BiggerPockets Real Estate Podcast - 993: Seeing Greene: Should I Start Flipping Houses in My Market? (How to Know)

Episode Date: July 23, 2024

Should I pay off my rentals or scale to more doors? Should I start flipping houses in my local but expensive market or go long-distance? When is the time to move from residential to commercial real estate? We’ve got some crucial questions to answer on today’s Seeing Greene as David and Rob tackle the best ways to build wealth and set yourself up for retirement in 2024. Want to reach financial freedom faster? Then, this is the show for you. First, an investor who eagerly wants to retire asks whether he should flip houses in the expensive San Francisco Bay Area or begin in a lower-priced area. Next, when is it time to scale vs. pay off your rental properties? When partnering on a house hack, who’s responsible for what, and how do you split up the finances? Finally, a return caller asks about the pros and cons of residential vs. commercial real estate and whether bigger properties will help him reach his goal of retiring with a sizable rental portfolio.  Need answers to your real estate investing question? Head over to the BiggerPockets Forums and ask it! We may choose it for our next show!  In This Episode We Cover Where to start flipping houses and whether an expensive market is too risky for rookies When to scale vs. pay off your rental properties (EVEN if they have low interest rates!) Partnering on a house hack and how to split responsibilities/profits when one partner lives in the property  Residential vs. commercial real estate and the pros/cons of buying BIG properties  When to trade your small rentals for larger properties with better potential  And So Much More! Links from the Show Ask Your Question and Network with Investors on the BiggerPockets Forums Join BiggerPockets for FREE Ask David Your Real Estate Investing Question See David and Rob at BPCON2024 in Cancun! Grab the Book “Long-Distance Real Estate Investing” Find Investor-Friendly Lenders Seeing Greene 985 – How to Use Home Equity to Retire, Buy Rentals, or House Hack Money Show 543 – Finance Friday: How the “Middle-Class Trap” Stops Your Early Retirement BiggerPockets Real Estate Podcast 763 – Barbara Corcoran’s Wild Real Estate Tactics You’ll Want to Repeat Seeing Greene 747 – “Amplifying” Your Equity and When to Pay Off Debt vs. Invest Get a BIG incentive on turnkey rentals from today’s show sponsor, Rent to Retirement. Text “REI” to 33777 or visit them here: https://www.renttoretirement.com/ (00:00) Intro (01:14) Should I Start Flipping Houses?  (11:37) Scale or Pay Off Properties?  (15:46) Partnering on a House Hack? (21:33) Comment Section Callout  (24:03) Residential vs. Commercial Real Estate (41:37) Share Your Thoughts!  Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-993 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 993. What's going on, everyone? Welcome to the Bigger Pockets podcast. I am your host, David Green, here today with my co-host spazzing out on YouTube. Rob Abovassola. How's it going, Rob? Oh, you know, it is warm outside. A tree fell in front of my house.

We're dealing with wreckage here in Houston, Texas. But I've got a lot to be thankful for because we've got AC and it's okay. We got no food. We got no booze. And our pets' heads are falling up. off. But in today's episode of Seeing Green, we're going to be answering your questions, not bringing you our problems. We actually have a really fun show today with lots of laughs and lots of information being shared. We cover if flipping works in expensive markets like mine in the Bay Area

from a caller who lives in the same city where I'm recording this podcast right now. How to decide the responsibilities in a partnership on how to structure a house hack? Whether someone should get into commercial real estate, stay in residential real estate, or blend the two. And if you've never heard of a cash flow casserole, you want to make sure you listen all the way to the end because you're going to be fascinated by this strategy, as well as common colloquialisms that are often messed up in the world of finance and real estate. You're going to laugh, you're going to cry, you're going to learn. Welcome to Seeing Green. All right, our first question today comes from David Moranis in Brentwood. Ooh, is this the same Brentwood that I am recording in right now,

or is this Southern California Brentwood where Rob and all his posh friends used to play croquet and practice their putting. We'll never know. All right, a little background on David before we get into his question. He currently owns a short-term rental in Davenport, Florida, and a long-term rental in New Bronfels, Texas, as well as a primary residence in Brentwood, still undetermined which Brentwood. As an accredited investor, he also is in three syndication, San Jose, Texas, and Florida. Would like to continue investing in Texas and Florida and maybe Tennessee, which are three states that I recommended five years ago everybody invested. If you listen to my advice, you probably did good. With the goal of increasing his cash flow.

