“Amplifying” Your Equity and When to Pay Off Debt vs. Invest
Want to buy rental properties while the market is down? If you didn’t already know, you could be sitting on the perfect funding source found right under your own feet. But with today’s mortgage rates still double what they were last year, is taking out any of your equity a mistake, or could this be the opportunity of a lifetime to scoop up some sweet real estate deals at a stellar price? We’ve got our expert investor, lender, broker, and ship-metaphor-making host, David Greene, to give you his wealth-building secrets.
Welcome back to another Seeing Greene, where we take questions live from BiggerPockets listeners on how you can retire early with real estate, build a business you love, and create generational wealth. This time, we’ve got questions on how to use home equity to buy more property, then we debate cash flow vs. appreciation and which is a better bang for your buck. We’ll also compare commercial vs. residential real estate and explain how these two seemingly similar assets operate VERY differently. And finally, David gives his favorite news sources on where to learn about the economy, the housing market, inflation, and every other variable that’ll help you make intelligent investing decisions!
Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!
This is the BiggerPockets Podcast, show 747. First off, if you don’t know what I mean by portfolio architecture, it’s the idea of seeing your portfolio of homes as one organism as opposed to every individual house as its own organism. You want to have some short-term rentals that spit off a lot of cash and some traditional boring rentals that provide very steady cash flow to protect you in downtimes. You also want to have properties that maybe don’t cash flow great, but they build a lot of equity for you, you’ve built a lot of equity into. You want to have some properties that over a long period of time, are going to make a bunch of money and some properties that in a short period of time are going to provide cash flow to get you through that long period of time.
You want to combine them all together, so that’s portfolio architecture. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here to help you guys make money through real estate and find financial freedom with a Seeing Greene episode for you today. First off, I’m proud of myself that I remembered to turn the light green before we start recording. If you want to see what I’m talking about, check us out on YouTube where you can catch the video portion of this podcast. Second off, if you’ve never heard of a Seeing Greene episode, these are shows where you, the listeners submit your questions directly to me about what goes on in my head, how I buy real estate problems that you might be having and you don’t know what to do when you should jump into the market, how you should jump into the market.
Every single thing that you’ve thought and said, “I love this podcast, but I wish David was here right now. I’d ask him this.” I could be here right now. You just got to go to bigger podcast.com/david and submit your question, and we make this show for the people and by the people. Today, we have a fantastic episode. I go a little bit longer, so please, there’s a reason I did that, check it out. Listen all the way to the end because we give something very, very good advice and stuff I know a lot of people are thinking about. We cover what to do when you think you’ve got a deal, but the area isn’t great. So in this question, I kind of dig into the three things that I use when I’m analyzing should I or should I not buy this deal?
There’s another question about when to add diversity to your portfolio and when to stick with what you know. This is a question a lot of people struggle with, should I just keep doing the same thing forever, for infinity or should I branch off into something else and win? Then, how I filter my news to form my thoughts on everything. One other people said, David, “Where do you get the information that you’re basing your perspective on,” which I thought was amazing, and I share some information about how you guys can do the same is more simple than you think, but also more powerful than you think. All that and more on today’s show. Before we get to our first question, today’s quick dip is I swivel at my chair to keep my energy up for you.
How do you keep your energy up and what actions do you take that help you move forward? How can you contribute more to the community of those around you and put some of your energy into the BP community? Let me know in the comments on YouTube and this quick tip will make much more sense if you listen all the way to the end of today’s episode. All right, let’s get to our first caller.
Hey, what’s going on, David? My name is Cory Meals. I’m a real estate broker associate and team leader here in North Texas. I’m also a real estate investor, and my question for you today is how can I leverage the current equity that I have in my property so that I can go out and buy more property to put into long-term debt? The idea is right now, I have 40 to 50% equity in all of my properties. It’s duplexes and a single family property. It’s roughly a million dollars in equity that’s just kind of sitting there. I don’t want to refinance these properties because I have 30 year fixed notes on them all in the low to mid 3% interest rates. They’re all cash flow grade and I don’t want to sell them either. I’m not looking to trade up. I want to figure out how I can tap into this equity.
Every lender I talk to says that they won’t take a second position to give a line of credit. They won’t give any kind of secondary loan so that I can go out and buy more property. There’s opportunities out there that I’ve seen here and there, and I just want to be ready to strike whenever I come across that great deal. So anyways, I’m looking for any end sighting you have on this. Also, for all of you BiggerPockets listeners, if you all are looking to move to the North Texas area, specifically Sherman, Texas, I’d love to help you out. Once again, my name’s Cory Meals. Thanks for taking my question, David and I’m looking forward to hearing the answer.
All right, thank you, Cory. Well, you’re making your journey a little bit of an uphill battle here because I like the question of how do I get the equity out of my properties, but the two easiest ways are both something you don’t want to do. So let’s take a quick step back and just talk about what equity is. Equity by definition is the difference between what you owe on a property and what it’s worth. So you’re saying that the properties are worth much more than what you owe. There’s about a loan of around 40 to 50% of the value of the property. So you basically have 50% in general of your property has equity. All right? What is equity at a philosophical standpoint? That’s a better question. Well, if you can learn to look at money as energy like I do, it makes a lot more sense.
When you go work a job, you work eight hours, they pay you $200 for your work, you basically have $200, which is a store of the energy that your labor and your time created for you. Okay? So we know that money is money, but I stopped looking at it the way that I used to because inflation has run rampant and now, I don’t know what money is even worth. What’s $200? Well, it’s worth a lot more than it was 10 years ago. It’s worth way more than 30 years ago. At 100 years ago, $200 was probably more like $10,000, right? It’s crazy, so you can’t just look at money as having an inherent value. You have to look at it as a store of energy. Savings, money in your bank account under your mattress is a bad store of energy. It loses value, right? So inflation is actually bleeding away at the value of cash.
