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BiggerPockets Podcast 534: Seeing Greene: Should I Buy Now or Wait for a Market Cool-Off?

BiggerPockets Podcast 534: Seeing Greene: Should I Buy Now or Wait for a Market Cool-Off?

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Welcome to another episode of Seeing Greene! That’s right, David Greene is back with more real estate answers, some brand new metaphors, and basic Jiu-Jitsu knowledge for the new and experienced real estate investor. In this episode, we’re taking ten questions from BiggerPockets listeners, investors, agents, and rookies looking to build wealth through real estate.

David discusses topics ranging from investing out-of-state vs. in-state investing, whether cash flow or appreciation is a more important metric to track, and how to accurately value a property when using more than just data and numbers. David also gives advice on building systems within your business to help you get more deals, and making your investing machine much more scalable.

This episode has questions from non-investors, rookies, and veterans so no matter what stage of investing you’re in, David answers a question for you!

Have a question you want David to answer on the next Seeing Greene episode? Submit your video submission at Biggerpockets.com/david.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

David: This is the BiggerPockets Podcast Show 534. Where I cover the question, should I wait or buy now? Cashflow or appreciation? And should I invest out of state or locally?

David:
Just like your family members always tell you, don’t invest in real estate, you could lose money, nobody ever gets criticized for telling you to not do something risky. The problem is there’s risk in that advice. There’s risk in not investing in real estate, because you don’t actually get anywhere. You stay in your W2 job forever. You never make any moves. Okay? Saying don’t pass the ball, you might have an interception. Yeah, that can sound like it’s good advice until you realize the other team has been scoring the whole time. Welcome everybody, this is David Greene, your host of the BiggerPockets real estate podcast Seeing Greene edition. Today, the beard is away so we get to play and we are going to have another episode where I will look at your questions individually submitted by you and answer them for everybody to hear so we can all learn and make progress on our real estate investing journey.

David:
We do this by bringing on top performers, expert investors, as well as just everyday regular people where we can lay out the tactics and mindset that will help you establish financial freedom if you make the simple choice to take consistent action. Before we get into the show, I want to tell you, we have a quick start guide for all of you with episodes organized by topic and ultimate beginners guide, tips for networking on biggerpockets.com and a bunch of other resources. You can find all of this at biggerpockets.com/start because you’re starting. A quick word of advice, I see a lot of you are asking your questions in the comments and that’s great. Just please take the extra steps, submit them at biggerpockets.com/david, and then go ask them in the BiggerPockets forums.

David:
You have over two million people there that can help you out with whatever questions you have that are stopping you from taking action. And you get out what you put in. So start connecting with other people. There’s people that need to know what you have just like there’s things that you need from other people. It doesn’t cost a dime to start serving and chatting with other people. All right. We’ve had some really good feedback on these shows and I would love to ask you guys to keep that coming in. I wanted to share a couple of the comments on YouTube here that you guys have been saying, the first comes from Nate Ruley, he says this was an amazing episode. Thanks DG for the insight, top five episode right here. I love this comment because it’s just like Brandon after every episode saying that was our best episode. Also, Denny Rosario shares, loving this. Thank you, David. I can’t wait for the next one, so much value in just an hour.

David:
This is a great format, it feels more personal, down to earth, and with questions that we all have. So the reason I’m bringing this up is because that’s what I’m looking for. Is this valuable to you? Do you like this? Do you want to hear more of these? And in addition to the interviews that we do with the guests that we bring on the podcast, where they get to share their stories. So please do me a favor, leave some more comments. Tell me what you guys like, what you don’t like and go to biggerpodcast.com/david to submit your question to be answered. All right. Let’s hear from our first guest.

Dana:
Hi David, my name’s Dana. And I’m from your neck of the woods here in San Francisco, California. My question today is on real estate investing strategy and knowing which one is going to be best for us to go with. So a little bit of background, my husband and I live here in San Francisco. We have W2 jobs, we’ve been studying real estate for about a year and we have $300,000 saved up and ready to invest. We’re looking at a couple different options. We’re looking at either investing in a multifamily, building out state and trying to focus on the cashflow that it’ll bring in, a multifamily tenant building here in state and focusing on the long term appreciation or potentially focusing on short term rentals here in California. We’ve had a lot of conflicting advice about which one to proceed with from family and friends. Ultimately, my goal is to leave my W2 job within the next five to seven years and become a full-time investor. So given all of that, if you were in our shoes, which strategy would you proceed with? Thanks so much.

David:
All right. Thank you, Dana. And so nice to meet a neighbor of mine. I’m about 45 minutes to an hour east of San Francisco, myself. My Keller Williams office is in Brentwood. So I love your question because it gives us an opportunity to unpack different ideas or strategies. And I love talking strategy with real estate investing because it all works. It’s just, what’s going to work best for you. So let’s start off with the question of, should I go out of state in state? I think you mentioned, do I want to go multifamily? Do I want to go short term rental? You’re looking at all of the options that you have here. In order to make sense of this casserole of choices that you have here. I want to explain a concept that I write in my books for BiggerPockets on how to be top producing real estate agent called the Spectrum.

David:
This is something that everybody has to acknowledge. And the idea is when you give something, you’re giving up something else, or when you get something you’re giving up something else. So on one end of the spectrum is cash flow. You typically can find properties that cash flow is strong and on the other area, you have appreciation and very rarely are they the same. It’s usually you’re giving up one to get the other. So a very easy example is could be Indiana, is a cash flow market. There’s lots of cash flow properties. That’s why a lot of investors start there. And then California, New York, some of the more expensive coastal markets, those are appreciation markets, properties go up in value over a long period of time. Now for a long time in real estate, investors have been told, ignore appreciation, because it’s not guaranteed, but just go for cash flow.

David:
And that’s because at the last crash people were buying properties that they didn’t know, they weren’t cash flowing at all. They really couldn’t afford it. And they were banking on appreciation. I don’t think you should bank on appreciation in order to buy something. In other words, if it doesn’t appreciate, you’re done, you have no extra strategy. You’re going to lose the property. But what if you’re in a situation that you don’t need cash flow, that’s very similar to you and your husband. You said you’ve saved $300,000. You both have W2s and a very strong job market, presumably making good money, a couple hundred dollars in cash flow, probably isn’t going to change your life. And I’m trying to introduce this concept gently, because a lot of people here, cash flow isn’t the only reason we invest in real estate and they lose their minds. I’m not saying cash doesn’t matter, what I’m saying, what matters is affordability.

David:
And if you can’t afford real estate, it needs the cash flow. But if you can, if you live beneath your means, you don’t have to go just for cash flow at the altar and sacrifice it at the altar of appreciation. So what we have to do when we’re picking a strategy is look at our own lives, where we are strong, where we are weak, where we need support and where we don’t and pick the strategy that works for you. Another spectrum that we want to look at is going to be passive versus active investing. So passive investing might be buying a property, letting a property manager run it and you don’t do hardly anything. Active real estate investing would be something more like a short term rental. So you’re managing the property. You’re putting it up on Airbnb or Vrbo, you’re organizing, the cleaners coming in. You’re dealing with the problems. There’s a lot more work there.

David:
And what you tend to find on this spectrum is the further you go towards work, the more money that you make. The further you go away from safe and the farther you go to risk, the more money that you make. That’s the trade off that we have when we’re investing. And that’s why we can’t compare everything apples to apples, because it’s not. Short-term rentals will allow you to buy properties in areas that would not typically cash flow. They don’t come close to the 1% rule. Short-term rentals allow you to replace the income of your job with income from real estate. However, that income is also a job. You have to recognize that it’s active income. So I’ve laid the table here. Now let’s get down to your specific situation what you guys are looking for.

David:
When it comes to cash flow versus appreciation. Personally, I have one metric that I look at, which one’s going to make me more, over a 10-year-period if I have appreciation and value, presumably appreciation in rents versus strong cash flow out the gate, which one’s going to earn me more money. And many times what I find is it’s like the rabbit and the hare. No, the turtle and the hare. Sorry, rabbit and hare is the same thing. The rabbit shoots out the gates that’s cashflow, right off the bat. You’re making really good money every month or at least some money every month. And then it just peters out and stays that way, versus appreciation can often function like the tortoise. It comes out slower. Maybe you even lose money. I buy deals frequently that don’t make me money the first year that I own them.

