How Do I Buy Another Property When My DTI is Too High?
Having a high DTI (debt-to-income) ratio is enough to stop many would-be investors from taking the leap and buying their first, or next, rental property. So, what do you do when your income isn’t enough to buy the next property? What if you’ve used up all your financeability on your primary residence or house hack? How can you squeeze out a loan to buy another property?
We’re back on another Seeing Greene episode, where your “one away from seven hundred” host, David Greene, is here to give you practical advice on buying and selling properties. In today’s episode, we take multiple video and written submissions, with topics touching on how to buy more real estate when your debt-to-income is maxed out, what to do with a dangerous tenant, refinancing at today’s high interest rates, and why off-market deals aren’t always what they seem to be. And, if you’ve struggled with setting standards before, you’re in for a special treat, as David gives himself (and all of you) a personal pep talk on expecting excellency.
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 699.
Frequently in life you’ll find the majority of people you find do not have a high standard for excellence. It’s a matter of the heart. And what I mean by that is that what’s in our heart will determine the actions that we take. If you feel a sense of obligation to do a really good job, you’re going to look for answers, you’re going to anticipate problems, you’re going to solve things without bringing problems to other people. If your heart isn’t a place where you’re saying, “I just want to get paid and do as little work as possible,” you’re going to bring people problems instead of solutions. You’re not going to anticipate what could go wrong. You’re going to cut corners in your work.
We’re coming up on 700, so stay tuned, we’re going to get there. My name is David Greene and I’m your host of the BiggerPockets Real Estate podcast here today with a Seeing Greene episode. In these episodes, if you haven’t seen one before, I take questioners from you, our listener base, and answer them for everybody to hear. And we have a heckuva show today. Heckuva is spelled H-E-C-K-U-V-A if you weren’t sure. You’re going to love it.
We get into how to give up control over projects or people not doing things the way you want. This is an excellent question that we answer, and sometimes you have to go dark green to find the light. Listen all the way to the end and you’ll know what I mean by that. Why an off market deal may not always be as good as you want it to be or you’re hoping it will be and how to evaluate that. And if someone is thinking about BRRR the right way. So we have a very interesting and cool BRRR question from Suzanne who’s like, “Am I crazy here? Everyone’s telling me that I should go this way, but I think I should go that way.” We answer that question and I think you guys will really enjoy that. All that and more in today’s show.
First off, thank you guys for being here. I really love the people that listen to the Seeing Greene episodes. Many of you have reached out and said that you like these. So if that’s the case, please let me know and leave us a comment on YouTube telling me you like these shows. Second off, today’s Quick Dip is we at BiggerPockets want to help you stay accountable to meeting your goals. The new year is right around the corner as crazy as that sounds. If you want to make sure you hit your goals, you’re going to need two things. One, you got to know what those goals are, so write them down. I did a goal setting episode with Rob Abasolo where we went over our goals for 2023 as well as how we did in 2022. So check out that episode if you want some advice on how to write down your goals. It’s harder than it sounds.
And two, you need accountability because if you leave it up to yourself, you’re probably going to fail. So find another accountability partner. And if you don’t have one, we want to be that accounting partner for you. You can check out how to find goals on episode 696 and you can subscribe to this channel so that you’re listening to it frequently so that you hear about our goals as they’re being done and make sure you stay on track to hit yours as the year progresses. All right, let’s get to our first question.
Hi David, hope this finds you well. Thanks so much for the show you do in answering our questions. My name’s Eli. I’m very early on my real estate investing journey. I just purchased my first property back in January of 2022. It’s a five-bedroom, two-bathroom south of Salt Lake City in Utah and I purchased it as a house hack, which works well for me as a strategy because I don’t have very much capital right now to make down payments.
In a previous episode of this podcast, I heard you mention that buying a house per year via house hacking with a low down payment is a great way to get a good return on equity, and it’s a strategy I’d like to continue to implement. However, one of the major blockers that I foresee to doing this is debt-to-income ratio. My understanding is that I should be able to use the signed leases from my tenants as additional income to sort of cancel out the debt taken on from the mortgage of the property, enabling me to house hack again in the future. I do have a W2 job as well. I’m wondering if you could talk a little bit more about the logistics and the debt-to-income ratio concerns of repeatedly house hacking and any other advice you’d have for someone seriously looking to purchase a house a year and get good return on equity and build a portfolio with minimal upfront payments. Thanks so much and I look forward to hearing your thoughts.
Thank you for that, Eli. You are asking great questions. So before I answer it, I do just want to commend you on your strategy. Don’t have a lot of money? Not a problem at all. Do exactly what you’re doing. House hack every single year. You’re going to learn the fundamentals of how to be a landlord. You’re going to start building equity. If you’re buying a house in that area of Utah and it’s that big of a house, you’re going to gain equity over time. You’re going to be very glad you bought that property. So well done making the most of what you have.
Now let’s get to the brass tax of your question. I can tell that what’s behind the concern is not being able to qualify for future properties. You’re concerned about the debt-to-income because what happens if you’re not aware, well you’re aware, but if our audience isn’t aware, is that when you take out a loan for this property, that now becomes debt against your name that we compared to your income and create a ratio there and you have to have more income than debt to be able to qualify for new properties. When you bought this property, you took on more debt. So it affects the ratio when you compared to the income that’s coming in.
