The ONE Factor That’ll Make or Break Your Rental Property
A rental property doesn’t need to be brand new, have the best amenities, or offer 24/7 property management to do well. An older home can out-cash-flow a new build with one specific factor. So, what is THE key to having a profitable rental property, and why do so many rookie real estate investors not pay attention to it? Tune in, and find out on this week’s episode of Seeing Greene!
We’re back with your “I finally remembered to turn on the green light!” host, David Greene. This time around, David is taking questions from all levels of real estate investors. Questions like what to do when your HELOC (home equity line of credit) rate is about to skyrocket, how fast to scale your rental portfolio, whether new homes are worth it as rentals, and how to turn a couple of rental properties into a real estate retirement plan. We even get a quick cameo from tax expert Tom Wheelwright on how to avoid taxes the next time you’re selling a rental!
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 759. All things being equal. It is absolutely better to buy a new home than it is to buy a resale home. But all things are usually not equal. In any market, they typically build homes in the most desirable areas first. So, after they built on the best land, they then go to slowly inferior land as the construction develops. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is.
What’s going on everyone? Glad that you’re here. This is me, David Green, your host of the BiggerPockets Real Estate Podcast here today with a silky, smooth, Seeing Greene show. If you haven’t heard one of these before, there are variation of the podcast where I take questions from you, our listener, and I answer them directly, so everybody else can hear giving financial advice, real estate help, guidance, encouragement, support, even a little bit of chastisement if you need it. Whatever it is, it get you over that hump and into building wealth through real estate.
In today’s show, we talk about several wealth building strategies and ideas, including what to think through when a family member leaves your property, if you should buy a new home and make it a rental, if the numbers work or if you should stick with resales, and how to evaluate a bigger opportunity versus keeping the great interest rate that you have. All questions that are on people’s minds everywhere with the shifting economy that we are going through all for your listening enjoyment.
Before we get to our first question, today’s quick tip, brought to you by Batman. What is something hard that you can go do today? Can you disrupt your comfort zone? I just want you to start small and put big intention behind making a change towards tomorrow. Don’t let your brain tell you you need to go do something huge. You got to build momentum to get to something huge. Can you take a short run? Can you eat a piece of broccoli? Can you do 10 pushups right now? Can you just do the littlest thing that before you check your phone, you do five calf raises just to get in the habit of doing something different than what you’ve been doing, get new juices flowing to your brain and seeing new results?
And remember, if you want to be featured on an episode of Seeing Greene, just go to biggerpcokets.com/david, submit your question there, and hopefully we can get you on the show. All right. Let’s check out our first question.
What’s up, David? Love the podcast. Thanks for everything you do. My question is this. I purchased my first rental property in December for $220,000. I used a HELOC from my primary residence for the down payment, and I was planning to do a BRRRR after the six-month seasoning period is over, which is July, and the goal was basically just to recoup the down payment and move on to the next one. The house is in a great, great market, and I have almost 100,000 in equity after six months. My current interest rate is 3.5% which is fixed. The HELOC is adjustable interest rate, but it’s at 4.5% over a 10-year period. The current cash flow is about $400 a month after all expenses, so it is cash flowing pretty good. The problem is the rates have skyrocketed in the last six months since December, and a cash-out refi would basically eliminate all of my cash flow, whereas the HELOC interest rate is not fixed, but worst case scenario could basically double to like 9% and I would still be cash flow positive.
So, I’m struggling a little bit on an exit strategy to pay back the HELOC. Do you have any suggestions for a different strategy to recoup my down payment, pay off the HELOC? I’m actually considering doing a flip in my area with the simple goal of just paying down the HELOC. Once I do, my cash flow will increase about $200, give or take, so I’ll be at about $600 a month once I pay down the HELOC.
So, my question is really, do you have any other strategies for recouping costs when the BRRRR strategy doesn’t necessarily make sense right now because of interest rates? Am I missing something altogether? I would love your feedback. Love to hear what you have to say about this particular scenario, and thanks in advance.
All right. Thank you, Clint. Couple things to go over here. I don’t know that it’s that the BRRRR strategy doesn’t work right now because of interest rates. It’s more that when you got into the BRRRR… when we get into the BRRRRs, we’re basing the end result off of today’s interest rates, and when interest rates go up, that means the deal doesn’t work out like we originally analyzed it too. So, what’s happening is, we’re paying more for the property upfront than we should if we knew what the interest rates were going to be at the end. So, I still think you made a good move. You still have a lot of equity in this deal, and you have two very good interest rates, one in the threes and one in the mid-fours. This is much better than I was thinking I was going to hear when I first started listen to your question, so let’s tackle what your options would be here.