When you look at equity, what that is, is energy that has been moved from your savings account into a property and it tends to grow. It grows because the loan’s getting paid down. It grows because the value of real estate tends to go up over time and it grows because cash flow that that property kicks off creates a return. So equity either grows money better than if it’s in your savings account or it just bleeds less. A lot of us don’t realize if inflation’s at 30% because that’s how much money we’ve added to the supply and your real estate went up by 15%, you still lost 15% of your money. It’s very hard to track exactly what inflation is. We use the CPI, but that’s not the most accurate thing.
Now, I’m not going to go too deep into macroeconomics right now, but I did want to just highlight the point that many of us think that we’re wealthier than we really are because we’re like, “Oh, my property improved by 15%.” Well, if inflation was really at 25 to 30%, you still lost money, but you lost way less than if you just put your money in the bank. Now, if you add leverage into real estate investing, that starts to sway it in your direction. Okay? So your question is how do I get the equity out of my properties? What you’re really trying to do is take the energy that is being stored as equity in these properties and put it out into buying new properties where it can be amplified even more. And there’s four ways that you add equity when you’re buying a property. The first is what I call buying equity.
This is just buying a property below market value. The second is what I call forcing equity. This is also referred to as value add, you force it to become worth more by something that you do to improve the property. The next is market appreciation equity. This is buying an area where prices rise faster than the average in the country, and then, the fifth is natural equity or inflation where it just becomes worth more because the dollar itself becomes worth less. So I do want you to reinvest that money, but the two ways we normally get access to that energy is either selling the property in a 1031 and moving it from the property, it’s into a new property. Now, the 1031 is just a way of moving your energy that’s more efficient.
You don’t lose as much of the energy in the transaction because you don’t have to pay the taxes, which takes away. The other one is a cash-out refinance where there’s still some energy loss because you’re going to pay some closing costs on that, but it’s very insignificant compared to how much energy you can gain if you go get the four ways that we build equity in another property. So you sell a property that’s somewhat maxed out, you get another property at less than market value, adding equity, then you add value to the property, adding equity. You buy it in an area more likely to grow and appreciate than the surrounding areas, adding equity and then, you continue to benefit from the same inflationary pressures that you got with the last one, which continues to add to equity that you were already building.
When you do real estate right, every transaction like this, every time you move your energy, creates a bigger and bigger and bigger snowball. Your problem here, Cory, is you don’t want to have to sell or refinance your properties because you like the rate you have and you don’t want to sell, which leaves you with limited options. You’re going to lenders and asking for a second positioned loan, so if anyone doesn’t know what that is, this is a loan taken on a property based on the equity of it, which some lenders would be willing to do. If you have 50% of the equity, they’ll give you another loan and put a second position lean on it. Many of them don’t, especially with uncertainty in where the market is headed, okay? It’s actually really hard to get financing right now because while all of us are like, “Is the market going to crash?” We’re getting all excited.
The lenders are like, “Is the market going to crash?” They’re getting nervous. They don’t want to lay it on real estate, which to be fair, we’ve warned you guys about for a long time, at least I know I have. When the market turns around and there’s amazing deals and everyone is excited because there’s a crash, it’s super hard to get financing, you’re probably don’t have a stable income in your job, it becomes very hard to invest in real estate when we think it’s going to be easy because we think we’re going to get properties at discounted rates. Based on what you’ve said, you have two options. One is putting a HELOC on investment properties, which is incredibly difficult to do. The only advice I have for you on that is to go to a local credit union or savings institution, but still it’s very hard to get those.
I remember looking for a solid year before I finally found a credit union that would do that on my HELOCs and I don’t have any of those right now. I’ve already refinanced those properties out of that or something you might not be thinking about is private lending. You can go borrow money from people on the private money and give them a second position lean on your properties and borrow money from them. Now, the rate is going to be higher probably than what you get at a bank unless you find a person who is happy to give you a 6% loan or 7% loan, even though that’s less than what a bank wants, it’s more than what they’re probably getting on their money in the bank.
So if you don’t want to sell and you don’t want to refinance, the only option that I think that you have here other than getting lucky and striking gold, finding someone that will give you a HELOC on an investment property is the private lending route. The advice I’m going to give you is just consider selling. I don’t know what the reason you don’t want to sell is, you know better than me, but if you can sell one property and turn it into two to three that each one of them, you build equity in those four ways, let’s say you just take two ways. If every property you buy, you get less than market value so you get a good deal and you add value to it, you’ve now increased the equity on each one that you bought. And so if you sold one and bought three, you’ve won six different times over, okay?
Then, if it’s in a market where the money continues to grow, that’s a third way you’re building equity, now, you’ve won nine times over and that snowball will continue. If the reason you don’t want to sell is because of the interest rates, I’m just going to advise you not to let that be the reason you keep a property. That might be an okay reason not to refinance. You like your 30-year rate, you don’t want to get out of that, but selling a property and reinvesting your proceeds into something bigger and better with a value add component in a better location and that you bought it less than market value, that’s how you’re going to build bigger wealth. So thank you Cory for reaching out. Good luck to you on that my friend. Our next question comes from Aaron and Evan both in Baltimore.
“Hey David, a friend of mine and I are huge fans and are ready to take action on our first property. You constantly say to buy the nicest house in the nicest area you can, and of course we’re doing the exact opposite. We have the opportunity to buy an off market property for 150K that if listed, would sell for around 180K. It is a duplex, both unit is rented by the same tenants for about five years in total, pulling in 1650 a month looking good against the 1% rule. Rents to the tenants have never gone up and could marginally without risk of losing the tenants. So it seems this is a no-brainer, but what is our actual strategy here? In terms terms of actual cash flow, it’s not a whole lot of dollars and in terms of appreciation, that’s a little unclear because the neighborhood is not great.”
“We are super excited to get our first property and simply trying to figure out how to prep to get the second. What say you?” Well, thank you both Aaron and Evan for running this one by me. All right, let’s start off with the big picture and then, whittle it down into the small. I look at real estate as building wealth in three ways, and so there’s three things that I ultimately factor into what I’m going to buy. The first is the cash flow, the second is the equity, the third is the headache factor. Very simple. So if a property cash flow is great, but there’s not a whole lot of equity, I might buy it. If a property doesn’t cash flow, great, I want to see a whole lot of equity in that deal or maybe I get a little bit of cash flow and equity, so I’m happy.