Now here’s one area of potential concern that we should be looking at. I am a loan broker but I’ll admit I don’t know every single detail of how loans work. So you should reach out to me, I’ll connect you with somebody at the one brokerage and they’ll actually look into this for you. But my understanding is that you can’t use the income from tenants if it’s your primary residence, which is what a house hack is. So you’re going to have trouble if you need the income from those leases to cancel out the debt you took on when you bought it if you’re living in the house, which you probably are, if it’s a house hack.
Now you’ve got a couple options. You could move out of the house and now make it a rental property, which is perfectly fine as long as you’ve been occupying it like you have. They’re not going to come check on you for that in most cases. And even if they do, you don’t have to stay in the house. You just had to intend to occupy it. And if you move out, it’s not your primary residence, now you can use the income that’s coming in from those tenants. You also have another room to rent out because it sounds like you’re staying in the fifth bedroom and renting out the other four. Then you can buy your next house and move into that one. And the one that you bought the first year becomes a rental property. The cool thing is you didn’t have to put down 20 or 25%, you put down the lower down payment.
There may be a loophole. In some cases we may have some loan products for you that would allow you to use that income, but most of those loan products require you to put 20% on in the next house. So that’s the struggle that you’re going to get into working this strategy. But it’s okay, there’s ways around it. You just got to figure out a way to not make it your primary residence when you want to include the income. Reach out to us. One of the guys on my team would be happy to talk with you about this and come up with a strategy so you can keep replicating it. I love what you’re doing, man. Keep your foot on the gas pedal.
All right, our next question comes from Rose Moore in Illinois. Rose has herself in a little bit of a conundrum. “Thanks so much, David, for all the education that you provide. I have learned a lot from these shows. I have a tenant in one of my units and I’m worried about her. She moved in February of ’21. I’ve been informed that 911 was called on February 15th because a neighbor found her on the floor unresponsive and the paramedics took her to the hospital. Again on March 9th, the police was called for a welfare check and the fire department had to kick in the door to gain entrance. The door is currently damaged and has to be repaired. I don’t understand why she’s living by herself if she’s having all these problems. I’m worried something serious may happen to her. I also learned that she smokes too and I’m afraid she may accidentally cause a fire. What can I do to protect my property? Please advise.”
All right, Rose. Well first off, I’m sorry that you’re in this situation. This definitely doesn’t sound like a fun situation to be in. Regarding what you can do to protect your property, I’m not aware of anything from a legal perspective that you can do here. Even though it does sound like she’s at a bit of a risk to be living by herself from a humanitarian standpoint, it’s good that you’re concerned, but from a legal standpoint, there’s nothing that says she can’t do that. I don’t think she’s in violation of her lease because she’s living by herself. As far as the door getting kicked in, I would contact the fire department and see if they have any kind of a reimbursement policy where you could get some of that money or if your insurance is going to cover it. If not, that’s probably going to fall on you.
Regarding the smoking, that’s something that you’re going to have to check to see if it was included in your lease. If it doesn’t say anything about not smoking in the home, she’s able to smoke in the house. And even though that is a fire concern, that’s not something that you can tell the tenant she can’t do. Because there’s not any obvious answers here of what you can do to protect yourself, here’s my advice for you. This is something where you should talk to a property management company and see if they have an attorney they can recommend or talk to other investors and see if they have an attorney that they can recommend and ask them if you have any legal grounds of either adjusting the lease or implementing something that’s not in the lease to protect yourself and the situation with this tenant. I don’t think anything is going to stand out here.
I might ask the tenant if she has family members and say, “Hey, I need an emergency contact since the last time you were alone, you passed out on your own and the fire department had to come. I want to be able to call somebody if something like that happens again.” And ask her if she’s comfortable with you stopping by to check on her or the property a certain amount of times. She doesn’t have to agree to that though, and that’s what I want you to understand, is there’s a very good chance she’s going to say, “No, leave me alone. I’m paying you the money for the house. I’m going to stay here.” I don’t know that you need to be incredibly worried about the house catching on fire. I would definitely make sure that my insurance was healthy and it was going to cover that. And I’d probably open up the dialogue and just explain your concerns and see what she’s open to.
At minimum though, this is a good lesson because the next time that you have a property to rent out or maybe this property, you might screen for tenants differently and you can adjust the lease to say things like no smoking or ask a lawyer if there’s a way that you can put a welfare clause in there where if you’re going to rent to somebody else who might have health problems or be older, that something is worked out where you can send somebody by to check on the property and make sure that nothing crazy is happening, right?
Coming from a background in law enforcement, I’ve seen things that other people don’t necessarily see. A lot of these older people end up being taken advantage of. And I’ve seen situations where gang members in a neighborhood literally moved into old people’s houses and in a sense held them hostage as they used that house for criminal activities. And these old people were threatened that if they called 911 they’d be in trouble and they were just basically put into a bedroom and locked in there on their own and a little bit of food was given to them and water and their house was just taken over and there was nothing they could do.
