Seeing Greene: Interest Rates, Flipping Tips, and Investor-Only Loans

David:
This is the BiggerPockets podcast, Show 672. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you. There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What’s going on everyone? This is David Greene here in Scottsdale, Arizona with the desert behind me, bringing you a show from the sanctuary that I bought with Rob.
I got a little retreat going on where I’m teaching people how to invest in real estate. We’re having a blast, and I get to make some content for you guys while we’re here. Now, this is a great time because I’ve got all this stuff on my head because I’ve been teaching people. You’ll notice my voice is a little bit hoarse. I’ve been doing a lot of talking and giving it everything I have all day long to give as much value as possible, and today is no exception. Today, we have a Seeing Greene episode where listeners like you submit questions, and I do my best to answer them in a way that will help them grow their wealth. It’s part of education knowledge, it’s part of motivation, and it’s part of giving you direction for what you can do to get from the place you are to the place you want to be.
Some of the topics that we cover today is, can you buy a house with someone else, and how much of the down payment are you allowed to contribute? Should you start flipping houses at 23 years old, and if so, what should you be learning? And one of my favorite topics, I had something great happen, what do I do with it? We have a listener who’s got a bunch of equity in a property that they bought, managed well, made good decisions on, and now they’re trying to figure out, should I keep this property? Should I refinance this property and reinvest the money or should I sell it? And if so, where should I put the money? I have a really fun time answering the question of what you should be looking at, and how you should be analyzing opportunity when you have a property with a lot of equity as well as opportunities to buy more property.
And again, I’m just going to say it, these rising interest rates are not a lot of fun, but they lead to a lot of fun because rising interest rates lead to decreased demand which leads to investors like us having a better shot at landing better deals. And in today’s show, I go into a good framework to operate by with understanding supply and demand and individual markets, how it affects them so you can pick the right one. If this all sounds crazy and cool and new to you, that means you haven’t read my book, Long-Distance Real Estate Investing, so I would encourage you even as a new investor to check that out because it talks about a lot of the principles of what you want to look for in a market as well as the systems that I use to buy properties everywhere. Today’s quick tip, get around people that are different than you, and more importantly, that think different than you.
If you get around people that think the same as you, you’re going to have the same life tomorrow that you have right now. Changes in life and improvements in life come from getting around people with a different mindset. You want to be around wealthier people, happier people, more honest people, fitter people, better overall quality of life people. You’ve got to get out of the areas that you’re comfortable. It will feel uncomfortable when you go do that, but it’s worth it. It feels uncomfortable every time you start working out again. Every job you ever took started uncomfortable when you first had it, but it usually made you more money than the job you had before and that is why you took it. So today’s quick tip is to get around people that are more successful in whatever way you can.
At the retreat today, I’m getting to learn a lot of new people that are getting to learn how I think, but you can do this on the BiggerPockets forums. You can do this at a local meetup. You can do this by just talking about BiggerPockets to other people that you come across in life and sharing it with them, and seeing if it resonates with them and possibly making a new friend. But just remember after you listen to this, if you leave thinking the same way that you thought before, you’re going to have the same life that you had before you listened to it. All right, let’s bring in our first question.

Brantly:
What’s up, David? My name is Brantly, I’m an investor and a real estate developer in Rexburg, Idaho. My question is hopefully simple, I’m going to break it down. So I’ve got a 16 unit apartment complex here in Rexburg, Idaho, a fantastic college town. It’s close to Yellowstone National Park, so that brings traffic this way as well. I’m trying to figure out if I should hold it or if I should sell it or refinance it. So we bought it from 1.5 million. It’s roughly worth 2.7, I would say, so I’ve got about 1.2 million in equity which based on the cash flow, it’s bringing in a measly 3% return on equity which I know is pretty low.
So I’m trying to figure out if A, I should just be grateful for what I have, that I hit the jackpot on it. B, refinance, but I’m worried about interest rates, and I’m worried that I would be in negative cash flow if I did that. Or C, sell it and then redeploy the money. I’m confident in my ability to find other options for it and to find more equity, more cash flow with redeploying that money, so help me out here. I love the show. Keep up the great work. Thanks, David.

David:
Hey there, Brantly. First off, I want to commend you for knowing the terms on return on investment and return on equity, and looking at your investment from a financial perspective. That’s exactly what you should be doing. Now, let’s talk about whether you should hold it or whether you should sell it. There’s actually a method that goes into this that you can use. The first question you want to ask is, do I want to hold this property? Is this something that I would want to keep? Because there’s something about it you really like, some reason to think that some new industry is going to be moving in soon, and you’re going to make more money, something like that because not every property is a property you want to hold for a long time. Now, here’s what gets in the way. A lot of the time we get emotionally attached to our properties, they start to feel like our children.
You’ve poured time into them, you’ve literally invested into them, you’ve thought about them, you’ve worried about them, you’ve solved their problems, and you’re like, “This is my baby. I don’t want to let it go,” but that’s not a good habit to get into. You can’t look at properties as your baby. They’re not people. Properties exist to serve you, and if this property isn’t serving you, it’s okay to let it go. Now, the question you have to answer is, “Should I refinance it and redeploy or should I sell and redeploy?” Here’s a few things that I like to tell people when they’re faced with this problem. I’ve already mentioned the first one, “Do I want to keep the property? Do I really like it? Is it an area that I think that there is more value that’s going to come to this property?” The second thing is, “What are my options elsewhere? Can I get an ROI and another property? Are there deals to be had?”
