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Seeing Greene: Should You Pay Off Debt or Invest in Real Estate?

Seeing Greene: Should You Pay Off Debt or Invest in Real Estate?

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Should you pay off debt or invest in real estate? Whether you’re young or old, rich or poor, in consumer debt or student debt, this is a question that almost everyone has. With inflation hitting decade-long heights, debt seems to be worth less and less every day. But, the other side to this coin is that asset prices, including real estate, are going up. Is there a right move to make, or are we stuck treading water without enough financial traction to stick to?

Hear answers to this question (and many more) on this week’s Seeing Greene, with your favorite host, agent, investor, and mortgage magician, David Greene. In this episode, you’ll hear topics touched on like whether to house hack or buy cash-flowing rentals, what to expect (and not expect) from your real estate agent, how to reduce (and account for) property taxes, how inflation and interest rates will affect the housing market and the best piece of advice David would give new real estate investors.

Heard a question that resonated with you? Want to hear David’s thoughts on a certain topic? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get real-time answers!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

David:
This is the BiggerPockets Podcast show, 597, Seeing Greene.

David:
When you try to find your property manager, ask them if they own rental property in the area that you’re buying. Ask them about their rental properties. Ask them which areas of town you should avoid. You’re looking for the one that owns property themselves. Those are almost always the better people to use, whether you’re looking for an agent, a property manager, a contractor, anybody in our space, even your CPA. If they own real estate, they are much more likely to have a good idea how to help you as an investor than if they don’t.

David:
Hey, what’s up everyone? I’m David Greene, your host of the BiggerPockets Real Estate Podcast. Here today with a special Seeing Greene episode. In today’s episode, you get my perspective, David Greene, on how to answer the questions that you guys have, as well as what I see happening in the real estate market. And most importantly, how you can use that to build wealth, because we at BiggerPockets care about nothing more than that, helping you build wealth through real estate, the right safe and honest way.

David:
In today’s show, we are going to take questions directly from you who have submitted them at biggerpockets.com/david, for me to answer. A couple questions that you’re definitely not going to want to miss.

David:
We jump into it with someone who wants to know, “Should I pay off my student debt, or should I invest in real estate?” You Dave Ramsey fans may want to check this one out and let me know in the comments what you think about how I did with that question.

David:
We have another really good question about, “Should I house hack in a very competitive market, or should I go to a different market that’s less competitive, and do a short term rental?” Those are probably two of the most hottest, best, and strongest ways to build wealth in all of real estate. And someone’s looking at both of them, and trying to figure out which would be the better option for them.

David:
There’s another person who asks about, “Hey, I’m trying to approach somebody as a newbie and I want them to partner with me. What are they going to be looking to see?”

David:
And then, one of the best questions of the whole show has to deal with your relationship with your real estate agent. And this person wants to know, “Hey, what’s fair to expect? Should I be looking at properties and sending it to them? Should they be looking at properties for me and sending them to me, and getting my opinion on this? I don’t want to be a jerk, but I also don’t want to know what’s expected. I’m tired of doing all the work and just sending it to my agent.” And guys, unfortunately, this is how it goes a lot of the time when you’re buying real estate. So I do my best job to tackle that question, give some advice on how to make that relationship better. And then, I share what the David Greene team does with our clients, so that we don’t have that same problem.

David:
If you’re new to this podcast, I want to welcome you. Please subscribe to it. If you go to biggerpockets.com, you’ll find an entire website full of more resources, just like this one, to help you get started on your wealth building journal. There’s over two million members. We have the best blog in the world. We have the best forum in the world, where you can go on and you can read questions specifically written by real estate investors that other people have answered. Tons of information. I know real estate can be scary, but it really doesn’t have to be.

David:
Today’s quick tip is going to be, I want to take you with me everywhere you go. Do you like this strong, sultry deep and semi-nasally voice? Do you wish you could be hearing me all the time? Well, you can, because you can listen to the podcast everywhere, and I want you to. In fact, I think that you should buy some AirPods to put in your ear, so that even when you’re not in the car, you can still listen to me and BiggerPockets.

David:
Okay, I’m not really that grandiose, but I do want you to continue your real estate investing education all the time. If you go to biggerpockets.com/podcast, you’ll see we have a revamped page, where we have brought more content, curated actual episodes that are sort of ranked in a way that you can find them on the topic that you really like. And then, more resources for you regarding this podcast.

David:
I would also like to highly encourage you to take one of the boot camps that BiggerPockets offers you, or attend to go to BPCON. Do something other than just listening from the outside. I like that you’re listening to me. I want you to keep doing it, but it’s kind of like the person that’s peeking in through the window and they’re listening to the people on the inside. I want you to get through that door, get in here with us and become a part of this group. And you can better do that by getting connected with some of the resources that BP has.

David:
All right, before we get to the show, I just want to encourage you all again, to please follow us on YouTube at BiggerPockets, and leave me a comment in the comment section, letting me know what you think about the show, what you’d like to see more of, anything funny, cool, creative that you can come up with, we want to feature you on the show. And if you’d be so kind, please go to biggerpockets.com/david, and submit your question for me to answer on this show. If you like this show, let us know. If not, let us know that too. All right, that’s all I got. Let’s get into the questions.

Raul:
Hey, David. Just want to start off by saying, I appreciate you, appreciate you taking the time to answer my question. Appreciate all you do with the content you put out, it really helps someone like me.

Raul:
Just to get right straight into it, I have a question. I’m graduating physical therapy school in this upcoming May, I will graduate with about 80K in debt. I have about 20K in liquid cash, in mutual funds and ETFs. So easy to liquid.

Raul:
My question is, should I just dump all that money into paying off my debt? Or should I, when I start working, build up more of my reserves to possibly buy my first house hack, and then try to use real estate to kind of pay down my student loan debt? Thank you.

David:
All right, Raul. First off, congratulations on getting ready to graduate. I can see if you guys are watching this on YouTube, that Raul’s room looks like it’s been painted in the colors of his school. So you got some pretty strong school spirit there. Hopefully, you can show this video on campus and everyone can see that you’re making big moves.

