I Don’t Make Enough to Invest, What Do I Do?

David:
This is the BiggerPockets Podcast show 843. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with a Seeing Greene episode. In these episodes, we take real estate investing from my perspective as I answer questions from you, our audience, about where you’re stuck, what opportunities you have, and the best way to play the chess pieces that are sitting on your board. And we have got a great episode for everyone today, including a coaching call that we are going to start off with and then some other questions from all of you about ways that you’re looking to scale your portfolio. But it looks like you took a couple steps in the wrong direction and how to get you put on the right path. Many of you who are listening to this now are going to relate to the questions that our guests ask and you are going to benefit from them as well.
So thank you for being here with me. Get ready for a great show. If you’d like to be featured on Seeing Greene yourself, remember just head over to biggerpockets.com/david where you can submit your question, either video or written, and I will hopefully answer it on a future show. Before we get to our first question, today’s quick tip is going to be simple. I am here at one of my cabins right now in the Smoky Mountains. I have 12 of them out here, and I’m on a bit of a tour and I’m going to check out every single cabin I have. I’m going to stay in many of them and I’m going to get a feel for what it would be like to be the guest here as well as come up with ways to improve the experience for the guests. This is very important because if you are a short-term rental investor, you may have already seen that the competition is getting fierce.
And if you want to stay near the top, you need to learn to look at your home from the perspective of the person staying in it, not the perspective of you that’s looking to get as much money as you possibly can. So consider staying in one of your own short-term rentals as well as your competition and see how each one of them makes you feel and what improvements can be done to give a better experience to the guest that you are competing for. All right, let’s get to our live guest now. Welcome to the show, Shelly. What’s on your mind?

Shelly:
Hi, thanks for having me. I’m a little bit all over the place, but my name is Shelly. I live in Philly with my partner and my 5 year old. What I do for a living is run a bicycle shop. I opened up the bike shop 13 years ago. At some point my landlord wanted to sell the building. He said, I want to sell it to you. He told me the price he wanted. I couldn’t swing that, but I asked my dad if he wanted to invest and he said, ye. My dad bought this building.
We’re in a good neighborhood, but the building needed a ton of work. Within the first couple years of ownership, the entire front facade needed to be replaced, and now we are in the process of learning that they did it wrong and we have to do it again. So it’s this major headache of a problem. However, somewhere along this same timeline, my partner and I bought a house together. We wanted to move. We decided it made more sense to hang onto the property, rent it out. We bought our next place, wanted to move, rented it out and moved. So we did this, what you guys call house hacking type thing, but we were just doing it because that was our life. And now we’ve seen the benefits of doing that and I’ve been interested in real estate for a long time.
I want to keep doing this. I also feel like the property that my dad owns, I do the property managing. I have enough bits and pieces of this world that I know I like it and I know I’m pretty good at it. And we took out a home equity line of credit on our one property, which you guys were talking about, fixed versus variable. It’s a 3.99 fix for one year, and then it turns variable. So that seems like not bad right now.
So I’m at this point where A, my dad wants out of this very… The property is about a million dollars, not counting some money that he’s dumped into it to fix it up. But that being said, he was able to pay it off. So we had this amazing asset in a good neighborhood that I think is worth investing in. And also we’d be able to pull money out of that to continue to invest in real estate. But he’s not on board. He’s more like, I make way more than this for way less stress in the stock market. Why are we doing this?

David:
And this is the one with the facade, right?

Shelly:
Yeah.

David:
So your question is when do you call it quits on a property? Should you buy out your partner, or how should you exit this property? Right?

Shelly:
Yeah.

David:
So what I like from what you said is that you like this, you’re in on it, you like the area, you’d like to keep going. Even though this property has been super stressful, you see the upside on it. Had you said, yeah, this property is a bear. It’s not really that great of a neighborhood. I don’t really see why I’m doing this, then the obvious answer is I try to get out of it. Considering that’s not your mindset on this, I would really stress maybe trying to figure out how you can keep it. And you have a partner on it that just so happens to be a family member. So you may be able to arrive to some agreement on how you could pay him out. So are you a 50/50 owner of that property?

Shelly:
I don’t have any ownership.