Now, in today’s market, we’ve got some better deals than I’ve ever seen in a very, very long time. I like buying in this market. So that’s something that I’m optimistic about, and I think you should be too. The next piece is, “Can I break my emotional connection with this property and sell it?” Now, if you’re only getting a 3% return on your equity, it should not be hard to beat that with more properties. And you also mentioned that you bought this property with partners, so you’re going to have to get their input on this as well. What I remember you saying about the area and the property itself is that it’s in a college town of Colorado where you’ve got people visiting a national park. So a third option you could look into is moving it from a long-term rental into possibly a short or a midterm rental and you can increase your revenue that way as well, basically finding the highest and best use for that property to increase your revenue.
If you really like Rexly, Colorado, it would be okay to hold it and refinance it and redeploy the money, but you’ve got to talk to your partners first. This isn’t a market that I would say, definitely sell. There are some markets where I say, definitely sell if the population isn’t growing very quickly, if industry is not moving into that area, if there isn’t a very clear and well defined path to appreciation in holding that asset, sell it let another new investor get in and take that over and move into a higher echelon of investing where the stakes are higher, but that’s okay because your skills are higher as well. If you feel like that market is slow and not growing, I would say move your money. The Southeast is growing rapidly as the population moves into that area.
Certain areas like Idaho, Arizona, Florida, Tennessee and Texas are exploding right now. As people move there, they need places to live. You seem like a pretty smart guy, so I would recommend that you look into where businesses are moving, try to get ahead of a very big plant, and then provide housing to the workers. That would be the advice I’d give you if you’re going to sell and move it somewhere else. If you end up keeping it, I don’t think that’s a bad area. I don’t really think you can go wrong either way. And congratulations on getting this asset that has over a million dollars in equity. That is fantastic, and I love you sharing this with the BiggerPockets community. Thanks for your question. Let us know what you decide.
All right, our next question comes from Mike Higgins. “I’ve got a good problem. I openly share my lessons learned and financials with all who ask, and this has sparked a lot of interest from friends and family and a willingness to become an investor, but not an equity partner. I’ve already identified an off market property with two duplexes on the same plot of land in the vicinity of my last duplex. Therefore, I am confident in my financial analysis forecast. My goal is to invest in this property using only private money funding. You should know I have listened to recent podcasts with Amy Missouri, and it was helpful. So what’s my problem? I need help understanding and explaining the best practice in the flow of funds that go from an investor’s account to an escrow account to using the money to buy the property. Where do the investors send the money or what type of account? Is this account part of an LLC or another type of entity? How is the account managed or controlled in such a way to ensure investors feel safe that the money is secure?”
All right, Mike, I don’t do a ton of this because as a lot of people know, I don’t partner on a lot of deals, but I have done it a few times, so let me take my best stab at answering that question. I’m going to give a caveat out here. There’s probably some people listening who could even give you better advice than me because they have done this. So this is a great question to go to the BiggerPockets forums and ask there because I bet you there’s a lot of people with more experience than even me when it comes to borrowing money and then deploying it in the right way. If you’re doing a partnership where there’s equity involved, you would typically have an LLC created or some form of legal entity, and every partner would have a percentage ownership of that entity. So if you’re 50/50 partners, you create a legal entity, you make yourself 50/50 partners of that, if there’s three of you, maybe you go 33 and a third for every person.
Or maybe there’s one partner who’s bringing in less money than the others, so they get 20% and the other two split the other 40%. But it’s easy to split ownership of an LLC, it’s a little more difficult to do it of the actual property which is why people tend to create a LLC, and then own the property in the name of that LLC when they’re going to be equity partners. But you said something different, you said you don’t want equity partners. So if your friends and family are willing to become partners with you but they want to be debt partners, now what you’re talking is them letting you borrow money and you pay them interest on that, and their investment is secured by the property that you’re going to buy. So what they’re going to be worried about is, “If I let this person borrow my money, if I give it to Mike, how am I going to make sure that I could get it back if something goes wrong?”
So what you want to do is have a title company at a lien to the property with their information attached to it so that if they don’t get paid back, they would technically be able to foreclose on you to get that money back. This can all be written up by an attorney. You just have someone draw up a legal document that says, “This person is letting me borrow this much money at this interest, amortized this way over this period of time, and they will have a lien on the property.” Any title company around if you tell them you want to do this will know exactly what to do. It’s not very tricky. This is another case of people that say, “I have to understand everything about what I’m trying to do before I go do it.” Now, you’ve just got to ask the right people to be involved that will tell you how to go through this process.
You can set it up so that you have a bank account attached to an entity that you already own that’s going to own the property or the duplexes that you’re buying, and then have them send you the money into that account. But again, their biggest concern is going to be making sure that a lien is put on the property with their name on it so that if they don’t get paid back, they can get access to that property to sell it to get their money back. It’s the lien on the property that the investors have that lets them know that their investment is secure, not necessarily the type of account they put their money into or if you have an escrow account set up.
Technically, their money doesn’t have to go into the actual escrow and into the deal. You could get their money sent somewhere else to you, have that money and then close the deal with your own money. If they’re letting you borrow 50,000, it doesn’t really matter if you put your 50,000 in, and then reimburse yourself with their 50,000 or if you use their 50,000 to close on the deal. What does matter is that they get a lien against the property, and you have a title company, and likely an attorney draw up the documents that spells out the terms of the loan. Thank you for the question, and I hope it goes well with those duplexes.

Al:
Hey, David. I hope all is going well. My question to you is centered around investing in this high interest rate market that we’re in. A little context about myself, I’m single. I live in the New York City Triplex here in The Bronx with my father. I work a W-2. My father is retired. The property that we live in was purchased in around 2006, 2007 for 650, and it’s since then appreciated to 1.1 mill. The house cash flows, we live in it, all expenses paid, big advantage.