David:
So the question you’re asking is a really good one. And this is a very common question that we see with real estate investing, is, “Should I pay off my debt or should I invest my money to make money, and then pay off my debt?” If you follow the Dave Ramsey school of thinking, it’s always, the answer is pay off your debt. If you follow sort of the more BiggerPockets real estate investing world, it’s learn how to invest in real estate, so you can do so safely, grow your money and then pay your debt off with it.

David:
I can’t answer your question directly, because unfortunately, what I would need to know is what’s the interest rate on your student loans. If it’s 2% or 3%, paying it off isn’t really saving you a whole lot of money. If it’s 12% or 15%, it might make more sense to pay it down.

David:
But here’s what I can tell you, with 20,000, you’re not really going to make a huge dent in that $80,000. So what the question we’re really asking is, “What is the first step I should take? And in which direction should I take it in? Should I start taking step towards paying off debt? Or should I start taking steps towards investing in real estate? And I have $20,000 to go in either direction.”

David:
In general, you seem like a smart guy. You’re listening to the podcast, you’re getting ready to graduate. You’re probably going to be making some decent money as a physical therapist. I would be asking myself, “How do I keep my expenses in life as low as possible?” Because if you can get that, you can pay off your debt, you can invest in real estate, you can do anything if you can keep your expenses low.

David:
One of your biggest expenses or probably the biggest expense for just about everybody is your housing expense. What you’re going to be paying in rent. And what a lot of people don’t think about is it’s not just what you’re paying in rent right now, it’s what going to be paying in rent five years, 10 years, 15 years, 20 years down the road if you don’t buy a property. Go back and look at what rent was 20 years ago. It will be shocking to you how much lower it was than what it was today.

David:
But I promise you, 20 years ago, people were saying the same thing, “Oh, it’s more expensive to buy than it is to rent. I’m going to rent and I’m going to save some money.” Well, you don’t end up saving money, because you lose control of your own agency when it comes to your wealth. You’re paying someone else’s mortgage. You’re paying rent that the market determines. When you buy a house, you lock in a 30 year fixed rate. You are paying that amount for as long as you’re living in that house.

David:
So I’m going to skew you more towards house hacking, and that’s because you can eliminate your biggest expense, you can start building wealth through a property. With the rate that properties are appreciating because of inflation, A, it doesn’t make sense to pay off debt when you’re paying it back with cheaper dollars in the future. So don’t pay it off right now, unless it’s going to hurt you financially. And B, whatever asset you buy is going to go up exponentially faster, most likely. Of course, we don’t know that for sure. Which you can then use to pay off your debt.

David:
So if that changed, let’s say that the price of things went down and it didn’t increase and you didn’t have opportunities to get cash with the real estate, well, you could always pivot and start paying off your debt then. But with the market we’re looking at right now, I think you need to buy something that you can live in part of it, keep your expenses low, or non-existent, and learn how to be a landlord. Sort of real estate with training wheels, to get your feet underneath you. And then every year, buy another house with money that you save from your physical therapy salary.

David:
So look at the ways this is going to benefit you. One, you’re going to keep your expenses as low as possible, by keeping your housing expense low. Two, you’re going to start investing in real estate and learn the fundamentals. Three, you’re going to get an asset that’s likely to appreciate, that will pay off your student loans for you. And four, this forces you to save your money and not spend it on dumb things because you’ll need it for the down payment of future properties.

David:
So the $20,000 you have is great. I commend you on saving that. Can you get to 30? Can you get 40? How much money can you save? And can you live beneath your means to buy real estate? Let your real estate pay off your student loan. And then you’ve got the houses and you don’t have the debt. And then, you’re really ready to scale. I hope that makes sense to you and good luck on your journey.

David:
All right. The next question is from Sarah in San Diego. “Hi, David. Thank you for sharing all your knowledge. I learned a lot after I binged listening to your show, as well as reading the forums and three BP books, including your BRRRR book. Currently renting, but have enough to purchase a property. I live in San Diego, California, where prices are high and the market is very hot. I ran the numbers and found I couldn’t afford to buy a property where I can house hack. I looked into other options and leaning towards getting a vacation home two hours away, next to a popular tourist destination and do short term rentals. I really like the area, but couldn’t move there as there are no jobs available for me.

David:
With the same capital, should I, option one, compete and buy a one-one condo in San Diego, then rent it out after a year? I’ll have higher monthly payments of over $800 compared to now, properties in the last two to five days after being posted. Or option two, stay in my apartment where I am paying below market comps, and buy the vacation, single family house, short-term rental, which will cashflow $2,000 monthly, conservatively, after running numbers and checking rental projections, then save enough for down payment for another house, a short-term rental or a primary home?

David:
Appreciation forecast for San Diego is 28.7%. While the short term location is 23.3%. Even after the capital, I will have enough reserves for one year. I hope you can help me decide which option is the best. Thank you again for your time.”

David:
All right, Sarah, the short answer I’m going to give you, based off the numbers you gave me, the short-term rental makes more sense. The cashflow is much stronger. The appreciation is pretty similar, and you can get in faster without falling behind. So if everything you said is completely accurate, it probably makes more sense for you to get that short term rental.

David:
I’m not sure that the way you’re looking at it is entirely accurate. So one thing to think of, if you’re buying in San Diego, your amount of money you’re going to put down is significantly less than if you’re buying the short term rental, because you can buy it as a primary resident. So you could put 3.5% down, 5% down, 10% down, not 20%, 25%, 30% down, that many lenders are requiring for short-term rentals that are going to be investment properties. So even if the price point is lower on the short-term rental, your out pocket expense could be higher because you have to put a higher percentage down on the house.

David:
You also don’t solve the problem of the rents that you are going to pay going up. You said you’re currently paying less than market rent, but that isn’t something that you can control forever. And you may be stuck, unable to live in San Diego if your current living situation changes and you don’t own a home.

David:
So I would say, can you find something in San Diego that you can make work? Don’t look for the triplex that’s already ready to go. Can you find a house in San Diego that has a basement you can live in, and you can rent out the upstairs? Or maybe you turn the upstairs into two different units, and you rent those out, and you live in the downstairs. Can you be creative with getting yourself a primary residence in San Diego, if that’s where you want to live, that no one can ever take it away from you, that you can stay in that property as long as you want, and if you do choose to leave, you have a rental property where you can rent out all the units?

