10 Common Real Estate Investing Questions Answered by David Greene

David:
Hey everybody. Welcome to the show. We are going to be doing another episode of the seeing Greene BiggerPockets Real Estate Podcast. Now, normally we do interviews with Brandon Turner and I interviewing a guest and pulling the information out of them that we want you to have to help with your own real estate investing game. On today’s show, we are going to get specific questions from people that you are most likely wondering yourself. So we’re going to have you the BiggerPockets community, submit your questions to us. I’m going to answer them. I’m going to do my best to explain the why behind the answer I gave, help increase your knowledge and your wisdom, and give you some motivation to get out there and buy more real estate.

Intro:
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David:
Now if this sounds cool to you and you submitted a question, thank you for doing that. If it wasn’t picked, that’s okay. Submit it again. And if you haven’t submitted a question, please go to biggerpockets.com/david. Submit your question and your video of you asking it. Now the best questions are going to be picked. We’re going to answer them on the podcast. Everybody in the BiggerPockets community gets to benefit from the awesome question that you asked. So I think this is really cool. Please let me know in the comments below if you liked this style or if you prefer the other style. But for today, the beard is away, and we’re going to play.

David:
Today’s quick tip. I’ve always wanted to say quick tip like that. Brandon makes me say it in the high voice, but he’s gone. So I get to be Batman. Is, consider what you can learn from the Barrel of Monkeys. Now this does age me. Okay? Barrel of Monkeys was not popular when I was a kid. It’s more of my grandparents’ generation, but I had a grandparent, and they had a set of Barrel of Monkeys sitting around that I played with when I was a young child.

David:
The concept of Barrel of Monkeys is that you’ve got all these monkeys with hands like this. Okay? And they all link together. You make this chain of monkeys. Now, the reason I like to use that as an illustration is I think that’s the best way to set up a community and a lifestyle when it comes to real estate investing or other goals. So in my world, I always try to have someone above me that I’m reaching up to, and I’m learning from them, and their knowledge is pouring down into me so that I’m improving. That keeps me humble. I never actually think that I’m too great when I’m looking up to other people.

David:
And then I like to have somebody below me that I’m pouring down into them, often the information that came from above that came to me. And I could disseminate it to the people that are hanging below me. Now that keeps me from becoming down on myself because I’m always reminded, “Hey, I have something to offer.”

David:
I just want to encourage all of you guys to think the same way. You got to have people above you and you got to have people below you. If there’s not people above you, then you can start to think that you got it all figured out, pride sets in and you’ll make mistakes. And if there’s nobody below you, then you’ll to think well, what’s my purpose? Why am I even doing this? And you’ll lose some of the humility that comes into play. So consider how you can be a monkey and develop your own chain in the barrel of monkeys, in the same way that BiggerPockets is sort of offering that now. I’m here to share with you guys a lot of the information that people have taught me and that I’ve learned throughout this process. I really hope it benefits you. And I hope you guys continue in the spirit of that, passing it on down to people beneath you.

David:
So with that said, today’s first video submission comes from Dan Short in Chicago. And I actually think this is a great question. I’m excited to answer this because a lot of people ask the same thing.

Dan Short:
Hey, David, how you doing? Thanks for taking my question. My name is Dan Short out of Chicago. I currently have three doors, and I want to start expanding my portfolio as fast as possible. And I would like to grow this to be a full-time business. So that’s the kind of scale I’m looking for.

Dan Short:
My question is about finance. One of my existing doors has quite a bit of equity in it. Do I take advantage of today’s interest rates and refinance, and use the cash to build a portfolio? Or should I just take a HELOC and again, use that cash to build my portfolio and ramp this up as quickly as possible? Hope all is well, thanks for taking my question.

David:
All right. Thank you very much, Dan. Well articulated and wise question to be asking here. So here’s my take on Dan. He’s in that place where he’s got the bug. He’s got his first couple of units. They’re going much better than he thought. Dan probably had that thing everybody had before they get their first property where they’re just scared to death. And then you actually get it. And you’re like, “That’s it? That’s what I was so worried about? I want to do it again.” It’s the same thing that everything else in life goes. Before my first Jujitsu class, I had a lot of anxiety about what it was going to be. After I went, I’m like, “That’s it? I want to do it again.” When you got that bug, man, you got to make hay when the sunshine. So this is a great time in Dan’s, and I’m excited to answer this question.

David:
One of the things that he mentioned is that he wants to scale his portfolio and he wants to make sure he’s doing it in the right way. Before I answer Dan’s question about the HELOC versus the cash-out refi, I just want to illustrate that when you hit that point where you’re very excited, it’s easy to make mistakes. In your submission Dan, you mentioned I have three doors. There’s nothing wrong with saying that.

David:
Sometimes when people refer to the doors they own, and this might not be Dan’s case, but for many of you, it could be the case. They’re starting to track their success by a metric like doors owned, that’s not always the best thing to get into. Sometimes having a lot of doors means having a lot of problems. They don’t always equal profit. So if you’re in that position and you got a couple of properties or you got a couple of doors and you’re telling yourself, “I need more doors,” slow down, you don’t need more doors. You need more cashflow. You need more appreciation. You need better investments. That’s what you need.

David:
Now sometimes that comes through getting more doors, but don’t think that the doors is the goal. Just a little word advice there. Because when you’re super excited like Dan is, you’ll just throw yourself in and you’ll get into everything.

David:
Now on to Dan’s question. What Dan’s asking here is should I do a HELOC or a cash-out refi? I’m going to take a minute to explain what both of them are, how they work, and then the pros and cons of each one. And then it becomes a pretty simple answer of which decision is the best for Dan, as well as what would be the best decision for you.

David:
A HELOC stands for home equity line of credit. Now anytime you’re getting a loan in real estate, that loan is being secured by something. Now secure just means if you don’t pay it, they can take that thing from you. A HELOC is secured by the equity in your property. So if you have a lot of equity in a property, a bank will give you a loan based on that equity, because they feel safe that if you don’t make the loan, if you don’t make the payment back to them, they’ll go take the property away from you. So when you have a lot of equity, there’s a lot of safety in the bank. It’s actually very simple.