David:
I mean, I’d be okay if it didn’t make me money the first couple years really, but you get a slower start and then over time the rents go up just like the property value goes up. We tend to look at appreciation only saying, well, the value of the property is going up. And so I don’t want to bank on that. Well, rent goes up too and your mortgage stays the same. Just like the amount of money you owe on the property stays the same. That equity is what creates value. The difference between what the property’s worth and what you owe. Well there’s equity and cashflow as well. Your mortgage stays the same, but the rents keep going up. And the difference is how much you’re going to cash flow. And many times when you invest in more desirable areas, the first couple years you don’t make as much money, but then later on you make much, much more and that’s why the tortoise won the race.

David:
So here’s how I tend to look at investing. Take a spectrum where you have cash flow right off the bat and appreciation on the other side and see how far on the appreciation side you can go before you risk losing money. If you live way beneath your means, and it’s a situation like you and your husband, Dana, maybe you could get to where one of you saves 100% of their income and you live off of the other person’s income. You don’t need cash flow right off the bat. So you have the luxury of investing in areas that are going to appreciate and five, 10, 15 years later, you’re crushing it compared to the cashflow properties. Now what if you’re in a situation in life where you don’t live in San Francisco and you don’t have 300,000 saved up and you’re just like everybody else in the world, right?

David:
Well, those are people that should start with the cash flow properties. They also function like training wheels. You’re not going to lose a ton of money, but you’re not going to gain a ton on cashflow. Just like you can’t go faster when you have training wheels, but you won’t fall off. So for those people, they need to start with cashflow properties and learn the fundamentals of investing. Learn property management, learn valuing properties, learn how to fix houses up and keep them in good shape. Learn how to communicate with the contractors and the handyman that do that, learn what software you’re going to use at bookkeeping in all the little details that make investing possible. You learn it with cashflow properties. And then as soon as you get to a point where you don’t need the money, you start buying more expensive properties, you start getting into better areas.

David:
So when I first started, I was definitely looking for cash flow because I was trying to replace the income I made as a police officer. So is in the south Jacksonville, Florida area buying a whole bunch of properties. Now at a certain point, I didn’t need that cash flow anymore. I am now selling all of those and reinvesting that money into areas with much higher appreciation potential, taking on more debt and taking the position that I think we’re going to have a lot of inflation and I want to benefit from it. So to wrap this all up for you two specifically, you probably want to be in the appreciation place where you make more money. As far as the short term rental in California, either you’re going to have to take time away from your job to manage that. And if you have the time to do it, that can work and you can reach out to us.

David:
I’d be happy to help you find something. I have real estate teams in California. But if you don’t want to stop working or you making good money, or you don’t want another job, short-term rentals are not the way to go. At minimum, you’re going to have to put the time in to finding a person that can manage them for you. Property management companies can be very, very expensive. It’s hard to make the numbers work sometimes when you are paying 25 to 30% of the rents to a property manager. So for this season, if you guys are still working, short-term rentals might not work, which brings you back to you want passive income and you want some form of appreciation. I would be looking at small multifamily, one to four units in the better markets. And I wouldn’t worry so much about if the cash flows in year one, I’d want to know what cash flow is in year five, assuming that you guys have stable jobs and your personal houses in order, which it sounds like it is if you’ve saved $300,000.

David:
If that isn’t quite aggressive enough for you and you want to go a little bit more, then I would look into the short term rentals and make sure that you have a job where either you or your husband is flexible enough to take time off of work when something pops up or that you have a family member or a friend or someone that you can put in charge of answering the phone when the guest calls. To sum up your question, which I love, it forces us all to recognize that you have to give something up to get something. And that’s okay. The people who never make any progress investing are the ones who want to try to get everything and give up nothing and life doesn’t work that way. It’s good to understand the spectrum. There’s passive versus active. There’s convenient versus inconvenient, which typically means more money, right?

David:
More risk tends to mean more money than safer. And if we can all look at every investment opportunity on a spectrum and then help figure out where do I fit in there where I can be comfortable and still push the limits of what I can get out of a property you’ll make the best decision for you. All right, this next question comes from somebody who submitted it through biggerpockets.com/david, but didn’t include a video. So we don’t have a video. However, John G from Wisconsin asks, in episode 473 of the BiggerPockets Podcast, Luis from Texas asks if he should REFI to gain capital or not. This led to you stating right now is the time to buy because home values are only going up. Per my real estate agent, it is ideal to continue to save money and then wait for the market to correct itself for now.

David:
Homes are overvalued and passed on other experts. I refer to online. They’re staying the same. Do you think now is actually the time to buy or should investors wait until the market cools down? Thank you, John G from Wisconsin. You’ve opened Pandora’s box with this question and I’m going to do my very best to answer it with the understanding that I don’t have a crystal ball and everyone will tell you that, but that doesn’t do you any good. Because you’re asking the person who’s supposed to be the expert what are they doing? So I’m going to answer the question. I’m going to lay out the landscape of real estate right now. And then I’m also going to tell you what I’m doing in my own personal portfolio. So you can know that I am putting my money where my mouth is.

David:
Your real estate is telling you it’s good to save money and wait for the market to cool down. I will always tell you that it’s good to save money, regardless, as far as waiting for the market to cool down that becomes a gamble. Now, here’s what I want everyone to understand. You can’t avoid gambling when it comes to this. And when I say gambling, I don’t mean risky behavior. I mean, you got to make a bet. You got to choose a side. Either you are gambling that the market is hot and it’s going to come down and you’re going to wait. Or you are gambling that it’s not going to go down. It’s only going to go up. So are not going to wait, but either side involves risk. Either side. We don’t know for sure. And that’s what I want you guys all to understand. There is no safe bet right now, okay?

David:
This is what’s hard. It’s typically in life, there’s a safe option and a risky option and you can choose both, but I’ve been hearing people say for five, six years, the market is going to crash. And so they thought they were being safe and they didn’t buy houses. And now they’ve lost a ton of equity and sometimes even priced themselves out of the market where they can’t buy a house because prices never came down. So what I’m getting at is, it’s not always safe to wait. Now, sometimes it is. How do we know the difference? What I look at are fundamentals. Now nobody can know for sure, but at the last crash, if you were paying attention, I didn’t buy a house at that last crash because I was looking at fundamentals that were as simple as a teacher, a police officer, a regular blue-collar worker is buying a million dollar house with a payment that they cannot afford.

David:
And they’re only able to qualify for it based off of fancy lending practices. It was not sustainable that amount they were pre-approved for was not based on their debt to income ratio. It was based on a negative amortization loan and adjustable rate mortgages and tricky financing. So the fundamentals were weak. When I look at the market now, I don’t see that happening. In fact, I actually own a mortgage company. And so I’m looking at people buying houses all the time and I run a real estate team. So I’m looking at people who are buying houses all the time and I myself am getting mortgages, and I myself am buying houses and I’m telling you it’s different from what I’m seeing here. Yes, it is red hot. There’s not enough supply. Everyone’s going after homes, but they’re going after homes, they can afford. Their debt to income ratios are healthy.

David:
The loans are 30-year fixed rate mortgages, healthy loans with low interest rates, which is making it affordable for them to buy houses. Now that brings us back to the supply and demand problem. There’s not enough housing supply for the demand that we have. And that is why I don’t think we’re going to see a crash. Before, we had way more many houses than what we needed. In 2005, 2006, builders were throwing them up and people were buying them, but we didn’t need as many houses. People were just buying, second, third, fourth houses as pure really speculative investments, similar to buying a stock. Well, now people need a place to live. We have not been building houses. Now every market is different. Your market might have too much supply and it might be worth waiting, but in almost every market that I’m looking at, the demand for housing, the healthy demand that people need is more than the supply that can be offered, so that creates a rise in prices.

David:
Then you dump low interest rates onto that. That creates NOS on the engine that makes prices go up even more. Then you dump into it, all the economic stimulus that the government is providing that creates it even more. And when you look at all these headwinds that we’re throwing into the normal fundamentally sound concept, that there is not enough supply and too much demand. And you throw everything on top of it. That creates the craziness instead of just a strong, predictable increase. So my fear, John, would be that you’re waiting for a crash that is not coming and that your agent is telling you to wait, maybe because they don’t want to be seen as pushy. Agents get criticized a lot, just go to the BiggerPockets forums, there’s a whole lot of people saying your agent, isn’t looking out for you.