David:
If you cannot, the short-term rental option is your best bet, and you’re going to have to keep buying those because you’re going to need that income from those short term rentals in order to help cover the cost of your rent, if you want to stay living in San Diego.

David:
There’s also a little bit more risk with the short term rentals, because you don’t know if that area that you’re talking about, the tourist destination is going to allow it forever. They may outlaw short-term rentals. They may only allow a certain amount of them. They may say you have to get a permit, and only issue a certain amount of permits. It may look good right now, but the scary thing with short-term rentals is what’s it going to be like in the future?

David:
So that’s just something to keep in mind. I’ll sum that up by saying, if you can, I would rather buy in San Diego. Get at least one property there and then start looking at these short-term rentals. If you can’t, go after those short term rentals, but do it aggressively and keep looking for property in San Diego at the same time. Hope that helps. And thank you for your question.

Devon:
Hey David, how you doing? Always love your content. Seeing Greene episodes are definitely awesome. Thank you. Keep it coming.

Devon:
So my question is related to realtors, and kind of what an investor can expect typically. This is just a curiosity now in today’s market, what investors can expect as far as them working for the investor, and also for just a retail client. Is it reasonable to expect that the realtor is going to go out and actually look for something for you and try to find what you want and send you listings? Or like a lot of times in our experience, you just kind of set up a portal and they set you free, you start looking, send them things, you go and look, and it’s kind of a pretty easy process as far as that goes?

Devon:
I know you have your system, your three tiered system to really try to hone down, and this is with residential retail clients, on what actually someone’s looking for, and very specifically looking for. And I know it’s kind of a double edged sword. The realtor, it’s probably frustrating for them because the client’s just going to go look on their own online. There’s so much information and all the listings are there. And it’s probably frustrating a lot of the times for the client, that the realtor’s not really listening.

Devon:
So just curious on you and your team, do you guys actually go through your system of figuring out what people want and then actively send them listings? Thanks a lot. And talk to you soon.

David:
Devon, I love this question. So thank you for sending this in. This is one of my personal… I don’t know the right word to use to describe what this is, but this is one of these things that I like talking about, because this is a pain point in my life when I’m working with realtors, and I see it from both sides. Because I’m an investor and I want my agent to do certain things for me, but I’m also an agent, and then I understand what the struggles are from there. So I’m one of the few people that can sort of walk this line.

David:
Just so you know my credentials, I’m one of the top agents. Well, now I run one of the top teams in Keller Williams, in the entire company of 180,000 agents. It’s the biggest brokerage in the world. So we sell lot of houses. I have worked with a lot of people. And then obviously as an investor, I buy a lot of property and I have pretty high standards. So I see this from both sides. It’s one of the problems I’m trying to solve and it’s incredibly difficult to solve it. And that’s why I’m glad you asked this, because I think so many people have the same concern, is they’re frustrated with their agent. And then, I hear agents talk and they’re like, “I don’t want to work with investors. All they do is waste my time. They’re tire kickers. They want to free education.”

David:
And I just want to break this down for you a little bit. Let’s start off with how I have my team do it. And this came from years of experience of trying to understand this from both sides. When you come to us, we give you a consultation. We explain every thing that goes into buying a house, how the contract works, how contingencies work, a home inspection. We review a home inspection with you. We talk about appraisals. We talk about the loan. We talk about the way we’re going to send you homes to look at, all of that. Then you decide if you’re going to work with us or not. And we decide to commit to each other.

David:
Once we commit, we set up a agreement where we’re going to call you as the buyer every day, at a predetermined time. And we’re going to ask you if you saw anything you like, and we’re going to say, “Hey, we sent you the stuff. What did you like about this?” Now, if both sides hold up their end of the bargain, there’s fewer expectations not being met and there’s fewer frustration. You know on your end, “I’m getting a call at 10:30. And this is where I need to tell my agent, ‘Hey, these are the questions I have about these properties that he sent me,’ or, ‘Here’s the ones that I found. Here’s my questions about them.'” We then get that information. We give it to a junior agent or a showing assistant, whatever you want to call it. We have them go get that information for our buyer’s agent, bring it back to them. And then, they give it to you.

David:
What often happens is one or both sides don’t keep up their end of the agreement. So the buyer doesn’t make it on the 10:30 call, or they just want to send text messages throughout the day saying, “What about this?” Well, the agents in the middle of negotiating other deals, looking at properties, waiting for calls back from people, trying to help you with what you’re trying to do, trying to keep their other deals from falling out of contract for whatever’s going on, talking to loan officers, talking to title and escrow, they’re going to miss those text messages that you’re just randomly sending, not you, but a buyer would be sending.

David:
Then the buyer gets the impression, “Oh, well, the agent doesn’t really only care about what I want. They don’t respond to me. They don’t answer their phone.” They expect that person to be like, the minute they call, bam, they’re just going to be able to be there. But we can’t do that for you and everyone else too, because they also want that call at the exact same time.

David:
So at that point, the agent starts to say, “You know what? They don’t make the calls we’re on. They’re not responding on the houses I’m looking up for them. I’m not going to spend all my time calling listing agents and trying to find a deal we can put together if they’re not even going to respond to me.” So then they stop looking up houses. And then you are already upset that you’re not getting good service, because they don’t answer their phone, have to go look up your own houses. And now you send them the house and the agent goes, “What do they want me to do with this? What questions are they asking me? We were supposed to talk about this and they didn’t want to.”

David:
As you can see, the relationship falls apart. Now, the agent looks at it like, “The client’s not spending any money. I’m spending all my money on my license. I’m spending money on my time. I’m spending money on gas, as I drive them around to look at houses. They’re not spending any money. I’m getting ripped off.” The client looks at it from the same perspective, “My agent isn’t helping me. They’re not responding to me. They must not want my business. They’re not giving me good service.”

David:
The problem is that both sides think that it’s their job to be served. It’s actually a partnership. The agent makes no money unless you buy and you make no money unless you buy. The goal needs to be, “How do we buy a house?” And a lot of times what doesn’t happen is the difficult conversation is not had, where the motivation is determined.