David:
You don’t have any ownership? Okay. You were saying you were property managing for him, right?

Shelly:
Yeah.

David:
So on that note, is your dad, I know he can make more on the stock market, but is he like, hey, I need this million dollars today. Is there any opportunity to sell or finance it from him, I guess is what I’m getting at?

Shelly:
Yes. But then I think comes the other aspect, which is that, if I were to do that, I don’t think it would cash flow. I think he’s onto something that it’s not a great investment, so that’s stressful. It feels more like the appreciation game.

David:
Okay. Well that changes things a little bit. Where’s all the money going? It feels like $7,300 a month is not that far off from the 975 if it’s got no debt on it. Where’s all the money going?

Shelly:
It’s not that it’s not going anywhere, it’s that he’s looking at his cash on cash return and is like, it’s just not a lot of dollars.

David:
So here’s what’s odd. If you put a loan on it, if he did a cash-out refinance, his cash on cash return will skyrocket.

Rob:
Because he gets all that back in his pocket.

David:
And I’m not saying this to tell you that’s what you should do. I’m saying in his brain how he’s looking at this, if he’s only looking at a cash on cash return. There’s two levers that affect… And when I started seeing this real estate made a lot more sense. There’s in the formula of a cash on cash return, there’s two inputs. There’s how much profit you make and there’s how much money you put into the deal. If you pull on the profit lever, you can increase the cash on cash return, but it’s like a tiny short little lever. It’s very hard to pull. If you pull on how much capital is invested in it, your basis and you reduce that, your cash on cash return skyrocket. That’s the really tall big lever with all the leverage.
So if he did cash out refi, even with rates higher, the cash flow would go down, his cash on cash return would go up. He would have theoretically whatever money he pulled out of this thing to now go put in the stock market at his higher returns. And he would have effectively owned real estate and stocks using leverage from real estate to buy stocks instead of real estate or stocks. Not telling you that this is my solution right now, but do you think if he understood it from that perspective, it might change how he’s looking at this?

Shelly:
Perhaps. I mean, I think the whole thing is just beyond stressful for him. So that’s where I struggle. Because I’m like how can I angle this to me be like, no, it’s fun when it’s not my money.

David:
Why is it stressful for him? Because he’s just looking at that 6% and he’s like, I could do so much better?

Shelly:
No. Not just the dollars. I mean the actual act of we had to get all of our tenants into Airbnbs when this construction was happening. The bike shop had to close. All these things that dealing with the ins and outs of other people I think, maybe just don’t like that stuff.

David:
Well, that’s true. Real estate can suck when that is the case. There’s no way around it. This is definitely not passive income, and that’s one of the reasons that we talk about that is when you buy stocks, it’s relatively or completely passive income. You push a button, what return you get, but you just have less control over it. The stock market can collapse and there’s not as much you can do versus with real estate, if it starts to go bad, you can jump in there with some elbow grease and some creativity. You can salvage it. It sounds like he doesn’t like having to deal with the tenant issues and the building issues, and then he’s saying for the return, I’m getting the juice is not worth the squeeze, right?

Shelly:
Yeah.

David:
But are you doing some of that property management work? Why is so much of it coming down on him?

Shelly:
It’s not. I mean, I keep him in the loop. He wants to be in the loop. So I can’t just go writing 20,000, 30,000, $40,000 checks without checking in. And I think, yeah, every time something comes up, it is a little bit like, yeah, here we go again.

David:
He’s not used to that. That’s all that it is. He’s not listening to podcasts like this listening to all of the tenant problems that we talk about. He’s used to buying a stock in something and just looking at the number. And in his mind he has a baseline set of that’s how investing works. Is you don’t make decisions, you don’t feel any stress. Money just comes to you. So I don’t know that, Shelly, you’ve done anything wrong here. I think his expectations just weren’t at the same place that yours were. So maybe let yourself off the hook a little bit as you feel like you let your dad down or did you do something wrong? This is how normal real estate investing works.
Now I’ll add this. When Rob and I encounter the same stress he’s having, even though we’re like, our cash on cash return sucks, all these things went wrong. I’m really stressed out. What we are thinking of is, well, I’m still paying off the mortgage. Well, the values are still going up over time. Well, the rents are going to be higher in five years than they are right now.