First of all, you mentioned paying off the HELOC to increase your cash flow by $200 a month. That would work, but that isn’t the reason I would want you to pay off the HELOC. I would want you to pay off the HELOC because it’s not going to be 4.4% when it adjusts. You’re incredibly lucky you’re there. Some of the HELOCs that I’ve been seeing on investment properties have been quoted as high as 11.5%, so you need to pay that thing off for safety reasons, for defense, not for more offense, so to speak.
Now, that would move us into talking about, I guess, another question. Should you refinance, get your money back out, or should you keep these rates? I’m leaning towards keeping the rates, but here’s how I would make the decision if I was you. If you pull your money out, can you invest that money and get a $400 a month return on that money because that’s what your cash flow is on this current deal? If you can invest that money and get $400 in another deal, it makes sense to keep the original one breaking even and just paying off the mortgage and getting rent increases every year that eventually become cash flow and acquire another asset that replaces the 400 you lost. So, if that’s the decision that you make, you end up with two properties instead of one. You add equity to the second property just like you did to the first, which increases your net worth. You replace the cash flow that you lost with a new property, so you don’t lose anything there, and your original property doesn’t cash flow, but it will cash flow later because real estate will go up over time and so will the rents. If you’re not able to reinvest that money in another property and get that same $400 a month, it might make sense to just keep the rates that you have and look to make money in a different way.
The real estate, which you kind of alluded to and you talked about house flipping, I think that’s a great idea. If rates are going up faster than you can control to make the BRRRR work at the price you pay in the original amount, you probably want to move away from BRRRR, right? Like BRRRRs are very close to flips. You could flip a property instead of refinancing, and it’s a very, very similar process. Maybe you plan on that. You go after the equity, you know what the cashflow will be if rates are at a certain point, but if rates go up more than that, you just sell it. You actually could probably sell the property you’re at right now, and you could recoup some of your money that way. You don’t have to refinance it to get the money out. You could sell it, turn that into a flip, and then go do it again.
So, this is why knowing different strategies helps because in certain markets like this one where you started with a BRRRR, it worked as a BRRRR. It just didn’t work perfectly. You’re not able to get your money back out of it. You ended up with a great traditional rental here. You could just flip the next house. Look for a property, has a lot of meat on the bone, add value to it, buy it right. Decide at the end, do I want to flip it and get some cash which I could use to pay off my HELOC, or do I want to keep it refinance and go on to the next one?
But that’s the advice I’d give to everybody that’s in your position where they’ve got BRRRRs that are having a harder time working out. Just ask yourself if selling it makes more sense or if holding it makes more sense. As long as there’s new deals that are coming into your funnel here, you’re fine to sell real estate and buy new ones. The problem becomes when you don’t have new deals coming into your funnel. If you sell the property and flip it, you end up with nothing, you have nowhere to reinvest that money again, and you have no long-term cash flow. So, what you want to avoid is having no deal flow. As long as you’ve got deal flow, whether it’s a hold, as a BRRRR, or whether it’s a sell as a flip, you’ll make money in one of those directions and keep snowballing it into new deals.
Thank you very much. Let me know how that turns out.
All right. Our next video clip comes from Kyle Wilkin in Asheville, North Carolina.
Hey, David. My name is Kyle Wilkin. I live in Asheville, North Carolina. We bought our first home in 2020, so we got a really good interest rate. We currently rent out our basement and are able to pay our mortgage each month with that money. So, we’re trying to figure out what’s next. And my question for you today is how much is too much when we’re making this first step in our investment careers? There’s a farm that’s 22 acres, has four buildings on it. We would rent out three of those and live in one of them because we would have to sell this home to put the down payment down on that farm.
So, I’m not asking if it’s a good deal because I think it’s a good deal, but my question is just if you were in the beginning stages of investing, would you recommend us making a leap for something bigger like this farm where we can store my landscaping equipment because I have my own business and rent out three of the homes and potentially have some more land to sell off later, or create other business stuff like wedding venues or stuff like that, or would you recommend us sticking with what we have in our home and the income from our basement until we can get another single family home? And that would allow us obviously to have more cash flow at the beginning stages.
So, I’m just curious what you would advise people like us who are just getting into the game. Thanks, man.
Kyle, this is a great question. I love this. All right. Thank you first off for saying you’re not asking if it’s a good deal. You already know it’s a good deal because now I can give you advice based on the assumption that this property’s a good deal that has three houses that could be rented out as well as a barn to store things.