David:
Okay, so let me give you an example. We’re in a very hot market right now. Man, I put a couple properties under contract and while they have been in escrow, they have gone up over six figures in value, in a couple weeks period of time. It’s very wild. There’s a lot of money to be made, but it moves very quickly. If you’re a person who’s buying in a market like this, and you’re saying things like, “You know what? I’m not in a rush. I’m going to wait for the right deal to come along.” What you’re telling your agent is, “I’m not motivated. Don’t prioritize me. You need to go work with the people that really need a house right now before prices get any higher.” And you’re probably getting put to the end of that agent’s list.

David:
Now, if it’s a market where it’s very hard to find buyers, you’re probably going to get red carpet treatment from most people, because they really need you as a buyer. But if you’re a buyer right now, there’s a million of you, and you may not be the one who wants it the most. Somebody else might want it more. And that’s why your agent isn’t communicating with you. They’re not looking up houses, because they’re not getting the feeling that you really want it. They are looking up homes, but they’re sending them to the person who’s like, “I need a house. I need a property. I’ve got a 1031. I believe in real estate. I’m serious about doing this. I’m going to do whatever it takes to get ahead.” And those people are jumping ahead.

David:
Now, I realize the danger in what I’m saying, because when markets get hot like this, sometimes people make bad decisions. And so, it’s always easier to tell you the listener, “Hey, don’t rush. Take your time. Don’t buy anything you don’t want to buy.” And that’s true. But I can also see on the other hand, people said that two years ago, and properties in my area that were selling for 1.3 two years ago are now in 2.0 to 2.1. It’s so much money that’s been lost because people took too much time. And that’s just the challenge of this very fast changing market that we have, that in my opinion is due to the federal government creating inflation by over supplying our money supply, has made it very difficult to buy. And what you’re describing here, Devon, is showing up in the agent and investor relationship.

David:
So here’s some advice I have to you if you’re working with an agent. If you’re not motivated, if you’re not, “Hey, I’m getting this done.” You got to tell them that, and you got to be okay with the fact that you’re probably not going to be their priority. And the agent who does make you the priority, doesn’t know what they’re doing most likely. I would say that you have to ask yourself, are you in or are you out. You can’t be halfway in between in a market like this, unless you’re in a area that just isn’t appreciating as much, maybe somewhere in the Midwest, where it’s not as competitive.

David:
If you are an agent, you need to be very clear with your clients about what you will and will not do. My agents are trained to have difficult conversations that nobody wants to have. They will say, “Hey, I’ve brought you four deals. The offer that you said you wanted to write was not realistic. I talked to a listing agent and they said they had better offers with better terms. And you still submitted that bad offer. I don’t think I can help you.” And then, we let the client decide, do they want to change their strategy, or do they want to just say, “Hey, now’s not the time for me to buy.”

David:
But those very direct conversations are not had, because realtors want to be liked. And investors are afraid if they anger their realtor, that they won’t get good service from them. And so, they end up in this limbo. So as far as what we do, we are very direct. We do look up houses for our clients. I have a whole team of people that literally, all day long, junior agents that are not getting paid, are in the MLS, looking at possible house hacks, looking at possible investment properties, trying to figure out, “Can we get this house for our client?” They are giving it everything they have.

David:
And the average buyer probably doesn’t understand how discouraging it is when they finally find the right deal and the listing agent says, “Yeah, we’ll take an offer today.” And we put it in front of the client and they go, “Oh, I don’t know. I need to think about it. Oh, that’s a good idea. Let me noodle it over.” Or, “Oh, I think I like it, but just not quite enough. I’m just not going to buy. I’m not ready yet.” Well, they didn’t tell us that before we spent all the time looking. So that’s where the relationship tends to fall apart. You do want a agent that is actively looking at properties for you, but you have to understand if they find it and you don’t move on it, you are telling them, “Don’t prioritize me.”

David:
So I think how this problem gets solved is that both sides recognize what the other’s looking for. And we’re more honest with each other upfront about what we can give. Thank you, Devon, for asking this question. I can sense your frustration. I’m sorry it’s like that. If you’re in California, please reach out to us, and let us help you with this problem. And if you’re not, maybe you could get one of my books written for agents and give it to your agent and say, “Hey, I’d like service like this.”

David:
All right, everyone, we’ve had some very good questions so far. Thank you for submitting them. We’re going to answer some more questions in a little bit. But before we do, in this segment of the show, I like to read off some of the comments from the YouTube channel. So if you’re not watching this on YouTube, I would recommend you to subscribe to BiggerPockets on YouTube and follow us there. It’s not just the podcast, but there’s all kinds of other content related to helping people make money through real estate, that you can be checking out if you follow us on YouTube. I also like to read the comments on the shows and see what you guys are saying. I want to hear what you liked, what you didn’t like, what you want to hear more of, and what you thought was unnecessary. And we read all these comments, and some of them aren’t very serious, but if you are leaving serious comments, I want to thank you.

David:
In this segment of the show. I’m going to read some of these comments, let you know what you guys are thinking. And I want to highly encourage you to leave me a comment on this episode, and let me know what you liked or what you’d like to see more of.

David:
First comment from Daphne Hill, “Love these shows, David. You are a natural teacher and never make guests feel like their questions are dumb or have been answered hundreds of times before. Thank you.” Well, thank you for that, Daphne. I don’t think these questions are dumb, and who cares that they’ve been answered hundreds of times before? Most questions in real estate are not new. In fact, almost all of them have been asked before, but you’re here on BiggerPockets to get them answered for yourself. So keep them coming.

David:
From @Firsty, I don’t know if this is like, “I’m first,” or, “I’m thirsty,” said like a child. “Hey David, thank you for all the value that you provide on a weekly basis. I’ve learned more from you alone than all other real estate investing resources combined.” Well, thank you. “My question is, when I just started out with your first property, how do you claim rental income from a personal residence on your taxes? Will a lender use income generated from your personal residence to lower debt to income ratio when trying to finance your next house hack? I have had no luck with my local lenders as they don’t consider my own residence as an asset that can provide rental income. Also, can you claim rents from your personal residence in your personal name as opposed to needing to create an entity to name the house hack as a business? I’d love to hear your feedback from this. Much love from North Carolina.”