Appreciation from his other investments has been great so far. No experience in flipping, but has done do-it-yourself projects on previous primary residences. He works in project management for his W-2 and has experience working with contractors, hopes to leverage his mechanical engineering background and experience to build a small flipping business. All right, let's get to David's question. Hey, David. This is David from your hometown of Brentwood. My question is about flipping the Bay Area or maybe Sacramento has a means of supplementing my W-2 income.

profits were put into down payments for buy-and-holds outside of state since I am terrified of being a landlord here in California. I had been thinking of an STR or small multifamily in Orlando, and I am pre-approved through the one brokerage for a conventional loan. But I've been struggling to find deals. So I'd like to get a flipping side hustle going to increase my cash reserves. I am a super commuter, so it would really only be able to physically visit sites on weekends. ends the majority of the time. So what do you think? Is flipping in the Bay Area working during these times? Thank you, sir. BP podcasts and your books have helped educate me over the past few years, but I need to get my button in motion and grow my portfolio so I can retire ASAP and give back to others. Thanks for

your help. Appreciate you. Bye. All right, David, you know how to get on seeing green. Well done. You've answered the question. You are in my hometown of Brentwood. Crazy that you live here. You got my book in the background, which looks like it was strategically moved to show long-distance real estate investing in the center shot of the camera. You got some of Brandon's books there. I see it looked like they're kind of playing second fiddle to mine, which was also a great way to cater to my ego. It felt like looking at an audition for a role in a movie. That was so good. All right. What advice do we have for David here who wants to get out of the rat race and start giving back? Okay. So the question is, is Bay Area flipping working these days? I think that is always the question.

You are the NorCal guy that specializes in hello real estate, as you all say. I think this is the same question that's asked every year in San Francisco. Yes, everyone does ask this question. Is it possible to invest in Northern California real estate? And every year, it just gets better and better and harder and harder. That's what's going to be tough about flipping out here. If you're trying to flip locally, David, you're just going under cross crazy competition. you've got like legit full-time flippers that make an entire business out of this that spend

massive amounts of money mailing people because the majority of homeowners out here know what their house is worth. You're not going to bump into the kind of people who just want to get the things sold easy. They've been hearing everyone talk about how expensive real estate is. So if you're going to flip, I would not look away from doing it here. If you come across an opportunity, absolutely take it. But you're probably going to have to put your majority of your efforts in an out-of-state market somewhere. to get like a machine going, I would recommend somewhere in the Midwest. I think more Californians are going to be moving there. I think more Americans are going to be moving there as you see less

and less affordability through rising energy costs, food, cost, housing costs, everything. I think you're going to get more and more people that move into some of those cheaper markets. And because the margins are thinner, you don't have as many of the big boys that are competing over there. You still got a decent chance to turn a profit. You just got to kind of do it at volume, which if you have a mechanical engineering background. You're a systems guy. That gives you an advantage when you're trying to do it at volume. Rob, what do you think? Hmm, maso menos, I don't know. Uh, yes and no. I mean, I would say that the Midwest could still be competitive because there are a lot of people that don't have high budgets that, you know, all they can afford is that entry level flip where they make 10 to 25K. I think that the San Francisco

area is also very competitive, but I also think it's also weeds out a lot of people that try to get into it. So ultimately, I think, I don't know. I mean, and I don't have the data to support if one is more competitive than the other. I would ultimately say that it comes down to how deep is he buying, as our friend Henry Washington would say, how deep of a discount is he getting on that property? You said, David, yourself, that it's much harder to get kind of these deeply discounted houses out there. The only thing that gives me hesitation is that if you're flipping in the Bay Area,

we're talking about a very expensive first project, first flip, first burr, whatever it is, So to kind of get started in the flipping world in the Bay Area feels a bit risky if you don't really have much of a foundation doing any flips at all. Many people have done it. Many people have done it successfully. For that reason, I think I would agree with maybe trying to start in a lower priced market. Maybe some of the suburbs, maybe outside of sort of the prime area of the Bay Area or the Midwest. But I mean, I just kind of think it's like, how good of a deal did he get on the property? If you got a really good deal, then yes, a flip is going to work. My hesitation is it's expensive, thus very risky for a first time flip. I like the idea for you, David, of finding a wholesaler or two, maybe three, that is kind of newer in the business and doesn't have a huge buyer list built out. That is going to feed everything to you first. You're going to have to get out there and quote unquote network to find that person or a couple of them. But if you get someone who's trying to break into the wholesaling model and they actually get a seller on the line who's got something to sell and they'll come to you with it.

first and you can give an offer that they'll take where they make some money and you feel pretty good about it and you're not competing with nine other people and having to increase your bid to get this property that you don't even know if you can flip or not. And they just feed you a steady stream of these projects and you can have two, three, maybe four going on at a time. You've got a decent chunk of capital that you can use to fund these, especially if you don't have to use hard money right away. I kind of like the idea of you cutting your chops there, figuring it out and putting a system together and hey if you come across something in northern california to flip we've got some great bridge products that we can use so you can put little money into the deal to be able to flip it

but don't make it your bread and butter in a competitive market where you could lose everything on one deal and put yourself back diversify that try to get some base hits to mix in with those home runs that's how i feel too i think it's just kind of one of those where i'm like well he didn't tell us how much capital he had so my answer's going to depend i mean he's a mechanical engineer so he's probably a six-figure earner doing pretty well. It's my guess. It's an assumption, of course. But ultimately, I think, I think if he's got a lot of capital, it's one of those things where he can enter it and have some room for error. Maybe he can go over budget, maybe make a little less. If he's coming in with like 50 grand, then he should not be touching the Bay Area. Right. So I think my point of view is