The third one is usually going to be the decision factor for me, and that’s going to be the headache. I don’t ever want to own real estate in rough neighborhoods. I don’t want to own real estate in any situation where it’s going to take a lot of my time and energy and attention. It becomes too expensive. Now, this does work when you’re buying your first deal because right now, you have a lot of time, you have a lot of energy. Anything is better than where you’re at, so when you compare the property you’re looking at to where you are with no properties, it starts to look good. It’s kind of like gas station sushi. You’re hungry. Is gas station sushi the best? No, but is it better than being hungry? It could be, so it starts to make sense, but if you’re comparing this to a real sushi, you wouldn’t touch that stuff, right?
The problem with gas station sushi is it’s the unintended consequences that you could not predict that are going to take you down. That’s what I’m worried about in this deal. So here’s what I am seeing, Seeing Greene, as you’re telling me about the deal. In terms of actual cash flow, it’s not a whole lot of dollars. So cash flow, one of the first three reasons I’m looking to buy a property isn’t there. In terms of appreciation, it’s a little unclear because the neighborhood is not great. Okay, so you’re not getting appreciation from either natural … you’re not getting equity through appreciation as natural equity, which is inflation or market appreciation equity, which is buying in a great area because it’s not a great area, okay?
So those two ways you’re not getting equity, what about the other two? Is there a value added component to this? It doesn’t sound like it. If it’s not in a great area, you could dump a lot of money into this property. It’s not going to really increase the value and you’re not buying a lot of equity. You’re buying it from 150, it’s worth 180, sure, there’s $30,000 right there, but if you ever had to sell it, that 30,000 would pretty much have to go right towards realtor fees and closing costs and everything else. So you’re kind of breaking even and you have a headache factor, so there’s no cash flow, there’s no equity, and you have a headache. To me, this is a hard no. A very easy no. Don’t buy this property. Probably a reason the person is trying to sell it to you, there’s probably a reason they haven’t increased the rents for five years.
So you’re looking at that with rose colored glasses like, “Oh, I could bump the rinse and the tenants could still afford it.” Well, the current owner might have done the same if that was possible, who knows the reason that they haven’t bumped it. Maybe they’re just a super nice person, but maybe they think that the tenants are going to leave and they can’t afford the vacancy. I don’t see any reason that you should buy it, and I see a lot of reasons that you shouldn’t buy it. I’d much rather see you and your partner get something in a better neighborhood where you’re going to get better tenants, where rents are going to go up more overtime, where cash flow is going to increase, where the value is going to increase and you’re not going to have a headache factor and just be more creative with how you make that deal work.
Can you house hack in a really good neighborhood and put 5% down on the property and rent out the rooms or make ADUs and rent those out? Can you do something that is less comfortable than just buying a rental property but more profitable, because as I always say, when it comes to house hacking, comfort and profit are opposite ends of a spectrum and you got to figure out where on that spectrum you’re comfortable existing. So thank you for the question. Thank you for submitting this. I’m sorry that I can’t tell you to go for it, but I don’t think you should go for it. Not on what I’m hearing right now. Hopefully, this saves you a lot of money and a lot of headache and a lot of time, and you keep your capital for a better deal that is likely to be coming your way. Right now, it’s not a time to rush and jump into real estate.
This temporary little stall that we’re at from pushing interest rates higher and higher is putting more leverage in hands of buyers and less in sellers. So time is on your side for right now. Thanks very much guys. Give me an update on how that deal works out. Our next audio clip comes from Mark in New Jersey.
Hey David, this is Mark from Northern New Jersey. Thanks for taking my question. I love the show. I love BiggerPockets, I’ve been a fan for years. So quickly before the situation, my wife and I have good paying jobs, stable jobs. I’m in law enforcement actually, and we both make total of about 300K. We have no outstanding debt. We have good credit scores and we have low monthly expenses. Our experience, we’ve been house hacking for a couple years now. She’s seen the power of it. We own two duplexes, both with owner-occupied financing, low interest rates. We don’t have a ton of equity yet that we’d be able to pull out, but they are appreciating and they do spit off some decent cash flow and reduce our expenses.
So we’ve gotten that experience. Everything has gone really well. I have a great team from Realtor. I do currently manage my own properties and I enjoy it and continue to do so and I have great contractors. My question is, and the problem is I want to scale up to something a little bit bigger between four and seven units. I do know that that’ll start crossing into the commercial lending. However, the down payment, because things around here are so expensive, is quite large and we do have about 100K to put down towards our next rental property. However, I’m trying to think of creative ways to go about purchasing the next one. We were thinking about having some sort of seller carryback maybe on the next … on the 10 to 15%. The rest of it, I’m not sure how that would work with financing the other 80 to 75% or also raising private capital either from our friends and family, but I wasn’t really sure exactly how to do that.
I do … at least how to approach that, I would like to do straight debt and not any equity in the property. Any help, I’d appreciate it. I do plan and continue to work. I don’t plan on leaving my day job. I love my law enforcement work for now. So yeah, appreciate it and I’d love to come on and talk more about it if needed. Thank you.
All right, thank you for that Mark. Some really good stuff there and I see the dilemma that you’re facing. All right, let’s break this down. First off, the reason that I tend to talk about residential real estate more than commercial on this podcast is because residential real estate is much more flexible than commercial. I use the analogy of it’s like a jet ski. You can change directions very quick. You have more creative cool things you can do. With a jet ski, you can do 360s, you can jump wakes, you can go fast, you can go slow, you can make sharp terms. There’s a lot of different stuff you could do versus a battleship, which there’s not a whole lot you do. You go in a straight line and you plunge through obstacles and they’re safer but to change direction is a freaking endeavor.