David:
The benefit of a HELOC is that the closing costs are very low. Sometimes it’s as simple as just an appraisal is all you got to pay for. The way the HELOC will work is they will take the value of your home. They will then subtract how much you owe on that home. And you’ll be left with your equity. They will then let you borrow a percentage of that equity. So if you’re at an 80% HELOC, if the home is worth a million and you owe 500,000, they will have a line of credit that will let you borrow 80% of that 500,000. Which is I don’t know, $350,000 or so. Let’s say maybe $340,000.

David:
It’s very similar to a normal home loan. The benefit like I said earlier is that there are no closing costs. Or if there are, they’re super, super low. Now the downside is it’s not a fixed rate. You’re going to pay a higher interest rate than a standard loan, and that rate can go up as interest rates go up.

David:
So typically if you’re looking to do a short term loan, a HELOC is the best bet because there’s less upfront costs. And you’re usually going to pay it back when you’re done. I use HELOCs all the time, often for flipping properties. I have a HELOC, which is an open line of credit on a property. I borrow against that HELOC. I put it into the house I’m going to flip, or the loan I’m going to give into somebody else’s deal, or the construction that I’m going to do on my own bird deal. Then that person pays me back where I refinance my burn and get my money and I then go pay off the HELOC. So typically, HELOCs work better in short term scenarios. That’s what I’m trying to get.

David:
Another benefit of a HELOC is if your line is for 350,000, you don’t have to borrow the full 350,000. You can often just borrow 10,000, 15,000, 20,000. And you’re only going to pay interest on the part that you borrowed when you pay it off. You’re not paying interest anymore.

David:
My personal opinion is you should have HELOCs on all of your own rental property, assuming that you’re good at managing money. If you know that you tend to spend money on bad things, that might not be a good idea. A lot of people got into trouble in 2005, ’06, ’07, ’08, ’09, because they were taking helix on properties and they were buying, boats, and RVs and jet skis, and motorcycles, and vacations, and a lot of stuff that wasn’t wise things to be spending money on.

David:
Now let’s compare this to the other option, which is a cash-out refinance. Now a cash-out refinance is more of a permanent loan. You are taking a property that has equity. And you’re not taking out a line of credit where you have the option of borrowing a certain amount. You’re taking out a set amount of money. What you’re basically doing is getting a loan on your property to replace the first loan that is on there. But the second loan you’re taking out is for a higher amount. So in the same example, you have a million dollar house. You owe $500,000. Instead of getting access to 80% of the equity, which would be the 500,000, they’re going to take the million dollar number. You’re going to usually pull out 80% of that, which is a new loan is being made for 800,000. They’re then going to pay off the 500,000 that you already owe. And the cash-out is what you have left over, which would be $300,000.

David:
Now there are some closing costs associated with doing a cash-out refinance, just like when you’re buying a house. There’s always closing costs associated with doing a loan because that loan is going to be sold on the secondary market and usually end up in the hands of Fannie Mae or Freddie Mac. So it’s more expensive in the beginning.

David:
The upside is that the longer that you have that loan, the less that cost matters because you’re locking in the lower interest rate for a long period of time. So if you’re needing to access that money to go reinvest it permanently, the cash-out refinance is usually the better option. If you’re going to use that money for a temporary thing like a house flip, or putting money into somebody else’s deal, or rehabbing a house, you already own that you’re going to then get the money out of when you go refinance that, the HELOC is a better option.

David:
So understanding how these tools work helps you to make more efficient decisions. Oftentimes you’re going to take a HELOC to go fix up a house or a flip, then do a cash-out refinance on that and pay off the HELOC money. You don’t always have to choose one or the other. Sometimes you can do both.

David:
Dan for your situation, if you’re wanting to go buy more doors and more real estate, it’s probably a permanent long-term decision. So the cash-out refinance would make more sense for you. Thank you very much for asking that question. I like being able to explain the differences and then have people see how those pieces fit together so they can make a better decision.

David:
Okay. Now let’s move to the Facebook groups. Now first off, the amount of support being given in the BiggerPockets Facebook group is awesome. Guys, please keep that up. I love seeing people helping people. So I’m also going to answer a couple of these personally. If you guys are not in the Facebook groups for BiggerPockets, please go sign up and get involved in that. A lot of the questions that you have can be answered there through Facebook.

David:
Our first question comes from Andrew T. “How long do you usually let your rentals sit on the market before tinkering with the rental prices? I’m renting by the room, and I put my rooms on the market. The first two got rented out within about the first two weeks. I’ve let the other two rooms stay at the same price for another additional week, and haven’t got much traction yet. Do you usually lower the price at that point? Or is there a typical amount of time you usually let your rentals stay on the market before trying to lower the prices? Are there other marketing strategies you try before lowering prices?”

David:
Now, Andrew’s situation is a little unique here because he’s renting out rooms in his house. But the principle remains the same. Whether it’s a short-term rental, a traditional rental, or renting out by the room. You’ve got this problem where if you rent it out for too low for the next 12 months, assuming it’s a year-long lease, you’re making a little bit less money than you would have made. But if you take too long before you get a tenant, you’re losing the full amount of rent every month. Here’s what I found in my experience. The math typically tends to support lowering the rent and just getting somebody in there, and avoiding the vacancy.

David:
So let me give you an example. Let’s say you’ve got a property that you could rent for $1,100 right now, but you have it at 1,200 because you want an extra $100 a month. That extra $100 a month ends up equaling a total of $1,200 in the year. So the question that we have to answer for ourselves, I was going to use my calculator. I don’t think that I’ll have to. Is how long can I keep a property vacant before I’m going to lose more than the 1,200 that I would make? And as many of you have seen, because I use pretty good numbers there, it’s right around one month of vacancy. And even if you got $1,200 for it, you’re breaking even or you’re going to be losing money. This is typically the problem. And when you get into higher price points like, “Man, I want to get 2,000, but I can only get 1,900,” this becomes even more significant. You’re usually better to put somebody in the property at the lower price, just get your 1,100. And not lose a month’s rent, which is almost the 1,200 that you’d get, even if you got that extra $100 a month.