going to really depend on like, if you have a little bit of capital, don't even touch it. I would not go the bridge loan route or the credit card route of just trying to get something done for your first deal as much as I love the take action spirit. I would say go into some of these lower price markets and try that, especially because he said he has no flipping experience, but he's done several DIY projects, which is sort of like congruent to what he's doing, but it's still not flipping a house. But if he's got a lot of capital, then I would say maybe find someone in the Bay Area market, find a mentor, go to a meetup, partner with someone who's doing it, say, hey, for this first one, what if I pitch in half the money and I shadow you? And that way he can actually transition into

this not so willy-nilly. He just said he can't go every day. He's a very long commuter. He can only go on weekends. So maybe what he offers this experience flipper is, hey, I've got capital. I'll put capital into this. I can show up on weekends to walk the property and make sure that the progress is coming along and there could be like a partnership that he strikes up. I think I'd feel more comfortable with him trying to do that versus trying to just jump right into a potentially six figure or multi six figure flip in the Bay Area. Yeah, same thing I was thinking. Like if you can start off a little bit more consistently and smaller, diversify your risk and mix in some of the bigger ones when you get some confidence going. I think that's a good strategy. Yeah. Yeah. Yeah. I feel better about

that. All right. Thank you, David. Great question. Let us know how it goes. We want to hear from you again. All right. Coming up, we have a question about de-leverging risk while also growing a portfolio. And we have a live guest coming up that wants to see if staying the course in residential real estate or going bigger in commercial is the right call. So stick around. Have you ever lost a DSCR deal because the financing just took too long? Red flags popped up late. The lender needed more time. The deal fell apart. Well, our friends at Dominion Financial just launched a program to help prevent that. With their new express rental loan, you can close it.

in 10 days or less, and they still offer their price beat guarantee, so you can get great pricing and a timeline you can count on. Fast, simple, reliable. That's Dominion Financial. Check them out at biggerpockets.com slash dominion. That's biggerpockets.com slash dominion. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and, and owners confident. One delay can throw everything off, and suddenly your day is all clean-up, no progress. That's why hundreds of property managers rely on bill to streamline their finances. Bill for property management lets you add all your properties, assign permissions, pay bills,

and receive payments quickly and efficiently, without the usual bottlenecks. It syncs with platforms like QuickBooks, Zero, NetSuite, and Sage intact, so your accounting stays aligned. You can automate bulk payments across properties and HOAs. Choose flexible payment methods like same-day ACH, international wires, card or check, and set custom roles in approval policies. There's even a dedicated bill inbox for each property to keep everything organized. Ready to simplify your workflow, book your free demo at bill.com slash bigger pockets and get a hundred dollar Amazon gift card. That's bill.com slash bigger pockets. You've upgraded how to buy properties, But did your insurance get the memo?

When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab. That's where blind spots can creep in. NREG works exclusively with real estate investors. They understand portfolios, how risk compounds as you grow, and why insurance should protect your upside, not just a checkbox. One uncovered claim can undo years of progress.

Before your next acquisition, review your insurance. Talk to NREG and get investor-specific coverage from specialists who actually understand real estate at nreg.com slash BPPod. That's nr eig.com slash BPPod. What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky DTI restrictions. They focus on your property's income potential. No tax returns or personal income statements needed.

Simple, efficient, and tailored for investors like you. Imagine a lender that sees the gold mine in your property, not just the number on your paycheck. That's the host financial difference. And they're approved in 47 different states, so your next big deal could be just around the corner. 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. We have a few more questions before our residential commercial eval. The next question comes from Brian Sparger. Ooh, funny side note about Brian. He wants his username to be pretentious platypus on bigger pockets.

if the admins will allow it. We'll make the call. We'll see what we can do for you, Brian. All right, Brian says, I am 44 and stuck between the idea of derisking by paying things off and trying to grow my portfolio with the market where it's at. I'm also struggling with how best to grow if I go that route.

I only do long-term rentals. I have a portfolio that combines stands at about 29% loan of value. All of my notes are 30-year fixed rates. I have one class A, some class Bs, and a class C. All my properties are profit. except one of the class B's where it breaks even. But I like the area because it's tied to government jobs and it's stable and appreciating well. I expect it to retain steady growth.

I also have a savings rate that allows me to put about $140,000 a year towards this. Any advice is welcome. Thank you. All right, Rob. So Brian here has $140,000 a year that he's able to save. He's got a portfolio of long-term rentals and he doesn't know if he should go big and scale or if he should pay off some of his existing properties to get the portfolio. them to cash flow. What do you think? I mean, if I'm reading this correctly, he says that his

current portfolio as it stands is a 29.2% LTV, meaning he's paid off 70% of the total mortgages of his portfolio. That's pretty good. I mean, as much as I'd love the idea of paying off properties, I would say given his age, he's 44, he's kind of right in the mid stretch of this real estate thing. He's got a lot of time to still build a portfolio, pay things off. I think that will come pretty quickly at this point. He's probably attacking principal pretty aggressively already as it stands because he only has a 29.2% LTV. So I would say with that in mind, I think I'm okay with him just buying more properties and kind of stacking equity, leaving his equity that's in there, not touching it. He's got some good low interest rates, maybe collect a couple more properties

for a few more years, and then we can work on attacking that principle. Well, he owes about a million dollars in debt. So it would take him probably seven and a half or so years. Yeah. Yeah, maybe six or seven years to pay this thing off. But of all that debt, only 230,000 of it is at 6.75%. The rest of it is like very low, 3.25 and lower. So he's not going to save himself a ton of interest by paying those off.