So sometimes people like this are in a situation where they could be taken advantage of and I can see why you’d want to check on the property and make sure that nothing like that’s happening. Don’t let this freak you out. It doesn’t happen all the time. More than likely, nothing like that’s going on with your house and you’re just a caring person that cares about your tenant and a lot of that care is now bleeding over and to worry about what could happen with the property.
I’m not hearing anything in here that’s necessarily causing me great concern. I think that there’s a lot of landlords that have tenants that are in situations like this. If it’s really bad, she may end up being admitted into a hospital or other healthcare facility at some point, in which case you’d be out of that lease and you could pick another tenant that would be better suited for the property and for your own business purposes. Thanks for reaching out Rose. If anything else turns up, please let us know. Go to biggerpockets.com/david and give us an update or ask another question. We’ll follow up with you there.
Our next question comes from Suzanne Johnston out of Lubbock, Texas.
Hi, I’m Suzanne and here’s my question. I bought a property in May, 440,000 at the time. It appraised for 172,000. I have finished the renovations on that house. With the market softening as it has, I’m sure it’s still will appraise between 200,000 and 220,000. I had planned on BRRRRing that property and taking the proceeds out and invest in my next property. However, since then I have decided that I want to scale a whole lot faster than I have been. And so I’m planning on using hard money for my next property. That being said, I’m still inclined to BRRRR that property and put the money in reserves even at the higher interest rate. My interest rate, if I didn’t say, was 5% at that time.
So I guess I’m asking am I being stupid? But basically my thinking is that I do not have an amount that I’m quite comfortable with in reserves anymore because I’ve bought two very [inaudible 00:12:37] properties in the last six months. And so I’d like to have more money in the banks and be in more debt. I just wanted to make sure that makes more sense to somebody other than myself. And so anyway, I guess just let me know. Thanks. Bye.
Hey Suzanne, so I have good news for you. No, you’re not being stupid at all and I actually really appreciate you for asking this question because it gives me a chance to provide a different perspective on this than most people would look at. I personally think people are more interested in interest rates than they really need to be. It creates this false sense of security. “So everything’s going wrong in the market, but at least I got a good rate and I can feel better about myself.” It just isn’t really practical. Furthermore, on this property that’s worth 200,000 or 220,000, you’re going to refinance 80% of that. So maybe you’re going to be getting a loan for 160,000. On a loan amount that small, let’s actually run the numbers on that very briefly so I can make my point here.
Okay, you said you’re at a 5% interest rate on a loan of 160,000 which would mean that your… Actually your loan amount might be even less than that, but we’re going to just compare at $160,000. Your principal interest is right around $859. That bumps up all the way to like 8%. What did I say it was? So we were at 859, it’s going to go up to 1,174, so about $300 a month more, okay? Nobody likes that. If you’re trying to maximize your cash flow, of course you don’t want to do that. Now I also don’t know you’re going to get an 8% rate. It might be less. Who knows? The point is $300 is not going to make or break anyone’s portfolio. It’s relatively speaking an insignificant number in your overall wealth building journey. It doesn’t change your life.
Now if you’re looking at the ROI on the property, that 300 could be pretty significant, okay? You’re like, “Well, I was getting a double digit return and now I’m not. And that can emotionally hurt, but if you zoom out and you look at the big picture, it’s not that big of a deal on a loan amount that’s that small. Now having that extra cash in the bank, the peace of mind that that would provide you, that probably is significant in your life.
In your wealth building journey, if you have more money in the bank and you feel that you’re more prepared to weather a storm, you’re okay if something breaks in the property… Nobody likes living paycheck to paycheck, that’s terrible when you don’t have money in reserves. And that will have a significant impact on future properties that you buy, how much you like real estate investing, the peace of mind you have, how well you sleep at night. Your overall experience is probably not going to be a whole lot less because of $300 a month. It would be a whole lot worse if you didn’t have any money and you were no reserves and you were just praying to God. Nothing goes wrong.
For that reason, I don’t think you’re wrong to follow your instincts here. Refinance it, put the money in the bank, get the peace of mind. That’s actually probably the prudent thing to do. Defensively, that’s the right move. Even though offensively you might lose 300 bucks a month, it’s better defense. And worst case scenario, you just wait a couple years, rents go up by that $300, you’re right back to where you were.
But you know what’s likely to happen? Rates are going to come back down and you’re going to refi back into a 5% or a 4.5%. You’re going to be right back where you were and you got the peace of mind during that whole period of time. People forget rates don’t go up forever. They don’t go down forever. They fluctuate. So it’s okay to put that money in the bank, wait if rates go down, refi. If they don’t, just wait a little bit longer. But overall, the defensive move is almost always the right move to make. So trust your gut, you’re thinking the right way. And thank you very much for sharing with that with us, Suzanne.
All right, thank you everyone for submitting your questions so far. I freaking love these episodes. Are you liking the Seeing Greene? Man, I got to fire my tech guy. I can’t believe that we were recording in blue this whole time. It’s not called the Seeing Blue BiggerPockets podcast. It’s Seeing Greene.