David:
Now here’s the way that I work around not liking that my rent was lower. When somebody is first considering moving into a property and they’re looking in their options, they don’t like moving. Okay? Nobody does. It’s a huge pain. And you want to use this to your advantage when you’re the landlord. They got to get all their furniture together. They got to pack up all their stuff in boxes. They got to call their friends, they’re friends are ticked off. Nobody likes moving. So if somebody is going to move into an apartment and they’re going to actually go through the process of they’re going to move, they’re going to be very picky about finding the right one. And they’re more likely to do it if the rent is lower. That makes sense.

David:
Now after they’ve stayed there for a year, they have the option of renewing the lease or moving somewhere else. Let’s say you increase the rent. Nobody likes that. But do they dislike it enough that they’re going to go through all that hassle of putting their stuff together, going through all the hassle of moving that they just did last year, calling all those same friends, spending all that same money? Sometimes the moving costs alone are more than what the rent increase would be for the next year.

David:
So what am I getting at? It is better for you to put it at a lower amount, get the person in there. And once they’re in there, start increasing the rent every single year to what it should be.

David:
Now there’s lots of reasons that I think landlords should be keeping their rent current. Another big one would be if you just think, “I don’t want to raise the rent. I’m going to keep the tenant happy.” The way inflation is going, five or six years of not increasing rent can put you so far behind that you’re never going to catch up. Rent control stops you from getting up to market rent unless that tenant leaves. And they’re probably not going to leave if their rent is really low.

David:
Another problem is people come to me. Someone just said this the other day. I talked to a family friend from when I was a kid who owns commercial property. And they have two units in the East Bay area. And they’re renting each one out for $1,100 a side, probably 20% of what they should be getting. They should be getting 5,000 aside. So they’re bringing in 2,200 instead of 10,000.

David:
And what they’re saying is, “David, can you help me sell this property?” It’s tough to sell that property for market value when it’s based on the income it’s generating which is $2,200, not the 10,000 that it should be generated. They accidentally dug themselves into a hole by not raising rent, thinking that they were doing the right thing. Now it’s going to not going to work out right for them.

David:
So those are the two reasons. I think you start off low, you get the person in there, then you increase the rent. Much more efficient way to run your business. Thank you for asking that question.

David:
Next question comes from Rachel. “I need advice on taxes. What do you deduct, write off, claim, etc.?” Okay Rachel, I have to say, not a CPA. Not giving you guys tax advice, but I do work with real estate taxes quite a bit. And I spent a lot of time trying to figure out how to structure my business and my life around what can be written off.

David:
The first thing is as a general rule, if it’s an expense for the business or the property, you can usually write it off. So obviously, the interest on your mortgage, the property taxes, the homeowners insurance, those are all expenses against the income property. Again, we’re assuming this is income property, not your primary residence, that you get to write off. Any repairs that have to be made. If something breaks and it has to be fixed, as well as the labor that you pay somebody else to take care of that property. That also should be written off.

David:
Many times you can write off business trips where you go to learn more about what your business is. So you attend the BP conference, or you attend a real estate conference where you’re learning how to be a better landlord, how to build more money. Check with your CPA. But almost every time I do that, they say, “Yep. You can write that off as long as the purpose of the trip was to do this thing.”

David:
Now here’s what’s cool. When you go to BP con, the purpose of it is to learn more about real estate investing. But are you going to have fun when you’re there? Heck yeah. Were you going to take a vacation anyway? Probably so. So it’s better to take your vacations in a manner that you can write them off than it is to take vacations in a manner that you can’t write them off. You’re also benefiting your business. Sometimes that vacation pays for itself. It’s just way better when you put your money towards real estate investing. So that’s a big thing.

David:
A side note before I move on to the next question is the concept of depreciation that I want to explain to everybody here. Appreciation means your house became worth more. Depreciation does not mean your house became worth less. I know that’s confusing. Depreciation is a counting term that is used to define the fact that your property that you bought is slowly falling apart every year, because nothing lasts forever. That’s the point I need you to get. I know in your head, you often think depreciation means down. It doesn’t matter what you think. It matters what the defin is according to the government. And according to the government, when we say depreciation, what we’re referring to is something falling apart.

David:
The good news to you is that you get to write off a percentage of your building every single year due to it falling apart. If it’s a primary residence, you divide the value by 27.5. You get to write that off. If it’s a commercial property, I believe you divide it by 38. Because we’re assuming that those properties will wear down slower because someone’s not living in them every day like a residential property.

David:
The point is a lot of the income you’re left over with after you write off all your expenses that you’d normally be taxed off is covered by the depreciation that you get from owning that property. Your accountant should be very familiar with this concept and should be able to run the numbers for you and make sure you are taking that when you buy property. If your accountant doesn’t understand real estate depreciation, and you’re trying to be a real estate investor, you need to get another accountant. Reach out to me, reach out to somebody else, find somebody that is familiar, possibly through BiggerPockets that you can trust. And go and talk to them and say, “Hey, I own property. Can you look at my taxes from last year and make sure I was getting my depreciation taken off?”

David:
When you hear about big time investors like the Robert Kiyosakis and the Donald Trumps that say, “I pay no taxes.” The reason that they don’t have to pay taxes is because they make sure that any income they made is less than the appreciation that they took on the property. It’s not a loophole. It’s not illegal. It’s not immoral. It is literally you being compensated for the fact that your property is falling apart every single year and it’s not going to last forever. So thank you for that, Rachel. All right, let’s get into another video question. The next question comes from Chris in East Texas.