The only one I would even consider paying off is that 6.75%, which he could do in about two years. Yeah, but that one's cash flow. positive, you know? Like the one, he said that the 187K1, that's the only one that's like break even, I guess. Yeah, they're all cash flow positive except for the one. Yeah, yeah. So I would say let those cook and maybe just buy another properties using the same strategy that he used to get to this, meaning maybe he puts down a little bit more so that he can actually cash flow. And then once interest rates come down in a few years or whatever, refi, get his high interest rates from today down and then have this really LTV light portfolio.

I like that. I think he's in a pretty good position. You know, Brian, you could put 50% down and buy properties for about $280,300,000 with this $140,000 that you're able to save. And by one a year like that for the next five, six, seven, eight years and just wait and see, like Rob said, what rates do? If rates go down, you refinance the stuff you bought into lower rates. If they don't go down, you still have money that you can put down, which allows you to

buy cash filling real estate that other people can't. There's going to be less competition. You're in a very, very solid position here. Just keep making progress. Just don't stop. Just keep hitting these base hits over the next 10 years and you're going to be in a great position. He is in that dream scenario, man. I mean, I guess the dream scenario is to have everything paid off, but at 44 to have 70% of your portfolio paid off, that's, that's insane. So I would say, keep scaling accordingly. don't go crazy, slow and steady, use your savings wisely, and enjoy your 29.2% LTV. I think it's such a beautiful thing. All right, our next question comes from Harrison in Milwaukee. Hi, David and Rob. My dad and I are thinking about going in on a duplex in Milwaukee together. We contribute equally for the down payment and

own the property 50-50. He's currently house hacking his duplex, and I would be house hacking this twoplex, but we would own it together. I don't know how to structure this partnership fairly. How do most partnerships split the responsibilities and the costs? Also, do you have any recommendations for how to purchase the property? We want to put as little down as possible. Thank you both for your wisdom and your time, Harrison. All right, when it comes to the financing for this bad boy, Harrison, if you're trying to put as little money down as possible,

you're going to want to use a conventional loan. You can do FHA for 3.5% down, or you can do a conventional loan for 3% down. In most cases, that's usually the better option. All you need to do for that is consult with a loan. loan officer. You need to tell a loan officer, ideally a mortgage broker, hey, here's a situation I'm in. How do we have to structure this? And they're going to tell you, one of you has to be on title. The other one can be added later. One of you has to be on title. The other one can't be

added later. Both of you're going to have to be on the loan. They will check with the underwriters and find out how the loan needs to be structured and the title for the property can be taken. As far as the plan for owning the duplex, which I think was probably the gist of your question, And Rob, do you have any ideas on how they can structure a partnership where they both own a property, but one of them is living in it? Yeah, this one is pretty, um, pretty nuanced. I think if they're going to own it 50-50, then the cleanest way would be for Harrison to kind of pay the entity of Harrison and his, like Harrison and his dad's entity, we'll call it Sun and Co LLC. pay Sun & Co LLC rent to get to live in the property. That feels like it would be the cleanest. So we like the idea of buying an investment property

that's not a primary residence and owning an entity and then paying rent to the entity. That'd be the cleanest way, what you just said, Rob. I think they might run into a problem if they have to get a primary residence loan. You can no longer purchase it in the name of an entity to be a primary resident. So in order to try to maintain the spirit of what you're saying

and also holding legal compliance, what I'm thinking, and I've never had to answer this before, is that rather than owning it in an entity, they own it in the name of whoever has to buy it based on what the loan officer tells them the rules are. But they open a bank account. They each contribute an equal amount to that bank account, say $10,000 each.

So they start with $20,000 in that account. Okay? Then the mortgage comes out of that account as well as all the expenses for the property, and the rent goes into that account, that Harrison's going to pay and that the tenant of the other unit is going to pay. So they're each going to pay market rent to this account. Correct. Got it.

Now, Harrison's contribution to the account, half of that will be his. So if the property cash flows positively, Harrison will still be getting half of that positive cash flow out of the account, but he will be paying money into it as a tenant. So he's sort of in a way that account functions like the entity that you were saying. Yep. and Harrison is paying money into it as a tenant the way that you were saying. Does that make sense? It does. Yeah, yeah. So basically just it's more of a personal bank account versus like a business bank account. And they're putting all their expenses in it. And then taking profits 50-50. And basically Harrison is just a tenant sort of of this house. That's it. He's a tenant in that sense, even though he's on title is owning it. He pays his rent into this shared account they have of which Harrison owns half of it. The other tenant's full rent goes into that same account.

When there's expenses for the property, they come out of that account. If the property sells, they split the money that's in the account. They also split the equity that comes their way from escrow after it closes. So Harrison becomes part tenant and part owner. Well, it's scary because we've never had to work this out, right? Yeah, because he is living in it as his primary. Yeah. He's living in it as a primary as a tenant.

