Bit, and this is where I fall out of my area of expertise, and I'm just remembering random little bits. You-bitcha. You-bitcha.

But if you have self-employment income, you could take your 401k and roll it into a self-directed solo 401k, and then you can invest in real estate. It's not subject to U-Bit, but again, all of the money that you invest out, the money that comes back, goes into the 401k. So that's something to keep in mind. So if you could get your 401k into a self-directed IRA, that's ideal. But even if you can't, you might be able to still do it as long as the money stays in the IRA. I would look at the return I was getting on whatever you're using it for. And if it's less than double digits, I'd look into buying discounted notes. This was something I did a couple years ago. So basically what you're doing is you're buying usually a second position lien, sometimes their

first position lien, that at one point was underperforming, somebody else bought the right to collect the payment from a bank or a lender because the person wasn't paying on it. So in a sense, the bank like didn't necessarily foreclose on the property. They just sold the right to foreclose on the property to somebody else. That person steps in and they get the person paying again. They renegotiate the terms of the note. They find out what was going on. If the person doesn't repay, then they would just foreclose on the property. But in this case, These are the people that did repay. You then buy the note from them.

So they get their capital back that they spent on the note, but you're buying the note for less than what the principal balance owed is. So I did this with Dave Van Horn's company PPR Note Co. I believe he wrote a book for bigger pockets as well. So for instance, I think I bought a note that was worth $90 something thousand dollars. And I paid around like $65,000 for it. I can't remember the exact numbers,

but it was about that. And then the person makes a payment to me every single month. If they ever stop making the payment, There's state laws regarding when you can foreclose, but you would just foreclose and you would take the asset that was worth even more than the value of the note was, right? So the note was worth 90 something thousand. The property was worth like 120,000. Eight years of time later, it appreciates to be in worth $250,000. There's a lot of equity in that property. Well, I just found out the person who owns a property that pays me the money, right, is selling the house. So they paid down what they

owed me a degree. It was like 95,000. Maybe they paid it down to 80,000 or something. But I bought it for 65 and I've been getting years of payments on this. When they pay it off, they have to pay me the full amount that they owe. So I'm going to get a, it's like equity in a sense from the note. You could do the money in your IRA in your 401K is probably not working as hard as you could get if you bought notes with it. So you do that. You put it to work harder. You let the money from the notes go back into the self-directed IRA or the 401k, whatever it is. You're getting a, a better return. When those properties do sell off or refinance or whatever the case would be, it's like the jack in the box pops. You get yourself a nice bump in equity. You use that to go

buy more discounted notes and you just rolled over. We don't talk about this on the podcast as often because I already know people are saying, why did nobody tell me about this? That sounds great. Because you have less control over the money. When you buy a rental property, you can improve the property. You can choose when to sell it. You can do a 1031. You can refinance out of it. You can improve the performance, the rents are going up. When you buy a note like this, you're actually exposed to inflation because that monthly payment I was getting was worth more seven or eight years ago when I bought it than it's worth today. And I can't do anything to fix that. You're at the mercy of the person who owns the property choosing to pay the note off or choosing to refinance the property

or sell their property. What are your thoughts on ways to get equity out of my portfolio? I know you said I have some lazy equity sitting there besides doing a 1031. I know my rates are really low right now, but I know I've seen the rates lately and they just seem so high. So how would you approach that? Yeah, the problem is when you try to get equity out, you basically can, a 1031 is the most efficient way. A sale without a 1031 is another way.

A cash out refinances a third way and a heelock is a fourth. Those are your main four ways to get into the equity you have. The problem with rates being high, like you just said, is that whatever you use, you buy is going to cash flow less, and if you buy it with the equity from the property, you just took on additional debt at those same higher rates. That becomes a problem, right? And so the reason I didn't bring this up is I don't see very many investors in most markets that are able to pull equity out of a property through a HELOC and use it as a down payment on another property. That worked when values were going up and rents were going up and interest rates were low. You had the perfect

trifecta that allowed you to just get a property, build equity, take the equity out, get the next one, the snowball that we talked about. It's like a hill full of snow, very steep, easy to make that work. That hill ain't going down at the degree that it was before. It is a straight shot in a lot of ways. And so you kind of already have to have some snow to be able to play the game that we were before. And I see a lot of people just budding their head into the brick wall trying to use that strategy and complaining it doesn't work. Well, it's because you didn't actually create new wealth. You're just trying to recycle wealth that you had previously. And that's why I don't know. The only way I can see that possibly working is if you took the money,

out of an inefficient asset like a long-term rental through a HELOC and put it into a short-term rental. And I don't love you take it on the risk of doing that until you have a proven track record of managing short-term rentals and knowing that you do it well. Yeah, that's a great point. I mean, it sounds like the easiest way to, well, easy, but to try and get additional cash flow versus a traditional long-term rental, like you said. Yeah, that's why I just said selling and redeploying is going to be your better option. And you're going to want to start with the houses that have the lowest return on equity because you're probably going from a low interest rate to a higher one. So to balance that out, you need to make sure that you have the laziest equity possible that