Chris:
Hey David, this is Chris. I’m from East Texas. I am a novice in the property investment deal. And I keep running into roadblocks. I can find a deal, start evaluating it, looking at it. And it seems like everything I run into requires 20% down. I already own a home, so house hacking is not an option. And I just don’t have the funds to put down 20% on 100,000 or 200,000. I’ve been trying to get into the multi family properties. There are a few around me that I’m interested in. But like I said, I keep running into these roadblocks for not having enough capital. And I’m trying to figure out how I can move past this. My goal is to have 200 doors. My goal is also to be retired in two years, and all I do is property. I want to get away from my job where I’m driving 1,000 miles a week to work eight hours a day, five days a week. That’s when I’m not working seven days a week trying to build more capital.

Chris:
So my question is, is how do I move on past this? How do I get past these roadblocks as MJ would say? I spend my time doing audiobooks and stuff while I’m driving. I’m trying to learn all I can. I’m just trying to figure out what I’m missing.

Chris:
My next question for you is with the new proposed capital gains tax, do you believe that owner financing is going to be a bigger option or a more valued option than someone taking their money upfront and paying almost 50% capital gains tax on when they can take 10 or 20% down and finance the property themselves, and save the capital gains tax is what I’m thinking that they will be able to do. What’s your thought on that? Anyway, my name is Chris. I’m in Tyler, Texas. The date is May 31st, 2021. Thanks.

David:
Hi Chris. Thank you very much for that submission. I don’t think you’re alone in the struggle you’re having where the way that real estate traditionally is bought or works is working against the lifestyle that you live. So that’s what I’m hearing that you’re saying. You don’t like the job you have. You want to get out of it. And you’re having these hurdles that are stopping you from doing it. Primarily that’s not having enough capital to put 20% down. And another one that you briefly mentioned but I think is probably getting in your way is not wanting to leave your primary residence.

David:
The first thing that I’ll tell you is that real estate is set up to be much cheaper to buy if you’re going to live in it than if you’re going to own it as a rental property. It’s very hard getting away from that 20% down. If you’re someone like me, it’s actually 25, 30% down that I have to put in every property. Buying a $500,000 property, that starts to turn into 100 grand, 150 grand that I’m having to put down every single time I want to buy something. It eats up the money really fast.

David:
So my first word of encouragement to you is going to be consider if the value that you get from living in the house you’re in now and not having to move is worth the pain that you’re having to live in all the time of working all these hours and not making any traction with your goal of I believe owning 200 doors and doing real estate full-time. That one little thing that you change might open up doors all over for you. One way that that could work would be house hacking, where you move out of your house and you make it a rental. You buy another house that you live in, that you’re comfortable in, but you can out part of the rooms. So that could be a duplex. That could be a triplex. That could be just buying a house with a basement and staying in the basement while you rent out the upstairs, or staying in the upstairs when you rent out the basement. But if you’re trying to buy real estate with less money down, you’re fighting an uphill battle if you’re trying to not buy it as a primary residence.

David:
Now, a few strategies that might work for you if you don’t want to do that. The first one is you have to come up with 20%, but it doesn’t have to be you. You could borrow that money from somebody else. You could get it as a gift depending on what type of loan that you’re going to be using. Or you could get a partner to go into a deal with you where they’re coming up with 10% of the down payment, you come up with 10% of the down payment. That’s one way that you can sort of avoid that 20% down.

David:
Another one is look to buy a property as a vacation home. Oftentimes my mortgage company, we do this a lot of the time. We find 10% down loans for people that are going to buy a second home or a vacation home. And at different price points, 10% can be huge. On a $500,000 house, that’s $50,000 that you can avoid not having to put down. So that’s something that I would look into is contact a mortgage broker, and then find out from that person what is your requirements for buying a second home? How far away from my house does it have to be? When can I buy it? And then how do we get that 10% down? The interest rates are actually pretty competitive on those two. They’re actually better than investment properties.

David:
Another would be if you have equity in your primary home, can you take out a HELOC like what we talked about earlier, assuming you don’t want to sell that house and you don’t want to do a cash-out refi? But either way, a HELOC or a cash-out refi would help you access the equity in your current house that you could put into the next house. That’s another way that you could kind of get that snowball growing by coming up with the capital that you don’t have.

David:
And another thing you could think about would be commercial properties. If you go buy a commercial property even if it’s residential five units or more, or it’s really traditionally commercial as far as you’re renting it out to businesses or something, it’s much easier to partner with other people to raise money for something like that. And the lending process is a lot less intrusive and a lot less painful. So if you just can’t get it moving in the residential space because you don’t have the capital and you’re not willing to borrow money, access it from your current house, house hack, commercial might be an option for you.

David:
Now as far as the capital gains question, here’s what I believe Chris was getting at. Currently right now, if they change the way capital gains are being collected, they want to increase how much people have to pay. Let’s say they increase it to 50% of your capital gain you have to pay. What Chris is asking is do people who own houses, will they not want to sell them because they don’t want to pay the 50%? Now I hope that doesn’t happen because we’re having a shortage of inventory as it is. The last thing we need is less people to put their houses on the market because they’re trying to get more taxes. And that’s just going to drive prices even higher because of the scarcity.

David:
When you do seller financing, let’s say your house, you bought it for 500,000 and now you’re going to sell it for a million. You would pay capital gains on that $500,000 gain minus whatever expenses that you had. So you’d be losing maybe say 50% of that 500,000. That’s a $250,000 haircut that you’re taking in taxes people might not sell.

David:
If you do seller financing, and you sell it to Chris for a million, and you keep the note, you don’t pay capital gains on that full amount. You only pay capital gains on the money you make from the note that Chris sent. Again, I’m not a CPA, but this is how it has been explained to me by CPAs of why seller financing is an advantage. So if Chris goes and buys that person’s house from somebody for $1 million and he makes a payment to them through seller financing, the person hasn’t actually realized the gain because they didn’t get the money from the sale. They just got a note. So they only pay that 50% on the interest that they’re collecting from Chris.

David:
So what he’s asking is if they change this, will this give me more opportunity? Now on paper, it probably should. That would make more sense as more people if they’re going to have to pay higher capital gains would go through seller financing.