So I don't talk to your loan officer. How about that? Another way could be Harrison buys it completely himself, gets some type of, see, I want to say it's a gift letter from his dad, but now I don't know if he can do that if his dad's also going to own part of the property. So you could say we're like, I'm going to give away 50% of the equity in the property to the person who gave me 50% of the down payment. But then I myself will be responsible for all of the repairs and I will be responsible for all of the expenses. That's another way that this could be structured where Harrison, buys it and he's on title, but he gives his dad half of the equity in exchange for half of the down payment. All that has to be disclosed to the lender to make sure that they set that up legally.

And then when they sell the property, dad gets half of the profit. But Harrison was responsible for all of the expenses during the time that he lived in it. Yeah, I guess. I think the only weird part is when they go to sell it, Harrison wouldn't have to pay capital gains because he lived in it for two out of the five years. Right. But then his dad would have to pay capital gains because he didn't live in it? Most likely, yes. So it's kind of this really weird trying to make an investment property work as a residential

setup and vice versa and have your cake and eat it too. So I would just say, be careful. Talk to your loan officer, see what they say. There's absolutely a way to do it. I think, David, the way you said it is what feels the most correct. But everyone's got their own set of lending guidelines. So make sure you connect with the lending. that understands real estate, investing, house hacking, and can guide you more accurately.

All right. Getting into the next section, this is where Rob and I like to review YouTube comments from previous shows. Sometimes we get into bigger pockets, forum questions, or even reviews from Spotify or Apple Podcasts. Today's YouTube comments come out of episode 985, where we had lots of great comments from some Rhode Islanders chiming in and people sharing their situations. You want to take the first one, Rob? Sure. Okay, so SLE says, what I like about you guys in your show is that every time I watch it, I feel smarter and wiser. Thanks for making me better. I have not started my real estate as an investor, but praying that 2025 will be the year, just lining up all my ducks in the middle of the road while traffic is moving as the ducks get ready to jump in the water full of crocodiles in Florida. Laffey cry face emoji. Hold on. Is it ducks in a road? It's not that, right? Ducks in a row. Okay, good. I was like, uh-oh. I've been saying it wrong my whole life.

And then he created a whole analogy out of it. So maybe we just rebrand it to ducks in a road. I do find it hilarious that there are things people can go their whole life thinking or what people say. And then you're like 34 years old before you find out that isn't what people actually meant. Didn't you have a really funny one of these and we talked about this in Cabo, Rob? I think so. So brass tax is not T-A-X. It's not like a tax on brass.

It's like T-A-C-S. Getting down to Brass Tax. That's one of them. What? Is that obvious to you? How old were you when you realized that it wasn't a tax on your breast? This morning. It's like, looking at our scene, I'm like, what is this brass tax? Why don't I was that to be?

That's good. That's really good. I remember there was an age where I learned that it wasn't French benefits. It was fringe benefits. Okay, that's a good one. I don't know how it was always pronounced like French benefits. It's for all intense and purposes. not all intensive purposes.

That's a pretty good one. Come on. I'm not alone here. I'm not alone. Hey, for all intensive purposes, that purpose is very intense. Yep, it makes intense sex. All right, Estleck,

thank you very much for sharing this. We appreciate you. All right, coming up, we have a live guest who's going to be joining us with a question about staying the course in small multifamily for a million dollar purchase price or going bigger. commercial real estate and what the best route to take is. So stay tuned as we get into the real

estate weeds on this one. There are two kinds of real estate investors, those who have reviewed their insurance and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NREG.com slash BPPod. That's NREIG. com slash BP pod. New Year, Clean Slate, and maybe a vacancy that needs to get filled fast? That's

where a veil comes in. With Avail, rental listings can be published to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, Apartments.com, Redfin, and more. No copying and pasting. No juggling multiple platforms, just one listing that shows up everywhere. If getting rentals organized and filled fast is on the list this year, start with Avail. Sign up for free at Avail.co slash Bigger Pockets. That's A-V-A-I-L-C-O-Sash Bigger Pockets. Tax season reminder for all the real estate investors listening, if you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about.

cost segregation. It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost segregation guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to costsegregationguise.com to get a free proposal and see your potential tax savings. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters

more than ever in this economy. That's why I like Mind. Unlike other property managers, Mind manages your property like an investment. They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score, and they have the results to prove it. Go to mine.com slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. And welcome back. Mark, welcome to the Bigger Pockets podcast. Mark here was on episode 747, where he was on seeing green and asked some questions about residential versus commercial real estate. Mark, I understand you've had a few changes in your situation and you want to get some updated advice. So first off, welcome to the show.