All right, now that we are seeing green, let’s get to the comments. In this part of the show, I like to read comments that you all have posted on our YouTube channel about the show so everybody can hear what is being said. And I want to encourage you to go to YouTube and leave me a comment on today’s show. And while you’re there, subscribe to the channel and hit the notification bell so you hear when we’re doing an episode like this.
Our first comment comes from the EffortlessApproach. “The best investment I made was getting a brand new Subaru going on seller appointments, and that changed everything. The seller treated me with way more respect rolling up in a new car compared to my chipped paint one. Come on, perspective is everything. It’s literally earned me 10 times more money than if I didn’t have it. My old car had a bad axle, I had anxiety anytime I drove it in the snow in Colorado. Once I got the new car, I went on appointments more than ever, which equaled more deals I wouldn’t have had, especially those times I had to drive an hour away to make sure I get the deal. That’s the worst advice is to not get a new car. It starts every time.”
This is hilarious. It sounds like this is a real estate agent who’s talking here. I like the boldness. Now it sounds like this car gave you confidence, which probably led to your business in being improved more than just having the car. And I’ll say if it had a bad axle and you were holding your breath every time you had to start the car, it’s not that you needed a brand new car, it’s that you needed a new car for you. You shouldn’t be driving around in anything that you don’t trust if it’s going to start when you want it. So congratulations the EffortlessApproach for your new car, your new confidence, and your new progress. Please keep going. Consider checking out the books I wrote for BiggerPockets for real estate agents. They are cold Sold Skill and Scale.
Our next comment comes from Alan Hernandez. He’s talking about episode 684, which was a live call with Parker. “The moral of this interview and a reminder to myself is that you can’t be too quick to leave your job. Quitting your job can be a major strategic blender if you bounce too soon. Hunker down folks and milk that W2. P.S. I promise, jobs start to suck less when momentum builds when working on building your dreams and your earnings are higher than all of your bosses put together. Keep grinding folks.”
Alan, thank you for sharing that perspective. That’s very cool. Now, should everyone keep every W2 job they have? No. Is it good to have the goal to replace enough income that you can quit your job when you want to? Yes. But what we’re talking about there is freedom. The freedom to quit if you want to quit, the freedom to do work in different areas. And the point here isn’t that you need to quit your job to go build that freedom. The point is that working your job can speed up the process with which you get to freedom.
My personal opinion is what really matters is what you’re spending your money on. If you don’t love your job, you should be saving money more than everyone else. The next book I’m working on for BiggerPockets is a lot about this, is what do you do with your money and what does that say about you? If you love your job and you want to work there every day, I can understand why you might not save money as much because you have no goal that you’re saving towards. But for everyone listening to this that doesn’t love their W2, use that as incentive to save even more, to live beneath your means so that you can get enough money that you invest that you can eventually change that scenario. Alan, thank you for sharing that.
Our next comment comes from Kurt Anderson. “The live coaching call was pure gold. I probably skip one out of every three or four episodes, but if I’m confident that you do that every episode, I wouldn’t miss a single one. One man’s opinion.”
Thank you very much for that, Kurt. I love the live coaching calls too. They’re harder for us to do from a logistical standpoint. We have to schedule the people and get them to be there, make sure their internet is working and it has to work around my recording schedule, but they come out really cool. So if you guys would like to be on a live coaching call, please go to biggerpockets.com/david and let us know by submitting a video that you’d like to be on a live call. We plan on doing more of these real life scenarios in 2023 to help you navigate the market conditions that we’re all facing as they change more rapidly every month.
Francois Boizo. “David, you were very encouraging and uplifting to the dog trainer and the new investor. You did not take the hammer and bang it on his head, rather you saw an accident opportunity of what he called a mistake or failure. Awesome man. Failure is not the opposite of success. It is a part of success.”
Oh boy, that’s good. I’m going to give you a custom analogy I just thought of right now, Francois. Yeast, I’ve never had it, but probably tastes gross and probably isn’t that great for you to eat raw. But if you put yeast into bread, it makes the bread way better. Failure may be the yeast of life. You need some of it within the bigger picture to make your success better and make it even possible. But if all you have is failure all by itself, it sucks. So thank you for the encouragement you gave me when we were talking to the dog trainer. I remember that show too, and I remember seeing his eyes light up when he realized it wasn’t that he had failed, it was just a different opportunity that he could be taken advantage of and I hope he’s making more money now than he ever was before.
GoneWiththeShirt. “OMG, that is exactly my situation too. Thank you so much, David, that you gave those great advice. I’m too shy to be on camera talking to you, but I knew someone else will ask my questions and today is the day. Now I’m much more clear on what to do.” Not exactly sure which of the shows you’re referring to, but I’m very glad to hear this GoneWiththeShirt. That’s very good to hear. I’m also very curious to know what on earth your YouTube handle came with. GoneWiththeShirt’s kind of funny. It was probably the show that we did with Parker it sounds like. But this is the point. We make these shows so everyone here can hear that they’re not alone. You’re not the only one going through these problems. When your deal doesn’t go the way you thought, it doesn’t mean you did it wrong. Everyone’s deals don’t go the way they think. My deals don’t go the way they think.