I’m assuming when you say good deal, you’re meaning that it will cash flow and that the return will be something that you’re happy with. Now, the part where your question gets tricky is that you’re saying you have to sell the home you’re in to put the down payment on the farm. I don’t love to put the down payment on this next opportunity. I don’t love that. You’re living for free right now. The tenant is literally making your entire mortgage payment renting out the basement. That is a big win for you. I don’t know what rent would be. I’m assuming it’s somewhere around $2,000 a month, so you’re cash flowing positive whatever that mortgage is that you’d normally be paying. Let’s assume it’s $2,000. Is this next deal so good that it makes it worth losing that $2,000 a month of cash flow? Because in your head you’re probably thinking of it like this property is a net even. It’s just breaking even. It’s saving you a lot of money, a lot of money. And by the way, you’re not taxed on money that you save. You’re only taxed on money you make. So, a $2,000 savings of not having to pay mortgage is probably more like making $2,500 a month. It’s even better if you sell this property to buy those ones, can you say that it will be the same, right?
I would rather see you take a HELOC on this property you have that’s already awesome for you. Use that as the down payment money for the next one assuming that you have the equity. If you don’t have the equity, can you borrow money from somebody else to buy the next deal? Because as long as you’re paying less than $2,000 a month for the money that you borrow, it’s still better than selling your house and having to take on a mortgage somewhere else.
Now, I think you mentioned that you could move into one of the three houses, so you’d be renting out the other two and getting the storage for your equipment. Run the numbers that way. Can you buy this property with three homes on one lot, live in one of them, also, not have a mortgage, and be a net benefit to where you are right now?
So, let’s just assume it’s apples to apples, right? Right now, you’re living for free. If you buy that one live in one of the units, you’ll be living for free again. Is that real estate worth more than the one you have? Because that could be a win, right? Let’s say you go from a $300,000 of property to $700,000 of property, but it’s still a breakeven for you. Now, you have three potential units going up and rent instead of the two that you’re in right now. There’s an argument to be made that that could work. Is the storage of that barn going to save you money that you were spending to store your equipment somewhere else, and what’s your quality of life like? Do you enjoy the house you’re in more than you would enjoy living in that one?
Here’s what I want to make sure you’re not doing. You crushed it on your first deal. You’re living in North Carolina, you’re living for free on a house act. That is incredibly difficult to do. Most people don’t get to live for free. It’s a win if you just live for less than what it would be to pay the full mortgage. I don’t want you to think that every deal’s going to be like that one and be in a rush to jump into the next one because you had a good experience on the first one, but I also don’t want you to miss out.
So, if I was in your situation, I would look into getting a HELOC on my primary and using that for the down payment. I would look into borrowing the money from someone else and paying them interest to use their money to buy the new property, or I would analyze where I live now and what I’m saving versus where I would live there and what I’d be saving. And if that is a superior move to where you are now, yes, you could sell your house, and you could go buy that property. Just make sure if that’s the road you take that you put it under contract contingent on selling your home so that you don’t lose your deposit. If you’re not able to sell your house or you don’t want to put your house on the market, try to sell it to get the money, and then, when you go to buy this other property, it’s off the market or somebody else has bought it. Let me know how that goes.
All right. Our next question comes from Wendy Clark in Meridian, Idaho. I love your podcast with the very helpful in-depth information you provide and with your sense of humor and your chair swiveling. That is funny. She’s mentioning the chair swiveling because when I start talking and thinking at the same time, I sometimes fidget a little bit, right? So, I’ll do this thing with my chair, or I have a couple other little idiosyncrasies, and she’s calling me out on that. That’s fun.
I currently have no portfolio, but I own my home free and clear in my trust, and I want to know if it’s possible or smart to move into the ownership of my real estate investing LLC instead to rent the house. It’s individual, three bedrooms, two baths to traveling nurses for short to medium term rentals as it would be part of my new REI business, and would this be doable? Is it smart or not smart or helpful?If you’re not the person to ask, I apologize. If not, who would you kindly direct me to be the person that I could ask this to?
Thank you so much, David, for all that you do to teach us and move us forward and upward on your REI journeys. With gratitude, Wendy.
Well, first off, Wendy, that is very sweet of you. You said a lot of very sweet things in here, and I can tell from the way you worded this that you are overwhelmed, and your mind is a little bit jumbled with all the options. Let’s try to take this big ball of yarn and straighten it out into several little strings that we can analyze more clearly.
You did mention that your home is owned free and clear in a trust. So, does that mean that there’s a stipulation that it cannot be used to generate income, or if it generates income that you’re afraid that that means the income has to stay in the trust? That could be what you’re getting at here. I would wonder if you do rent the home out even though it’s in a trust. If you could claim the income as business income that is not related to the property itself? So, maybe the appreciation of the home or the loan pay down the equity that stays in the trust, but the cash flow that comes out of running it.