Second, tell us what we can do to help. What's been changed? Thanks for having me. So what's changed over the last about year, year and a half? So originally I asked the question, we only had about $100,000 in cash. Since then, we've bumped up to about $300,000. Just being able to save low cost of living with the house hack and also a little bit of an inheritance. And our equity has grown in our first two properties. We're sitting at about $500,000. 500,000 in equity right now between two duplexes as well. So looking to see our plan was to use the cash that we've accumulated to purchase a four unit property, which would be about a million dollars in my area. And then possibly using the equity down the road after that one is

stabilized using some of the equity in one of the properties to purchase another four unit. And I actually just listened to, I believe it was episode 985 that just came. out where you and Rob discussed exactly that as far as using what you guys how you guys feel as far as using Helock from a rental buying another property. So actually, funny enough, I just kind of got your perspectives on that as well. Okay. So first off, there's some congratulations due here. You've increased your cash by how much? A lot. 200K. I can comfortably say that it's mostly my wife and she makes a bit more than me. And again, our expenses are just are really, really low. That's still awesome, though. I mean, that's a lot.

Yeah, that needs to be highlighted. There's a benefit to keeping your expenses low. It's not easy to do. It's kind of like Rob's haircut looking like it does every single day. He doesn't just wake up like that. It takes some effort. Keeping your expenses low is not easy. So congratulations there. Also, staying on the path of wanting to buy more real estate. So making more money and saving more money. That is, in my mind, the best strategy to take if you're trying to build a portfolio. You're investing money that you've made. you're not trying to creatively come up with money you don't have and shift equity around. That just becomes more risky than real estate needs to be. It's already a risky investing class. So several things you've done well there, Mark.

Congratulations. You have the goal I'm assuming here of scaling. That's what we're talking about today, right? Correct. I think, but I think I'd like to keep it within the self-managing kind of realm. I don't really see myself as like a Brian Burke or, one of these guys for, you know, thousands of units, just kind of keeping it with, within house. So scaling, but not, nothing too, too crazy.

I don't feel that I need to go to a meetup and say I have, you know, hundreds of doors or anything like that. Sure. Sure. I have a question. What do you, what does scaling mean to you? Like, obviously, maybe that does mean more doors, but when you think of scaling for your ideal scenario, is scaling meaning increasing your cash flow or increasing the size of your

portfolio? equity, what is it that you're actually trying to attack right now? So I think scaling to me, because finding in a hard number, I know a lot of these people, they know their expenses, they know exactly how much you're spending per year. Our situation will change over the next couple of years with kids. We're going to finally stop house hacking after five years. So I know that that'll be a fluid number. Scaling to me means the properties are self-sufficient so that they are able to basically,

I don't need to take any of my money and put it into it. I have enough, you know, let's say I have enough properties that, you know, if four of them are doing well and one has, you know, large cap X expense that year, I can, you know, I can just kind of move money around. It pays for itself. That's one part of scaling. The other part of scaling to me is I'm going to be retiring at 55 from a government job and keeping me busy enough to stay busy while I'll be, quote unquote, retired. I won't be working a government job anymore, but then I will still be involved in the day-to-day. I could step away for a week or two to travel, but it does keep me somewhat busy kind of either managing the managers or just doing things here or there. I know that's

not a specific answer, but just kind of keeping me busy enough to keep me stimulated, but not so busy that I'm drowning in it. And it's, you know, I've just bought myself another job where I'm working 40, 50 hours a week on my portfolio. That's what scaling means to me. Got it. So if I'm hearing it correctly, you're looking to balance out your portfolio architecture, meaning you want a little bit of diversity and income so that whenever, you know, one property is not doing so hot, another property is picking up the slack and you always have that flexibility. That's one. Two is you are willing to invest in something that might take a little bit more work and that would be worth the extra cash flow for you, but you don't want so much work that it feels like you left retirement to go work another

crazy, crazy job. Correct. And the other thing too is that I don't need the money. Obviously, like we talked about my expenses, I don't need the money. So if, you know, I do buy a property and it's not cash flowing day one, year one, year two, that's totally fine. That's what we bought. We purchased a three unit about four months ago now that I'm currently sitting in as a house hack. And it's probably not going to cash flow, even depending on when we move out, it might not cash flow for that first year. But it eventually will because it's in a class A area, which is totally fine with us. And we're fine with putting in a little bit of sweat equity. Because we know we're playing the long. and we know after 5, 10, 15 years, which we plan on holding, that everything rents will appreciate, the area will appreciate it. Nice. And so the question for today is, with all these things in mind, what can you do? What are some ideas of, like, how you could utilize 300K to increase cash flow, increase maybe some equity, and like, what's that next move with that amount of money?

Correct. And also, I know last time when David answered the question, the main question was stay in residential or go commercial. and it's kind of a revisiting that question. You know, I'm right on the cusp with our down payment and our cash size, it would be right around the four unit. However, it seems like when you buy more units like a bigger building, you kind of get, you know, usually get a better price per door.

You know, you could buy around here a duplex for anywhere from 600 to 800,000, or you could buy a four unit for around a million dollars. So obviously that's less per door. Would it make sense for us to just wait a little bit and then scale up? because about five units are going for about anywhere from 1.2 to 1.5, depending on the exact location. Should we just wait and kind of scale up a little bit more to a five unit, again, bridging the gap between residential commercial, or kind of stay right in that sweet spot of the four unit. Yeah, yeah. Okay. So, David, I'm going to turn this over to you really fast, because I know you've owned commercial property in the past.