David:
Here’s why I’m not super bullish on that happening. For one, if it did, there would probably be some really big equity companies that have all been formed because these ridiculously low interest rates we have, and everybody has to get a return. So money funnels into these equity companies. That would put together some kind of crowdfunding where people would all put their money into a fund, and they would go buy all these houses using seller financing because they have a bigger marketing machine than the typical investor in East Texas is able to put together.

David:
What you really have to do to make what Chris is trying to do work is get to the seller first. You got to be the first person to talk to them and present this idea. I would think that companies will figure this out and they’ll get to them before you. The other piece would be how are you going to get in front of the sellers? You actually have to create an entire marketing machine. And if you’re good at doing that, that could be an option for you. But if you’re someone listening to this and you have a job, and you’re not trying to put together a marketing campaign, or an SEO campaign, or just talk to people all the time about real estate, don’t assume that seller financing is going to bail you out in these situation. Because there’s actually work that goes into getting in front of those people. But that is something that I would keep my eye on. If they do change the tax code, you should be thinking about how people that are aware of it are going to adjust the way that they exit their properties. Thank you for that, Chris. Okay. Next video.

Brody:
All right, David. So we talk a lot about identity and having that identity shift and how if you can shift your identity, it can have a direct correlation to the results and the success that you see on a daily basis. And I completely agree with that. But my question for you is what tips, tricks, advice do you have for somebody who’s maybe struggling to actually change their identity? And they’re just stuck holding on to who they currently are. I think a lot of times, it takes us to hit rock bottom before we can have that identity shift and change. But what if someone doesn’t want to go through hitting rock bottom before they change? What advice do you have someone right now who’s maybe average, but feels like there’s something more? How can we actually shift that identity? Thanks a ton.

David:
Brody’s question. And by the way Brody, thank you very much for the submission. You’ve asked a couple questions now, and they’re always really good. Had to do with changing your identity is hard. And typically people don’t do it until they hit rock bottom.

David:
Now just the phrase rock bottom typically means I can’t go any lower. And the idea is if you hit the bottom but you could go lower, you’ll go lower before you’ll change and you’ll actually look up. And this is absolutely a human problem. Behaviors typically don’t change until we have no other option.

David:
Now why is that? That’s the question that I ask. One of the answers that I’ve come up with, I think that myself and other people don’t change until we hit rock bottom is because most of us had developed our identity and our value system based on avoiding pain. That is just the knee-jerk response that every human being has. We become who we are. Our fitness level, how much we care about how we look, the friends that we develop, the work we get into, how committed we’re going to be, the effort we put into something, mostly just to avoid pain. That’s why you typically find really successful people. It’s so hard to find one that didn’t have massive pain when they were younger. That pain becomes the motivation that almost everybody goes through.

David:
So here’s what I’m getting at. Changing your identity is incredibly hard if you’re not in pain. If you’re comfortable, you might just not ever do it. And you’ll keep hearing us talk about it, but you’re never going to do anything.

David:
Here’s the good news. You are in pain. Every one of us are in pain. Pain is constant. Pain is persistent. Pain is consistent. Pain is everywhere. Sometimes, we don’t experience pain. And that’s because we numb ourselves, we compartmentalize, we block it out. We avoid the things that would remind us that we are in pain. So you don’t have to go find a way to create pain. And if I want to help somebody change, I don’t have to go hurt them and say, “Okay, change.” I just have to remove the numbness, the things that we’ve done instead to kind of stop the pain from effecting us. So when Brandon says, “Well, you could just go watch Dancing with the Stars,” Dancing with the Stars is just a way to avoid pain. You’re not happy with your life, you’re not happy with your finances, you’re not happy with your future. So you’re numbing yourself with dancing with the stars, but that doesn’t make it better.

David:
If we took away Dancing with the Stars, and then we took away the Oreo cookies, and then we took away the shallow relationships, and we just took away everything that we used to find comfort, you would find yourself in a whole lot of pain. And the gift is you’d have a whole lot of motivation to go out there and do something else.

David:
So to your question Brody, how do you motivate yourself if you haven’t hit rock bottom? Don’t wait to hit rock bottom. Start taking away the things that you’re comforting yourself with right now. And you know what they are. I know what the things are that I comfort myself with that I shouldn’t be. I just don’t address them. You guys know what it is also. Get real with yourself. And if for some reason you just can’t, go find another person that you trust and say, “What are the ways you think that I numb myself or I comfort myself when I really shouldn’t?” You’d be amazed at what you will realize you’re doing that you never consciously chose that is dictating the way that your life goes.

David:
The other thing is if you project yourself in the future and you say, “I could have in 20 years 100 doors, more money than I would ever need, more influence, security, all these things that I value. But if I stay the same way where I’m not going to have it,” you will experience the pain of loss if you can fast forward yourself 20 years. If you just stay where you are right now, you’re just going to think, “Well, I have everything I need. I’m good.” And you’re never going to make a decision. If you force yourself to think ahead and you realize I’m not going to have what I could have, you will experience the pain that will make changing your identity different.

David:
I know this wasn’t just about real estate, but I think it has a lot of impact on the way that people will find success, especially through real estate. So thank you for asking that and thank you for letting me answer.

David:
Okay. We’ve had some great questions so far, and hopefully I did a good job of answering them. If you guys are enjoying this and you like what you’re hearing, please take one second. Send this to somebody in your life that you think would benefit from hearing it. A lot of the times, we can kind of sneak into somebody’s life what they need to hear if we coat it with enough sugar that makes the medicine go down. Mary Poppins reference right there. But it is good for people to be able to hear this, especially that whole concept of are you numbing yourself? Are you stopping yourself from being successful?

David:
The next question comes from Adam W. “Watching the rookie show number 55. Using a HELOC is like an account you can keep coming back to after and paying back tomorrow.”

David:
Okay, Adam. Yes. In a sense, a home equity line of credit is a line of credit similar to a credit card. The difference is it’s limited to the equity in your house, so you don’t have unlimited access to it. And the rate is way cheaper than a credit card because it’s secured. The reason that interest rates on credit cards are so expensive is they’re so risky for the lender. Basically when I get a Visa or a MasterCard, they’re giving me access to money with no way of knowing if I can pay it back, or if I’m going to pay it back. The only way that they can tell if I’m going to pay that money back is my past history of paying other people back. That’s called a credit score. It’s a risky way of lending money, which means they compensate for that risk by charging a higher rate.