I just found out… Here’s a crazy story of what’s going on in my own portfolio and I’m experienced, okay? I had a short term rental city inspector set to go to a property that I want to get a short term rental permit for in South Florida. We sent them to the house while construction was still going on. Not only did we not get the permit because the house was under construction and clearly not ready to be licensed as a short term rental, but they also went and tagged up all the work that was being done by the contractor there and now said, “You have to go redo all of this work so we can come check on it.”
That sucks. It’s going to set me months behind, it’s going to cost more money. I’m going to have to go talk to the contractor, figure out what they were doing. It even happens to me. This stuff happens all the time. The more you listen to episodes like this, the less crazy and less discourage you feel hearing it’s not just you, it’s all of us. But hang in there. That property will become profitable. 10 years later I won’t care about what I went through right now. I’ll be very happy that I own it. And real estate investing is all about planning for the long term.
Our last comment comes from MissyQ, “My 2023 goals. I’m going to flip my first home in 2023 after I buy my first home. I’ve been engulfing myself in learning all that I can so that I can be prepared.” That was from our goal setting episode, and I would like to encourage all of you to use this podcast as your accountability partner. We talked about how important it is to have an accountability partner when you’re going over your goals. Keep listening to this. Set the notification bell, like the video and keep tuning in because you need to be putting it at the front of your head what your financial goals are. We tend to push those to the back all the time. Life keeps throwing stuff at you and you tend to get caught up in PTA meetings and kids’ homework and paying bills and things breaking that need to be fixed and holiday events you got to attend and drama that’s going on in your friends’ life and you forget all about your financial future. Well, episodes like this can help at stay top of mind.
Another piece of advice I’ll give you is considered buying some AirPods and subscribing to YouTube Premium. That’s what I did. Now, I don’t get paid at any kind of affiliation fee by YouTube or Apple, but what I do get is the gratification of knowing that I’m helping you. What I’ve done is anytime I’m taking a walk, I’m taking a run. If I’m going to the grocery store, anywhere, I put in my AirPods and I listen to different educational programs on YouTube. Oh, I just said programs, but I sound like my grandma. Nobody says programs anymore. What do you call? I guess a YouTube channel. I just couldn’t think of the word at the last minute there. Don’t say programs. That makes me think of Golden Girls and Matt Locke and Murder, she Wrote.
But I do listen to different people on YouTube that are talking about the economy, economics, real estate, finance, interest rates, the Fed, all the stuff that you guys depend on me to know so I can give you the information. And I’m not taking extra time in my schedule to do it. I’m taking time that I already had to be walking through the grocery store or waiting at the DMV or running whatever errand I had to run and I’m listening while I’m doing that. I highly encourage everybody else to consider doing the same thing and listen to podcasts like this.
All right, we love and we so appreciate your engagement so please keep that up. It’s very encouraging to see. I’d also like everyone else here to like, comment and subscribe on YouTube if you haven’t done so. And go and give me a five star review on whatever app you listen to podcasts if you’re not on YouTube right now. Those reviews really help when it comes to making sure that we at BiggerPockets stay at the top of the charts and I want to make sure that happens.
Our next question comes from Kevin in Phoenixville. First time I’ve ever heard of Phoenixville. “Should I consider selling this unit that I know has no major issues given that it’s newer and give up such a low rate, 2.5%, to purchase three to four other units while borrowing at the current 5% interest? Alternatively, I could use a HELOC to tap the equity, but suspect that would be a bit more expensive than the 5%.”
Ah, so this is a question of how to scale, Kevin. So let’s dive into this. First off, don’t let the rate make the decision, okay? It doesn’t matter if you’re at a 2.5, go into 5, go into 8, go into 12. It doesn’t matter. What matters is the overall cash flow that you’re going to get having one property versus several. So if you can sell this one that’s making X cash flow and reinvest irregardless of the rate at Y cash flow, if Y is more than X, it’s probably a good move to make. Then the next thing you could look at is the equity. “How much equity do I have in this property? Can I increase that by going over several properties?”
Now, if the value of real estate continues to decline, going from 1 to 3 could amplify your losses. But if the value of real estate goes up, going from 1 to 3 will absolutely amplify your gains. So that’s the question you have to ask. Do you think real estate’s going to go up long term? If you do, I’d say yes, sell it. Buy three more. They may go down a little bit in the short term, but eventually they’re going to be worth much more. If you think real estate’s never going to go back up and it’s going to go down for a long time, or not just for the near future but for the long future, the far future, now is not the time to make that move.
But I do want to highlight that looking at the interest rates isn’t what’s important. Because if you could buy more properties at a higher rate, but they cash flow more because the price rent ratio is in your favor or they’re in a better location where the rents are going to increase faster and they’re increasing on three units as opposed to one, then it is a good move to make. In most cases, selling a property for more good cash flowing solid properties in great locations is almost always the right move. But make sure you’re analyzing from an overall cash flow perspective and not the interest rate.
All right, our next clip comes from Jared Haxton in Prescott, Arizona.
I’m a relatively newer listener to the podcast, but I have devoured every episode that has come out since May of this year and I just signed up for the pro membership. So the extent of my real estate history is doing two of what you dubbed sneaky rentals by turning my primary residences into rental properties. That leaves me with two rentals and a primary residence right now.