I don't know if you still do. What do you think? What is that appropriate moment for an investor from your experience of maybe parlin, or foraying, if you will, into the commercial space. It's a different way to manage it, and the financing is very different. You rarely ever find investors that do both commercial and residential. Super rare. And it's just, it's like two different sports. So I want to ask you, Mark, what are the elements of real estate investing that you don't like and you want to avoid?

Some things I don't like that I don't do now really. I don't like dealing with leasing up properties, you know, units. I don't really enjoy finding. deals. It's so hard to find deals in my, in my area that I just, Jonathan Green is one of the guys in my area and he has his thoughts on wholesalers, which I 100% agree. There's not really, there's not really deals out there for wholesalers. It's a lot of who you know and on market stuff. Those are, I guess, the things that I don't really enjoy doing. I do like doing some of the day to day in bits and pieces like working on properties. I don't mind kind of self-managing, but I would

say really the only hand I think I just do not like or just leasing up. And I think that's pretty much about it. All right. So you don't like looking for the deals, which I'm assuming means you don't like spinning your wheels and not making any traction. There's not a lot of deals out there to look at so you don't like wasting time. You don't like leasing up, meaning finding a tenant for the property. Is that right? Correct. I've hired that out to my mentor and my realtor as well. Okay. So what are the elements you do like? So I guess as weird as it sounds, I actually don't mind dealing with tenants. I know most people don't. I can understand why. I like kind of being somewhat in the minutia a little bit. I like kind of dealing with the, I don't mind doing the bookkeeping. At some point, I would like to

hire that off. But for now, I don't mind it. I like analyzing deals. I love looking on for right now, just, you know, Redfin Zillow and kind of running numbers while I'm on the couch and going to look at properties. I enjoy, I enjoy that. And I enjoy not necessarily rehabbing because I have a contractor who I'm actually friends with, so that really helps. But I enjoy dealing with him and some of the projects when we do have to, you know, take on renovations and things like that. I kind of not being a GC as much as just kind of, you know, above the GC and just kind of directing him. You like the vision. You like to look at it. You like to try to figure out how it's going to work out and you like to manage it once it's been purchased, but you don't like anything that doesn't make progress. I can tell

that's a big theme in this talk today is I want to feel like I am moving forward. what can I do? With commercial real estate, the majority of the effort to do that well is in the analyzation upfront looking at like would it work and having the cash to pull off the plan. Like once you buy it, I believe in our first segment we did with you, I talked about commercial real estate like a battleship and residential real estate like a jet ski. Once you buy that commercial property, it is very hard to change course. It takes a long time.

Your leases go for a long time. time. When you lose a tenant, it is very expensive to get another tenant in there. Usually you have to spend a lot of money to improve the space for the next tenant to want to use it. The remodeling isn't something that you're going to have much to do with. It's usually the tenant that's going to be overseeing their own remodeling. A lot of the stuff you like about real estate is what I'm getting at. You're not going to be doing. You're going to be constantly looking at deals all the time and analyzing that, but not just like how do the numbers look? It's going to be, how do I analyze the tenant themselves, as opposed to the property.

When you're analyzing residential real estate, once you know it's in a good neighborhood, there's not a whole lot that goes into it other than having a screening process for a residential tenant. You might pick a tenant for your commercial property, fill it up with six different tenants and four of those businesses go out of business.

And now you've got four vacancies that might take a year and a half before you find another tenant to put in them. It's very, very different than residential real estate. It doesn't mean it's worse. It's a completely different skill set. You also might have a tenant that stays in there for 15 years and you don't have to worry about anything and you just keep getting rent bumps.

And when it's triple net, they're paying the property taxes, they're paying the insurance, they're paying for the improvements. It's wonderful. But it's definitely, in my experience, more high risk and more high reward. It's very different than residential real estate, which you could just kind of scale bit by bit. You're looking to make progress in whatever it is you're doing. And I worry that possibly stepping into commercial real estate will, feel much like the opposite oftentimes as you learn this new niche of real estate. It's going to be

frustrating. It'll be hard, hard work, all that good stuff. And it may be a while before you see that quote-unquote progress and that vision come to fruition. So for that reason, I think I would probably push you a little bit towards like staying in what you know, which is on the residential side. Would it make sense to start looking at instead of staying at the four-unit multifamily, look at like the five to, you know, five, six, seven multifamily properties as well. More so than the triple net, it would make sense. What I like about it is you have something to chew on. You're going to have like eight, nine, ten units of different tenants.

They're going to be leaving. You're going to have to conduct turns, make sure that everything gets done. It seems like you enjoy that part. And that is what it takes to be successful as like a mom and pop operator is you got to pay attention to the details. I think it's one of the reasons Rob does really, really good with his business is he's in those details all the time. Where it's going to be tough for you is the uncertainty that comes with the financing.

A lot of people bought good assets that were cash flowing well, that when interest rates went up and their note came due, all of a sudden, this cash flowing asset at the new interest rate does not cash flow and you have no choice. You have to either refinance it or sell it. And if you're going to try to sell it, the next person buying it is paying way less for it because they're buying it at that new rate.