Rob:
We’ve still got the tax benefits.

David:
Yes. There’s a big tax benefit. We didn’t get into that yet. So even when the one metric like cash flow isn’t working that we wanted, there’s a pot of gold at the end of the rainbow that stops us from getting discouraged that he doesn’t have. He’s not seeing that. He’s probably not getting tax benefits of cost segregation studies on a million dollar asset that could save him. If you added that into this, if he was a real estate professional, oh my gosh. And it sheltered all the other money that he’s making from his other investments, he’s like that 6% return goes to 28% or something like that. It would change everything. Right?

Rob:
Yeah. But he’s probably not a real estate professional is my guess.

Shelly:
Yeah. I was going to ask that because I just listened to that class episode and he did just retire from his day job. So could he be, if this is the only thing he’s doing?

David:
Yeah. That’s what I was getting at is he may not be right now. The question would be, well, dad, if you became a real estate professional… And the other thing, Shelly, is this only works if he’s making income. Does he have income coming in from other places that he’s being taxed on?

Shelly:
I mean, he just retired, so not really.

David:
What about other investments?

Shelly:
Stock market, does that count?

David:
What about the taxes that he would pay on the 6% return? If that was money he made in stocks, he’d pay capital gains taxes on it. But what if the depreciation from the real estate completely sheltered it? That 6% could start to become looking a lot better. And if you also have rent bumps worked into the thing, the tenants… Can you paint a picture for him that in five years that that 6% is actually going to be up here?

Shelly:
Yeah, perhaps.

Rob:
Well, I think the other thing to keep in mind is he’s zeroing in on cash on cash return. But the actual metric is really the ROI. And the ROI tends to be pretty significantly higher than that cash on cash because of the things that David talked about, which is debt pay down, appreciation, tax deductions and cash on cash return. When you factor all those in, it actually ends up being a pretty-

David:
Equity growth.

Rob:
Yeah. Equity growth ends up being a pretty juicy number I think.

Shelly:
And basically if you’re partnered with somebody who’s not stoked on the property, your options are either to convince them that it’s a good idea or try and buy them out. And that’s it.

David:
Yeah. Because this is more of a relationship question than just a real estate question. Because you’re like, okay, I like it, dad doesn’t like it, what do I do? Right?

Shelly:
Yeah.

David:
And from that perspective, you’re probably not going to get that horse to drink even though you’ve led him to water. If he’s stuck in his ways, if you’ve explained to him that this is different than stocks and here’s all the other benefits you’re getting and he can’t get out of that binocular of cash on cash return, you could say, all right dad, you could sell it. By the way, is there rent bumps worked into leases that you have with the tenants to where it’s going to be making more money later?

Shelly:
I mean, no. Historically, people haven’t stayed. There’s one apartment where someone’s been there a long time. But every time somebody moves out, we fix up up and charge more.

David:
Yeah. Is that because the area that it’s in is bad?

Shelly:
No. It’s a great neighborhood.

David:
Why are you getting so much turnover?

Shelly:
I mean, when I say not stay long, I mean two to three years. I think people use it as a, I’ll stay in this apartment until I buy a house or until somebody just graduated grad school, they moved to a new city.

Rob:
Well, I guess my other question to you, Shelly, is why are you so invested in the deal if you’re not an owner of the deal? Because you’re property managing it, so I imagine you make money from that. Are you just really wanting to keep that property management fee? Because it feels like you could just go property manage for other people now that you have experience.

Shelly:
Totally. No. I own and operate the bike shop. It’s on the first floor. I guess I get a little bit, and when this would happen when the landlord wanted to sell initially that I was like, oh gosh, who’s going to buy this and are we going to get pushed out?

Rob:
That’s interesting. So I mean, I feel like if you sold it, you probably could negotiate. Most of the time people don’t want to inherit tenants, but that’s usually like long-term rentals. I feel like commercial tenants may not be the same stigma, so I feel like if you were selling it, you’re inheriting a long-term lease, as long as you have good payment history and you met the owner. I think you can negotiate not getting pushed out. Looking at the actual, you mentioned that if you sell or finance it, you don’t think it would cash flow. If it’s a million dollar building and you said the rents are $7,300 bucks total?