David:
A HELOC is less risky because it’s tied to a property. And if you didn’t make the payment, they could take the property back. So the rates tend to be way lower. That’s why I like them. If you’re responsible and you handle money well, it’s a very, very cheap rate and way to borrow money. And you can pay it off, borrow against it, pay it off, borrow against it, only use what you need. And you’re only paying the interest on the money that you’ve borrowed, just like a credit card. If you have a $50,000 limit but you’ve borrowed $5,000, you’re only paying the rate on the 5,000.

David:
Now here’s why I like this as a lender, as a mortgage broker. When you have a HELOC, you have flexibility. So if you have a line of credit for $50,000 and you’ve borrowed $5,000, it’s a very, very low monthly payment you’re making because it’s usually a 4, 5, 6% interest rate on these HELOCs. When you go to buy a property, if your debt-to-income ratio is too tight and we can’t get you a loan, paying off that HELOC right away can lower it sometimes. The other thing is if you owe $8,000 on a credit card at 18%, that’s going to have a more significant impact on your debt-to-income ratio than if you owe $8,000 on a HELOC at 4.5%. It’s just less money. So we typically find HELOCs are more efficient ways of borrowing that allow us to be able to help you borrow more money when you want buy more real estate. That’s one reason why I like them.

David:
I also look at a HELOC as a loan you give to yourself, okay? I could go borrow money from somebody else at 9% to go buy the deal. Or I could borrow it from myself at 5.5% on my own property and then pay it back when I’ve done. So I’d rather borrow money from myself at a lower interest rate than I would from somebody else at a higher on.

David:
Next question comes from Juanita W. who asks, “What are the pros and cons of being a realtor?” This could be 10 podcasts to get into. So I’m going to try to answer this a little bit more succinctly, especially because not everybody is a realtor. As far as the question of should I get a realtor so it makes me better investor? Should I get my license? No, I don’t think so. It’s a lot of money you’re going to put into it. It’s a whole skill set you have to develop. It can be massively frustrating and it doesn’t really do anything to help your investing world other than your experience you gain from working with a lot of clients.

David:
But if you’re getting your license just because you want to be an investor, you’re not going to work with a lot of clients. So the whole upside to doing it sort of disappears.

David:
The other reason is when you’re in an investor, you don’t pay the agent. The seller pays the agent in almost every single circumstance. Okay? So it’s already free. Why do you want to go get your loan license to save money on something that you’re already not paying? Access to the MLS is very easy to get. A lot of places have it through portals. I just don’t think that the benefit is there.

David:
Now the pro to being a realtor is that you can a living. If you’re doing this to make money, it makes sense to they do it. It’s a great business to get into if you’re completely committed to it. Now, 87% of agents fail within the first five years of starting. So most people don’t stick with it, which is why when people say, “Just be a realtor. How hard could it be?” Well, only 13% actually make it. It actually is really hard to get there.

David:
So don’t do it if you’re not completely committed to getting to the top. You want to be at the top 20%, it’s worth doing. If you don’t, it’s not. And don’t do it if it’s not something that you want to do to earn income. Being a realtor is not something you do for the passive benefits that it provides. It is active work. It’s a lot of work. So only get into it if you’re super committed in my humble opinion.

David:
Matthew C. asks, “Should I consider any risk of being self-employed, no W-2 income when evaluating a bird deal? My concern is the refinance step. I’d hate to get stuck with 12 to 15% hard money loan on the rehab because of any added complication finding a bank loan due to self-employment. Any wise words? Appreciate it.”

David:
First off Matthew, that’s a wise question that you’re asking. This is really good. In the book I wrote Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple, I give the advice that if you’re going to do a BRRRR, don’t wait until the refinance step to get pre-approved. Get pre-approved before you even buy the property. You want a lender to tell you if you can get a loan, or if you can’t get a loan before you super deep into this project. One of the biggest problems that I see is people come and say, “I’m self-employed and I can’t get a loan. And now I don’t know how to get out of this 15% hard money loan. The BRRRR method sucks.” And I’ll just say, “No, you can’t get a loan. You shouldn’t be buying properties if you can’t get a loan.” Just because the BRRRR method means financing it later, doesn’t mean you don’t have to finance it. Would you go buy a regular property and put it under contract without getting pre-approved first and then say real estate sucks because I had to drop out a loan after I paid for an inspection and an appraisal? No, you should be talking to the lender first. So that’s the first thing I will say.

David:
Now when it comes to self-employed income, that makes this even more important. Because if you’re not making money as a W2, if you’re making money as someone’s self-employed, lenders look at that as a little more risky and a little more complicated. So the amount of money that we are able to use as far as your income when calculating your debt-to-income ratio is different and has way more complications and rules when you’re self-employed. That’s the first thing to say. That’s one reason you want to get in front of the lender early.

David:
The other thing is self-employed people tend to do it to avoid paying taxes. I just see this as a pattern that comes up all the time. “I’m self-employed. So I get to write off all this stuff that I do, and I don’t have to pay taxes.” And that’s great when it comes to taxes. That’s not great when it comes to getting financing. I make sure that I still show money that I made every single year. And I get taxed on that money so that it makes it easier for me to go buy more real estate later. To me, owning real estate is a much better financial decision than just saving money on taxes. Just like hiring a great listing agent is a much better decision than just avoiding paying a commission. You’re going to lose so much money to save a little bit in commission. It doesn’t make sense.

David:
This works the same way. So to sum this up for you, if you’re self-employed anyone listening to this, call me or call somebody else. But talk to a mortgage broker first and say, “Here’s my taxes from last year. Here’s what I’m making. What would I have to do to get a loan?” Sometimes they just tweak things. Sometimes you have less write offs. Sometimes they just have to check with your employer and find out how long have they made this money? Are they on bonuses? Are they on commissions? How much money are you actually going to be keeping? I guess if you’re self-employed, it’s not an employer, but many people are self-employed that have a contractor that they’re getting their money from.