David:
All right, so Firsty here is actually asking a question in the comment section. And Firsty, you’re going to be rewarded for that. So it sounds like what you’re trying to say is you’re willing to claim the rental income that you’re making, but it’s coming from your primary residence. Meaning, you’re probably house hacking and renting out the rooms.

David:
So here is the best answer I can give you. I’m not sure if they’re going to include it or not. Some loan programs and some underwriters will take income that you are claiming on your taxes and use it, period. Others will say, “Oh, it’s your own primary, you can’t claim it.” In many cases, I’ve seen that they will let you claim that income that’s coming from your primary residence. The problem is most people don’t claim it on their taxes. So what we typically see is someone, their debt to income doesn’t qualify. And they go, “Oh, well, I’m actually making $2,000 a month from renting out bedrooms in my house.” And we say, “Well, it’s not on your taxes.” “Well, I am making it, so can I just declare it now?” And that’s the problem.

David:
So if you’re making money renting out your house, you should be claiming that on your taxes as income. And in many cases, the lender will use that, because it shows up on your taxes. That’s the key that I want make here. It’s not a guarantee that it’s always going to work, but in general, if you’re not claiming on your taxes, you can’t use it. If you are claiming on your taxes, you can use it. And this is primarily for conventional loans, because conventional loans are usually bought by government sponsored enterprises like Fannie Mae and Freddie Mac. That means the government gets to create the guidelines that they’re going to buy loans from. And then those guidelines are passed to underwriters, which are passed to your loan officer, which are ultimately passed to you. So moral of the story, stop trying to save money on taxes by cheating the system if you’re trying to buy more real estate.

David:
If you are being told by a lender that they can’t use it, my advice is you find a mortgage broker. That’s what we do. So we’re not just a bank that lends out our own money. We go find different banks, find the one that has the program that will work for what you’re trying to do. And then, we set you up with that bank. And then, they pay us for the service that we provided, by bringing you to them, instead of having you do it. So a lot of the time people are just doing their own work. They’re calling bank after bank, after bank, and they’re saying, “Hey, can you do this?” And then they’re asking you questions, like this to me, “Hey, can we do this?” You just got to find the right mortgage broker, that will tell you, “Well, no, you can’t with them, but yes you can with these ones, and we’ll set you up over there.” So look for a mortgage broker when you get told no. And if you want to reach out to me, I’m happy to get you connected.

David:
All right, next question comes from Mr. Ribeye. This is funny. “Dang, David Greene, grinding like Stephen A. Smith. Give the man a break, BiggerPockets.” Apparently, Mr. Ribeye thinks I’m working too hard, and I really appreciate that, but it’s not hard work when you’re having fun, man. This is a blast. I love doing the show. I love hosting the podcast. I’m finally getting to talk on the mic, now that Brandon is gone. Don’t tell him that, but you guys all knew. I got maybe 3% of mic time when Brandon was here. So I am loving it. Keep your questions coming, biggerpockets.com/david. Also, very funny screen name, Mr. Ribeye.

David:
All right, our last question is coming from the comments on YouTube, from VernardKMR. “As you keep buying properties that would appreciate, good long term investment locations.” Right off the bat, Vernard, you’re a man after my own heart. “How to manage paying the property taxes for all the homes you’re buying, which keeps increasing as you keep buying more and more property, and there’s no cashflow to save towards payment of property taxes? Any ways to reduce property taxes or such?”

David:
It sounds like what you’re saying here is you’re buying properties that don’t cashflow, because you’re not including the property management as an expense in your expenses. So if you’re buying something and it’s paying for the principal interest tax and insurance, PITI is what we call it, that’s not actually cashflowing. You also have property management, you have property taxes, you have homeowners insurance, you have some other expenses like maintenance and vacancy, that you have to account for. I don’t have this problem of not being able to pay property taxes because I include the property tax as an expense in the home. It sounds like you might not have been doing that. And so, you’ve been buying properties that don’t cashflow, but the property tax is not impounded, meaning it’s not collected every month in your payment. So you have to pay it every six months and then you don’t have any money set aside to do it, so you’re coming out of pocket.

David:
I don’t know any way to reduce your property taxes. That’s usually not going to happen. In fact, they typically only go up. So in some areas like mine, they only go up at least right now, we’ll see what California does with this, but they only go up when the property changes hands. So if I go buy a new property and someone else bought it at 300,000, they’re paying taxes on the $300,000 price. Well, if I go buy it for a million, I’m now paying taxes on a million dollar price.

David:
Taxes go up, but it’s very difficult to get them to go down. I’ve seen this happen during a recession. So in Contra Costa County in California, the tax assessor, I believe his name was Gus Kramer, came under a lot of fire because when the county needed money the most, he was going and reassessing people’s homes at lower values to lower their taxes during those hard times. Now, that’s very popular with the homeowners, but it was very unpopular with the other politicians that were saying, “We need this tax money because we have all these foreclosures. And the houses that are selling, are selling for less. So we can’t pay our budget.” In this area, housing had exploded in price. And so, the government spent all the money.

David:
And then, when the home values dropped and people stopped paying taxes because they were foreclosing, now all of the different government organizations weren’t able to pay their employees and they had to start laying people off. It got really hard.

David:
So in those environments, sometimes the taxes will go down, but that’s not a strategy that you want to count on. You really want to make sure when you buy it, that you are accounting for the property taxes that you’re going to have to pay and running those into your numbers to make sure they cashflow.

David:
All right, are these questions and replies resonating with you? Do you like hearing about how I’m grinding like Stephen A. Smith or that there’s no way to really lower property taxes that I’m aware of? Does learning about who to go to when you have a certain problem help you? Well, if so, let me know that in the comments on YouTube. And if you have a question and you’re too shy to go to biggerpockets.com/david, ask it on YouTube, and we might be able to feature you in one of the Seeing Greene podcasts.

Brandon:
Hey, David. Thanks for taking the question. Big fan of BP and the pod. So my question is around inflation and interest rates. So you’ve been talking a lot on the show about how inflation’s going to continue to drive home prices up in the next 12 to 18 months, and I definitely understand the logic behind it, but I’m curious with the fed indicating that they’re going to continue to raise rates, how you think that’s going to offset the inflation?