As a result of this advantage, I’ve been able to accumulate a down payment over the number of years hoping to find another property, another gem like this one down the line, but due to high interest rates and home price is not really dropping, I believe I’ve been priced out. So I’ve been looking at cash flow markets like the Midwest or upstate New York. I’m thinking of potentially buying in cash. The thing is I would love to add leverage to my portfolio, but I don’t want to run the risk of over leveraging myself due to these high interest rates. So I guess, my question to you is, if you were starting out, and you had around a quarter million, how would you invest it in this market? Look forward to hearing your answer. Thanks.

David:
Okay, Al. Here’s where I’m going to challenge you. I heard you say, how would you go about investing in this current high interest rate market for investment properties that typically require 25% down? And you say this would rule out house hacking because you care for your father. Few things, I don’t know if you’re looking at it the wrong way, but I just want to challenge you and let everybody else here because I think the questions that we ask determine the result that we get. By the way, I bet Brandon Turner himself would love what I just said right there. You said, “How would I go investing in this high interest rate market?” I’m reading that as you are implying that it sucks that rates are high, but I’ve got to say, I’m having more fun investing than I ever have in my entire career. This has been a blast for me, and the only thing that changed that made it possible for me to do this is the higher interest rates.
I want to take a quick minute to explain how interest rates affect real estate because many people think they know, but they don’t really know. Conventional wisdom or maybe common knowledge I would say, suggests that as rates go up, prices go down as there is this inverse relationship between rates and values, and that is true, but kind of. While there is an inverse relationship, it’s not directly connected. There are situations where rates can go up, but prices don’t go down, and that happens when supply and demand are off. I think a better way to look at it is that interest rates affect demand. The higher rate goes, the lower demand goes. You can see a direct relationship between the two and it is inverse. Rates go up, demand goes down, rates go down, demand goes up, and that’s because when rates go down, the house becomes more affordable, so of course, you wanted it more, and when rates go up, the opposite happens.
Now, let’s talk about supply and demand. If they are even when rates go up and demand goes down, you would theoretically have more supply than demand. You would have to reduce the price of that supply which would increase the demand for the asset, and then they would come even again. But in many markets throughout the country, we don’t have even supply and demand. We have not enough supply and way too much demand, and even though rates are going up and it’s pushing demand down, it’s not getting all the way down to where supply is. Other markets in the country, we had too much supply even further demand that was there, and so in those markets we didn’t see prices going up anyways. In this current high interest rate market, a better way to look at it is that there is less demand, meaning you have less competition for the same assets.
Now, in an environment like that, my advice is you buy the best assets. If you could go get it and there’s less competition, but we don’t really know, what if prices come down even more because rates could go up even higher. Well, to hedge your bet against the market going down, get into the better neighborhoods, get into the better assets, get into the stuff that you never could have bought before because someone was going to snatch it up right away. I’m not a old man, but I’ve been around the game for a little bit now, and I’ve seen a couple different market cycles, and here’s something I remember from the last nasty one. In 2010 when prices crashed, they did not crash evenly across the board. The best neighborhoods, the best cities, the best real estate had a little bit of a dip. It didn’t collapse.
The worst areas, the déclassé neighborhoods, the places where there wasn’t natural demand, a demand was kind of artificial based on the market, those areas were decimated. If you’re from Northern California like me, think about Stockton, California. It got hammered. Now, think about Walnut Creek, California, needle barely moved. So whatever your market is, understand that when the market could drop more, you actually want to get into the better homes which are typically higher price but they’re safe. After our market is crashed, that’s when I would go invest into some of these other areas that aren’t as desirable because they’ve got nowhere to go but up. So it’s the first piece of advice I’m going to give you. We don’t know what’s happening in today’s market. We don’t know if rates will keep going up, and therefore prices could keep going down, but demand will keep going down if that happens, so buy better assets.
What do I mean by better? It doesn’t just mean they are more expensive, but often they are more expensive. It means better locations, better schools, better amenities, better views, better neighborhoods, bigger lots, pools, better floor plans, better constructed homes. We’re talking about this stuff that people that have money would prefer to buy, not the stuff that’s entry level that someone who doesn’t have as much money just has to accept. The next thing I’m going to say, your broker told you that you got to put 25% down, but caring for your father shouldn’t automatically mean that’s true. There might be more to the story than what I’m reading here, but I would advise you to talk to a different broker and say, “I want to live in this investment property. My father’s going to live with me as I care for him,” but I don’t think that will automatically disqualify you from getting a primary residence loan.
And if you’re worried about putting 25% down, find a place that you can live in that you can also rent out which would be house hacking. Do that for a year or the period of time that you can, and then move out, let a tenant move in, and repeat this again. You can go from butting down 25% to somewhere in the five to 10% range depending on the type of property that you buy. You want financial independence, here’s my personal advice. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you.
There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What you do have a lot of control over is creating equity. You can buy equity, you can build equity, you can force equity by improving a property. You can get into the right market where appreciation is more likely to happen, and oftentimes with appreciating values comes what? Appreciating rents. That’s another way that you put the odds in your favor to grow more cash flow. So don’t just think about getting cash flow right off the bat, especially if you’re going to stick all your money into one deal and it’s hard to get it out. Think about how you can improve the value of the property that will result in equity being created. Think about how you can buy in the best markets where people and business are moving to. That will result in equity growing over time.
Once you’ve done this several times over several properties successfully, you can move that equity into a higher cash flowing asset. You can literally house hack putting five to 10% down on several different properties, 1031 all of them into one commercial property that gets really good cash flow, and get a commercial loan and then go back to buying properties the house hacking way, and just keep turning these little green houses into big red hotels over time. Last piece I’m going to leave you with is, just remember these higher interest rates have made it possible to get some of the best assets and define the more motivated sellers. You never found them before because as soon as our house hit the market, somebody else snatched it up because there was 10 people trying to get it. Be grateful for the fact that we’re in market where rates have gone higher, demand has gone down, and we can actually get some real estate and just be extra careful about how you run your numbers. Thanks, Al, and good luck to you.