David:
And then if you want to get deep into real estate investing, sometimes quitting your W-2 job early is not the best advice. Sometimes you stick with it so you can keep getting loans and you don’t leave till later in the journey. Thanks for that question.

David:
Okay. We have a few more video questions that have come in. Let’s take a look.

Giovanni Neri:
This is [Giovanni Neri 00:41:05] from Calexico, California. I listened to your stuff all day man. Whenever I’m driving, as you can see right now. [inaudible 00:41:13] That’s you right now. Yes, sir.

Giovanni Neri:
A bit about myself. I live in a small town. I’m an average Joe. I work for a high school in Calexico. I’m your IT guy, and I have a question. I want to find financing for feature deals. Currently, I have a single family that I’m renting out. And I built an ADU, and essentially doing unit on the side. So I’m picking up two rents right now from one property. I’m out of cash, so I want to build more. I want to actually be able to buy my second or third, or jump into apartments. But my biggest obstacle, financing. So my question is how can your average Joe find financing? I really appreciate that. Thanks man.

David:
All right. Thank you, Giovanni. And I actually don’t think you’re an average Joe. I think you’re an average Gio. All right. This question is very similar to the one that we had earlier when it comes to I’m having a hard time qualifying for a loan. Now kudos to Gio because you have already had a property with an ADU generating rent from two places. And you’re seeing the benefit of wanting to invest in real estate. And you’re saying, “I want to do more of this.” That’s the same thing that I went through.

David:
Now I had a W-2 job and I was a police officer. And I realized, “Oh my God, I just bought three rental properties. These things are incredible. How do I get more?” Right? And I went to the lender and I said, “How do I get more?” And they said, “Well, the rent you’re bringing in, we can only use 75% of those. So you end up kind of losing a little bit of money on paper. You’re making this much of your salary as a police officer. If we subtract the amount of money that these rental properties are losing you on paper, they won’t lose any money in real life. You’re going to have a hard time getting loans in the future.” And I said, “What do I got to do?” And he said, “Make more money.” I’m just being completely honest with you. I changed my lifestyle to fit real estate investing.

David:
What that meant for me was that I moved to the Bay Area away from a city called Manteca where I grew up in the Central Valley. I rented a room from another cop. I paid him 500 bucks for the room, which at the time was pretty dang cheap. It’d be really cheap, probably half of what people would pay right now. And I started working a lot of overtime. And by a lot of overtime, for me that meant every single day. I was just going to work as many hours as I could.

David:
Now not everybody’s in that position and you don’t have to be some of you have families, some of you don’t like working that much. Some of you want a more balanced life. Dude, that’s totally fine if that’s where you’re at. But for me, my commitment level was all in. I wanted to do a lot.

David:
The point is I changed my life to make my goals a reality. I started working a lot of overtime. The lender could see that that overtime was consistently being earned. It wasn’t like I had one month where I made a lot of money and the next three where I didn’t. They were able to say, “Hey, he’s sustained this over a six month period, a 12 month period,” whatever it was. “We can now use that overtime included to his salary for his total income.” Now my income was high enough to support the debt-to-income ratio that I needed to be able to buy more real estate.

David:
My advice to you and anybody else who’s asking this question, you may not be a police officer. Overtime may not be an option. Maybe it is, but you don’t like working it. I don’t know. But what I do know is you are banging your head against a brick wall trying to change estate to make it work for you. I believe, my personal opinion is you change yourself to make real estate work for you. And you change yourself to make fitness work for you. You change yourself to make relationships work for you. Anybody ever been in a relationship where they’re trying to convince the other person to change? Very difficult. But sometimes when we change ourselves, all of a sudden the problems just go away.

David:
That’s the best advice I would have. Gio, it sounds like you’re doing amazing things. Can you find a way to do amazing things that earns more money? Can you get a second job? Can you get a better job? Can you get a promotion at the job you have? Can you take some of the skills you have and apply them in a different way? Put your time in a more dollar productive environment so you can make more money so that you can buy more real estate. If you can’t or it takes you time to do that, in the interim, here’s what I would say.

David:
Work with another investor that has deals coming in where there’s actually creative opportunities. If you can get yourself in front of sellers directly, you can avoid needing to use bank money to buy the properties, because the bank money is really the choke point in what we’re talking about here. You can’t borrow money from the bank because you don’t make enough income to have the debt-to-income ratio that you need. If you can get the bank out of it, you can solve that problem. That’s just a lot of work. For me, it was easier to work within the system rather than trying to go around the system, which meant I had to change my life. I had to rent a room from other people. I had to put off buying a house for myself until I had eight or nine rentals that were generating income for me. That’s the way I did it. That’s the way I think works better. I think really, that bug that you have to invest in real estate can drive you to be a better person. It can drive you to step out of your comfort zone. It can drive you to have more success in your workplace environment, in your vocation than if you were comfortable.

David:
I think that’s the best road. I don’t know if it’s the best road for everybody. But I would strongly consider everyone listening to this. If your problem is financing, don’t look at real estate as the solution for I’m not making enough money. It doesn’t work great for that. Look at real estate as the motivation to go make more money. Meaning challenge yourself, gain more value, gain more skills, do things differently. Let that pull you towards getting over some of the comfort that you’re in, because real estate is an awesome care, at least it was for me.

Brian Tome:
Hey David. Brian [Tome 00:46:46] coming to you from Worton, Maryland. I’m a huge BiggerPockets fan. I love everything you guys do. And I really look forward to you answering my question. So a little bit of background for my question is my wife and I have been residential real estate investors for the past three years. We’ve acquired in total seven single family residential units. We’re working on our next project right now, which is a duplex. But a year ago, we kind of shifted our focus from the acquisition of single family residential to a live-in flip. We bought a house in Worton, moved down here. We’ve started the renovations. We’ve got some more to do. But if the market remains steady, in a year’s time, we’ll be able to exit this property and probably max out the section 121 exclusion.