Could your LLC rent the home in the trust and then keep the additional cash flow? That’d be one way I would look at it. The first thing is you have to ask a lawyer. That’s who you’re going to go to that understands trust law because I don’t. I’ll just tell you that right now. I’m thinking out loud, but I don’t know if that’s the case. Then, you want to talk to your CPA and find out “What would the tax implications be if I do this?” If you don’t have a CPA, and you want to sign up with a new one, you could email me in. I’ll put you in touch with the one that I use, but that’s exactly what I would do.
Then, rather than them saying, “No, you can’t do it.” Here’s what everyone needs to understand. You go back and say, “How could I do it?” Or you throw options, and you wait for them to say, “Oh, yeah, that could work.” So, I just came up off the top of my head, could your real estate investing LLLC rent the home in your trust, and then, lease it out to traveling nurses and keep the profit that it makes while paying your trust rent to use the home that you’re not in anymore, right? I don’t know that that would work, but that’s what I would throw in front of the CPA or the lawyer to find out if that would work.
I love that you’re asking this question of me. I love that you’re being involved in Seeing Greene. You’ve got a great idea. It’s not going to be as challenging as what you’re probably thinking. There is a way around this problem. You just got to ask a CPA and a lawyer what to do. I’d start with the CPA because they’re usually going to be cheaper, and then, I’d ask them if they had a real estate lawyer referral you could talk to.
Thank you, Wendy, for your awesome question, and let me know how that goes.
All right, everyone. Thank you for submitting. My favorite part of the show is we have questions that we can answer, and that’s what you’re all here for. Please make sure to like, comment, and subscribe to the channel.
In this segment of the show, I’m going to read comments that you, I, audience have left on previous shows to see what everybody thinks. These are often fun, insightful, sometimes mean, but usually cool.
Our first comment comes from Professor X. This was just perfect. The answer to the question scenario about paying off properties was exactly what I needed. I’m going to keep working and enjoying living at the same time.
I love hearing that because it’s more about just getting a bunch of money. It’s about getting money in a way that you enjoy and enjoying life while you do it. Thank you, Professor X.
Our next comment comes from Marshall Hennington. By the way guys, these all come from episode 747. If you want to go listen to that and find out why people are commenting.
Excellent, David. You’re a good dude and very humble. I have followed BiggerPockets these last three years, and it inspired me to have acquired two homes, a triplex and two fourplexes, and I’m currently an escrow on another property, and I own my own main home. All due to taking action. Yes, it is. Five years ago, my credit sucked, and I was in debt and had student loans. I cleaned up all those problems and that was five years ago. Now, I’m building a small portfolio. I also plan to pay off three properties in the next three years. If I can do it, anyone can do it. Get to work fellows and start your new life.
Marshall, that is an inspiring comment. That is an encouraging comment. It’s a freaking awesome comment. I love hearing this, and what I love about it is you didn’t just say how you got a deal. Most people come and that’s their question. How do you get the deal? Okay, I got the deal. How do I get my next one? But you actually talked about how you cleaned up your entire life to get the deals. Real estate didn’t just get you some cash flow. Real estate caused you to clean up your credit, pay off your debts, manage your money better, put systems together to scale the multiple properties and be disciplined enough to pay them off.
There are so many benefits that you picked up from your pursuit of real estate, and this is why I tell people, let real estate be the carrot that drives you to make better life decisions. This is my opinion. I don’t speak for everyone. But when I hear people say, “David, how do I buy real estate with no or low money down?” My first inclination is to say, “Why do you have no money? Is there a good reason?” Maybe you have child support payments that are just destroying you, or maybe you’re a caretaker for a sick parent or child and you can’t go make more money. That’s okay. You should not feel any shame about that. But what if it’s just that you’re 38 years old and you still live at your mom’s basement chasing the dream of being a video game engineer, and you need to let that go and get your grown man on.
What if you have terrible spending habits, and you make good money, but it flies out the window just as easily because you’re not disciplined? Is the fact that we don’t have money an indication of a bigger problem in our lives? It’s easy to look for a way around that. Well, how do I buy real estate without having to change anything about my life? I don’t like it. I’d rather that we said, “I want to buy real estate.” These are the habits that are getting in the way of buying real estate. I need to change them, okay? If you want to have a six-pack, of course, there’s always an answer around it. You could get liposuction, okay? You could have ab implants. I think that that’s a thing that people actually get to look like they have it, or you could say, my lack of exercise, my poor diet, my lack of sleep, my issues are stopping me from having a six-pack.