It takes a lot of work to slowly turn a battleship from one thing to another. Residential real estate is like a jet ski and commercial real estate is much more like a battleship. When you chart your course on a battleship, you put a lot more time into analyzing that deal, underwriting that deal, making sure your course with that battleship is dead on because if there’s an iceberg coming up at the last minute that you didn’t see or you’re going into shallow water, you can’t turn nearly as quick as residential real estate. Residential real estate is flexible. However, it’s not as resilient and it takes more work just like you got to pay more attention when you’re riding a jet ski than if you’re controlling a battleship.
You just sit back and let it do its thing. So your situation is that you’ve done well with residential now you want to get into commercial. The reason I use that analogy is there’s a lot of people that will try to take residential approaches to real estate and apply it in the commercial world and they’ll crash. You got to be very sure of where you’re going with a commercial space. It’s a much more long-term approach. It’s harder to build equity, it’s harder to make decisions, whether it’s multifamily or it’s commercial or it’s triple net, you make a decision when you buy and you’re kind of locked in as far as what you can do. You got to execute the plan you had. You’re not going to change courses like you can with residential real estate with shoppers, a lot of different ways that if something didn’t work, you could try something else.
When it comes to this commercial endeavor you got, you’ve got 100K, you need to make sure you put it in the right deal and you need to understand you’re not getting it out nearly as fast. There’s also more risk in commercial lending, especially with the mortgages because you typically get a four or five year period of time before a balloon payment is due and you have to refinance, and if you bought something at 3% and now your balloon payment comes due at eight or 9%, you might find your payment doubling or almost tripling. It can be really, really rough, when you get into this world. Your best option if you’re trying to find something creative to not spend all your money is to borrow money from other people.
This is what I do a lot of the time and it works really good with commercial deals specifically. So my partner Andrew Cushman and I will typically raise money for deals that we find and we give away equity in those deals, but that becomes tricky too. You probably don’t want to be a full on syndicator. What I’d recommend is if you find a commercial property that you like, you have a plan that’ll work, it’ll work even if rates increase from whatever you’re getting right now. You borrow money from someone, but instead of giving them equity in the deal, you pay them debt. They get a guaranteed return. They get 10% on their money, 8%, 12%, whatever. You’re going to have to pay them to get their money, but you don’t make them a partner.
You don’t want them coming along and saying, “Well, I think we should do this or I think we should do that, or I think we should sell,” and you want to hold, that makes things complicated. So going to people and saying, “Hey, I can give you a loan,” and if they say, “Well, how do I know I get my money back?” You say, “Well, you’ll have a second position lean on this property.” It’ll be secured by this property. It gives you a higher chance of being able to raise more money than you could have before, to help buy the property. You just want to be careful, because if the deal goes bad, it’s now extra bad because you’ve taken on extra debt. A lot of the time when we talk about borrowing money to buy real estate, we’re only giving you guys the rose colored glasses result.
You could borrow money, you could buy real estate, you get all the benefits of real estate and you didn’t have to put money into the deal. Well, when the deal goes wrong, it goes extra wrong. Not only did you lose all the energy and time you put into the deal and your money, but you lost somebody else’s money and you got to pay them back, so now, you lost twice as much money, okay? So this isn’t like a no consequences way to buy real estate when you start borrowing money from other people, which is why in general, I’d tell someone to lean away from that until they’ve already bought enough of the deals. Now, Andrew Cushman, who I mentioned earlier, I trust that guy with my life. He is so good at what we do. I don’t worry about borrowing money to put into deals as Andrew does.
I probably wouldn’t put money into your deal if this was your first commercial deal that you had ever done. Just something to think about as you’re going into this and if you’re thinking you only have a 100K, I don’t know that jumping into commercial is the best move for you right away because it’s hard to get the money back out of it. If I could put a 100K into a fixer upper property and I could buy it at undermarket value and it’s an area that’s likely to appreciate, you got three ways that you’re going to build equity, I’d do that for two years. Let the property become worth more, make it worth more at equity when I’ve bought it. Then I would 1031 that money into the commercial property that you’re talking about.
That would probably be an easier way to turn that 100K to 200K, 250K and then move it over, but let me know. Tell me what did you end up doing? Did you go for commercial? Did you hold off on commercial? Personally for anyone thinking about getting into commercial for the first time, the time is on your side. This is siege warfare and the other people are running out of food. Okay, the longer you wait, the easier that battle is going to be. This is not a time to rush into commercial lending because you’re going to be seeing a lot of balloon payments reset and sellers have to sell properties for discounts because they either can’t refinance or they don’t want to refinance into the higher rate.
Okay, this segment of the show, I like to share comments from our YouTube channel. So if you’re not checking us out on YouTube, consider doing that. You get to look at the green light behind me. You get to see my handsome face. You also see some of the hand gestures that I’m making as I’m talking. Sometimes I do this little thing when I’m describing the spectrum where it looks like a fish is getting bigger or smaller. Sometimes I hold up fingers when I’m making points. Sometimes I put my hand on the top of my head and pretend like I have a mohawk. Lots of things that you can see if you tune in on YouTube. Also, we want to hear from you. So if you’d like to be featured on the show, go to biggerPockets.com/david and submit your question.
All right, our first comment here, “Hi David. Thanks for producing this content. You talk a lot about inflation and real assets in the real estate field. I wonder what your opinion of Bitcoin is with regards to inflation and the hardness of money/assets. It seems like you were seeing a lot of similar things as those in the Bitcoin as a commodity space. Thank you.” Funny you mentioned that because I did talk about Bitcoin earlier today. All right, here’s my transparent view on Bitcoin. I do own some of it, very little. I’m not like a huge proponent or apologist for Bitcoin. I just think it’s likely to go up in value because like you said, inflation. I don’t think it’s nearly the same as real estate. I don’t know. First off, let me just say I don’t have hard opinions on this because I have no idea.