And now you're the distress seller that we're always targeting and you did nothing wrong to end up in that position. Just you didn't have a chair in front of you when the music stopped. That's what makes me nervous about somebody in your position mark who's trying to grow bigger. Those assets are really designed for someone that's already grown big that can put 50% down on that thing or 40% down. So if interest rates move in an unfavorable way, they refinance and have less cash flow, but it's not that they can't refinance.

You're still at the point where you're trying to turn a, a chunk of change into a much bigger chunk of change. So the advice that I would be giving you is probably along the lines of go into cheaper properties and see what you can do with the Burr method. You're going to be very active. You're going to be overseeing rehabs. You're going to be using your vision. You're going to be trying to look at properties that need a lot of work that have some

equity in them that you can go in, turn around, fix up, slowly build equity. And then maybe once you get 8, 9, 10 of these single family properties or small multifamily properties with equity added and refinanced 1031 into some of these commercial assets that you're talking about. Rather than taking your cash and putting it right into commercial, I'd rather see you take your cash, put it into residential, grow your equity like you have on the ones you have at the point you think that, hey, I'm ready to move away for managing 10 of these properties. Sell 10 and buy one 10 unit apartment complex like you're talking about. What are your thoughts? Hold on one little thing. I think the 5, 6, 7, 8 doors, it's not like once you get past

four doors, it's all of a sudden like, oh, oh my gosh, it's way harder. Like, I think you're ready for that. I don't, I think that's honestly a pretty similar decision. If you had said, hey, I want to buy a 30 unit building, then I'd be like, okay, that's, that's different than a four unit. Five, six, seven, eight. I mean, it's more work for sure because there's more doors. I just don't think it's anything that's like a night and day difference personally, but that's just, uh, that's just my thought there. All right. So let's see if we can sum some of this up, Mark. You've got quite a bit of cash you've saved up, you want to scale. I think the best way to do it is to convert that cash into equity in different properties, which you're going to do by buying them below market

rate, adding value to them, and then hopefully you get a little bit of market appreciation equity to where the wins carry it further. I would say do that until you run out of opportunities or you run out of time slash energy. When you're just like, oh my, like it hit me in northern Florida when I hit around 50 properties or so, I was like, I just hate this whole port. It was not that bad, but it wasn't that great. It was just constantly, this thing broke, this tenant's upset, this issue happened, you know, this person got a bullet lodged in their garage door and they're mad at their landlord for it or whatever.

And I just realized, okay, let's sell these 1031 into something that's going to be less work and then start over building a portfolio the same way again. That's the advice that I'm going to give to you. I think you're going to like doing that because it's going to give you stuff to look at. it's not going to be a waste of your energy when you're looking at the cheaper properties that are lower price point that need a lot of work that other investors maybe don't want to take on you're going to have to find another market probably somewhere in the south somewhere in the Midwest just somewhere where housing overall is cheaper and there's less competition from other real estate investors and most importantly

your dollar will go further because you've got quite a bit of money saved up if you're trying to invest somewhere in Ohio somewhere in Alabama some of those investors they don't have as much money as you do to take on some of these projects so you can take something on that they can't. And you're also not going to need to hold it forever. They're going to be looking at this stuff like, I'm going to hold this thing for 50 years, so it better be a great deal. You could be a little pickier because you're probably going to exit, sell it to someone else that wants a turnkey investment, then 1031, that money into some of the stuff we're talking about today, the more expensive properties and the better areas that you're used to.

Rob? Yep, solid plan. I like it. I endorse it. I co-sign it even. You're not going to tell them to do short-term rentals? This is your chance. You're the short-term rental guy, right? Everyone in the comments is going to say, Rob, all you ever do is tell people, to buy a short-term rental. I do think for what it's worth, if you were going to buy a five to eight-unit building, I think the dream scenario is if you bought an eight-unit building, you rent four of those out long-term, two of them out mid-term, two of them out short-term, and have a super diversified eight-unit building that kind of cranks out cash in different varieties and different returns. And that to me is like the juiciest way to do a small-time multifamily.

Rob, I think that is great advice. In fact, I'm going to write another. book and I'm going to call it cash flow casserole based on your idea of six regular, two midterm and two short term. Nice. I like it. I'll write the forward. It'll be forward. Let us know in the comments.

Do you think that this new book that Rob's Forward Forward is going to be called the Cashflow Cacharole or the Cashflow Casidia? I just may take it serious. All right, folks. That's our show for today. We've covered quite a few topics, which is awesome, including does flipping in the Bay Area still work with all the high competition? how to decide if the responsibilities of a partnership are being split up fairly, the brass

tax that few investors talk about and how to avoid those ducks in a road in your own portfolio, all that and more, plus a live call on today's seeing green. Did you love it? Did you find Rob to be hilarious? Did you find me to be tolerable? Let us know in the comments on YouTube your favorite part of today's show as well as what you would like us to cover. Rob, anything you want to say before we get out of here? Listen, for all intensive purposes, I just wanted to to say this was a really fun episode. We got into some good philosophy. And hey, maybe I'm changing the way I think. I always do every single time I share the mic with you, man. So, appreciate you having me on. Awesome. I'll let you get out of here. This is David Green for

Rob putting the brass and brass tax I was solo. Signing off. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe Content. And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included involves risk. So use your

best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.