Brandon:
Basically, my two partners and I are trying to figure out if we want to refinance a property and try to pull the cash out. And it’s in a secondary market, it’s in Manchester, New Hampshire. So it’s not really a primary market. If we should refinance and pull the cash out and continue holding it, or if we should sell it and we’ll probably get close to 100% ROI on the money that we’ve invested in it already. And maybe bring that down closer to Boston, where I live, and obviously it’s a much greater appreciation market. So I’m curious, how you think inflation and interest rates will be affected over the next 12 to 18 months. Thank you.

David:
All right, Brandon, this is also a really good question. Before I answer it, I just want to talk about this whole inflation thing. To be perfectly honest, I don’t know what’s going to happen. I don’t have the crystal ball, nobody does. To be even more transparent, nobody in my seat likes to answer these questions, because if we’re right, everyone goes, “Okay,” and that’s fine. “He was right. He’s supposed to be, he sits in the chair of the podcast.” If we’re wrong, they come after you with pitchforks and they want to chase you out of the swamp like Shrek. And so, no one answers these questions. They tend to avoid ever giving a direct answer. And when I was in your shoes, I hated hearing someone say, “I don’t have a crystal ball.” And then, it was followed by a bunch of big fancy real estate terms, where they gave a non-committal answer.

David:
Like when a politician’s asked something they don’t want to answer, and they just say a bunch of words, word salad, that doesn’t actually amount to anything. So I’m not going to do that here, but I do want you guys to understand that I don’t know for sure. What I can tell you is I’m not just telling you what I think’s going to happen, I’m also doing it.

David:
So what I’m doing is, I’ll tell you Brandon because a lot of your questions had to do with the similar financial situation that I’m in right now. So regarding the question of are interest rates going to cause prices to come down, even because of inflation, I don’t think so. I don’t think interest rates are going to have much of an effect on it at all. And the reason is, there’s not enough supply.

David:
When you have to buy gas for your car, do you stop buying gas because it becomes more expensive? Because that’s what happens, when interest rates rise, mortgages become expensive. So the idea would be, if rates go up, housing prices become more expensive. So people have to sell their house for less. Prices have to come down because rates went up. But is that what happens when you buy gas for your truck? I’m assuming you have a truck, I don’t really know that, but you look like a truck guy. Probably not. Maybe you drive to less places, but the places you have to drive, you’re still going to go and you’re just going to pay whatever gas costs. You have to do it.

David:
When it comes to housing, you might have a few people that might buy less houses than they normally would. But there are so many people that need to buy a house, they’re going to pay whatever it costs to buy that house. And the problem is supply. There is not enough homes to buy. If we had an even amount of supply and demand, when price prices went up, making homes more affordable, you would see what you’re talking about happen. The problem is we’re all looking at it from this equilibrium point, where if one little thing changes, the rest will adjust, but that’s not where we are.

David:
It’s like the kindergarten teacher sitting on the seesaw and the little tiny kindergartners on the other side. And nothing’s going to happen because they’re heavy enough to get that thing to balance out.

David:
Our supply issues are so big that the people that are in the position of being the buyer, the demand has no chance of being able to catch up. And that’s the problem we have. So, no, I don’t think that rising interest rates are going to make hardly a dent at all in the price of real estate.

David:
Now, the second part of your question gets more interesting. And this is where you’re asking, “Well, what’s the best play?” Not just, “Should I play?” Because I think by now, most of you can tell, I’m all for playing. In fact, I’ve been on record as saying, I think this might be the best market we’ve ever seen to buy real estate in, even though we think we’re at the top of it.

David:
Now, that’s very interesting. So here’s what I’m doing, I have some properties that I bought in California 10 years ago or so. And I’ve done very well with those. Just not really me. Just inflation made me do very well with those. Similar to this property you have with your partner, and you’re trying to figure out, “Should I sell it or should I refi it?”

David:
My thought is, you sell it if it’s a house you don’t want or in an area you don’t want to be, that simple. The answer’s always, if you have equity, you sell instead of refi. Now, sometimes the question is, “Do I sell, or refi, or do I just hold?” That’s a different question. But if you’ve decided you’re going to make a move, you keep it if it’s an area you like, and if it’s a house you like. You dump it if it’s not. And then, you put the money into a place that is an area you like and a house you like. And it’s really that simple.

David:
One of the things that makes these houses in California properties I want to keep is because of the continued depreciation. They keep going up in value and I don’t think it’s going to stop. So I chose to refi them. Now, I refied out of a 3.6 or 3.7 interest rate, into a 5.5 interest rate. So my rate jumped nearly two points in order to do a cash out refi. And to many people, they would say, “Why would you do that? It’s going to hurt your cashflow.” And I understand that, but it’s because the money that I take out of them is going to earn me so much more cashflow, than what I took on by increasing the mortgage, it’s not even close. And I’m going to make more appreciation.

David:
Now, this is similar to you, because you’re thinking about selling the house that you have or refinancing it. But what I loved is that you said, put the money back into Boston, where we’re going to have a higher appreciating market. And that’s what I’m doing. I’m taking that money I pulled out and I’m going into markets that I think are likely to continue to appreciate in both the rent amount that we can get and the value of the asset that’s going to appreciate, and I’m going to keep the stuff I have appreciating in California. I’m going to buy new stuff that appreciates somewhere else. And I’m going to just amplify what I’m doing.

David:
Now, go to the other side of the country. I’ve got some other properties in the south that have done well, that are cashflowing very strong, but they’re not going up in value, like the California houses did. I am selling those ones and 1031-ing into property that is going to appreciate more.

David:
So I’ve got the same problem. Do I refi or do I sell? Well, these are the ones I’m refi-ing and these are the ones I’m selling, and this is why. And the reason I’m making moves like this right now is because I do think inflation’s going to keep going and going and going. I don’t think it’s good. I don’t like it. I’m actually kind of mad about it, but it doesn’t do me any good to be mad about it. It just makes sense to see what’s going on and make the best decision you can.