I work in IT, but I spend all of my free time and travel time listening to BiggerPockets. So apparently, I need to be doing more to get into the real estate arena, and that is actually what brings me to your doorstep today. I decided to take some action and I have found myself with the exclusive opportunity to put together a deal on a piece of off market commercial industrial real estate that I have somehow maneuvered my way into.
So as quick as I can, here are the details. The two owners are in their late 60s and 70s and want to retire, and in their words, ride off into the sunset. It’s two parcels that total about four acres with a 6,400 square foot office building. There are 13 different tenants that pay anywhere from 2,600 a month down to $50 a month, and they’re confident that they can get $2 million for all of it. If taxes and insurance remain the same for the next buyer, the total net cash flow is about $9,500 a month. They really don’t want to finance any portion of it themselves, but said it wasn’t a full on deal breaker if they carried a small part of it.
There is about an acre of open land that I’m thinking could be used for mini storage and the location has some nice things going forward as well. I walked in there like I had done this a thousand times before, got all the info, condensed it all, researched a bunch of stuff, posted in the BiggerPockets forum and made some really cool connections and got some great feedback that I decided to add to my pitch preparations.
I am very aware that I know almost nothing about this. Regardless of what happens in my first deal here, I want to maximize the training opportunity and run down every path that I possibly can. I figure if none of the roads hold a solution for this deal, at least I have traveled a lot of paths and that will undoubtedly come in handy for my next deal.
So I have a flurry of questions in my head, and it looks like this. What do you think of this deal on the surface? How many different ways could I come at the financing since I don’t have any meaningful capital of my own to contribute? I’m local and I’d love to manage the property on the side, but I’m not sure if that actually matters to anyone. If the owner got their $2 million, it would have around a 4 or 5% annual return baked in, but rates are pushing to 7s. Are there any cool ideas on creative financing that would at least be valuable for me to travel down as a newbie or they might even have a chance of working?
There’s nothing like being in the pressure cooker of my first live exclusive deal to accelerate my learning curve. So I’m ready to turn the heat up and try some stuff. You guys are doing an incredible job out here and I can’t wait to hear any thoughts you have on this. Thanks. Oh yeah, and if you ever want to do a live coaching call, I am 1000% on board and available at any moment of any day. Thanks.
All right, thank you for that, Jared. Let’s talk about the positives of the deal. It sounds like you’re interested in this because it’s off market. That might be the only reason. Because when I’m listening to you talk about the actual metrics here, I’m assuming this is triple net based on the way you’re describing it. A 4 to 5% return without a huge amount of value add and quite a bit of labor, like if you’ve got some properties that are going to be rent for $50, I don’t know how that’s really beneficial to you.
So I’m just kind of trying to turn this over in my head because you gave me a lot of information there. It was all really good stuff. I don’t love triple net in a highly inflationary environment. And the reason is the lease terms are usually set in place to go up, if they go up at all, by 2 to 3%. 4% is high. Oftentimes they’re locked in place for the same amount every single year. And that’s fine if there’s no inflation or inflation is low, but when inflation is at it like it is now, which who knows how to measure it, but personally I think it’s probably in the 30 to 35% range is based on how much money that we’ve created that wasn’t there before, the price of everything else is going to be going up much faster than the price of your properties. That’s one thing I don’t love about the deal.
Now, if you were coming and saying, “Hey David, it’s a 20% return right off the bat,” so even though it’s not going to keep pace of inflation, I might be more excited. But 4 to 5% isn’t that exciting either. You could get a better return than that on a lot of stuff. You could invest in residential.
Now let’s say you said, “Well yeah David, but I got a bunch of cash I want to deploy and I want to put it into one property. So if I can buy this one for 2 million, put $400,000 to work.” I’d say “Okay, that might make sense for you,” but you’re saying, “I don’t have a ton of capital. I actually need the money from someone.” And so I think, “Well, let’s figure out how you could get someone to partner on this deal.” But no one’s going to be excited about partnering on a 4 to 5% return when it doesn’t have big value add to it. So you’re not going to be able to find a partner most likely.
And then I thought, “Well what if he needs the tax benefits and there’s a lot of depreciation that he’s going to get out of this triple net property? That would be a reason.” But you haven’t mentioned anything saying that you’re a real estate professional or that you need to shelter income. So as I’m running through this scenario, nothing about this deal is really jumping out at me as something that you should be excited about. And then I wondered, well why is he looking into it this deeply? And I think it’s because you found an opportunity that’s off market. You’re talking directly to the sellers. And there’s a good learning lesson there, because just because something is off market does not mean it’s good deal. In fact, many times off market can be bad deal. Think about the Zillow Make Me Move feature. Do you think you were getting a great deal on a Make Me Move? That’s something you have to literally pay such a high price to get the seller to consider selling their home that you’re getting ripped off just to get that property.
For a long time it was so hard to get anything at a reasonable price that if you could go off market, you were guaranteed to get the property because you didn’t have to bid with 12 other buyers. And I think the phrase off market became synonymous with better deal. And in many cases you do get good deals when you go off market, but that’s not going to be a 4 to 5% return, okay? So off market doesn’t mean good or bad, it just is. Now you got to analyze to determine if it’s good or bad, and the numbers here are telling me bad.