All right, thank you everyone for submitting these questions so far. At this stage in the show, I’m going to read you the comments from YouTube, and I would love it if you would leave me a comment on YouTube as well. Tell me what you liked about the show. Tell me what your questions are. Let me know what you thought was funny. Tell me what you want to see more of, if you haven’t noticed I’ve got the desert behind me. I’m out here in Scottsdale at the sanctuary that Rob and I bought, putting on an event and recording the Seeing Greene for you guys. Do you like it when I’m on location to different places? Do you want me to post more videos of where I am? Would you like to see these recordings with different backgrounds and different spots? Tell me what you think would make the show cooler, and we will do our best to put it in there.
By the way, make sure you give a shout out to Eric Knutson at BiggerPockets, who got me a brand new microphone while I’m out recording because I think I sound fantastic. All right, our first comment comes from Assassin Dude, “Yes, to Deal Deep Dive episodes. It would be great to have them as a recurring episode type. I find it very educating to walk through real examples.” Do you know Assassin Dude, also known as AD in the streets? We’ve been toying with this idea of having me walk through properties, some that I’m buying, some that I don’t buy, and then making episodes of why I liked it, why I didn’t like it, what I looked at, what made me chase it or what didn’t. If enough other people come on YouTube and they say, “Yeah, we want to see an episode where David’s walking through a property, we can see the deal and then he can break down what he liked or didn’t like about it,” I’ll make sure we do more of those.
Next question comes from Inzora 100, “Deal Deep Dive for sure, 1031 as well. I sold the property for a $98,000 profit. I’m looking for the strategy to best leverage that and reduce tax liability.” Well, Inzora, you should go to BiggerPockets.com/david, and submit the information about this so that I can give you advice on how you can reduce that tax liability and increase the cash flow as well as your future upside on that property and build some wealth my man.
And our last comment comes from Benjamin Pape, “Thank you so much for taking my question, David. You earned me some bragging rights at work.” I love that man. Everybody at your job should see you featured on the BiggerPockets podcasts if you are a loyal listener and you’re listening to this right now. At your local meetup, you should be able to show the clip of you talking to me, asking a great question and getting it answered. How can you do that? You go to BiggerPockets.com/david and submit your question there as well as commenting on the YouTube page so that I can read your comment on one of these shows, and you can get bragging rights that way as well. All right, let’s take another video question.

Jace:
Hey, David. My question for you is around co-balling. I invest in the Salt Lake City market and have three rentals. My wife doesn’t really want to move a fourth time to get the fourth rental, and that means we’d need to put 20% down which is currently out of reach. However, I have a younger brother who I could co-invest with and he could move into the property for one year, so we’d only need to put 5% down. And here in Salt Lake City there’s a lot of properties with basement rental potential, and that’s what I’ve done with the previous ones is living in the upstairs while renting out the basement.
So if he could live upstairs for one year and rent out the basement, then he could pay for his portion of the mortgage and then get the remainder to pay towards the mortgage from the tenant below, and then after the first year he could move out. My first question is do you see any lenders having a problem with this, if I’ve provided almost all of the 5% down payment while my brother lives in it? And my second question is how do you recommend structuring the ownership split between my brother and I? I would provide the down payment. He would cover his portion of the mortgage, and we’d split the cost of the repairs. Thanks for all you do.

David:
All right, Jace. I like how you’re thinking here. You’re not asking the question of should I do it or should I not do it? You’re asking the question of how can I do it? And your questions are leading you down a good path. Now, let’s talk a little bit about what some of your options are. What I hear you saying is that you can’t buy a house because your wife isn’t on board with you moving your primary, so you’d have to put 25% down to get an investment property, but your brother is willing to buy a primary residence, and you’re trying to think about how you can use him to get the house. If your brother’s the one buying the house, and he’s the one getting the loan in his name, this could work. You could have yourself added to title after it closes. In most cases, that would probably be fine.
The problem is that you’re wanting to provide the down payment, but you want your brother to buy the house, and here’s how the lending standards are probably going to go down. They need the down payment from the person who’s getting approved for the loan, so if your brother can’t get approved for that loan or you wanted to be the person on the loan, this isn’t going to work. Now, one possible thing that you could do is you could have your brother buy the house in his name, and then you could gift him the down payment, but I don’t know if you can gift an entire down payment. I’d have to have one of the guys on my team look into what the guidelines are for that, and if you can get a full down payment gifted from somebody else. If you can’t, your brother’s going to have to have some of that money himself.
What you’re talking about is tricky because it sounds like what you’re saying is you want your brother to buy a house but with your money. Now, you’re correct in seeing that each person needs to contribute something to this deal, but where you’re wrong is when you’re thinking about borrowing money from a lender, and then having your brother be the person who is on the loan, meaning he was approved to make these payments, but you giving the money for the deal. That’s going to be very tricky to work, and on a primary residence it probably won’t go down the way you’re describing, so can we get your brother to get approved for a loan himself? You should reach out to us and see if that could work. Or if you’ve got a broker you’re working with, reach out to them. Assuming you can figure out a way to get the house, let’s talk about your strategy of if you’re going to split the mortgage with him because he’s basically paying rent to live there and split the expenses.
Your brother’s not bringing much to this deal other than the possibility to get the loan. Cutting him on the equity just because he’s paying rent which is the same rent that somebody else would be paying if they live there doesn’t really benefit you financially, and splitting the expenses with him could benefit you financially because a tenant’s not going to do that with you, but I don’t know that it’s as big enough benefit to be worth it. It sounds like you’re trying to get around the 25% down to buy an investment property. My advice to you, and I’m not in your position, is to try to find a property that your wife does not mind moving into. Not every house hack has to be a rent out the rooms to people you don’t know situation.