I’m going to go make changes in my life so that I could get what I want, way healthier. Not only to get the six-pack. You get better cholesterol levels, more healthy life, better energy overall, a better mood. A lot of you might meet people at the gym that are friends. A lot of benefits that will come out of making these changes. The book I’m working on for BiggerPockets right now, keep an eye out for it. It’s going to be called Pillars of Wealth. Has to do with the ways that you can change your entire financial picture, not just one part of it which is real estate investing.
Marshall, thank you so much for sharing that. I hope you post that in the BiggerPockets forums as well.
Guys, we love and we so appreciate the engagement. Please continue to like, comment and subscribe on this YouTube channel. And if you are listening on Spotify, even if you’re not listening on Spotify, but you have the Spotify app, do me a favor, go there and keep an eye out for polls. Spotify has recently allowed us at BiggerPockets to ask questions to see what you like about the show, what you don’t like, and how to make it better. So, keep an eye out for those polls and engage with them, participate with them whenever possible because we want to make the show as good as possible. If you could take a quick moment right now to leave me a comment on today’s show and let me know what you thought, what you liked or something that you noticed, I would love it.
All right. Our next question comes from Casey Penessey.
Casey says he and his brother have several rental properties that they want to sell. They do want to reinvest, but they’re a little concerned about the timeframe restrictions of Section 1031. Remember, you can exchange properties in a 1031. You use a qualified intermediary, and by doing so, you avoid most, if not all of the income tax from selling the properties.
So, you really have two choices. The first is you do have… You would meet those two tests which is 45 days from the time you close on the old properties to find or identify up to three potential new properties that you choose from, and then, 180 days to close on those new properties.
You can also do a reverse 1031 exchange which means, you can actually buy the new properties before you sell the old properties, and that gives you a lot more time to actually be dealing with this. So, the 45 days is 45 days after you close, but you can do it up to two years before you sell the new property. So, you just need to work with a qualified intermediary who really understands reverse 1031 exchanges to do that.
The other option you have is to sell the property, recognize the game, and then, close on a new property or new properties by the end of the year. What happens then is your new properties, you’re going to get bonus depreciation for 2023. That’s 80% of the cost of leasehold improvements and contents of the building which probably is about 20% to 22% of a property with a good cost segregation, and that is probably enough to offset the tax from the game. Actually may save you money. So, be sure to run the numbers and decide, “Do I want to do a regular 1031 exchange, a reverse 1031 exchange, or do I want to simply recognize the gain, and then, buy new properties?” But be sure you do that by the end of the year so that you match up the tax benefits from the new properties in the same year as the tax consequences of selling the old properties.
All right, David. What do you think?
I think that was some fantastic advice, Tom, and I don’t really have a whole lot to add to it. You covered every single base that I was thinking, and you did it much better than me because you know taxes, and I don’t. It’s nice to see you on the podcast again. I love when we get to hear from you. You’re my favorite tax person. You made a very good point there. I’ll just highlight that.
When you are trying to shelter income from one year, it has to be the real estate that you bought in the same year. You can’t be in January closing on a property and use the depreciation to shelter income from the previous month in December. The cost segregation studies don’t always have to be done at the time that you buy the property. You could buy it in December and do your cost tag studies in January for the previous year’s taxes, but you do have to buy the property in the same year that you are taking the loss.
Very good point there.
All right. Our next question comes from Arjun Kadam. Arjun owns one property aside from his personal home and has about 500,000 in equity at this point.
Hey, David. I’m a huge admirer of you, and oh, I have a not so secret admirer. There we go. And really wanted to ask you a question that’s been on my mind for a while now. I’m a new investor in the Phoenix, Tucson market. In the last four months, I’ve made over 10 offers on resale properties, and each offer has been over asking. I’ve been seeing that because of the huge spike in the values of homes in the last two years, especially in Phoenix. There’s not much of a difference in price between a really old house versus a brand-new house. In some cases, the difference is as low as 10 to 12K. Considering that a new house will not have any capital expenses for five to eight years and will also attract better renters, do you think it makes sense to invest in a brand-new home as long as the numbers make sense for it to be a good rental? What suggestions would you give to someone who wants to buy brand-new properties for rental investments? Are there any red flags? I have never really seen anyone discuss the prospects of buying a brand-new home as a rental property on BiggerPockets and would like to really hear your thoughts on the same. Thank you.
All right. First off, Arjun, congrats on asking what might be the best question of the entire Seeing Greene episode. This is awesome, and I love how you’re thinking. In fact, my mind used to work in a very similar way when I was a new investor. So, assuming that you want to have a career like mine, you’re off to a good path. If you don’t want to have a career like mine, well, I don’t blame you because sometimes, I don’t even want to have my own career, but you’re asking good questions, nonetheless. Let’s get down into this, all right?