David:
Robert Kiyosaki gave some advice at a speech I was at one time, and I’ve never forgot it. And he was talking about politics. Everybody has a side they take in the political arguments. And he was saying, it’s like heads and tails on a coin. Who’s right? Who knows? But there’s a third side to a coin, and that’s the edge. So if you stand a coin on its side, you’ve got heads on one side, tails on one side, and then a tiny little ridge. The best place to be when it comes to money is to stand on that ridge, to see the head side, to see the tail side. You can see both sides and then you make your moves based on how you see the game playing out. And you try to stay as objective as possible, and not get caught up into the emotional side of it, or the righteous side of it, or how you think the country should be run. You can’t really control that. So you focus on what you can control and you play the cards the see them being dealt.

David:
Thank you for asking that question. That was very good.

David:
All right, next question comes from Ameet Agarwah from Sacramento, California. That is very close to me. I’ve got a team in Sacramento and I’m there all the time. So hopefully, we can meet at some point. We can help you with your real estate investing.

David:
“Thanks for all the content that you and BP provide. I would like to know your views on buying new construction property versus an older 30 to 40 year old construction. Isn’t paying a few more dollars for a new or relatively new construction property better than buying a 1980s, 1970s kind of construction? Brand new construction comes with one year bumper to bumper warranty. It also reduces the chance of typical other maintenance issues like plumbing, roof, appliances in an older house. What is your point of view?”

David:
Not a bad question. Okay, so let’s get into this. Where do I want to start? The first would be new construction does come typically with a one year warranty, but during the first year is when you’re never going to need it. What breaks in the first year? So I don’t really put a whole lot of value onto that, I’ll just say that as a caveat.

David:
As far as a direct question of, is newer better or is older okay? Let’s look at how it affects the value of property, as well as how it affects the time you’re going to put into that property. If you’re buying multifamily property, I see the year, they call it the vintage, same thing that they use with wine, is much more important. And that’s because if you’re buying a multifamily property with 80 different units, you have 80 different HVACs or 80 different plumbing areas, 80 different electrical components. There’s a lot of things that can go wrong. And the longer that it goes, the more of a headache and money you’re going to spend fixing all these individual components. You also see with multifamily investing that people want to spend as little as possible, because they bought it for the cash. They bought it to run it as a business.

David:
Now moving into residential. Most residential homes are not owned by investors. They’re owned by people that live there. So they’re not going to be as cheap when something breaks. They want conditioning, they’re going to get a new air conditioner. They don’t want their house to leak when they want to take a shower, they’re going to get the plumbing fixed. So you tend to see less deferred maintenance, at least in my experience, in the residential space than what you do in the commercial space, where you have just more sort of slum lords that are trying to avoid having to ever dump money into their property.

David:
Another thing I’ll say, is that in some areas, newer homes are valued higher than older homes. So in an area like California, where we have limited supply, it’s built out, we like to say. There’s not a lot of places in Northern California, or even in the nicer parts of Southern California, where you can build new homes. They’re just already built in the best areas. And the location is more important than anything else.

David:
So if you’re trying to buy in Huntington Beach, in Hollywood, in Malibu, or if you’re in Northern California, trying to buy in San Francisco, you’re trying to buy in San Jose, there’s not a whole lot of areas to build. So you’re more interested in getting in the location you want with the shorter commute, or the more valuable real estate, and if you got to buy a really old house, you don’t really care as much because you don’t have any other options. It’s either an old house or no house.

David:
Now, let’s take this to central Florida. Construction’s popping up everywhere out there right now. There’s tons of stuff being built because they have tons of land. You have options there. You can do resale, where you’re buying something that’s already been built maybe 50 years ago. So it’s an older home. Or you can buy new construction right across the street in a community that’s being developed.

David:
In those areas, I would go for the new construction, assuming that they don’t have ridiculous HOAs, or special assessments, or something that makes it less desirable. Yeah, of course, I’m going to want to go for the newer home, but there’s very few parts of the country where investors are going to where that’s even an option. If you’re trying to buy in Austin, Texas, and Seattle, and any of these really high explosive growth markets, they’ve already built out all this area. So new home construction isn’t really an option, unless you go really far away. And now that you’ve gone really far away, you don’t have the best location and you’re violating the first rule of real estate.

David:
Hope I brought a little bit of clarity to that question. You’re thinking like an engineer. I wouldn’t be surprised if you were, because that’s exactly how an engineer would look at real estate. But you have to remember that real estate is valued by how many other people want it, how much demand there is for it. And most people buying real estate are not engineers or they’re not investors, they’re regular people just wanting to own a home. And you got to think like them, if you want to win in the residential game.

David:
All right, from Mike S. in Fresno, “I own a small single family residential home. Has been used by my family, converted to a rental. I’m a first time landlord. I would like to hire a property manager to be in charge of all details, to get necessary upgrades and rent this place out. Would love to have your suggestions on how to find and hire a reliable manager.”

David:
All right, Mike, first thing to be aware of, if you’re hiring a property manager to manage a construction component of this, you’re already putting yourself in a position where you’re more likely to fail. That’s usually not what they do. They may have a contact in the construction industry, but they probably don’t manage them very often, and they’re not experts in doing that. You would be better off, in my opinion, to have a property manager and contractor, and you manage the two of them. Don’t try to line them up, where it’s you, property manager, then contractor. If you have a very unique situation with a property management company that also has a construction component or something, maybe that would be different. But in general, that’s going to be very rough.

David:
The next thing I would say when choosing your property manager, in general, you have two types. You have the property manager that has a system that they bought, maybe a franchise, and they’re doing it to generate income for themselves. So their whole purpose of having this business is to get as many clients like you as they can. And then they tend to nickel and dime you to get as much money out of you as they can, because that’s the only reason they exist. You’ve got another type, and those are the types that were investors themselves, built a system for themselves. And now, they offer that to people like you, but they’re not learning how to do this on your dime. They already know.

David:
It’s very similar to me as an agent. When I got my license, and my first day, I wasn’t on par with everybody else that had already got their license too. I wasn’t on par with everybody else who just got their license that day. They had to learn sales, the contract, legal stuff, and how real estate worked. I already knew how real estate worked. See, I had built a system for myself, where I bought houses and I knew what to look for, and I had a strategy, and I could find the right deals, and I knew how to negotiate. And so, I was the property manager that had built a system for myself.