David:
You should never pay over asking price. Your agent is greedy. And sometimes that’s true, but sometimes that’s not. Sometimes that’s legit good advice. I just bought a house for myself in the east Bay Area. And I paid over asking price. And my agent that is representing me on this deal, didn’t have to tell me to do it. And this was even a house that didn’t get multiple offers, but I knew that more offers were coming. I knew that it was worth more than what they were asking for and the better bet would be to lock this property up, which is very hard for me to find. There’s not very many of them. And in 30 years, I will not care that I paid over asking price. It’s much better that I bought it than that. I tried to get a deal where there was no deal to be had and I missed out altogether.

David:
Now I’m going into details to explain this question because so many people are wondering the same thing. Let me give you some advice to get out of this nasty, back and forth. If your brain looks at real estate, as you buy high and sell low is bad, or you buy low and sell high is good. If you’re looking at it like it’s a stock, you’re forced to time the market. That’s your only strategy that will work. And this is what people did in 2000 through 2006, that caused them to lose money. They treated real estate like a stock. I’m going to buy it, wait for it to go up. I don’t look at real estate that way. When I look at real estate, what I’m trying to figure out is the five or six ways it’s going to make me money. It’s going to make me through yes, appreciation going up.

David:
It’s going to make me money, paying the loan down. It’s going to make me money through cash flow. It’s going to make me money through cashflow that continues to grow over time. It’s going to make me money through tax savings in depreciation. It’s going to make me money by allowing me to access the equity with a cheap loan to myself, to go buy more properties. There’s a lot of ways that real estate… I can also force equity by fixing it up. Because real estate makes you money in so many ways, you don’t have to look at it like a stock and you shouldn’t. I look at it as a long term investment. If I buy this thing and hang onto it for 10, 20, 30 years, how is it going to perform? If you look at it that way? You take so much pressure off yourself from in this moment right now, I have to make the best move.

David:
This is not day trading. Nobody listening to this should be buying real estate with the perspective of a day trader. This is a long, slow, boring, I’m going to plant a tree and the best area that I can afford, I’m going to wait for it to grow. And I know it’s going to produce fruit, but I don’t know exactly when, I just know that it will. And none of us know that when it will, because we don’t control the federal government. We don’t control macroeconomic factors like how much money is printed or what happens with the economy. Or if we go to war, you can’t control that. And you don’t need to, you don’t know exactly how fast a tree’s going to grow either. But you know that if you keep it healthy, if it’s watered, if it gets sun, it’s going to grow and nobody ever regretted planting that tree.

David:
So John, that’s the advice that I have for you. Now, I promise that I would tell you what I’m doing in my own portfolio. I’m loading up. I’m selling a lot of the properties that I have that are in non appreciating areas or non-big appreciating any areas. And I’m reinvesting into bigger houses, more expensive houses in more appreciation areas because I believe we’re going to see a lot of inflation. I don’t believe a crash is coming. It would be so much more popular for me to tell you, just wait, there’s a crash coming. No one ever gets criticized for saying, wait, don’t go. Just like your family members always tell you don’t invest in real estate. You could lose money. Nobody ever gets criticized for telling you to not do something risky. The problem is there’s risk in that advice. There’s risk in not investing in real estate, because you don’t actually get anywhere.

David:
You stay in your W2 job forever. You never make any moves. Okay? Saying don’t pass the ball, you might have an interception. Yeah, that can sound like it’s good advice until you realize the other team has been scoring the whole time. All right. So I’m doubling, tripling, quadrupling down on what I’m buying. I’m loading up to buy a whole bunch more real estate. I’ve already bought a lot of real estate this year. I’m going to be buying more. I’m doing it safely and I’m doing it responsibly. I’m buying properties that will support the debt that I’m taking on. I’m buying properties in areas I believe will appreciate more. And I’m continuing to live beneath my means in case worst case scenario happens and we do have a crash. I will be okay. John, hope that answers your question. If you want some more clarity, submit another question, but give us a video the next time.

David:
All right. Our next question comes from man C and he states, property analysis numbers vary when using different tools. Why is that? What numbers to trust? I really like this question. And I think a lot of people have the same question and the answer is going to have some similar components to John’s question that we just heard, where he’s trying to figure out, how do I look at things? Is the market going up or is the market going down? Here’s the problem with using property analysis tools as the only factor to make when buying real estate. The tool is meant to support you, to give you information, to give you facts that you need to make your decision. It’s not meant to be green light, red light. If the number says this, move forward. And that’s where people get into problems, right?

David:
So let’s say that we take a property in a terrible neighborhood. It’s been sold numerous times over the last five years. It’s in disrepair, but you can throw a tenant in there and you can buy it for $30,000. Okay? You might be looking at a ROI of 48% on a property like that. And if the only metric that you’re using is ROI, you’re going to say, I should buy it. Now property analyst tools can help you determine your ROI, at least in part they can. And if that’s what you’re using to make this decision, you’re going to buy this house. But every investor that does this for any significant period of time, we call these properties, pigs sometimes or dogs. They know that pigs don’t work out. That there’s unforeseen problems that you can’t have predicted just looking at an analytical tool. And it’s not the tool’s fault that that happens. The tool is just giving you an information based on what information you gave it.

David:
And what you can’t predict is how many vacancies or evictions you’re going to have, what the turn cost is going to be to get the property ready every time a tenant moves out, what your legal fees might be if the tenant refuses to leave and you have to evict them, there’s a lot of things that you can’t objectively know until you get into the deal. Real estate investing is not pure science. There’s also an art that goes to it. Now, the tools can help us with the science component, but where people make the mistake is that they think, oh, if the number is right, I’m just going to move forward. You can’t get perfectly right numbers. Just think about a sports team where if you’re a basketball team and you say, well, this player right here, he scores 25 points a game. So if we bring him over and the current guy scores, 10 points a game, we should get 15 points a game more just by bringing him in.

David:
That’s what the stats show. The problem is he scored 25 points on that team and that system where maybe he was the main person, you got two people ahead of him on your team that are going to score more. There’s not enough basketballs for that person to score 25 points a game. They’re going to score less on your team. And that’s where stats can be misleading. But it’s not the stats that are misleading. It’s our interpretation of these stats. So when you’re looking at the deal saying, which is the right number to use and what number to trust, you’re already starting from the wrong position. That’s not the right way to invest. I look for three things that I’m investing. The first is the area and I want to it to be a non-headache area. The second is, do I have equity in the deal? Either I can create equity or I’m buying in below market value to where I have equity.

David:
And the third is, well, what is the cash flow and when will it cash flow? Is it going to cash flow in year one? Is it going to cash flow in year five, somewhere in the middle? How much cash flow can I expect? Now, the BiggerPockets calculators, which you can find at biggerpockets.com/calk C-A-L-K they will provide you with that cashflow, a basic summary of what to expect there, but they can’t tell you what kind of area that it’s in. And they can’t tell you exactly what equity you have. You have to know that. So to sum this up, I would say putting trust in pure numbers, isn’t a good strategy because numbers themselves, can’t be trusted. Now. That’s weird because math doesn’t lie. Okay?

David:
But you can’t get the numbers to have all the empirical data that you would need for them to be accurate. There’s too many moving parts that happen with real estate investing. Just like with stocks, you don’t know what Elon Musk is going to do. Is he going to go on Joe Rogan’s podcast and do something illegal that causes stock prices to crash or even something foolish? Nobody could have known that when they were looking to buy Tesla, right? And real estate investing works the same way. So I would trust numbers that… Or I guess what I should say is if you’re going to use a tool, use a tool, you can trust like a BiggerPockets calculator or a spreadsheet that was made by someone reputable or you yourself, if you’re reputable, but don’t make your decision based purely on what those numbers say, look deeper.

David:
None of us marry somebody based on what they look like on paper, right? We need to know what it feels like to be in a relationship with that person. Most decisions in life, we don’t want to make based on just what it shows on paper. That is one thing we look at, but we also look at the whole picture. So hope that helps man C, I can see you’re frustrated. I’m hoping my answer though, it isn’t going to give you the quick fix that you may have been looking for will still lessen some of that frustration, but kind of a better path. All right, next question comes from Mike G. My son is about to turn 18. I have the means to purchase a four unit apartment building. I think it might be a good move for my son to purchase this and then commit to live there using the rents to pay for the mortgage.