I don’t think it’s going to become as much of a currency as it is going to become a way that wealthy people shield their money. What’s different about Bitcoin than other cryptocurrencies, at least my understanding of it, is that you can’t make more of it. So the other cryptos can just, the same things that cause our dollar to be inflated, can cause those cryptocurrencies to become inflated. Let’s make more of them. My understanding is that the way that Bitcoin is designed, you can’t make more of it and the work it takes to mine more coins until you get to the ultimate thing is similar to mining gold. I think that’s actually why they’re calling it mining, is because it takes a lot of energy to create more Bitcoin, which makes it a better currency. You don’t want to just be able to print dollars or have quantitative easing and boom. With no effort, you’ve got more of it.
Gold is a cool form of currency because if you want to make more of it’s a lot of work and energy. It takes money to get it out of the ground. It takes time to get it out of the ground. So maybe you can increase the supply of gold by two to 3% a year by mining more of it, but think about how much money you had to spend to do that. It’s close to the amount of gold that you added to the supply. So it’s kind of a wash. I like that about Bitcoin, so that’s why I bought a tiny bit. I mean less than $10,000. I’m not talking about a whole lot of money. This is not my main investment strategy. I bought when Bitcoin went down, and if it goes down more, I might buy a little bit more of it, it’s like the only thing I do that’s play money, basically. Yes, I do think it’s different and I think some of the principles that work in real estate will work in Bitcoin for that same reason.
I think there’s a world where wealthy people who don’t know how to invest in real estate because they’re not as smart as you guys are not listening to this podcast, are not going to trust dollars. When they think about real estate, they just think about the house they live in, which doesn’t cash flow. So a lot of people look at real estate and they see the problems of it because they’re not … it still costs money to own it when you’re just forking out a mortgage, they look at money that is created through business, which business is a great way to reinvest money, but you have to … there’s risk there and you have to put time into it. So the people that are looking for a passive way to store their cash, I think that they will put it into Bitcoin because it’s easy. It’s so much easier than owning real estate.
You just click a button and you move it out of whatever you bought it, into your ledger and boom, you’re good to go. So that’s my opinion on Bitcoin. If you are wondering if I’m a fan of Michael Saylor, I don’t know a ton about him, but I do. I am a fan of his understanding of money as energy. I thought that was brilliant. I have adopted that mindset. I just think real estate works better and makes way more sense than Bitcoin, and I think all of you that are using that whole money as energy understanding will do way better with real estate than any of these Bitcoiners are ever going to do, so let’s go kick their butts. All right, our next comment comes from Jacob Force. “I love the passion, David. We believe in a system that has proven to work. Thank you for the knowledge, expertise and willingness to share.”
Well, thank you Jacob for your kind words and thank you for acknowledging my passion. “I pretty much get this way when I talk about a small handful of things. In general, I am a very isolated, introverted, stoic person but when it comes to talking about real estate or handful of other stuff, I definitely can get excited.” Mike H, “Is David pissed he got tricked by Rob Bill into investing in that mansion in Scottsdale that is not renting, while he keeps talking about not listening to gurus that sell courses.” Well, well, well. Mike H, are you trying to draw a wedge between Rob and I? No, I am not pissed at Rob and we knew that it was not going to make a ton of money right away. I was actually the one that told Rob, “This is something we’re doing for the long term, not the short term.”
So no, I’m not pissed. If I’m pissed about anything, it’s just that he really cares about decor and design much more than me and he spent way more money making the property pretty than I would. Let’s be fair, Rob is a pretty guy. Go look at him. He has to wear these faded black pocket T-shirts just to downgrade how good-looking he is with that incredible quaff that sits upon his head like the crown of a king in Game of Thrones. I’m a pretty homely looking guy, man. I look like a combination of Shrek, Jason Statham after Thanksgiving dinner and Dana White on two hours of sleep, okay? No one is going to sit here and accuse me of being a pretty person. So of course, I wouldn’t have spent as much money as him beautifying the property. No, I’m not mad and Rob is not the guru that I’m talking about selling courses.
I am pissed at gurus that tell you that real estate investing is easy, that tell you that cash flow is something that can replace your income within a 10-year period. I’m at pissed gurus that try to say, “You don’t have to do the work. You can buy my course and it will do the work for you.” Okay? So I actually have courses that I sell as well, but they’re not like $10,000, $50,000 courses and it’s very clear when you join it, you’re going to do the work. So I often relate wealth building to fitness. The people that rip people off are selling fitness is easy by the ab roller, by the thigh master. Remember those old machines from the 30s or 40s where the lady gets on it and it puts this band around her waist and it shakes her and it was like you could shake fat off?
If you guys don’t know what I’m talking about, Google that, it’s hilarious. At one point, that’s what they told people, is you just sit there and this thing shakes you, your fat will jiggle and it will burn right off. It doesn’t get you fit, and I’m not the fittest guy ever. I just got done talking about what I look like, Shrek, Dana White and Jason Statham when he’s got too much mashed potatoes in his system, but I do know that fitness does work and it’s hard, limiting what your diet is, which to me is saving money, not spending it on dumb stuff, not spending on things that don’t matter and working out really hard, which is equivalent of offense. Working hard at your job, getting promoted, starting a business, serving your clients, grinding in a healthy way are the only ways that you make money over the long term and the only ways that you get fit in the long term.
Now real estate is what you do with the money that you’ve already made. I’d rather see people put their money into a house act than put it into a course that tells them, “Ah, it’s going to be easy. You don’t have to work hard. You’re going to be financially free in two years using my system, and it doesn’t happen.” I don’t think Rob teaches people that, but there are a lot of people out there that do. Many of them compete with our podcast, so yes, I’m going to continue to sound the bell that education is good, but if your educator is telling you, sign up for my gym and you can lose weight and get ripped without a diet, without sweating when you work out without hard work, they’re probably selling you steroids and they might work for a short period of time, but the long-term consequences are not worth it, and I am a non-steroid wealth builder.