Shelly:
Yeah. I mean that’s including bike shop rent, yeah.

Rob:
I see. Okay. Yeah, so it does feel like if you were to sell or finance, you’re going to be pretty close to a break even depending on the interest rate your dad gives you.

David:
Yeah, and I don’t think dad’s going to be stoked about seller finance because if he’s trying to get higher than a 6% return, he’s going to want higher than a 6% rate in his mind. And that doesn’t make sense for Shelly to do it.

Rob:
Well, yeah, but then there’s also the case that he’s going to have to pay capital gains on the million bucks so he won’t have to pay capital gains.

David:
But they bought it for 975. What would you sell it for Shelly?

Shelly:
Yeah. I mean I feel like to break even at this point, considering we’re going to have to do the facade again, it’d probably have to be like 1.2, maybe one one.

David:
Would it be worth that though?

Shelly:
Yeah. It is a good question. And I don’t know. The neighborhood’s gone up in value, but, yeah.

David:
So he may not want to sell it, because he’s going to say, I’m going to lose money if I sell it. Why is the brick facade needing to be continually replaced? What’s going on with that?

Shelly:
There’s a wooden beam that has warped and the entire… You’ve seen when brick buildings have a belly and sometimes you can reinforce it with star bolts. So this wooden beam is what’s holding all the bricks up and that’s twisting. And the first guys took all the bricks down, put all the bricks up without replacing that wooden beam.

David:
Okay. Yeah. Because it does feel like… Do you have any that you can put into this or no if you were to buy it from your dad?

Shelly:
Yeah. I mean not anywhere near those kinds of dollars. I mean…

David:
Well, no, because you bought it for 975, but what’s on the actual debt?

Shelly:
Well, there’s none. Yeah. I mean, there’s none.

David:
Okay. Yeah, it is all paid off. Okay. Cool. Yeah. All right. I think the problem… That investment, if I owned it, I would not be super mad about a 6% cash on cash return if it’s paid off free and clear. When you pay a property off, you’re making a conservative bet and you’re really betting on appreciation. It sounds like it’s just the paper cuts of little things going wrong that’s causing your dad to be frustrated because he’s not used to being a real estate investor. And when you first get in, this happens to everybody. You just don’t know about things like what you described about the structure of why the brick facade didn’t work, and it’s an expensive mistake that you make when you’re learning which is why I always tell people, don’t jump into something huge on your first one. Just all this stuff is going to go wrong. Learn with training wheels. So it’s a small fall to the ground. You don’t want to learn how to ride a bike on a motorcycle type of a thing.
Your dad probably, he might just say, yeah, sell it. I don’t want to deal with it. But is someone going to pay 975 when it’s a commercial property. And commercial paper it’s a little tricky getting a lot right now. What are you laughing at, Rob?

Rob:
You keep saying facade. It’s facade.

David:
I’m sorry. You’re right. Do you ever do the thing where you read a word and then you say it like your head sees it instead of when it’s said out loud. I’m going to be getting roasted in the comments of this [inaudible 00:16:58].

Rob:
Well, yeah. My wife used to say she had never read Helvetica before. So one time she’s like, “Why don’t you do a helveteta font?” And I was like, “Helveteca. What is that?” Helveteca. And man, she’s like, “Oo one’s ever said it out loud. How am I supposed to know?”

David:
I don’t know if that’s why that’s so funny to me but it always is. Thank you Shelly. You got me roasted here by the BP production staff and Rob. Usually Rob is the roastee… I’ve become the marshmallow and he’s become the stick for the first time.

Shelly:
I love to see it.