David:
Am I correct in believing that he could qualify for a much lower interest rate? We’ve had him on a credit card account to build his credit. So it’s someone established. If that is true, we would gift a down payment and put it in his name, setting him up for a good start investing. Thank you. All right, Mike, thank you for your question. And I’ve got some good news for you. You’re asking me a question that you don’t need to be asking of yourself. It doesn’t need to be something you answer, this is very easily answered by a banker or a mortgage broker, whoever’s going to be financing the deal that you’re looking to buy for your son, which by the way, I think is awesome. It’s very similar to what Brandon did with Rosie. He bought her a fourplex in Washington and when she turns 18, it’s going to be hers.

David:
And he’s got the cash flow for the next, I guess 18 years since he bought it, when she was first born and then she’ll have a house which she can use to pay for college, live in, REFI, buy her own house, buy her first car, whatever it is that she wants to do. Now, the reason I’m saying that you don’t have to ask that question is because you can easily go to a mortgage broker and say, hey, this is my son. Tell me what his rate would be. This is my stuff. Tell me what my rate would be. And you could figure out very quickly, which one is going to be cheaper. Now this is one of the reasons that I started a mortgage company, because people ask questions like this all the time. And I wanted a safe place to direct them. The financing of real estate is really important.

David:
The financing ultimately determines how much of it you can get, how much capital you have to put into it, as well as what the cost of it’s going to be over a long period of time. And you hear from some of the more experienced investors that will tell you financing makes the deal, right? We interviewed Pace Morby on our show and he talked a little bit about how he can get in with no money down and give the seller the price that they wanted. Just do a 0% loan and he can make that deal work under those terms. It’s not just price that matters. So for everybody listening, when you have questions like this, do not let this be the thing it stops you from moving forward. This is a quick, quick solution by just asking the person who’s the professional in the area, how do I do this?

David:
And it doesn’t just go for lending, this goes for, if I have a question about how much a roof costs, there’s nothing that stops you from calling a roofing company and say, I’m looking at buying a house that’s this many square feet. What do you think it would be to put on a new roof? And they’ll tell you and then say, hey, how much would it cost to get a person out here to inspect it? It’s usually like 150 bucks or something and you can get a person out to take a look at the roof and tell you if they can fix it. If it needs to be replaced, then estimates on both. So don’t be shy about asking more questions to learn more. Now I can’t answer whether your rate would be cheaper or your son’s rate would be cheaper, because I’m not looking at your file.

David:
We would need to see how much income you’re each making, what your credit scores are, stuff like that. My guess is your son at 18, isn’t going to qualify for the mortgage because not many 18-year-olds make enough money to have a debt to income ratio that supports taken on the payments. You probably will if you’re looking into this. So my gut tells me that’s where it’s going to go, but who cares? Ask the mortgage broker. And if you want, I can have our team run it through you, just send me an email and we can do it that way. Or if you know a reputable mortgage broker that you feel comfortable with, go to them, they’d be happy to be able to do this. Doesn’t take too much time. All right. Our next question comes from Ashley D in Orlando. One of the areas that I myself am looking to invest in the near future.

David:
Do you recommend taking out a HELOC on a primary home as opposed to tapping into pre-tax retirement funds to invest in a multi-family property? This amount would serve as a down payment for the property. Thanks. Okay, Ashley, this is a great question. So if I understand you correctly here, what you’re trying to figure out is I can either take a HELOC on my primary or I can tap into are they pre-tax retirement funds to invest in a multi-family property and trying to figure out which is the best use of capital. So the first thing I would say is if you’re good at this, you should do both. I wouldn’t pick one or the other. It would just be which one do I do first? If you’re not good at this, maybe that’s not the same. The next question would be, how much do you need the money in your retirement fund to feel safe in life?

David:
If you’re cutting it close and you need that nest egg, I would leave that alone. And I would focus on the HELOC. The third question I would ask if all things are equal is which is cheaper money? So if let’s say your HELOC, you can borrow at 5%, but that retirement fund is earning money at 8%, you should use the HELOC money. If it’s the other way around, if the HELOC’s going to be six and a half percent, but you’re only making two or 3% on the retirement fund, then you want to use the retirement fund money. Now for everybody who jumps in and says never use your retirement account money. I feel okay giving Ashley that advice because if something goes wrong and you do lose that money somehow, you can just replace it with money from your home.

David:
You can take out the HELOC, you can put that money back in the retirement account. You can then overtime pay down your HELOC with the profits that come from the retirement account. So you’re not left high and dry. But the first thing we want to do when we’re faced with situations like this is create apples to apples comparison. So in order for me to answer this, I need to know what is my rate on the HELOC and what money am I making in my retirement account and how do those two amounts increase or decrease over time? So if you can figure out that, just get it down to a number, then it’s very easy. This is where tools like investment calculators can make your job very simple, because they can tell you, well, this number’s here, this number’s here, you want to go with the cheaper number and that’s the one you should use. And yeah, that’s the best advice I can give you there. Thank you, Ashley.

Bennett:
Hi David. My name is Bennett, huge fan of BP. I’ve been following you guys for the last couple of years and I really love what you’re doing with this question answer. So thank you for taking my question. My question is, I know one time you and Brandon didn’t seem to have a difference in philosophy in terms of how to return investments to your investors. I have a few investors who are interested in investing with me and I’m just trying to figure out how to work out the deals. I know that my long-term goal is to own the investments outright? So I think it makes more sense to give just a straight return on the person’s money.

Bennett:
So if they lend me a $100,000 and I give them an 8% return, they’ll get back $8,000. Or I know the more common way is to partner up on deals and to share the risk and reward. But that also doesn’t allow the person running the deal to own the deal outright unless there’s some type of buyout later on. So I just want to know your take in terms of that and if so, how you structure the deal in the percentage way. Thanks a lot. And I appreciate you for taking my question.

David:
Bennett, this is an amazing question. Thank you very much for asking this. Now, for those that didn’t quite understand what Bennett was getting at. Let me unpack this for you a little bit. We’re talking about partnering our deals together and Brandon does it one way and I do it another way, but I also would be willing to do it Brandon’s way in certain situations. And I’m sure Brandon has times where he does it my way. So it’s not really my way or Brandon’s way. It’s two different ways. Understanding your options. You’ve got debt, you’ve got equity. Meaning when I partner with you and I’m buying this deal and you’re going to partner with me, you get debt in the deal, which is me paying you a return on your money. It’s guaranteed. I have to pay you in Bennett’s example, he said 8%. That is how I have traditionally done all my partnerships.

David:
I’m going to go flip a house. I’m going to go buy a deal. I’ve got money tied up somewhere else. I borrow money from you. I pay you a return anywhere between six to 9% depending what the market doing. And you get that money irregardless of how this property pans out. If I screw up and I screw the pooch, you still get paid. That’s the safer way. And usually has a smaller return, which is what I talked about earlier in the show. There’s a spectrum between safety and risk and risk is always going to get the bigger return. The other way is equity. Now, when you’re investing in a deal and getting equity, you’re not getting a guaranteed return. You are getting a share in the upside of the deal that is usually more than what you would’ve got if you got your guaranteed return or your debt return, I guess, I don’t know if it’s ever guaranteed, right?

David:
Somebody could have a heart attack and die or something like that. But you’re also sharing in the risk when you go with that. So if this property performs poorly, if a hurricane hits it and wipes it out, if the person who bought it doesn’t know what they’re doing or they do know what they’re doing and it still doesn’t work out. Your money can be lost just like as if you bought that property yourself. So the first thing to understand is if you go with equity, you typically have a higher upside, but you also have a lower downside. If you go with debt, you have less upside and usually less downside. Okay? That’s just the simplest way that I can describe it. So when you’re raising money from people or you’re a person looking to put money in a deal, the question you got to ask yourself is how aggressive do I want to be?