All things being equal. It is absolutely better to buy a new home than it is to buy a resale home, okay? So, now again, this is the caveat of all things being equal. There are less capital expenditures. You’re getting better technology. They’re more energy efficient. Your tenants are going to like them more. There’s a lot of benefits of buying a new home, but all things are usually not equal, and here’s where we’re going to dig in on this, okay? Arizona’s not the perfect market to make this point, okay? So, what I’m saying is in general, markets like Arizona, you probably would be better getting the new home construction. Not every market’s like that, and here’s why.
In any market, they typically build homes in the most desirable areas first. Now, Arizona’s different because it’s all desert. So, of course, there’s some areas that are better than others, but objectively speaking, it’s just a different part of the desert depending on where you are if you’re like in Phoenix, right? So, you don’t have as big of a difference between homes that were built 50 years ago and homes that are built today. But what if you’re in Austin, Texas? They’re going to build the best homes in the best part of the area. What if you’re in San Francisco, California? They’re going to build the best homes on the beach side with the cliff views, the ocean views, the closest proximity to the freeway. What if you’re in Southern California? They’re going to build the best homes in the best locations with the best weather and the best views.
You see where I’m getting at? So, after they’ve built on the best land, they then go to slowly inferior land as the construction develops. So, you get more homes being built further away from the ocean, further away from the downtown centers, further away from all the infrastructure that you want. You got to drive farther and fight more traffic to get to the best restaurants or the best entertainment.
Now, of course, this is not hard and fast across everything. I imagine in areas like Kansas, it’s not a huge difference. There’s just a bunch of land, so part of it is understanding the market that you’re getting into, but you’re asking very good points. New construction is better. What I want to make sure that you get right is that location’s even more important than age of construction. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is, unless you pay to have your house picked up and move somewhere else, which usually is not financially feasible. You’re better off to just buy another house somewhere else. You can’t move it, which is why location is the most important thing. It’s also the first thing tenants and owners search for, “Where do I want to live?” Then they say, “Okay, what’s the best house?” Nobody looks at pictures of houses and then says, “Oh, I really love that. When I’m going to buy it? By the way, where is it?” You start with location first. That’s always the most important part.
The other thing with new construction is it often comes with more regulations than stuff that was built previously. In almost every market I’ve seen, if I buy a 40-year-old home, a 50-year-old home, it has almost no restrictions on renting. There’s no HOAs. There’s way less likely to have the covenants, codes, and restrictions that say what I cannot do with the property. You get freedom.
On all the new home construction, you get hit with the HOAs that say, “You can’t or can’t do this. These are all the things you have to do with the property. We have regulations for this part of the city where you’re not allowed to rent it out this way.” You see what I’m saying? When you buy new home construction, you are also buying into new rule sets. Not all the time, but most of the time. So, if that’s the road you’re going to take, make sure that you have a very good agent or broker that can look into this for you to make sure that you’re not missing out.
Buying a property that you’re now not able to rent out to people or that has more expensive HOAs or other restrictions that won’t let you use it the right way. It’s because of that that I have typically not bought very many brand-new homes. I usually end up buying the resell myself because they’re in the better locations, and they have less restrictions on how I can use them, but I love how you’re thinking. This was an awesome question.
All right. Our next question comes from Nels in Minnesota.
Hey, David. I’m a newbie investor from Minnesota with no properties under my belt who has been consuming all things real estate investing for the past year. So ready to get into the game, especially with my lease ending this summer. I’m all in and will likely be house hacking a small multifamily property by myself, but there’s more to the story.
My grandfather passed during the pandemic, and he left behind two properties to my mom. We are a close-knit family, and she wants me to manage what has done with these properties. I’m thrilled to not only help set her on a path’s retirement but take my own steps towards financial freedom as she wants all decisions to benefit her, my siblings and me.
The properties, number one is a partially completed project in rural Wisconsin, not far from where I live in Minnesota. Think of a completely empty house with not much other than a bunch of tools and new appliances, none of which are even hooked up. An evaluation of this property puts it in the $150,000 to $200,000 range. The second property is completely paid off, three bedroom, one bath with a nice size lot in San Jose, California. Well, San Jose’s right down the street from me. My grandfather show… My grandfather has owned it outright since ’69 and not a thing has been updated since as far as I can tell. It needs work, but it’s valued right around a million.
Although my grandfather’s passing is unfortunate, we have an opportunity to create a family legacy because of him. If you were in my position wanting to take steps to both retire my mother and launch and scale a real estate in business myself, how might you attack this strategically?
Here’s my initial thoughts. Sell the Wisconsin home to get my mom’s some financial cushion and use the excess plus some of the equity in the San Jose home to add value to that property. Work with a local property manager out there to make monthly cash flow. However, if we want the cash-out refi route, we would also be able to put equity into additional properties and really get the ball rolling. Is this option a no-brainer?