David:
It’s an interesting visual. Okay. All right, Shelly. I don’t know that there’s any easy answers out, but I don’t think it’s a terrible deal. It’s just a mediocre deal. And I really think moving forward in the real estate space, this will be the norm. Mediocrity is the new success in a sense. Because rates keep going up and everything is going against real estate ownership and the economy is really starting to stall. I don’t know that your dad’s going to be getting a 6% cash on cash return in the stock market forever. Definitely not with the potential upside of real estate.
So I think first off, you can’t keep bearing his upsetness with the whole thing. I would turn it back on your dad and be like, “Okay, dad, you know I love you. I want you to feel better. What do you want to do?” Because he probably just grumbles to you as the property manager every time something goes wrong because he wants you to fix it. And you can’t. You’re not the one that can go in there and fix the mistakes that were made. So I just turn it right back around. Say, “Okay, what do you want to do?” “Well, I don’t want to deal with this anymore.” “How do you want to not deal with it?” “Well, I just want to get rid of it.” “Okay. Do you want me to find a broker to sell it for you? Totally understand.” “Well, do you think it’s worth more?” “I don’t know. It might be worth less”. “Well, I don’t want to sell it at a loss.” “Okay, what do you want to do?”
You’re going to have to keep playing that game to get him to take ownership of this problem. And what you will find is that emotionally, all of a sudden this burden lifts off of you is you’re not having a deal with somebody else’s issue because you jumped into this trying to help them and they ended up hurting you. There’s a story in the Richest Man in Babylon. It’s a really good story and it talks about how there was an ox that was complaining all the time that the owner would wake him up in the morning and hook up the thing to his shoulders and he’d have to drag… What’s the thing that the ox drags the till? Whatever. The plow. Thank you for nobody remembering that. Thank you, David, for remembering that. The ox would have to drag the plow across the dirt.
So the donkey was like, “Look, here’s the deal. Tomorrow when he comes wake you up, just bellow really loud as if you’re sick and he’ll feel bad for you and he won’t make you work.” So when the owner comes to hook the plow up to the ox, the ox bellows really loud like he’s sick and it’s not going well. The owner tries three or four times and it doesn’t work, and he gives up and instead he gets the donkey and he hooks the plow up to the donkey and he makes the donkey do it. And the moral of the story was, which I thought was brilliant, never try to help somebody by taking on their problem.
You love your dad. You’re trying to fix this for him. You’ve jumped into the fray to help lighten his load when you have no equity in the deal, and you’re dealing with all of the burden and he’s not having to carry his own plow right now. Your dad needs to take on his damn own plow. And then you as the property manager should just be acting like the property manager saying to the owner, how do you want to fix it? And I think you’ll feel a lot better.

Shelly:
Cool. Solid.

David:
And if you want to know more about The Richest Man in Babylon, check out Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom as I borrow heavily from the principles of that book in my own. Available at biggerpockets.com/pillars.

Rob:
Yeah, I was actually just thinking the sequel to your bird book could be bird den.

David:
Oh, that’s good. That’s very good. Look at this marketing master right here. The bird den. Removing the bird. The only way I could think of Shelly buying it, which she would either have to get a loan to buy it, she’d probably pay less than 975 with where rates are, or she’d have to do seller financing, in which case dad would say, “Well, I don’t want to do seller financing because I could get a better return to the stock market.” I’d like to see Shelly just push everything right back to him. Be like, “Okay, dad, you sit underneath all this stress and you figure out how you want to get rid of it.”

Rob:
Yeah. Ultimately, I’d say the real big reason you’re invested is because of the bike shop, I don’t know if I’d spend a ton really trying to solve this. I think if there’s an opportunity for you to really own this or buy this or negotiate this with your dad, then I’m like, yeah, great, push on that. But if it’s not, then yeah, I think try to move on, to push that back to your dad, like David said.

Shelly:
Yeah. That makes sense.

David:
The C S smile on that face next time we talk to you, Shelly. You got to get this burden off your shoulders. That’s the ox’s job. Be the donkey.

Shelly:
This is a BiggerPockets therapy session?

David:
Yes. First time that I’ve ever called somebody a donkey in a positive light.

Rob:
In a positive way. That’s right. Because you usually call… Yeah. When you say it to me, it’s usually other things.

David:
All right. Thanks Shelly. Let us know how that goes.

Shelly:
Thanks.

David:
Shelly. For those who may have ideas that we didn’t think of, because they’re always screaming at the radio like, “What do you mean? Why are you not telling her this?” I feel like there might be somebody out there who’s thinking that. How can they get ahold of you to share their advice?