Can you get a nice house that has a basement and an ADU and you can rent out those, and you can live in the main house, and your wife never has to see the tenants or share a living space with them? Could you guys live in the basement and rent out the ADU and the main house? Same thing, you have your own living quarters. You’re probably going to have an easier time trying to get her on board with what you’re trying to do than to get your brother to buy a house with money that you give him. If your brother can get qualified for the loan, that would work. If your mom or dad can get qualified for the loan, that could work. Or if you could find another partner that could do this, that could work. The thing is the loan’s going to be in their name, and you’re going to have to get added to the title afterwards, that if you could make it work that way, I think this could be a strategy that could work. Thank you for your question.
All right, our next question comes from Dane in Omaha, “When we do a BRRRR, and you start the refinance process, we always use 20 to 25 year commercial loans which are a five year adjustable rate mortgage with an 80% loan to value.” Okay, so first off, what Dane is saying here is, when he does a BRRRR he gets a five year adjustable rate mortgage, meaning for five years that he has the loan, the interest rate is the same for all five years, then it can actually increase at that point, and usually by a certain amount every year, and then the 80% LTV means he’s having to put 20% down on the property. “I see a lot of people talking about DSCR loans. Do you have an opinion on which product is more appropriate, time and place for both?” Thank you for that, Dane.
Not only do I have an opinion, I think we do better DSCR loans than anybody in the country. We do a ton of them, so I know a lot about these. Here’s what’s cool about a DSCR loan. I know it’s confusing, and people are talking about it like it’s this crazy cool strategy. It’s really not. It’s very boring. A DSCR loan is just a way of saying we’ve always valued commercial real estate by the income it provides. So when I’ve gone to buy commercial real estate, the bank doesn’t even ask, “Well, David, how much money do you make? How many expenses do you have?” All they say is, “How much money does the property make, and how much expenses does the property have? Because once we know that, we can figure out the NOI, and when we know the NOI, we know what the property’s worth, and then we can determine if we’re going to give you a loan to buy it.”
You see, when you’re buying a commercial property, the bank just wants you to be the operator. They’re not lending the money based on your ability to make or save money. It’s a more financially sound underwriting process which is why they use it for big buildings. Nobody goes and buys a 400 unit apartment complex for $30 million and gets approved based on their ability to repay that loan. There’s not a whole lot of humans in the world that can repay a loan of $30 million based on their own personal debt to income ratio. The DSCR product is just taking the commercial underwriting of what does the property make and applying it to residential real estate because we are using it as a business, we are using it as an investment. We are intending for that property to earn income, so it makes sense that the person giving us the loan will look at the deal the same way.
The cool thing about the DSCR loans that we do is that they are still a 30 year fixed rate term. You don’t have to worry about this adjustable rate mortgage that typically comes with commercial property. You don’t have to worry about inflation taking your interest rate and making it skyrocket, and if you happen to not be operating the property well, your cash flow can get diminished. They’re actually safer than the commercial option, and that’s why I like them more. Time and a place for both, only if you think it’s better to get an adjustable rate mortgage. If you don’t love the adjustable rate mortgage which, in general I try to avoid it unless it’s clearly way better, I’d go with the DSCR loan at the 30 year fixed rate so that you can lock things in and you can always refinance it if rates do come down in the future.
Question six comes from Christian in Chicago, “As I am 23, I only invested in stocks currently, and looking for which property to buy. What is a good amount to have in cash for me to be able to flip a home? I keep seeing many people talk about creating a business structure to flip homes. Is that a good route to take? I’m also open to other tips as I’m going to be a new home investor.” All right, Christian, let’s break this down a little bit. I appreciate you reaching out. You’re asking some good questions, but there’s a lot of questions you’re not asking, and I’m going to focus on those in this answer. It’s not just about how much cash you need to have on hand to flip a home. It’s much more about how familiar you are with the market you’re flipping the home in, and how well you can manage the operation of said home flip.
There’s two things that destroy most home flippers, and ironically that the same things that hurt most BRRRR deals. The first is that the value that you intended to sell the home for goes down, either you misestimated what it would be or the market shifted on you during the renovation. The second is that the construction gets out of hand. If your contractor rips you off, if there’s more wrong with the house than you thought, if there was a bait and switch where they told you what it would cost, and then they came back and asked for more. If they’re not experienced, if their crew quits in the middle of the job or if they’re just lazy, the whole thing can balloon out of hand, and you can put a lot more money into that deal than what you originally expected. So flipping houses is something that I would typically recommend for someone that has experience, knowledge or a background in construction.
Now, after you’ve invested in real estate for a while, you will gain those things, and then house flipping becomes a more viable option. But for you at 23 just getting started, it’s very difficult to acquire those resources that I just described, and learn how to flip at the same time and try not to lose all your money. I don’t know you, so I can’t deter you from doing this, but I can say what it sounds like as this is a very risky endeavor. Now, I would ask the question, “Well, why do you want to flip homes as a 23 year old who’s never invested in real estate and only invested in stocks?” Probably because you’re thinking you don’t have that much cash, and you heard people say, “If you don’t have money, go flip houses and you can make it. If you don’t have money, go wholesale and you can make it.”
And I’m going to be blunt with you, frankly, I think that’s bad advice. It’s just easy to tell a person that doesn’t have money, “Well, go use these strategies of real estate investing and you can make money with them because they’re not long-term investment strategies. They’re short-term income producing activities.” On paper, that’s true. The problem is they’re also part of the riskiest and some of the hardest ways to make money in real estate. It’s much easier to buy a property, wait a long time and it’s going to go up in value if you wait long enough, the cash flow’s going to go up, and it’s hard to lose. That’s why I typically encourage everyone to buy more properties like house hacking, a great way to build yourself equity over a three to a five year period of time. Get some capital that will supercharge your business much less risky, which is why I tell people to go do it.