All right, Jared Franklin has our last comment, “Does your team hound you for swiveling in that chair for a whole hour? Have they tried the shock collar that activated when you swivel?” All right, Jared calling me out here, but thank you for doing that in a respectful way. That’s funny. Jared either has OCD or I have a bigger problem or we have some combination of the two where I can’t sit still and he can’t stand people that can’t sit still. If you’re not watching on YouTube, I guess there’s another reason other than my fingers or my spiky hair with my hand looking like a shark. I also apparently swivel in my chair. If we’re just being transparent, let me set the tone for being open and honest about things. It is very hard to think about what you’re going to say, say the words and then continue to think about the next thing you’re going to say.
Also, find a way to keep your energy high and present the information in a way that someone is going to hear and like. Have you ever listen to someone that talks and they say, “I’m really smart,” but when they talk, they talk like this. They use big words. It’s very hard to know at what point you should pay attention because there’s no intonation in their voice. I can’t focus when they’re speaking that way, and I think a lot of people talk that way because they don’t want to make a mistake or they don’t want to sound dumb. Okay, I’m trying to make this information taste as good as I can, keep your attention as good as I can, keep my energy high and still say the stuff you need to hear.
So what happens is it’s like all hands on deck to my brain and then, I don’t think about what’s happening with my body, okay? So I do start to swivel in my chair as I’m trying to stay in the zone. I’m trying to mentally stay focused on where I’m going with something and then, I start to fidget in ways. Okay? It’s kind of like that, I don’t know what to do with my hands thing that Will Ferrell’s character does, I think it’s Talladega Nights. It might be Anchorman, but it’s funny you’re like, “When you’re aware of it, you don’t know what to do with it.” So yes, they have not tried to stop me from swiveling in my chair. If they did, my fear is all the energy it would take to stop the swivel would make me one of those very boring communicators and people wouldn’t like it.
Personally, I think the movement is the magic. All right, you could send your real estate related questions or your job related questions. If you want to learn how to make more money at your job, that’s something I’m going to be taking on as well to biggerpockets.com/david and I’m looking forward to how I can help you. Don’t be shy, share your question, put it out there for everyone to hear. I guarantee you that someone else is thinking the same thing and you taking this action will help more than just yourself. I live by the barrel of monkey’s philosophy. You should always have one hand reaching up to people that know more than you and one hand reaching down to people that know less than you and letting the information flow along that chain so that you don’t get a big head keeping it all to yourself and you don’t get isolated thinking that you suck. All right, let’s get to our next video question. This one from Jordan Tinning.
What’s going on, David Greene? This is Jordan from Mukilteo, Washington. Wanted to make this video and just say thank you for stepping up and doing the podcast. I think you’re doing a phenomenal job. I really appreciate your perspective, your detail, and your strategic nature in which you attack a lot of these real estate issues and you have some big shoes to fill, but honestly, I think you’re doing a great job. That said, I am interested in learning more about macroeconomics and more specifically how that pertains to real estate investing and how we can use that to our advantage. So you talk a lot about knowing the bigger factors that are at play so that we can be smarter investors. What resources would you suggest that we look at, read and/or consume to get better at that?
The only things I can come up with are Economics for Dummies that are very boring and really don’t have any context into what’s going on today with the stimulus money that’s being printed or the Federal Reserve just printing US dollars like crazy. So what resources would you suggest? How would you go about learning more about some of the bigger factors that are at play and just looking forward to your feedback. Thanks so much for your time.
Jordan, you are a man after my own heart. I love your take here. Guys, we love real estate investing, but I have a different approach to why I do it. A lot of people say, “Buy real estate so you can get cash flow so you can work for 18 months and never work again,” and I just don’t think that’s realistic. A handful of people can pull that off and most people never will. It’s not a scenario that’s likely to work out for you. You’re going to end up going back to work and starting over and losing years of productivity that you could have had. Okay, I look at real estate much more as a place to put money that you’ve already made and let it grow, and it does need to be the way you’re going to build wealth, but you’re going to build wealth, you’re not going to necessarily create wealth.
It is very difficult to create wealth through real estate. It’s where to grow wealth that you’ve already built, and the reason that real estate has done so well over the last 10 years is not because we’re all geniuses as much as we like to think, it’s because of what Jordan is talking about here. It’s because of inflation, and I know that a lot of people do not tune into this podcast to hear macroeconomic boring words like quantitative easing and the M2 money supply and inflation and stimulus. I get it. You just want to hear how do I get the next deal in the duplex? I do share that information. I like to share negotiation strategies specifically because I’ve spent so much time in the trenches being an agent that I’ve learned how to get really good deals.
I’ve learned how to track them down, and I do teach people that stuff all the time. Go to davidgreene24.com and you’ll see a lot of the stuff that I’m talking about here, where you can learn more. However, all of that pales in comparison to understanding what’s happening in the big world. So I’m going to give you an analogy here. I could teach you how to swim. I could teach you how to cup your hands perfectly to be maximally efficient with your swimming, how to kick your legs at just the right way. You guys, if you’re watching on YouTube, you see all these hand gestures I’m making because I’m trying to make the people jealous that are not watching the video or the people that think all I do is swivel in my chair.
I could teach you how to breathe the perfect amount of times, how to keep your head down and only come up to the side to get a breath in. There’s lots of things that I could teach you that will make you a better swimmer. Here is the problem with that, the person who knows nothing about swimming, who doggy-paddles, who catches a wave, will go way faster than Michael Phelps, who’s the best swimmer ever, when he doesn’t have a wave behind him, okay? The actual benefit of understanding what the government is doing with our money supply, what we call macroeconomics, what the dollars are doing, it dwarfs the value of being a good swimmer. Now, to me, it’s not either or. I’m going to teach you how to swim better and I’m going to teach you about the waves because why not? Sometimes waves aren’t coming, and in those cases all you can do is focus on swimming.