David:
Do I want to be more aggressive or more safe? And that’s not different than anywhere else in the financial world, right? Should I buy these stocks or should I buy these stocks? Well, there’s usually more aggressive ones and there’s more safe ones. Should I go stocks or bonds? Well, bonds tend to be safer with a lower return and stocks tend to be higher with more risk and more volatility. So what most people tell you is in the beginning of your career, you go riskier and near the end you peter off and you become more defensive and go for less of a return. But I don’t know every one of you who’s listening to this. So I can’t tell you which one is better. You just have to ask yourself what your goal is. Now, as far as Bennett’s question, he’s now asking from the perspective, I’ve explained it to you so far, from the perspective of putting money in a deal.

David:
Now we’re going to shift over to the person who is getting money from you to run the deal. And what Bennett is saying is that I want to keep this property. I don’t want to have to sell it. So which one makes more sense? And that’s very important to recognize, the reason that I have borrowed money from people and paid debt, as opposed to giving them equity is very simple. And it’s twofold. The first is most people that invest with me, either don’t know much about real estate investing or don’t know as much as me. So they’re actually not betting on the property. They don’t know if it’s a good deal or not. That’s why they’re coming to me. They’re betting on David and his word and my character, which means I’m paying them regardless of how that property does and that’s what they’re putting their trust in. Okay?

David:
They’re not putting it in the deal. So I don’t want to give them equity in the deal because then if it doesn’t work out, my name gets jeopardized. And the whole reason they invested in me is they trusted they were going to get their money back. The second reason I don’t like the equity model for myself right now is because I want to continue to own the property. And when you buy it with a bunch of other investors, you typically have to sell it to pay them all back, right? So you’re not really investing in real estate. You’re turning yourself into a long term flipper of really big deals. Now, in some cases you can refinance it and pay them back their money, that way, or raise money for your next deal and use that money to pay these people back. It just becomes complicated.

David:
And the deeper you get into that, the more committed you are to having to get another deal. And it turns into musical chairs. And my personal opinion is right now, the multi-family space is so fraught. It is so hot. There are so many people that are making money in that space, then do a lot of things wrong, because the market itself is lifting them up. That it appears like you can’t go wrong. Everyone’s getting a great return. Well, at a certain point, the music stops. You’re left without a chair. And that’s the investor who kept rolling money over or the syndicator who kept rolling money over. And they ended up buying deals that weren’t great because they had to buy the next deal. I don’t want to use the word pyramid scheme, because that has a negative connotation or a Bernie Madoff situation, because it’s not the same.

David:
Bernie was raising money to pay people and then spending that money on himself. This is legit. They are putting it into properties, but the principle of there’s pressure on me to get another deal. There’s pressure on me to reinvest this, makes it very hard, because that’s not the way that I like to make moves. I like to sit back with no per pressure, wait and see what the best deal that comes along is. And when I see it, I pounce, okay? If you’re a lion and you’re looking for the right gazelle and you’re starving, you’re probably going to make bad decisions. If you just, I need something, right? I like to make sure I’m never starving. I’m never desperate. I’m never in a position of weakness so I can wait for the perfect move with very low risk and very high upside. And I only move on those.

David:
That’s one of the reasons I don’t lose money in real estate by nature of getting yourself into syndicating and then wanting to keep the property, so you got to refinance it and there’s usually not enough equity to pay everyone off. So you got to raise more money on the next deal to pay them off with that. Now the next deal might go, okay, but you got to do that again. And on the third deal, maybe you bend your standards and you buying a property you shouldn’t have bought or an area that you shouldn’t have bought. That’s why I don’t like going that road. And I think Bennett is seeing that, too. So what he’s saying is, I think I should just raise debt and if you want to own properties, that’s exactly right.

David:
Now for those of you raising money, I think you understand where I’m getting at here. In the future, I will be raising money. I’ll be doing syndications and funds, but it probably won’t be just for I’m going to own real estate. It would be more investing into land contracts and giving money to home builders or other people that are really good at using that money, getting my investors a return and then getting the money back out. It’s not going to be a long term let’s buy this thing and let’s hold it for forever. Because then I got to sell it to pay everyone off. So I hope that makes sense for you guys. And more importantly, since most of you are looking to put money into deals, as opposed to buying them, be very clear on the merits of both.

David:
If you want a very safe return and you trust the person and you know that they’re good at what they do and you trust their word, debt is usually a more predictable and safer way of going about it. If you’re wanting to be aggressive and you’re wanting as high of a return as possible, and you’re trying to snowball this money, equity is usually the better way. Just don’t get into the false sense of security that because everybody has been making money over the last five years, 10 years with syndications that they always will continue to make money, because that’s definitely not guaranteed.

Ronnie:
Good day, David, this is Ronnie [Glendo 00:41:01] from Napa, California. Currently I’m a house flipper over in the Houston area. I work for a law enforcement agency and I’m actually looking to leave the agency and work full-time as a real estate agent as well as a real estate investor. Currently I have a virtual assistant working for me. She has access to the Texas MLS as well as other lists that she can utilize to get me off market leads. So my question to you is how do you keep track of these leads? What software or program do you use in order to make sure you stay on top of things? Initially she’s going to be bringing in the leads, but I want to make sure I follow up and continue to press forward as I work with other investors as partners and such to get these deals, just curious as to what you use to stay on track of everything. Thank you. Take care.

David:
Hey, thank you for that Ronnie, you have a very similar career trajectory as mine where we both were in law enforcement and then got into becoming real estate agents and also investors. So a few pieces of advice I’ll give to you any first responder, really any W2 worker who’s looking to get out of their job and into real estate. The first piece I would say is don’t make the move as fast as you can, make it when it doesn’t make sense to have that job anymore. Now this is assuming you don’t hate your job and you’re not miserable all the time, but I’ve seen too many people that thought they got a dealer to and they’re like, oh, this real estate thing is easy. I’m just going to do this instead of my job. And they leave. And then it’s very hard to get financing and money’s not coming in.

David:
And so you get back into that situation where you’re the hungry lion, not the smart lion and you start looking at deals. You really have no business going after, but thinking I need some way to make money. I need to make this deal work and that can spiral you in a vicious cycle into making poor decisions. So part of the reason I kept my W2 job, as long as I did when I didn’t have to was that I liked it. It gave me just no pressure. I had a paycheck coming in. I had benefits that were covered. I had a lot of my social needs that were met from that job. And I was able to invest in real estate while doing it. There was no rush to get out of it. In fact, I didn’t say, hey, this has to happen until I developed an injury that was so bad that I just couldn’t keep working any more.

David:
And it worked out to where it was a right around the time that my real estate agent business was starting to pick up and I needed more time to focus on that, but I didn’t quit as soon as I got my license. That’s what I’m getting at. A lot of people make that mistake of leaving their job as soon as they get licensed and it takes a while to build it up. Now, Ronnie, what you’re trying to do is fight a two front war or maybe have two parallel tracks. One of them is getting clients for real estate agent business to replace the money that you’re making in your W2. The other is getting investment properties that you’re going to put that money into. Now, part of the problem with real estate is that it functions very well in general over time. It builds a lot of wealth.

David:
What it does not do right off the bat is build passive income or cash flow. It’s hard unless you have a ton of capital to replace a full-time job with just income coming from real estate. And if you do, there’s ways you can do it. Short-term rentals, buying cheaper properties that have higher cash flow numbers. It’s not passive income. You just traded working as a law enforcement officer to working as a property manager. And that’s not always a good trade. A lot of people don’t… They look back with that with regret saying, hey, my CPA job, wasn’t that bad compared to what I’m doing now. So don’t get rose-colored glasses. What I like to do is find a way to make money in real estate, invest that money into investment properties and let those pay me when they’re ready. Just let that tree produce fruit when it’s ready to produce it and it’s mature.

David:
Don’t try to eat fruit that’s not ripe yet. Right? Don’t try to get that tree to do more than it’s capable of because you may kill it. So for your situation, you’re asking how do I track deals? Well, the good news is you’re going to track your real estate deals that you want to follow up on, with the same software that you can run your real estate agent business through. And it’s software that we call a customer relationship manager or a CRM. Many brokerages have one that they will offer you for free. So I’m with Keller Williams and they have a CRM called command that tracks all of your clients, all of your transactions, that helps you organize everything and know where you are in the process with your escrows that you have for your clients as well as helping you to lead, generate to those people and keep talking to them.