Flipping houses, very risky. I flip houses, and still at times I get caught off guard by stuff that I just didn’t think could have gone wrong including the price of materials going up or my contractor having issues in their personal life, stopping how well the deal gets put together. You can have neighbors in the city complain about it, and that can slow everything down, and it can take four to six months of extra time to get things done where you’re holding costs which could be anywhere between two to $10,000 on most deals, accumulate every single month. I don’t want to make this all about horror stories, but I do want to say, if you don’t have very much money and you don’t know much about real estate, stop looking at flipping and wholesaling as the best way to go. And every wholesaler and flipper listening to this is giving me an amen and a hallelujah to what I’m saying because they know just how hard it is to do what they do.
Here’s my advice, if I’m right and you don’t have a ton of knowledge about real estate investing, and you don’t have a ton of money saved up. First off, ask yourself the tough question of why you don’t have a lot of money. You are 23 years old, you haven’t given yourself very much time to be able to save money. You probably don’t make great money at the job you have. Those are two things that you can change by continuing to save money over time, and by continuing to focus on making more money, by bringing more value to your employer or to a different employer, you can actually start to accumulate more capital. While you’re doing that, you can buy properties that accumulate capital for you. That would be house hacking. This is where you buy a house with anywhere from three and a half to five to 10% down in a gray area.
You find something under market value that you can rent out to other people. You earn some cash flow from the rents that you get from them as well as the value of your property increasing. Once you’ve built up equity, you can move that equity out of the home and into your bank account and then go invest it. If you really think about it, capital is what we call value when it’s in your bank account, and equity is what we call value when it’s in a property, but you can move them back and forth. Now, I did not mean to crush your dreams there. What I really wanted to do is set some more reasonable expectations because I’m trying to figure out from your question what might be going through your head. I’m assuming that you’re hearing a lot of people saying the stuff that I said. You’re interested in real estate investing, and you keep hearing people say, “It’s a great investment opportunity, you’ve got to get into it.”
In many cases they’re right, but there’s different ways of doing this. Flipping is a short return that is very risky and takes a lot of work. Buying a primary residence and house hacking it and waiting for a long period of time is delayed gratification, a long-term requires less work and is also much safer, so I’d like to see you start with the safer route before you get into the more risky stuff. Now, nothing says you should stop learning about flipping while you follow my advice. So here’s some information that I could give you where you can increase your knowledge so that the podcaster that you’re hearing like this, and the mentors that you are out there finding will be giving you information that makes more sense. I’ve written some books that you should check out, reading The BRRRR book would probably be one of the better ones because it’s like flipping, but instead of selling the house at the end, you keep it, put renters in it, and let it build equity for you over time.
So that book is called Buy, Rehab, Rent, Refinance, Repeat. If you just search BRRRR David Greene, you can find that one. Also, BP has some really cool personalities that do this for a living that you can learn from, two of the greats are James Dainard and Terrell Yaba. Both of them are in the Seattle area where there are high price points, and they can make a great profit flipping. And there’s also many others on the BiggerPockets forums where you can go and find local Chicago meetups or meet other local Chicago flippers and learn from them. I appreciate you saying that you’re open to other tips as you are a new home investor, I would highly recommend learning about house hacking. I wrote a couple of articles for Forbes talking about it. If you just type in house hacking into the BiggerPockets forums, there is a ton of information.
I tell people all the time, you’ve got to be doing this. I wrote a book called Long-Distance Real Estate Investing about buying properties in other states. I wrote a book called The BRRRR Strategy which is about buying properties, fixing them up and getting your money back out. Even though I’m a huge proponent for both of those, I’m an even bigger proponent for house hacking. Every single person should be buying one house a year for themselves as a primary residence as a house hack, and then anything else you do like long-distance investing or the BRRRR strategy should be in addition to house hacking in the best location you can possibly get in. Last piece of advice, if you really want to flip, here’s a great way you can get into it with training wheels. Find a fixer upper property that’s really ugly and been sitting on the market a long time.
Buy it as a primary residence with a low down payment, move into it and house hack it. Either fix it up yourself or pay a contractor to come fix the house up while you live there. You get all the benefits of a flip, we call this a live and flip, without the risk of trying to get it done while you’re holding costs are super high. Sell that house or rent it out, repeat. The next thing next year you can go a little bit bigger and a little bit better, and grow your wealth safely, slowly, but in a fun way that’s sure to be rewarding for you over the long-term.

Matthew:
David, you have more analogies than Jim Carey has faces Green. Thank you so much for taking my question. David, it’s a simple question which is, I’m trying to set a 10 vision for my real estate portfolio, and to a degree, even just a 10 year vision for my life. But how do I make sure that I’m setting goals that are large enough? I’m afraid that because I’m shortsighted and can’t see 10 years into the future that I might be setting goals that are too small, and thus I might be chasing the wrong goals. Can you help me have better goals? I appreciate you, David.

David:
All right, Matthew Vanhorn. You know we have a Dave Vanhorn in the BiggerPockets community. He’s an awesome guy. I love talking to Dave Every chance I get. Super smart, very humble, and always giving back. So guys, go check out Dave Vanhorn, and send him a message saying that David Greene says he’s awesome. I’m sure he’d appreciate it. He is the note expert in this space. I’m wondering if you might be related to him and don’t know him, Matthew. All right, the question of, am I setting too big or too small of a goal? I like it. You’re asking a good question. Here’s the problem with the question, you’ll probably never be able to answer it. A lot of people hear this, and they hear someone say, set bigger goals, and they make a vision board, and they put a jet on there, and they say, “I want to have a private jet.”