When waves are coming, I want you guys looking behind you, timing the wave so the wave will propel you past all the people that aren’t doing that, and that’s what macroeconomics is. So Jordan is asking for resources where he can learn more about this, I think that that’s very wise. First off, Jordan, I love your question, so reach out to me. I’d like to get you connected. You guys can do that through Instagram or my BiggerPockets account or you could submit a question on here if you have the same type of thing, but places where I go to get information about this, there’s a couple other podcasts that I listen to. One of them is Patrick Bet-David Show on Valuetainment. They talk about the news and they bring experts in to discuss this stuff.
So like I mentioned Michael Saylor earlier talking about money is energy. I specifically got that off of Patrick Bet-David’s podcast. When Michael Saylor came in, he was preaching Bitcoin, and I’m not a bitcoin believer so to speak, but I loved his perspective on money. I got a ton out of that. Another one was an episode with Richard Werner, who is the father of quantitative easing. Okay? This isn’t like these secret esoteric speakeasy communities where you can learn about economics. It’s all right out there for people to see, just tuning your reticular activating system to pay attention to it. Richard Werner is the person who I heard, who is the one that came up with the idea for quantitative easing, which was the government buying securities and other financial instruments and pushing money into the economy that did not exist, so we say print money, but they’re not actually printing dollars. They’re doing this electronically.
He’s the one who’s the first person that said, that I’d ever heard, “Raising interest rates does not stop inflation. There has never been a model in the history of economics that proved it does,” which was mind-blowing because when I was in college learning about it, this was like ECON 101, right after supply and demand, and you learned about the invisible hand with Adam Smith, then you learned about how lowering interest rate speeds up the economy or makes inflation and raising interest rates slows down inflation, and it made a lot of sense. There’s an inverse relationship. I went my whole life thinking it, and then I heard from the guy that created quantitative easing saying, “That’s never been proven. I don’t know why we all say it. It makes sense, but it’s not true. It doesn’t do that.”
I don’t want to go too long into this topic because you could tell I’m passionate about it. You guys might not care as much. Let me know on the comment if that’s the case, if you want to hear more of this stuff, but he made this great point that the money supply is what causes inflation. It just depends on how you define inflation. If you define inflation as prices going up, yes, you can slow that down by raising rates, but you cannot take money out of the supply just by raising rates. You’re going to have more money and wherever you have more of something, it’s worth less. If this is complicated, if you guys just think about diamonds. Diamonds are worth a lot of money because there’s not a lot of diamonds. Okay? What would happen if we tripled the amount of diamonds that were available to people? What would the cost of diamonds do?
It would obviously decrease incredibly quickly. We just took three times as much diamonds as what we’ve ever had and boom, in one day, those hit the market. No one would be paying 25 grand for a diamond anymore. They’re freaking everywhere, right? Maybe you buy them for like 500 bucks or something like that, maybe even 5,000. That’s a lot less than 25,000. Now, what if the financing of diamonds became super expensive? What if we said, “Hey, that loan that you used to use to buy an engagement ring, instead of a 5% interest interest rate, it’s going to be a 75% interest rate.” Well, now, even though diamonds only cost five grand instead of 25 grand, you still would … they’d be very expensive because the financing to buy them went up.
That’s what’s happening when we’re raising rates, because what happens is if the financing of 75% goes back down to five or 10%, the cost of diamonds is going to plummet with it, because you added too much supply to the market. That’s why I talk about macroeconomics. That’s what we’ve done to our money supply. Yes, we have a temporary halt right now because we’ve raised interest rates, but it’s still supply and demand that’s going to determine this, and at some point, those rates are going to come back down because some politician is going to get voted in, if he’s the one that puts them down or she’s the one that puts them down, and boom, you’re going to see the price of real estate take off again, which is why I’m not a doom and gloom person who’s saying, don’t buy real estate.
I’m saying be careful buying it right now while the rate for diamonds is 75%, because it could come down more temporarily, but long term it’s going to go up. So Patrick Bet-David is one place. I also just watched the news straight up, Fox News, CNN, MSNBC, whatever you watch, they will talk about what’s happening in the economy. The danger in the news is when you take the perspective of the network or the anchor that you’re taking it from. I don’t care about that. I want to know what Jerome Powell’s decision in the Fed was. I don’t need CNN or Fox to tell me how to think of it. I’m then going to go research different places that talk about Jerome Powell’s decision and run that through the filter that I already have from my education in economics as a whole. Barry Habib with MBS Highway is one person that I think gets it right a lot of the time.
So I follow him and then, my text letter Behind the Shine, which you guys can sign up for, it’s free. I put information in there about what I see happening in the economy, so if you guys just want a little quick hit, you don’t want to have to put a lot of time into this. Go sign up for Behind the Shine. I call it that because my head shines and Brandon’s text letter is called Behind the Beard, so I wanted to one up him and let me know if you think that my text letter is better than Brandon’s because it’s very important to me to win these petty battles between he and I. All right, our last question moving on is from Jamie. Jamie Tuske in Northern California, we’re neighbors. “Some background to help out. We’re 37 and 38 years old. Full-time W-2 jobs, making about 220K a year, and we have three kids and we live in Northern California,” which guys is very expensive in Northern California.
That’s basically the San Francisco Bay Area up to Sacramento. “We have some cash save, but would rather not touch it and we have about 110K available to use from a HELOC. I’m a project manager and I have experience rehabbing homes, so we have that advantage as well. We bought our first investment property a short-term rental this year. We use cash and HELOC funds to purchase, update, and furnish, and we currently owe about 67K on the HELOC. We like your idea of portfolio architecture and would like to expand our portfolio, either short-term rentals or long-term rentals using the BRRRR strategy and/or fix and flip, depending on numbers, preferably with multifamily.”
“One question for you is, if you were just getting started in our position, how would you move forward? Would you focus on paying off the HELOC and save more cash or move forward in purchasing more real estate and pay off the debt later? With prices declining and buyers having more advantages now, we don’t want to miss the boat and the opportunity, but we are conflicted. Just looking for some guidance on the smartest way to move forward into building our portfolio. Thank you for all you do and the content that you and BiggerPockets team puts out.” All right, thank you for that. Jamie, first off, if you don’t know what I mean by portfolio architecture or what Jamie is referring to here, it’s the idea of seeing your portfolio of homes as one organism as opposed to every individual house as its own organism. Okay, it’s not accurate to just look at how a house operates.