David:
I use one called Brivity that my buddy Ben Kinney made, and he’s been on the BiggerPockets podcast before. If you want to listen to his story. And Brivity is really good with helping me track all of the transactions for my real estate team, we typically have anywhere between 30 and 40 at any given time. So we need software to know, the transaction managers have to know where we are at every stage of that process. I also use it to manage my database. So if you’re anywhere near me in California, if you’re in my database, you’ll get a text message or an email when I’m going to have a meetup, what the topic’s going to be. If I’m going to be doing a webinar and you want to join, I’m working on getting that squared away and buttoned up even more. So the people that are in my world know what’s going on and they stay in touch with me and they can come to the events that I’m hosting, or they can take a class that I’m teaching or they know, hey, I should submit a question on the biggerpockets.com/david site.

David:
That’s very important when you’re a real estate agent, you have to stay in touch with people. Now, my advice would be to find a CRM that will work for that as well as help you track the leads that your VA gets. So your VA needs to create, it could be a spreadsheet, as simple as Google sheets or Excel, where they put a list of the property addresses and the information you want to know. Obviously the phone number, the seller’s name, the email, the property address, maybe you could have them put a Zillow Zestimate or something. So you have a ballpark of what you think it might be worth. And then notes of how motivated that seller is or what that seller wants or what you need to know before the phone call is made. Now, what I would have you do is make a list of questions that VA, your virtual assistant is going to ask the person and then train them in what you’re looking here, right?

David:
So the house is worth X. I want Y and I’m motivated by this amount and then have them structure these deals so that the more motivated people are at the top of that list, that would be the most rudimentary way that you could track it. A CRM would be better because you can have it set reminders for you for who to call. So this is what we do. Let’s say that I have… I’m going to use an example of someone who wants to list their house with my team, as opposed to a property that I want to buy because it’s a very similar dynamic. If you say, hey, David, I want to sell my house in Napa, but I don’t know if I want to sell it right now, but what do you think it’s worth? We just have a conversation like that and I want to make sure we stay in touch.

David:
So some other agent doesn’t jump the line and go talk to you and you forgot about me, or you felt pressured by them. I can tell that CRM remind me every 30 days to text Ronnie or to comment on his Facebook post or do something so that we stay in touch. And every 30 days, I get a reminder about you and your properties’ information is stored in that CRM and I can run a quick CMA or I can look and see what the value of it is. And I can text you and say, hey, how’s it going? By the way, did you know your house has gone up about $30,000 since we last spoke, has anything changed in your behalf? It’s very simple. And that’s how people like me that have just tens of thousands of people that we’re trying to stay in touch with in our database.

David:
That’s how we do it, is we’re using software to help us stay organized. You can do the same thing for these investment properties. And that’s what I would recommend as your VA, this is what your system should look like. Your VA gives you the list of people that they’ve called, that have expressed some interest in selling. They’ve gone through the questionnaire that you have for them that will identify the people that are more likely to sell with a property that you want. They put those at the top of the list. You make the calls, you talk to the people, you then put notes into the CRM saying, this is what I want. I’m not really sure they’re going through a divorce. I need to check back in later and see if the divorce actually happened. Maybe it won’t, whatever it is.

David:
And then set reminders for yourself in that CRM to check in with them. Now, if they’re not super are motivated, you just have your VA check that reminder system and do it for you. You have them text those people or call those people and say, hey, are you ready to sell? Have you thought anymore about our situation? If they are really motivated, then that’s one that you can make sure that you do on your way to work, right? You just wake up in the morning, you look at your CRM, it’s got five notes of people that you want to check in with. You send five text messages, then you get in the car, you use a handsfree device and you start calling people when you’re on the way to work and maybe on the way home. And you can work it into what you’re already doing.

David:
It’s not that complicated if you get it systemized. So to sum up, you need a CRM. You need to incorporate your VA into using it. And you need some system that prioritizes the deals that work more likely for you versus the ones that you don’t think are going to be as well. Good luck on your journey. You’re not that far from me in Napa actually. I’m about an hour away from Napa. For those of you that aren’t familiar with the area, that’s where all the wine comes from, that everybody really likes. And so we should definitely meet up. You should come to one of my meetups. I’d like to meet you, get to know your crew. If you guys are into the same stuff that I am, maybe we could become friends. Thanks for the question, Ronnie. I appreciate it. Hey, hey, we’ve had some great questions so far.

David:
Thank you everybody for submitting them. We couldn’t do the show without your question. So I really appreciate it. If you’d like to have your question answered on this show, go to biggerpockets.com/david, because that’s my name and submit your question there. The next thing I will want to know is are these questions and replies resonating with you, right? Do you have part of you that hears this show and goes, oh, I’m so glad that there’s someone who’s breaking this down in more detail or I’ve always wondered, should I go cash flow or appreciation? And this makes more sense. We want to hear that if that’s the case. In fact, I need to hear that, to know if these are shows that I should continue to make. So please go to the comment section and let us know what you think about the show. Tell me what you like.

David:
Tell me what you didn’t like. Maybe be nice when you tell me what you didn’t like, but still I want to hear that. Let me know what types of questions that you would like to get more of and what you feel like gives you the best value. Also, please do me a favor, like the video, share it with other people you know and subscribe to the BiggerPockets channel. There’s not a better YouTube channel that you could be listening to if you want to develop financial independence through real estate. So that’s a no brainer. You should be subscribed here. But I would really like it if you could share with other people who maybe have some interest in BP, but they’re not a fanatic like you, share the episode with them, say, hey, here’s a person who’s breaking down individual questions with real estate in real time, Dave Ramsey style. There’s a lot you can learn here. Tell me what you think. I’d love that.

David:
Okay. Let’s get into some more questions and see what more value we can bring. Next question is from Jason W in Texas, I would like to be a real estate agent, but my primary focus is investing. What companies allow their agents to wholesale and invest? I’ve heard some companies don’t like wholesalers or investors. What are your thoughts? PS, I’d love to be on your team. All right, Jason W in Texas, thank you very much. So let’s start with why this is even a question. When you are wholesaling a property, what you are actually doing, if you’re doing it legally is you are putting it under contract under a specific set of price and terms. You are then assigning that contract, the right to buy that house under those, I guess it doesn’t have to be a house. You’d be wholesaling or anything, the right to buy that object under those rate and terms to somebody else, you are then making money off of the difference between the two, the spread of what you put under contract for versus what the person is paying to take over that contract.

David:
Now, the better of a deal you get from the seller, the more money you’re going to make from the person you assign the contract to. That is how wholesaling works and there’s a lot of people doing well. The reason this becomes tricky is because as a real estate agent, you are licensed and you are required to be a fiduciary, which means you have to do what is in the best interest of your client. Okay? A lot of people don’t realize this, agents pay a ton of fees. They pay a lot of money, they get a lot of training. They put a lot of time into this and they are required to do it in the best interest of their client. Wholesalers are not. Wholesalers can say whatever they want to say, and there’s no governing board that’s going to look at what they did and say that wasn’t okay.

David:
You don’t have protection with the wholesaler. It becomes murky waters when you’re an agent who is going to a seller and saying, I’m going to wholesale this deal because the seller may be operating under the opinion that you’re doing what’s in their best interest. And when you tell them I will buy this house for a 100,000 or I’ll find someone that will pay 120. They are thinking, well, that’s what my house is worth. Maybe it’s worth 130, I get it. I’ll do it for 120. But what if that house is really worth 210, they have a very strong argument that you violated your fiduciary duty to them by giving them 120 for the house when they took you at your word or assumed because you’re an agent, that’s what it’s worth. And then assigned it to somebody else when it’s worth more.

David:
And this typically becomes a problem when family members who thought they were going to inherit the house or somebody else who wanted to buy it, sees what you did and says, you took advantage of my mom or my grandma or my aunt, my uncle, whatever the case would be. Right? You should not have done that as an agent. And that is why brokers don’t like agents that also wholesale much of the time, because it’s murky waters. Now my gut tells me at a certain point in the future, wholesaling will become harder to do or maybe even illegal in a lot of areas because of this specific problem. As far as your question of which companies allow their agents to be wholesalers and agents, I don’t know. That’s very specific to the brokerage that you want on a work for. So that’s something that you have to ask them.