So if there’s something that I forgot you said in the video or that wasn’t mentioned, I don’t want to turn you off from buying this deal, but if the only reason that you’re looking at it is because it’s off market, I don’t think that this is worth pursuing. I think those two older gentlemen probably don’t know what the market’s worth when they say that they can get 2 million for it. They may not know what interest rates are doing right now. They may not understand that the market isn’t super thrilled about a 4 to 5% return. They may not realize that triple net properties are not the flavor of the month like they are in some economic environments where they’re considered really safe. There’s actually a lot of people that are holding money waiting for the market to continue going down so they can get better deals. And this doesn’t sound like a great deal. So you’d have to get it at a much, much lower price or with incredibly favorable terms.
The other thing I want you to be careful of, I know I’m going on this one for a long time, is that when you buy a triple net property, and this is the lesson I had to learn the hard way, you often don’t realize how much money you have to spend every time a tenant leaves, okay? On the property that I own. It’s not uncommon for the tenant to request 80,000 to $120,000 in improvements to that actual unit before they move in because they need to take that space, whatever it is, and have it converted to work for their business. If you don’t have enough cash to buy this place, you’re probably not going to have enough cash to deal with those problems when they pop up and I’d hate to see you end up in foreclosure, which just makes mean that this asset class isn’t the best place for you to get started. I’d rather see you start with something like a house hack where you can put 3.5% down and learn some of the fundamentals and ways you can exercise your creativity in real estate in a much safer way.
The other problem with triple net properties is that the only time you can get out of that 2 to 3% increase in lease ups is when the tenant leaves. So you’d be happy the tenant left, but then you got to go dump all the money into getting the property ready for the next tenant and there goes all of your profit. So in general, I wouldn’t be looking at a property like this unless it was an incredible deal where you’re getting it far below market value and the cash flows were way stronger than they’re at now unless you bought it for tax purposes.
However, do not let this discourage you. I love your attitude, I love your energy. Keep going. Find another deal and send us a video here on biggerpockets.com/david for us to review. Also, I want to let you know I love the fact you’re using my sneaky rental strategy where you buy a primary residence and you turn it into rental property without having to put 20% down. Keep doing that. Maybe just look for ways to maximize that. Find some fixer-uppers, find some houses in better neighborhoods, find some people that are looking to sell or they think the market’s going to crash so they’re willing to take a discount on their home before the market crashes. And then when it doesn’t crash or if it doesn’t crash, you will have gotten a better property in a better location for less money down that you could still make cash flow.
Our last question comes from Michael Roetzel in Arkansas. “I have three rentals currently. I have sold a few in the past. One flip under renovation and one house under contract with the idea of it being a long term hold. I’m looking for advice on the renovation mindset. What do you say to a person who has trouble with wanting too much perfectionism and control?”
So funny that you say that Michael, because this is something I’m dealing with in my own life. It is not uncommon for me to see employees that work for me or people that are in my business or people that are working for me like a contractor or an insurance provider anything that just don’t care as much about excellence as I do, all right? So luckily I don’t have that problem with BiggerPockets. My producer Eric is awesome. He does an incredible job producing these shows and we get along and we work very well together. But that’s because he has a very high standard that he expects from himself and he knows that I have a high standard, and so we get along. Frequently in life, you’ll find the majority of people you find do not have a high standard for excellence. It’s a matter of the heart. And what I mean by that is that what’s in our heart will determine the actions that we take.
If you feel a sense of obligation to do a really good job, you’re going to look for answers, you’re going to anticipate problems, you’re going to solve things without bringing problems to other people. If your heart is in a place where you’re saying, “I just want to get paid and do as little work as possible,” you’re going to bring people problems instead of solutions. You’re not going to anticipate what could go wrong. You’re going to cut corners in your work.
And the problem is the people that are trying to do as little work as possible and still get paid are always clashing with the people that are trying to do the best job possible for different reasons. And this is probably what you’re experiencing and it’s very likely what I’m experiencing. And as people listen to this, they’re either in the camp of, “Yeah, why does everyone suck?” and they don’t try very hard. Or they’re in the camp of, “Why is it never good enough? And how come no matter what I do, you always say, ‘I could have done it better’?”
This as a struggle that has been going on with human beings for the as long as time’s been going on, right? I’ll talk to one performance coach or one psychologist and they’ll say, “Yeah David, you just expect too much of people. You have a problem where you want everybody to be like you.” And I’ll talk to another one that will say, “Yeah David, you don’t expect enough of people. You need to be raising your standards. And if people want to play in your world or they want to live at where you are, they need to step up their game.” And I don’t know if there is a right answer to this. I really think it comes down to what’s going on in the heart.
My advice to you for someone who’s dealing with too much perfectionism control is the same advice that I’m giving to myself. Rather than continuing to try to push certain human beings in one of my businesses that do not want to step up their game, I need to just make sure that they’re doing good enough and put my energy somewhere else where people do respond to it.