David:
And then, I just opened it up to other people. Like, “Hey, friends and family, do you want me to do what I did for myself to now help you?” And then, I trained other agents in how I did it for myself. It’s one of the reasons my team did better than other people who aren’t doing that. They’re just selling homes to make money. That’s all they’re doing. And they’re going to tell you whatever they got to you to get you in a contract. And that’s the typical real estate agent.

David:
So I say all this to say, when you try to find your property manager, ask them if they own rental property, ask them if they own rental property in the area that you’re buying, ask them about their rental properties, ask them which areas of town you should avoid. You’re looking for the one that owns property themselves. Those are almost always the better people to use, whether you’re looking for an agent, a property manager, a contractor, anybody in our space, even your CPA. If they own real estate, they are much more likely to have a good idea how to help you as an investor than if they don’t.

David:
All right, we have time for one more question. This comes from Lexi B. in Detroit.

Lexi B.:
Hi, David and BiggerPockets team. My question for you today is, if you were approached by a zero experience investor, looking to get into the game for multi-family real estate, buy and hold rent out, what documents or information would you expect for them to bring to the table? And what documents or information would really set them apart from other newbies looking to work with veteran investors?

Lexi B.:
Another question I have for you is, what is one piece of unique advice that you would give to somebody new that you wish you would’ve known when you very first started?

David:
Lexi, I like the questions here. All right, let’s answer the first question you had. You said, what documents or advice would I have for somebody who was reaching out to an experienced investor as a new one. It’s not documents. It’s not a resume. I wouldn’t care about any of that. What I would be asking if someone came to me and said, “Hey,” I’m what you’re saying is, “I want to invest your money, or I want to partner with you on a deal, but I’m new.” I don’t want them to learn how real estate works on my dime. I would be looking for them to say, “I worked for a property management company for X amount of years, and I did this and this and this. And I’m very good at these things. I worked for a contractor for this period of time and I managed their projects and I oversaw their business, and I ran bids for them.” Or, “I solved these problems. I worked for,” fill in the blank.

David:
I need to see some kind of experience already in the real estate industry that directly relates to why I should trust them. And a lot of people don’t like that. They’re already working a job. They don’t want to have two jobs. They don’t want to intern anywhere. So they go to the property manager company and they say, “Hey, I want a job.” And they say, “We’re not hiring.” And what do you do? Well, you’re better off to say, “Can I intern for you? Can I work for free? And let me prove myself.” If you’re good, they’re going to end up paying you. And if you’re not that good, you’re going to know that’s not your thing. You need to go find something else.

David:
But I’m a big [inaudible 00:49:54]. We have people that come to work on my loan team and they know nothing about loans, and we give an opportunity to start as an intern. So they’re not going to get paid, but they get to learn, and they don’t have to pay to take a program to learn how to learn. And if they are good, we end up hiring them as a processor. And if they’re good as a processor, we end up hiring them as a loan officer. I think that’s the best road to take. It’s very difficult to convince anyone who’s good at doing something to teach you the ropes or to mentor you or to help you, if you haven’t been willing to sort of pay the price to learn those steps on your own, which the easiest way is going to be through an internship.

David:
As far as the advice that you’re asking me, that you wish somebody would’ve told me, the first thing I wish somebody would’ve told me was that I don’t need to be as scared as I was. I was constantly worrying about what would go wrong. “What if I don’t have tenants? What if this happens? What if the prices dropped?” Just like a lot of people think now. And I realized that even when the prices did drop, they bounce right back. If you just hold real estate for long enough, you’ll make money.

David:
And so, that would be another thing I wish they would’ve said, is, “David, quit looking at it as the first year you buy it. You’re buying it for 50 years. You’re buying it for 30 years. So look at it in a 30 year perspective. Is this a property you want to own 30 years from now? What’s it going to be worth 30 years from now? What’s it going to cashflow 30 years from now? Then make your decision on if you want to buy that property.”

David:
Too many people and too many times, me included, get stuck in right now. I can tell you about deals I bought eight years ago and I paid 110,000 in appraise and 130… And I was, “Yes, I crushed it.” I got it below the appraised value. And now it’s worth 270, 310. What is the difference? It doesn’t matter what it was worth when I bought it, because it doesn’t stay at that value forever. So I put way too much emphasis on just trying to get the best deal. And I should have just been buying more properties in better areas and then managing my own finances, so I could pay for them if something went wrong. I would definitely advise taking that longer term approach and not getting caught up in the minuscule minutia of right now.

David:
All right, that is the end of our show. Thank you again for everybody that submitted a question here. And thank you, the listener, for hanging out with me and letting me be the one to kind of teach you what I know about real estate. I sincerely hope that listening to this has given you some confidence to take action, has given you some clarity where you may have had some confusion, and has fueled your drive to invest in real estate and to play the long game when it comes to building your wealth. I love doing this. So I give you a sincere thank you for giving me your time.

David:
Please, like I said before, give us a comment on YouTube. Tell us what you think about this show. Also, leave a rating or review on iTunes. If you want to know more about me, you can find me at davidgreene24.com or you can follow me anywhere on social media, @davidgreene24. You can also message me directly through the BiggerPockets website, where I do my best job to keep my inbox as clear as I can with all of your questions.

David:
If you would like to talk with me about us representing you in California on real estate, finding you an agent somewhere else, helping you get pre-approved for a loan, whatever it is, send me a message. I am happy to speak with you and get you connected to whoever I know.

David:
And make sure that you are following BiggerPockets. The best company in the world when it comes to real estate investing.

David:
Thank you guys very much for your time. I will see you on the next one.

 

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In This Episode We Cover:

  • How inflation can positively affect your debt payoff and using your momentum to buy real estate
  • House hacking in expensive areas vs. buying short-term rentals that cash flow
  • How David’s real estate team sets up clients and investors for success
  • Finding the right property manager that will handle your portfolio’s headaches
  • Whether buying new construction or an existing home has better long-term ROI
  • How to claim rental income (including house hack income) so you can increase your financeability
  • And So Much More!

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Books Mentioned in the Show:

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