David:
This is something I do, are you okay with it? And I would be prepared if I was you for most of them to say, what is wholesaling or I don’t quite understand what that would look like and because as Professor X from the X-Men once said, people fear what they don’t understand. Many of them are going to have a knee jerk responses saying, no, don’t do it. As far as what you’re looking to do, you can be an agent and an investor, nothing wrong with that at all. I would encourage you to be an agent and an investor. What you can’t always do is be an agent and a wholesaler. And guys, let me make this clear. Wholesaling is not investing. You’re not investing when you’re wholesaling. It’s just like, you’re not investing when you’re flipping houses, you’re flipping a contract, you are running a business.

David:
And sometimes those two businesses are in conflict with each other and you’re not allowed to do both. Just like you can’t be a financial services advisor and also be a mortgage broker because the idea would be your clients trust you as a financial service advisor so you could rip them off on the interest rate or the closing costs and they wouldn’t even know what was happening. So there are certain ways where the government made laws that protect the consumers by not letting two industries join together. And unfortunately this often becomes a case. So my advice, when I get into a situation like this, let’s say that I wanted to start a wholesaling company. I would run it as two separate components. Okay? There is the David Greene team that represents clients that buy and sell. And I have this other company that another person manages and runs and they speak to the client and they’re not a licensed agent.

David:
That to me seems much smarter. So I get a partner. They go after the off market opportunities, not me because I’m the licensed agent and broker who’s running this business over here, but I still own the company and I would check to make sure that that’s good with any lawyer in your state. But in general, that’s much safer than trying to commingle you doing everything altogether. As far as being on my team, I don’t have a team in Texas right now, but I am looking to grow the David Greene team. I want experienced agents first. So if you’re brand new, you probably wouldn’t be the best partner to have with me. I need an experienced agent that knows how to sell real estate. That’s really good with clients as a high standard. And then I typically build around that agent. That’s where I get the new people and I plug them in and they have someone that they can learn from.

David:
So if you find anybody that you think would like to work on my team and would be a really good fit that knows how to sell real estate well, I’d love to have you on the team, let me know. All right, Rachel, in Salt Lake, writes, I have several multifamily properties and I would like to sell them all and trade up to a larger multifamily. Is that a good strategy? And if so, what is the best way to go about executing at 1031 exchange on multiple properties given the timing requirements. My properties are spread across Utah, New Jersey, and Hawaii.

David:
All right, Rachel. So I’m assuming the reason you want to do a 1031 from several smaller properties into one bigger one is you just don’t want to manage a lot of different properties. And I got to say, I can fill you on that. I scaled my rental portfolio very quickly and very big. And then I realized, man, once you’ve caught all these fish, it’s a lot of work to clean them and I didn’t really love it. So I’m in a similar boat as you. Let’s talk about what a 1031 exchange is. It comes from the internal revenue code, section 1031 and it’s typically called a like kind exchange. So this is a section of the tax code that gives you the ability to delay paying capital gains taxes. So if you’ve never heard of this before, if you make an investment and it makes money and then you sell it to somebody else, you have realized a gain according to the tax code.

David:
That gain is taxed. It’s not taxed exactly the same as income, unless you’re a certain income bracket or a certain designation. But for most people, the gain is taxed differently than your income tax, but it’s taxed just the same. Okay? So everyone understands, if I make money at work, I’m going to get taxed on that. Well, you also get taxed if you take the money that you made and invested it and did well, the government finds a way to tax you every single opportunity they can. And they’re also taxing you on the stuff you’re buying. They’re taxing you on the property tax or the properties you own, that you were 1031-ing. But the value of the 1031, which is one of the few ways that investors actually get billed out here and helped is that you don’t have to pay that gain right away.

David:
If you reinvest the money that you made on the game, according to specific rules, you can delay paying that capital gain tax. So you have more money to put into the next deal. So if your capital gains was going to be 10% or 20% that 10 or 20% instead of paying the government can go into your next deal. So presumably you get a bigger, better deal and you have more money that continues to snowball. And when you sell that one, you’ll pay the government, unless you do another 1031. Now it’s called a like kind exchange because the properties have to be like and kind in nature. Okay? So my understanding of this that I’m not a CPA would be, I can’t sell a house and 1031 that money into a car, because that’s not a light kind exchange. Now I’m not a CPA and I remember when I was first learning about this, that there were examples that were given of people that would trade art for stocks or something. Okay?

David:
So maybe the definitions have changed from when I first learned about it, because my understanding now is you can’t switch asset classes like that, has to be like kind in nature. So you wouldn’t be able to sell a rental property and 1031 into a home that you would use as your primary residence. That’s not kind, it has to be rental for rental. There’s other rules. And I’m going to tell you some of the more common ones, but again, I’m not a CPA. So this is a very simple answer. Just like the person who asked the question earlier today about the mortgage broker, will I get a better rate, or would my son get a better rate? Just go ask him. It’s really simple. You can ask a CPA, you can email me and I’ll connect you with my CPA, same thing.

David:
A few things you should know. If you make, say $300,000 on that sale, you have to put the full $300,000 into a new deal. And anything you don’t put in, would be taxed proportional to what you didn’t put in. So if you didn’t put in 50,000, you’d get taxed as making $50,000 of gain. Another thing is that the debt you take has to be the same or greater. So if you owed on your property, say 50,000, sorry, $500,000, whatever the large multifamily that you’re buying into, has to also owe at least $500,000 or more. Okay? The third piece, and this is very important. Everybody don’t ever forget this, is this is something where you can’t do it on your own. You cannot have what is called constructive receipt of those funds. Meaning you can’t sell your multifamily only properties, put the money in the bank, ask the title company, wires you the funds then go look for your next property.

David:
Because that money has gone into your hands. You’ve had constructive receipt. You are ineligible for a 1031 according to how I understand it, you need to use an intermediary. So the David Greene team we use a company that’s intermediary for all of our clients and we let them know about this. Because many people come to me with houses that they have a lot of equity and that don’t cash flow great. And we sell the property, we take that equity, we reinvest it. They get way more cash flow. They have way better properties. You turn one into four and you restart the cycle over. That’s one of the specialties that we work on here, but we know that client can’t touch that money. So you have to have a company that’s going to hold the money for you in an Escrow account while you’re looking for the next one.

David:
Now, the last piece I’ll give you are the timelines and most people are familiar with these rules. From the time that your first property closes, you have 45 days to identify other properties that you would want to reinvest that money into, to give a list to the IRS that says, here’s the properties I want to buy. And you have 180 days to actually close on those properties that you have identified. For some reason that 45 day number is kicking in my head like it might not be right. I don’t want to double down on that. I might have different things in my mind, but Google very quickly. These numbers are everywhere. They’re not hard to figure out. And if you’re working with an intermediary, they can share it with you. If you go too long past those timelines, the IRS will not honor the 1031 and you will now owe those capital gains.

David:
So the question you’re going to have to answer Rachel, and if you’d like email me and I’ll put you in touch with the 1031 company that we use, would be if I sell these eight properties at different times, okay? I don’t sell them all in one go, where does my timeline start? If I wanted 1031 them all into one larger multi-family property, do I get to put the last one that sold? I have 180 days from there? Or is it 180 days from the first one? What if I want to buy two different buildings? Can I have two different 1031s that are going on? Those are the questions that you want to ask the person who knows these laws very well and works with them frequently.

David:
My advice would be is if you know you’re going to do this, that you get started identifying potential replacement properties way sooner, but you can actually write offers on them to lock them up. You just want to get to know your market really well. Because once you sell your houses and the time starts, you’re going to be under a crunch to find a property, to put that money into. And it’s very easy to become then hungry lion that makes bad decisions because they’re running out of time. You always want to be as much as possible coming from a position of strength and peace. All right, we have one more video question. Let’s take a look.

Zeke:
Hello David. So I’ve been listening to your podcast on BiggerPockets, you and Brandon for a while, read both of your guys’ books. A decent few of many way. I want to say Brandon’s really motivated me to get into the bigger picture, but David, your books particular have really motivated me in immediate focus in my life. And I had a question I wanted to ask you. So I’ve started taking my real estate licensing course and I’m about halfway done. I’m actually on a break right now, I had study and decided to make this video. And I live in a town where the market is really hot, but the houses are a little bit cheaper, but not far away, like very close, like literally a 15, 20-minute drive from me and enjoyable little country drive too that I like is a small town.