you're moving. Derek, what did you think about that note investing? Does that hold any interest for you? Well, it's something I need to, I guess, learn more about it and wrap my head around to see how that would work. And I've heard some of the benefits of it before and investing in notes. But yeah, it definitely sounds interesting. It's not something I'd consider, though, in the past. Okay. Well, I am also going to send you a copy of Dave Van Horn's book. It's called Real Estate Note Investing using mortgage notes to passively and massively increase your income, which is, you know, something you're looking at passively and massively increasing your income. As well as you've got $100,000 in cash. Is that your emergency fund or is that your, I don't quite know where to put this yet

fund? It sounds like the latter for the most part. I mean, we're going to put some of that into like education accounts for the kids, but that's only a portion of it. But the rest of it's kind of just sitting around for, I guess, emergencies. Have you ever considered lending that out? I do some private lending, and I think I'm charging like 12% right now. I'm only lending to people that I know, that I know are going to pay me back, who are, you know, doing super fun things with real estate on the East Coast, because it actually exists, David. And 12% comes into my bank account. They pay it off and then they borrow it again.

And because I know them, I don't feel like I am putting my money at risk. Because they then pay me back and want to borrow it again, I know that I now have a proven track record with them and I can do it again with more confidence. Finding somebody to borrow money from you that you know may be. be a little more difficult than, you know, I just Blaseley recommended. Is that a word, Blaseley? Anyway, but you, once you make it known that you have, potentially have money to lend, people come and start asking you, oh, David Green wants to borrow money. I'm going to lend it to him because I know him and I know he'll pay me back. But, you know, Rob Abasolo wants to borrow

money. Forget it, dude. Just kidding, Rob, I would lend to you too. But, you know, it can be a really great way to generate more income. And Bigger Pockets also has a book about that. It's called Lend to Live, earn hassle-free, passive income in real estate with private money lending by Alexandria Bershears and Beth Pinkley-Johnson. And I'm going to send you a copy of that book too. Awesome. Thanks. Another question I had for you, Dave. I mean, I like the idea of a simple paid-off portfolio when I retire. What are your thoughts on those people talk about maybe trying to pay it off with like a snowball type of plan. What are your thoughts on that versus redeploying lazy equity?

I'd love to see you start a business like we talked about doing SEO work for other small businesses or something that you like, figure out a way to make that profitable and put that profit directly towards paying off your debt so that you don't have to pay taxes. Yeah, that's a good point. And I mean, one of these properties, property number two, you paid $70,000 for. I don't even know what your mortgage. Oh, your mortgage balance, you've obviously refinanced that. Yeah, they're cash refinances on all my properties right before the mortgages climbed.

So I was lucky for that. But yes, that's why. And I think that's kind of the only way to tap into some of that equity is to cash out refi when rates are low, which isn't an option right now. Hey, David, can you write a mortgage for 3% for me? As soon as Derek here builds a time machine, we'll go back a couple years and I will absolutely do that. All right. Derek, what do you think of what David has been sharing? with the dead equity and potentially 1031 or getting more short terms or things like that.

Yeah, I think the idea of redeploying some of that equity and maybe get another short term once I have some more experience with that sounds like a good strategy for getting more cash flow. But as you mentioned, I think starting or working on another business that I could use that cash to help pay off rentals is another way that sounds appealing to me. I love that, especially because SEO is your jam right now and starting an SEO company is not that cash intensive. Like, you can probably do it with everything you have now. You need to buy a URL like Derek's SEO.com or whatever.

Buy a URL and then just reach out to, you know, I'm not even going to tell you how to get business because you're the SEO guy, so you'll figure it out your own self. use those SEO skills to generate some business. But it's such a low cash intensive process for you because you don't really have to learn anything. You already know it. And you don't really need to buy anything because you already have it. It's a computer and your brain. And I'm not trying to downplay what you have.

I'm just saying like it's so easy to start this. Because if it like if it doesn't go anywhere, what is it like $8 on GoDaddy for a URL? Fingers crossed for you, man. It was good meeting you. Thanks. David, thank you so much. This was awesome. My pleasure. Thanks, guys. I'll see in Cancun.

All right, folks, that was our show. Thanks for sticking around all the way to the end. We got into when a just where your mortgages are a good idea versus when they're bad, how to reposition equity, how to get to financial independence faster, what portfolio architecture is, and why Rob is a real estate investor and not a cheerleader. We sincerely appreciate you getting your knowledge from us. We love you a ton. Remember to head to Biggerpox.com slash David's and submit your question to seeing green. And if you like more information about Rob or I, you can grab our contact info from the show notes. Please do that. This is David Green for Rob, bring it on Abasolo.

Sign here. 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 Calico content. And editing is by Exodus Media.

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