On top of this, I make a high W-2 salary working in tech which will also fuel this engine. All in all, I feel like there is so much potential in all of this, and I’m okay making mistakes, but I’m needing a little push to jump off this diving board.
Thanks for all, you, Rob, and everyone at BPD. You guys make learning so fun and dreams achievable.
All right. Nels, that is a lot of detail and a really good situation for you to be in. First off, sorry about your grandfather. That is very sad, but the silver lining is that your grandfather left quite a bit of opportunity to his family. Another reason that I encourage people to invest in real estate, when you’re gone, that real estate stays, and the people that you love can really benefit from it. That’s got to be a really good feeling to know, on your deathbed, getting ready to pass that your family is going to receive a huge blessing when you go to take the sting out of missing you.
Second, you live near me. You need to reach out to me directly to talk about some of this real estate stuff. We’re going to do our best to answer what I can on the show, but you’re going to need a little bit more detail and opportunities. I do like what you’re thinking. I don’t think it makes sense for you to keep this project in Minnesota. You might have to put a little bit of money into it before you sell it, but it is probably something to sell. You don’t have experience in managing property. It doesn’t sound like this is a highly appreciating area. You’re better off to sell that property and get the money and put it into something where it going to get a higher return, which could be that second property in San Jose. Here’s why.
You mentioned it’s a three bedroom, one bathroom, right? I’m a real estate broker, and I serve in that market. If you were my client, and I hope that you will be, you would come to me, and I would say, “Look, we got a three bedroom, one bathroom. Can we turn this into a four bedroom, two bathroom?” That would increase the value a lot. If it’s worth a million as is that we’re talking like hundreds of thousands of dollars that you can increase the value of this home. “Can we convert the garage to add more square footage? Is there a way that… You sent us on a nice size lot. Do we have options to make this property worth more in addition to just updating it?”
Now, you also said to be put in touch with the property manager. I’ll be able to help you with that, but let’s make sure that it makes sense to rent it out. You might be able to sell this thing after you’ve made it worth more and buy a lot of rentals. Buy an entire apartment complex with the money that would come from this paid off thing that would cash flow much more than this property would, which would then allow you to spread that cash flow amongst your family. Maybe take ownership of that apartment complex and split it up amongst you, your siblings, and your mom, like you said, and everyone benefits.
Really, you and I need to sit down and look at how much money we would get out of the property in its current condition, how much we would get if we upgraded it, and how much we would get if we sold it and reinvested the money into somewhere else. But the one thing that I do think you’re on the right path with the selling the Wisconsin property, you’re going to have a hard time finding tenants in most rural areas as a general rule, and I don’t think that that’s an area likely to appreciate, so you’re better off to probably sell it and take some of that money, put it into the property that is going to benefit a ton from being upgraded and basically, build your family’s financial future from this point forward on the backs of what your grandfather left you.
So, thankful to him for what he did for you, and thankful to you for having a heart that wants to help your entire family. Make sure you reach out to me.
All right. Our last video comes from Veronica Gordon from Chicago.
Hi, David. My name is Veronica. I live in the suburbs of Chicago. Love your podcast. I’m learning a lot from listening to it. I appreciate your candid stories and your honest advice.
Hey, I am reaching out to you today because I want to know what your next step would be in scaling our business.
My husband and I have two long-term investments and we just recently completed a flip for our long-term investments. We have property A that makes about $200 and profit free and clear that I’m not so happy with, and our second property makes about 400 plus in profit and both of them are townhouses.
Want to know what would be your next step? Sell property A, 1031 it, and find something else like a multifamily. Sell both properties since they’re townhouses and we could be making a little bit more on them, or do we invest out of state? Maybe look at short-term rentals. What would your next steps be?
We’re in our ’40s. We’re looking at maybe getting some passive income for our retirement, and also, helping to fund our children’s college.
Love your show, and I appreciate your advice that you can give me.
All right. Thank you for that, Veronica. This is another really good question here. Okay. You’ve got two town homes. You just completed your first flip. You didn’t mention how the flip went, so we don’t have anything to go on there, but if the flip went well, I would encourage you to keep doing that. I think this is a market where if you can get really good discounts on real estate, flipping makes a lot of sense. You don’t necessarily have to hold it. As much as I would’ve advised people to four, five, six years ago because the appreciation that we were seeing that was exploding is slow down a lot, so you’re not missing out on as much if you’re not holding the real estate.
Regarding the two properties you have, $200 a month in cash flow and $400 a month in cash flow. You can definitely improve that.