Zeke:
I live in Michigan. It’s Chelsea, Michigan. And the housing there is also high, but at a significantly higher price range, like yeah, noticeably much higher. And so my question was, as somebody has an ambition to become a new realtor. I know that I shouldn’t focus too much on maybe getting overly ambitious. I heard you guys say the other day that to put the process on the pedestal and I think that’s great. That’s fantastic. So I want to start doing that, but that said, how do I get to a market where I can make a higher income? Is there a key or a trick?

Zeke:
No, that’s ridiculous. Never key a trick, but having any good, strong personality and good characteristics are a great start, but how would somebody like me who lives just around the corner from a really good market, get into that market as a seller and an agent representing the buyers and sellers. So any advice you have much appreciated. And I notice I tend to apply whatever I can in my life. So it won’t go to waste. All right. Cool. Thanks

David:
Zeke, thank you very much for your question. And this is going to be fun to answer. So here’s the good news, I’ll start right off with it. It’s not hard to sell houses in a different market than what you live in. In fact, I believe you mentioned it was just a short country drive away. So that’s not difficult at all. I live in a city called Discovery Bay that’s very close to Brentwood in Northern California. It’s about an hour east of San Francisco. I say I live in the San Francisco bay area because nobody knows where Brentwood is. But I’m also about an hour and 15 minutes from San Jose and about an hour and a half from Sacramento. That’s why I like this location. I’m not close to anything, but I’m not far from anything. And I sell a bunch of houses in the Sacramento area.

David:
I sell a lot in the San Francisco area. I sell a lot in the east bay of San Francisco, and I sell a lot in the south bay of San Francisco. And occasionally I sell in the north of San Francisco like Marin County area. It’s not hard to do because real estate is real estate. In fact, if you look at my… Or Read my book Long Distance Investing, it details pretty clearly that the fundamentals of real estate apply regardless of where you live. It just doesn’t matter. And the same is true for being an agent. If you know the market, if you know what the days on market are, if you know how to read the data, if you have skills at getting a house ready to sell and you know how to negotiate, you know how to price it right, you know how to get buyers to come up and price, you know how to represent your client well, you know how to market it well, I can sell a house anywhere.

David:
In fact, we actually have a team now in Southern California, we sell a lot of houses in Southern California. This whole myth that I’m the neighborhood expert in an area was just a freaking marketing scheme that real estate agents put together to give themselves a better chance to get business. Okay? News flash everybody, if your listing agent is telling you, I’m the neighborhood expert, I sell all the houses here, none of the people going to buy that house care. And that’s the people you’re trying to find. The people who buy the house are the ones who determine how much they’re going to pay. And they’re never going to talk to your agent who’s listening to home. They’re going to talk to their own agent. So there could be an argument to be made if you’re a buyer’s agent that you know the neighborhood really well.

David:
And you’re the expert. I think there’s some value that could come there, though not so much, it can’t be overcome, but there’s definitely no value as the listing agent. Okay? So Zeke, get that thought out of your head that I don’t live there. So I can’t sell houses there. No one cares. No one should care. What they should care about is how competent you are. And are you the best choice for them when it comes to selling their house? So if you can tell the sellers that you know their city, Chelsea, if you can mention your favorite coffee shop, if you can tell them your favorite hiking trails, if you can say just enough that they’re like, okay, I get it. He knows this. He’s not completely full of it. They’re going to trust you. They’re going to be fine. And then your presentation that you’re going to give them that highlights how much value you’re going to bring is what’s really going to matter.

David:
Now let’s flip that over to the buying side. Same thing is true. If you live 30 minutes away, it doesn’t matter what matters is, do you know Chelsea because that’s what the buyers care about. They shouldn’t even be asking where you live and they won’t be asking where you live if you come across as confident. So for all the agents that are listening to this, and if you’re not an agent, this principal applies to whatever business you’re in. Your confidence is what helps people determine how much they can trust you. Okay? Your confidence is usually based on your skill. I just started jujitsu and we can’t do an episode, whether you don’t get reminded of that. Right? I can tell as a brand new person, if the guy that I’m about to roll with is looking at me like, oh God, is this guy good?

David:
He looks kind of big. He looks kind of scary. He hasn’t smiled in the last 14 hours. They’re worried. And they don’t know where we’re at. They don’t have confidence because they don’t have their own skills yet. They’re new. When I go against a black belt, there’s no worry on their face. They just don’t care if I’m mean, because they have so much confidence in their own skills that they will just wait and see how this thing plays out. All right. But my point here is that confidence is built based on skill. And so many people avoid building skill in life. In fact, this is what I did my Ted Talk on is how important it is to learn how to build skills. If you’re an investor and you’re always like, I don’t know if I should buy this house. Maybe I should buy that one.

David:
Am I doing this right? You don’t have confidence because you don’t have skills, right? Just like deploying dynamite. I don’t have any skills that what I want you guys to focus on. That’s why Brandon says analyze 100 properties a week. We’re not trying to just be these Buddhist monks that are like, carry that bucket of water at the top of the mountain and pick a purple flower and come back down. We know that if you do that, your skills will develop. So one of the things that I tell people on our real estate team, we have a listing presentation and a buyers presentation. So if you’re going to buy a house with us or you are going to sell a house with us, we actually have a presentation we give you that highlights what we do, what matters, how we do it, what it’s like to work with us.

David:
We remove a lot of the apprehension and fear that people have from getting started. I tell them to give that message to every single person they know irregardless of if they have a house to buy or sell, they should be giving it to their friends, to their coworkers, to their parents, to their cousins, to their neighbors. Everyone should hear this presentation. Now partly we do that so that those people can get value from us and see that we’re different than your average agent. That we’re better. We put more effort into this, but partly we do it because I want them to build up their skill at giving that presentation. When they give that presentation enough times people ask questions that they don’t know how to answer. That gives them an opportunity to go get those questions answered. That builds up their skill. Over time of doing this over and over and over like imagine a really rough rock that gets dropped into a river, over time of that water going over the rock, it becomes smoother and smoother and smoother.

David:
And in this example, the smoother you are, the more confidence you’re going to have. You got to get repetitions in to build skill. And this is the step everyone skips. They want to jump into confidence and they look for things to make them confident. They look for a Tony Robbins speech or a book, or they look for a personality that makes them think, yes, you can do this. And they get that feeling of confidence from an external source. And then they rush out into the jujitsu match and their confidence leaves them, because that person’s not there. What you need is confidence in your skills. And I’m telling you as an agent, focusing on the numbers, the marketing, the thing, they get your client the most money will make you a better agent. That’s all that I focused on. How do we get our clients the best deal possible?

David:
How do we save them the most time possible? How do we get them the most money for their house possible? How do we make the experience as smooth as possible? And how do we do this to as many people as we can? That’s all that I just freaking focus on all the time. Just this relentless pursuit of how to be better at what we do. The same thing goes with investing. The same thing goes with everything else. If you do that, you’ll be confident. If you are confident, people will be drawn to you. If people are drawn to you, they will work with you. If they work with you, you will close more. You will make more money. Your confidence will get even bigger and that cycle will slowly grow. So thank you for asking this question, Zeke. It applies to people more than just agents for anybody in life who wants to build up their confidence they need skills.

David:
All right. That wraps up another hard day’s work here on the Seeing Greene BiggerPockets podcast. I want to give a heartfelt thank you to everybody that we heard from today that actually went to biggerpockets.com/david and submitted a video question. Guys, it can be a little nerve wracking to put your ignorance out for everybody to see. And ignorance is not a bad word. It just literally means without knowledge for people to express the areas that they’re not knowing something or they’re not confident so that they can get answers. And then all of us can benefit from that too. So a genuine thank you to all the people who did submit questions, whether it was through a video or through the forums.

David:
I want to encourage everybody here to go ask their questions as well as share this show with others and then leave in the comments what you liked. Did I give too many analogies? Should I leave more analogies? How did I come across with that river rock one, that was straight from the hip. I’ve never used that one before. And if you like the episode, please be sure to subscribe so we can and get this content in front of more people and help our community out. For the BiggerPockets podcast, this is David rolling river rock Greene, signing off.

 

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