Brian Tome:
The problem is we really love the house. We love the neighborhood. We love the neighbors. It’s just a terrific lifestyle. So we’re thinking that maybe it’s time for us to pivot again and go into something else like multifamily, trailer parks, self storage, but shift our focus one more time and see if we can’t maximize our income potential in another way other than going on to our next live-in flip.

Brian Tome:
So what do you think? Do we bite the bullet and sell the house with the hopes of repeating the performance? Or do we just love the property and stay here? Really look forward to your answer. And thanks for your time.

David:
Okay. Thanks Brian. This is a really good question. And you got personal with it, which is how most real estate is done. I think it’s a way of building wealth that’s really combined with our personal lives together. So you can’t separate the emotions from what goes into real estate investing, but you can make them work for you.

David:
So as I understand your question, it’s we bought our live-in flip, we’ve added value to it. We planned on selling it and avoiding capital gains taxes because it’s our primary residence for a period of time, but we love the house. So we don’t want to leave. If we don’t leave, it’s going to be hard to keep buying residential property, which means we would then probably want to move into buying commercial property. If we do leave, we’ll get the money out. We can put it into the next deal. What’s the best option for us?

David:
Well, here’s the first thing that I want to highlight for everybody. We make money in residential real estate, many of us do. Me more than a lot of people. That’s where the majority of my portfolio was held. But it was not intended to be something that makes money. I just want you guys to understand that. The down payment system for houses is wildly more advantageous for someone that wants to live there. The difference between 3% and 20% is huge when it comes to capital that’s actually being put into a property.

David:
Commercial real estate was intended to make money. It’s intended to be run like a business. When you increase the profit of it, you increase the value of it. Residential real estate is more when you increase the popularity or demand of it to make it look more like a more expensive comp or function like a more expensive comp, that’s how you create the value. Not by actually the income it provides.

David:
Why am I saying this? Because long-term sustainability, residential real estate is a very difficult way to continue to grow wealth. It’s one of those things like first gear on a bicycle. It’s great to get you moving and it’s great way to start building wealth. But staying in first gear just burns a lot of energy. You’re constantly pedaling really, really fast. The gear progression system was designed so that you can slowly with your momentum put less effort into getting a better result. Less repetitions on the pedal becomes easier. It’s just so hard to start a bike in 10th gear, the amount of grinding that you got to do.

David:
I find real estate progression to be very similar. Single family homes like the one you live in and then house hacking are like first gear, second gear, third gear. At a certain point, you got to get into the big boy and big girl gears.

David:
I don’t know if this is that point for you. If you love this house and you really, really, really don’t want to move, you’re okay cash-out refinance instead of sell, okay? You could sell. You could also cash-out refi. My personal advice if you were my friend is I would say, “Listen, I hear people say all the time, ‘This is my dream house. I love it.’ Then they find another dream house that they love also.”

David:
I work with, I think we have 30 people in escrow right now. We’re going to sell a ton of homes. I come across people in this same predicament all the time. Do I want to buy my dream house or do I want to move? I like my house. Do I want to get another one? I don’t ever want to move again. This comes up all the time. I can’t tell you how many people have said, “I’ll never find another house like this. It’s perfect.” And then they’re super excited about the next house later. So I would keep that in mind to influence your decision.

David:
If you’re this serious, you’ve got seven properties, now you’ve got eight years, you might make more sense getting into the commercial space. Maybe you do a little bit of both. So don’t look at it like if I have to sell my property, I won’t get to live in a house I love. And don’t look at it like if I go into commercial, I can’t stay in a residential. All your options are still open. A cash-out refinance might be great on that property. You can live in it and you can use that money to buy the next residential property, and start commercial investing on the side. Or you could sell that house, find another one, do the same thing, or a combination of the two. You live in it for a year or two, you love the neighborhood. You save up money. You realize, “Hey, we want an even better house.” You sell it then. You still get the capital gains benefits.

David:
My sense is you’re putting so much pressure on yourself to make the perfect decision right now, and you don’t have to. You just got to make the decision that works best for you today. Tomorrow, a year from now, two years from now, more options will have opened up from a good financial decision and there won’t be pressure. It’s a smorgasbord of hey, what food do I want to eat?

David:
When you’re trying to get that first, second, third house, man, you got to eat whatever it comes in front of you. And sometimes we get in that mindset of, “I don’t want to starve. I have to get the next deal.” And we miss out on the fact that that’s not actually your reality. You have tons of options and you can take your time.

David:
So take a deep breath, talk or pray with your wife, decide on what you guys think you want to do. And remember whatever you decide, you can change your mind later. It’s not going to be permanent. Options create freedom. And you my friend have a lot of options for making some great financial decisions.

David:
All right, it’s time to wrap this show up. I had a blast entering your questions. I really the transparency and authenticity in the BP community with people really putting their personal lives out there and saying, “Hey David, what do you think I should do?” It feels good that I get to do this because I’ve been in the shoes of being a person who’s buying a house. I’ve bought a lot of houses. I’ve been an investor. I’ve been a primary residence person. I’ve run a real estate team and worked with tons of clients. I’m very familiar with these emotions. Now I have a mortgage company and we have the problems of how do we create financing? What I love is all the stuff I do in real estate, getting to apply it to help you guys so that you don’t make some of the mistakes that other people made.

David:
Hope that you guys really enjoyed this show. Hope you’re continuing to enjoy experience on BiggerPockets. I would love to hear from you. So if you have a question that I can answer, please go to biggerpockets.com/david. Please don’t be shy. You’d be surprised at the lack of questions that we’re getting. It’s kind of hurting my feelings. So please go on there, submit a video, write in your question. Let me know what you would like me to answer. It doesn’t matter how silly you think it is. I promise if you’re wondering how it works, other people in the community are also wondering how it works. And I’d love to be able to explain that to everybody.

David:
If you enjoyed this episode, please subscribe to the podcast and let me know in the comments. I want to know specifically what you liked, what you didn’t like, so we can tailor the next one to be even better. Thank you everybody. This is David seeing green Greene signing off.

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