And then they get a bunch of sports cars and they say, “I don’t want one Ferrari, I want 10 Ferraris, one in every color.” And then they get the biggest house that they can possibly find, and they put on the vision board and they go, “You know what? I actually need two of those houses.” And it goes on and on like this where they just say, “If I set my goal big enough, it’s just going to happen,” and goals do not just happen. The universe does not just bring you things and hand them to you. What happens when you set a goal is, your subconscious hears you say it and goes, “Oh, that’s what Matthew wants. Let me figure out a way to make that happen.” Now, oftentimes the goals we’re setting in our subconscious are actually more negative and fear based. So the goal would be, “Don’t look dumb, don’t lose money, don’t do something that I’m uncomfortable with.”
And your subconscious here’s that and says, “Oh, you would be really uncomfortable going to that meetup and learning from that person. Let’s not go today. Let’s watch Dancing with the Stars instead. Oh, you could lose money on that deal that you’re thinking about right now. We don’t want to lose money. Let’s find a reason to look at that deal and say it doesn’t qualify,” and on and on. Your subconscious listens to what you’re telling it and then does its job of making that happen. If you’ve ever said, I want to go work out, but secretly what you were thinking is, “I don’t want to get hurt at the gym,” or, “I don’t want to go to the gym and look stupid.” Your subconscious heard that, and when it’s time to go to the gym it goes, “You know what? Why don’t you eat a bowl of ice cream instead, you’ll feel just as good.”
Creating goals like you’re talking about, is just a way for you to program your subconscious, and if you program it to go by yachts and sports cars and private jets and these big goals, they’re probably never going to happen because you don’t have the means to actually get there. So here’s what I’m getting at, set a goal for yourself that is reasonable, that you can attain, and get comfortable with the fact that goals will always change. Very few people know when they start the journey what they’re going to want in the end. You can have some of the wealthiest, most successful, amazing people that set huge goals and hit them, and then their goal changes. They go from, “I want to make a billion dollars, I want to give to charity and help the most people. I want to influence the most people.”
Tony Robbins has a big goal of wanting to feed, I don’t know what it is, just tons and tons of people for Thanksgiving. He didn’t have that goal, I don’t think when he first started. If he did, it wasn’t the focus of his business. He had to go make money and learn how to be good at what he did. So here’s a couple of goals I think you should set for yourself, pursue excellence. In fact, I’ve started saying pursue excellence, not cash flow because cash flow will be the result of excellent work. As a real estate investor, if you become excellent at anything you do, money is going to follow you, and here’s how I know this. Think about what you want when you go somewhere. There’s a difference in the experience if you go to Jack in the Box versus Chick-fil-A. Why is that? Well, Chick-fil-A set a culture of excellence that they want everyone to follow. They are constantly raising the bar and raising the standard of what they want from people, and we have a better experience when we go to a Chick-fil-A.
Imagine, you go talk to a CPA and you say, “Hey, give me some strategies to save money using real estate on my taxes,” and they haven’t set a standard of excellence for themselves. Well, they probably give you some run around or tell you why it won’t work or it can’t work, and then bill you for that conversation. And every one of us who’s sitting here knows exactly what those conversations are like. Don’t get mad at a CPA. Don’t get mad at that individual person. Don’t get mad at the tax code. Get mad at the concept of shirking excellence because what you really want is a CPA who is chasing excellence, and as a result of that can help you, as a result of helping you, you make more money, as a result of you making more money they get paid more, and everybody wins.
This is what excellence does, is it raises everyone’s standard of living up, and my opinion is there’s not enough people that are chasing excellence. So if you’d say to yourself, “Well, I want to buy one house a year. What if I’d set the goal to buy two, I could have bought more.” It just isn’t realistic because it doesn’t work out like that. Set yourself the goal of, I’m going to buy as many properties as I can do safely. That could be one that could be 10, you don’t know. It could start off as one, and you start going to meetups, and then you meet an agent, and then that agent has a good contractor, and then that contractor has a good lender. And the next thing you know, you’ve got an awesome Core 4, and you’re so good at doing what you’re doing that you go, “Holy cow, I could scale.”
And then you go to that same meetup and start raising money, and within two years you’re buying a ton of properties. There’s no way that you could have known that was going to happen when you set your goal. And another circumstance you might go to the same meetup and not meet anybody there, and have to go to a different one and a different one and a different one until finally you meet those people, and that can be two and a half years of time. If you’re chasing excellence, it doesn’t matter. So here’s my personal philosophy, and this is going to be in a book that I’m going to be writing for BiggerPockets if God willing, I’m able to get it written. There’s three things you focus on to building wealth, and therefore your goal should be centered around these three things. Number one, is saving money. You want to live frugally, you want to live responsibly.
You don’t want lifestyle creep to cut into your life. So if you start making money, now you start spending money, you make more money, you spend more money, you’re always doing better as far as what you’re making, but you never actually get ahead because getting ahead is a difference between what you made and what you spent. So you want to focus on defense first which involves self-discipline and delayed gratification. You’ve got to find different ways to be happy than just spending money to make yourself feel good. Gary Keller had a really good comment. He told his son, “Son, the experience at the beach is the same for a billionaire as it is for the person that’s broke.” There’s so many things in life we can do that are fun that don’t cost money, and we don’t have money just focused on those things. Going hiking, going trail running, going to the beach, having really good conversations with genuine people, serving others, helping people that in ways you never got help.