So here’s an example of that, okay? Let’s say that I have a group of loan officers, an individual team on the one brokerage, and I see them and they just kind of lolly gag through the day. They do their job, they help their clients, they don’t make mistakes, but it’s kind of the bare minimum, okay? They wait for the underwriter to come back with conditions, they go get answers. And I go to them and I’m like, “Listen, I want you anticipating what the underwriter’s going to say before you submit that file. I want you to think like an underwriter so that we get the stuff they need before we submit it and four days go by and they kick it back to us and then another three days go by that we get it from the client. Now it’s been a week, we could have closed a week earlier.”
And they’re, “Ugh, why is it always not enough? No matter what I do, David’s never happy.” When I get that type of energy, instead of banging my head into that wall, I just need to be grateful that I have them. Let them stay in the position they’re at in life with the understanding that they’re never going to be a top producer. They’re never going to be the one who gets the best clients. They’re not going to be the one that I go personally recommend somebody to. They’re not bad. They’re doing their job. And frankly, they’re better than their competition and they know that. They’re just not excellent, right? I want them to be Olympic level black belt stuff. That’s how I’m always trying to be.
And I get very frustrated when I’m pushing people that don’t want to be pushed. And they get frustrated too, because they didn’t sign up for this job to be pushed. They signed up for this job to be who they are. And that’s who they are, they’re one of those people that says like, “Yeah, I just want to have fun or I just want it to be easy. I don’t want to have to work out on my comfort zone.” Instead, I need to just let them stay and find a different team within the one brokerage that’s craving my direction and craving my leadership and really wants to hear how can I get better and put my energy there.
I’m going to give you the same advice. So frequently on my rehabs, I’m not happy with the contractor or I’m not happy with my employee that’s managing the contractor. And I just gave an example earlier of how one of my employees sent someone to one of the houses that was under construction and was told by the contractor like, “Hey, you’re good to go. Send them.” And it turns out it wasn’t good to go. Rather than getting angry at all those people, which is just not good for them and it’s not good for me, I’ve just accepted, “Rehabs aren’t going to go as good as I think. Let me put my energy towards something else that wants it.”
And I would give you the same advice. There’s people in your world, there’s part of your business, you’ve got several things going on. You have three rentals that you already own. You have a flip under renovation and another house under contract, right? There’s someone out there in this world that does want to pursue excellence, the agent helping you find the next house, or the property manager that’s managing the houses that you already own, okay? There’s something out there where people are perfectionist-based and you’re just better off spending your time with them and doing less deals or putting less of your business as significance in the area where people don’t think like you.
I can assure you of this, you are not going to find a person that cares about your deals as much as you do, and that’s what you want. You want them to be paying attention to every detail the way that you do. And if you really want to go deep, perfectionism and control often come from dark places that aren’t necessarily positive. They feel positive to us because we see how it would benefit us. But sometimes perfection and control comes from a parent that you had that you were never good enough for and you were always trying to get their approval and you thought you had to be perfect and now you’ve taken that standard and you put it on everybody else and they never asked for that. And you’re making other people feel the way that that parent made you feel.
Or sometimes they come from a place of absolute fear that you’re just terrified of what’s going on in the market and you can’t control any of it so you look for what you can control and you put way, way, way too much emphasis on that and you’re making people unhappy that are around you. There’s probably no right or wrong answer. This isn’t a black or white issue, though it feels that way to people that want everything to be perfect. It does feel black and white. But if the people that you’re dealing with, they’re not on the same page, they’re just not going to respond and you’re going to waste a lot of your energy and constantly be frustrated and not enjoy this wealth that you’re creating.
So what I’d like for you to do is think about how to enjoy the wealth you’re creating, how to enjoy the journey that you’re on, how to see the things that you’re happy about. Let that make you feel good instead of the stuff that’s going wrong that makes you feel bad. And as I’m talking to you, I’m also talking to me. So thank you very much, Michael, for making me have this deep dive that I just did in front of 250,000 people on a Seeing Greene episode. I think it’s going to help me.
All right, that wraps up our show for today. And what a note to leave it on. You guys just got a personal therapy session with David Greene going into the dark green places of my mind. What color is dark green? Is that like a forest green? Why don’t we call dark green, right? That’s what we should call it whenever I go into those deep, deep places. Anyways, I enjoy you guys being here with me. I appreciate you guys being here with me, and I hope that sharing what’s going on in my world, what’s going on in my businesses, the problems I’m having, and the issues everybody else is having makes you feel better about your life. It’s better than watching an episode of Keeping Up with the Kardashians and feel good about yourself because you’re actually learning how to make money and find more freedom. So thank you for being here with me.
One last thing I’d ask for, if you could please leave me a five star review on Apple Podcasts or Spotify, wherever you’re listening to this podcast, as well as subscribe to our channel and leave us comments. We read them. And as you see, we put them in episodes and we take them serious. So I love you guys for being here. Thank you so much for joining me. If you’d like to follow me, you could find me online on all the socials @davidgreene24. Please go give me a follow there on Facebook, on Instagram, on LinkedIn, on Twitter, on wherever. You can also find me on YouTube @davidgreene24 now. They included handles, so follow me there, see what I got going on. Let me know what you think and make sure that you listen to another BiggerPockets Podcast when you’re done with this one. Remember, YouTube Premium, those AirPods, best investment you can make. Thanks guys. I’ll see you on the next episode.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.