Let’s say that you’re running a team because a portfolio is really a team. Do you analyze the strengths of every player? Of course you do. You don’t want bad players. You’re not going to buy bad deals because you don’t analyze them. You’re not going to make money on that. That’s not all that you do. You also look at how these players will play with each other, what’s the chemistry like between them, okay? If you build a basketball team of five incredibly good shooters because you’ve analyzed them really, really well and they all shoot the ball, great. You’re still going to lose because there’s no one to play defense. There’s no one to distribute the ball to the shooters, right? They’re not in a position where their strengths can actually be used because they’re all the same thing.
Portfolios are the same way. You may build it up to having 20 short-term rental properties and you have no time to enjoy life because while they’re highly profitable, they’re also taking up a lot of your time. They’re also highly risky and highly seasonable. The money comes in big and then, it just shuts off. You’re putting yourself at risk when you build a portfolio like that. You may have 20 properties that are all small multifamily, that cash flow pretty well and they’re just steady eddies. They provide exactly what you want every month, but after you’ve got 20 of them, you still can’t make enough money to ever quit your job. You’re making five grand a month, three to five grand a month off these 20 properties, and you’re like, “I still got to work.”
That doesn’t help you either. That’s too conservative. Okay? You want to balance this. You want to have some short-term rentals that spit off a lot of cash and some traditional boring rentals that provide very steady cash flow to protect you in down times. You also want to have properties that maybe don’t cash flow great, but they build a lot of equity for you, you’ve built a lot of equity into. You want to have some properties that over a long period of time are going to make a bunch of money and some properties that in a short period of time are going to provide cash flow to get you through that long period of time. You want to combine them all together, so that’s portfolio architecture. Jamie, it sounds like you’ve just got one property, so you don’t have to focus too much on that right now.
You could get a couple more of whatever works for you before you start thinking, about how you’re going to bring different assets into your portfolio. I wouldn’t worry about if you should pay off the HELOC right away. Now, a benefit of it is you can pay off your HELOC which reduces your monthly payment and will increase cash flow to your family, but you’ll still have the capital available if the deal comes. There’s nothing wrong with paying it down, but then keeping it open so that when an opportunity comes, boom, you just pull the money out, you go by the next deal. I think you are at a period of time where there’s good deals coming, prices are continuing to decline over the short period. There’s not a rush to jump in, but over the long period, we’re going to look back at this time and say, “Man, I wish I’d bought more real estate.”
It’s a weird dichotomy we got going on. We don’t know when the bottom is coming, but we know that it’s not going to stay like this forever. It’s when rates come back down or the economy turns around, who knows it might be a year, it might be six months, it might be three or four years. I can’t tell you that, but over a 30-year period of time, we will look at this as one of the golden times to my real estate, I really believe that. So, I would look at it like I continue to analyze deals in the market where I can make money as a short-term rental. So you didn’t mention where your short-term rental is, but let’s just pick that market because you know it. Okay? I would look for other properties that would work as a short-term rental. Then out of those properties, I would look for the ones that have the best ability to add equity to.
You mentioned that you can run rehabs. You mentioned that you want to do a BRRRR or a fix and flip, which are both value add opportunities, so find the biggest best house in the nicest area that will work as a short-term rental, and then look for the ugliest one. Look for one that’s marketed poorly. Earlier in this episode, I talked a little bit about how I can … I like negotiating. I like strategies. One of the negotiating strategies that I use is I look for poorly marketed properties with high days on market because nobody else wants them. Look for the chance to get the most value add possible, then go for the throat. Write the lowest offer that you can get away with. Try to get them to counter, find the seller that has the most motivation and needs to sell.
You’ll get buying equity and forcing equity out of the same deal. Then you’ll get market appreciation equity because you pick the best market. See how simple this becomes guys, if you just have the right set of goggles to look at real estate through and you know it’s going to work after you’re done with it because it’s in a market that works for short-term rentals that you’re already familiar with, do that, get three or four of those. Then let’s have the conversation about portfolio architecture, what you need to add into the portfolio to balance out some of the risk, if you should 1031 out of two or three of them and move it into something else, but at this stage, you don’t have to worry about that because you’ve only got one property. Great question. I would love to hear how this goes.
I’d love to hear about you getting great deals under market value and adding value to them and ending up with the cash flowing rental property. So go to biggerpockets.com/david and submit an update once you get something in contract. Thank you for that, Jamie. Also, you didn’t tell me where in Northern California you are. If you guys live anywhere near me, I want to know. I do meetups out here. DM me and tell me you’re in Northern California so we can get to know each other. All right. That is our show for today. I went a little bit long, but that’s because I love you guys and I’m hoping that you got a lot of value out of this. I hope my chair swivel, didn’t throw you off too much and that more of you are checking us out on YouTube where you can watch a more animated version of this podcast.
Also, I know you guys can be getting your information anywhere, so thank you for getting it from here. I’m doing my very best to make these shows as good as I can and give you as much information as I possibly can to help you build wealth through real estate. Please subscribe to the channel and follow me. You can find me at @davidgreene24 all over social media. That includes YouTube. I go live every single Friday night talking about some of the stuff in more detail. So if you’re like, “Oh, I wish he had gone deeper into this topic. He moved on too quickly.” Come onto my YouTube, send me a message, and I will answer these questions in more depth in any way that I can. Also, check out my new website, davidgreene24.com to see some of the other stuff that I’m doing, where I’ll be speaking, where we can meet up.
Hopefully, I’ll see you guys at BP Con in Orlando this year. It’s going to be a blast. It always is, and last but not the least, keep saving that money. You never know when the right opportunity is going to come up, and living beneath your means is a very powerful way to build the right habits to build wealth. I will see you guys on the next episode, and if you’ve got a minute, check out another BiggerPockets video.
Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!
Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.