All of these things feel really good and they cost nothing. Next step, focus on making money. Not enough people think about this. They just have a job and they say, “That’s my job,” and they don’t think about it anymore. If you’re at a job that is not challenging you, you go out and you cut grass every day for a landscaper. Chase excellence, try to cut that grass as good as you possibly can. Learn how to do it in the most efficient way possible. Look at the difference between going around the perimeter of the lawn, and just going back and forth across the lawn and see which one’s faster, which one you can do quicker and which one’s easier on the lawn mower. Make it a game to see how fast you can mow a lawn. The point isn’t to get really good at mowing lawns. The point is to get really good at solving problems and finding patterns because when you get really good at mowing lawns, and you’re chasing excellence, you get bored, and when you get bored, you start looking for the next opportunity.
And then instead of mowing lawns, you’re going to start wanting to teach the new people at the landscaping company how they can do the same thing. And now you need new skills, now you have new goals. I’ve got to learn how to train, I’ve got to learn how to manage. I’ve got to learn how to teach, and I start creating systems and models and training opportunities, and I start learning how to connect with other people. That’s a pretty valuable skill. Now, you can go start your own landscaping company, and you can be hiring and training the employees instead of doing it for someone else. Once that happens, you learn how to market. You learn how to grow the number of customers that are coming in, how to market to hire more people. And the next thing you know, you went from, “I just cut grass,” to, “I am a business person that runs a big successful landscaping company,” and that will probably open doors into finding really good deals.
Your neighbors that you talk to, the clients that you talk to are going to have neighbors that are going to be selling their house. They may ask you to go cut the grass of a house that someone would’ve found when they were driving for dollars. You might be able to buy that investment property. The universe rewards when we chase excellence, so continue to look for different ways that you can make more money by bringing more value. And then the third way that we build wealth is by investing the difference between what we made and what we kept. It’s really that simple. You don’t need to pay a hundred thousand dollars to take a course. You don’t need to look at 500 properties every single day hoping that the magical one will fall out of the sky.
If you are well capitalized and you are well educated, you will find the best assets, and then they tend to snowball and steamroll. You buy some really good properties this year, four years later they’ve grown a lot. You paid the loan down, they’ve gone up in value. You’ve got equity, you cash out or refi, that buys your next three. Five years later, those three, you’re ready to do the same thing, and you start to see exponential increases over time. But Matthew, you will rarely ever succeed past the level of success that you’re comfortable with. There’s no way you’re going to get to 30 or 40 properties if you’re still mentally at the point of, “I just cut grass.” You wouldn’t even be able to manage those 40 properties that you want to have. I guess, what I’m talking about is a shift in mindset from, “Real estate will help me escape the life that I don’t like,” to, “Real estate is a great way to build wealth, but it will challenge me, and I always have to be growing and trying to hit my potential.”
So rather than waiting to get a bunch of properties and then stepping it up, ask yourself, in what ways can you step up now? That is a goal that will never let you down. Every single day, you can get out of bed and the world is going to throw challenges at you, and you can ask yourself, “What can I do to be the best servant, the smartest person, the wisest person, the hardest worker, all of these virtues that will lead to success.” You don’t know the way that the universe is going to reward you for what you do, but you do know that you need to be become the quality of person to be able to handle the reward that comes. So my advice when people ask about goal setting is, don’t say I’m going to buy a 500 unit apartment complex. If you were given one of those right now, you would just run it in the ground and lose it.
Set the goal of I need to become the kind of person that can handle the wealth that I want, and I feel like the advice that I gave you will help you on that path. And then don’t leave anything on the table at the end of the day, work as hard as you can. Give everything that you can, learn as much as you can. Try to be perfect, chase excellence as much as possible, and you will find that these opportunities will find you. All right, and that is our show for today. I hope you all don’t mind me giving advice that’s not always directly tactically related to real estate investing, but does involve the character traits and the qualities that you will need to be a real estate investor. In today’s show, we got into how you can buy a house with somebody else using primary residence loans.
We had a great conversation there with Matthew about what you can do to set goals that require you to become excellent. Somebody made a very funny analogy saying that I have more analogies than Jim Carey has faces, which was pretty funny because in The Mask, Jim Carey’s face was green and that’s my last name and more. Look, to everyone listening, I really want you to be aware. We don’t know what’s going to happen in the market, but this is one of the best times to buy houses I have seen in a long time. As long as you are making more money, pushing yourself individually to hit your own potential, get out of your comfort zone in as many ways as possible. Avoid feeding your vices and the worst parts of yourself that will take all the money away from you that you have, continue to grow more wealth, make more money, save more of that money, and then invest it wisely.
You don’t have to worry about what the market does, and I’m such a fan of this because you can’t control the market, you can only control you. Last piece of advice I want to give everybody here, go to BiggerPockets.com/store and check out The Richest Man in Babylon. I wrote the Forward for the book that BiggerPockets has republished, but the book is incredible. It changed my life when I read it. Josh Docan loves it as well. It’s one of the first things that we bonded over. You can get a lot of value out of that book, especially if you’re a younger person like Christian here who wants to be a house flipper. Learn the fundamentals in that book, and then if you should buy something or if you shouldn’t, the decisions you’ve got to make become much more clear when you’ve embraced those principles. Thank you very much for being here with me today.
Thank you for letting me challenge you. Thank you for letting me push you out of your comfort zone a little bit as you heard this today, as I’m sure many of you were listening to these answers, and thought, “Ooh, I could probably do better in that area of my life too.” Get excited about that because that’s what’s going to lead you to more success. Thank you for your attention and taking this journey with me, and letting me be the person that helps grow your real estate investing knowledge. I’d love it if you leave me a comment, like this, share this and subscribe to the BiggerPockets YouTube channel. You can find me online everywhere @davidgreene24, Instagram, Twitter, LinkedIn, Facebook, all those places, and then on YouTube @davidgreenerealestate. I will see you on the next show.