In general, townhomes don’t make great long-term investment properties compared to regular homes. The rents don’t go up on them as much. You can’t do as much to improve the value of the house, so they’re likely to appreciate every year and they’re likely to get more rent, but not as much as if you got the money out of the town home and into a home.
So, the first thing I would look at would be selling, like you said, property A. 1031 it into a multifamily property that’s likely to have more cash flow. That might not be as easy as it sounds because rates are likely higher now than when you bought it. So, the townhome might be cash flowing at the low rate. But if you sell it and reinvest the money, unless you get significantly more rent, you might not get an increase in cash flow.
So, I need you to run the numbers looking at whatever that equity is you have in the townhome at today’s rates. Would it cash flow the same or more in another property? Now, assuming that it does, one option that you could get into would be buying multifamily real estate. Another one would just be buying a single family home in a great neighborhood and trying to find one that could have two units, a house with an ADU. Can you find one of those? Could you find a couple of those? If you can, then, you have the obvious recourse of selling the second house and going and doing the same thing again.
Another option that you might want to look into. Can you sell one of those, and use the money to house hack? Can you get a better home in a better neighborhood with more than one unit that you guys could move into, live in a smaller space, and get more rent? Not just because you’re getting more cash flow, but also, because you’re buying into a better location that’s going to appreciate over time.
All of your goals have to do with the future. You want cash flow when you retire. You want help paying for your child’s education. You need to be thinking about the biggest payoff you can get when you need it, which is not right now. So, if you sacrifice a little bit of the cash flow in the near term to get a bigger payoff in the longer term with better appreciation buying into a better property, you will make more money with that strategy than just maximizing the cash flow right now. But even if you don’t do that, you can still probably improve the cash flow by getting out of the town home and getting into an asset like small multifamily that’s likely to cash flow more.
Another thing, just throwing this out there, what if you sold both of them in 1031 into an apartment complex? We’re likely to be seeing a lot more of those coming into the market because people that own them have balloon payments due and rates are much higher than when they first bought it. So, if you could go find an eight unit, a 10 unit, a 12 unit apartment complex, can you sell both of them? 1031 into that, get way more cash flow, and then, set yourself up so that cashflow grows every year because you have 12 units increasing at rent, not one unit of a townhome or two units of two different townhomes. That can set you up very nicely.
I think that we’re poised in this market. There’s a lot of opportunity for new blood to be getting into the commercial multifamily space. So, people that never were buying apartment complexes can get in on those smaller like five unit and up stuff, and they should be doing it because the people who own them now are not going to be able to refinance or sell for as much as they want to with the increase in rates and the cap rate expansion that we’ve seen.
Thank you very much, Veronica. Love the question.
All right. That is our show for today, and guess what? I remembered to keep the light green for the whole time.
Thank you. Thank you.
I’ve been practicing this all week. I come into my office. I visualize success. I go and I turn the light from blue to green, and it is working, and so, I want to encourage all of you to do the same. What can you visualize right now that you want your life to look like that will change, and what hard thing can you go do? I missed jiujitsu for nine months because of life happening, and I finally went back this week, and it kicked my butt. I’m exhausted from that different kind of exercise, even though I’ve been lifting weights for six months. How many ways have we fallen out of shape in ways that we don’t realize it?
Have you been steadily showing up to work at your W2 and doing a good job, but putting your future goals aside? Did you go into your journal and make a plan for what you wanted your life to look like, and you were sticking according to those goals, but there’s other parts of your life that you haven’t been analyzing or evaluating that are falling apart? What can you do to build the smallest bit of momentum today? Something different. Can you start the day with a five-minute run? Can you do 15 pushups today? Can you read a book that’s different than you normally read? Can you listen to a podcast that you normally wouldn’t have listened to? Can you do anything that will shake you out of the complacency that we so easily fall into and get our mind thinking in different ways?
Thank you very much for joining me today. I want to see you win, and that’s what we’re here for. If you’d like to be featured on Seeing Greene, just go to biggerpockets.com/david. And if you’d like to know more about me, you can find me at David Greene 24 on all social media, so go, give me a follow, and then, check out my website, davidgreene24.com and do this. Go to my website. Check it out. Then, DM me on your favorite social media, and tell me what you like about my site. I would love to get your guys’ feedback just like you love to get mine. Let’s make this a two-way relationship here.
Lastly, if you’re listening to this podcast and you didn’t know that BiggerPockets has a website, we do, and it’s awesome. You are absolutely missing out if you’re not checking out the website and all the resources that BiggerPockets has to offer you. So, go there. Make a profile. Start checking that out and find yourself lost in that wonderful world just like I was when I first found it myself.
This is David Greene for Seeing Greene signing off.
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