Shelly:
Well, I did start an Instagram account for real estate stuff that has a silly name. It is called the Mousing Hackett. Like the housing market, but Mousing. So it’s got a picture of a mouse on a house. I don’t know. That exists. You could also find me at Fairmount Bikes that is spelled like it sounds, F-A-I-R-M-O-U-N-T-B-I-K-E-S bikes.

David:
The Mousing market or?

Shelly:
Really easy to say the Mousing Hackett.

Rob:
I see, okay. Is that what it is? Is it the Mousing Hackett? What? Everyone’s got hard Instagram handles today.

Shelly:
We’re going to have 250,000 BiggerPockets listeners trying to help you and they can’t find your Instagram account.

Rob:
Was it the Mousing Hackett, the nousing narket. I like it now. Now I get it.

Shelly:
When you see the mouse in the house, it’ll make sense.

David:
It’ll make more sense. That’s right. And that rhymes. You could have just called it that.

Shelly:
It’s true.

David:
All right. Thank you, Shelly.

Shelly:
Thanks guys.

David:
And thank you Shelly for bringing such a nuanced and complicated but very beneficial lesson for us all to learn from there. Best of luck with your data and let us know how that goes. I hope that everyone is getting a lot out of these conversations so far, and thank you for spending your time with us. All BS aside, I know there are so many places that you could be getting your real estate education from and they’re all competing for your attention, so I sincerely appreciate that you’re spending it here with me on Seeing Greene.
As always, please make sure to light comment and subscribe to the channel as well as share it with someone who you think would benefit from the message. We’ve got a few comments from other folks who did just that in previous episodes and we are going to read them in this segment of the show.
Our first comment comes via Apple Podcasts and it’s titled too good to be free. Boat Guy 545 says excellent source of real estate knowledge with a five star review. So thank you for that Boat Guy. Appreciate it. From episode 828, we have some YouTube comments. The first one says, love this episode, your podcast give me motivation when I start to lose steam, so thank you. Thank you for that. That is exactly what I want to do because it is a tough market. It is a tough economy and it could be a tough world to live in. So if we could give you some motivation, that feels great.
The next comment says, I’m not sure you can exchange a 1031 house for a multifamily. Are you sure he can do that? I know with the 1031 it has to be a similar investment. This is from JDP 0539 in YouTube and I will break this down for you. So it is called a 1031 like kind exchange, meaning that the trade in order to defer capital gains needs to be for a type of property that is like in nature and kind to the property that you sold. Now, it is something that you can trade a house for an apartment or a house for a multifamily, as long as they were both investment properties. My understanding of the law as it’s written right now is that is fine. What you can’t do is 1031 exchange a primary residence into an investment property, but you can change one type of investment property into another and that is pretty common. So thank you for pointing that out because we don’t want people to get into trouble, but you also gave me an opportunity to highlight what a 1031 like kind exchange is, so thanks for that.
Our next comment from Bridge Burner 4824 says, more Rob, always. The people have spoken and they want more Rob Abasolo on Seeing Greene. Let me know in today’s show if you want to see more Rob Abasolo on the Seeing Greene episodes. All right. Our next comment comes from Ramonda Laving House 3796. Thanks. I started listening to your blog recently and thanks, I have a question. How do you fire your property manager? Well, okay, that’s a good question. The first way is you have to tell them that you’re not happy with the service and you want a new property manager and they may come to you and say, “Well, you have a contract with us, you need to write it out.” I would just say, “What do you need from me in order to break the contract? I’m not happy here and I’d rather end our relationship amicably than have to go leave negative reviews about your company for other investors to see.”
Now, they may have spent some money advertising your property or preparing it. You don’t know what investment they made, so I’d ask about that and then I would explain that you want out of it and ask if it’s a financial thing or other methods that would make them be willing to break the contract, assuming you have one. From Andy’s Auto. I must say I’m 32 years old and have lived in Missouri my whole life, and there are many people here including myself that also use the word hella. Well this is news to me. How did this happen? I am from Northern California where apparently this word originated. I grew up my whole life in that area and didn’t know other people didn’t say hella.
So we must have had some a transplant that moved from California to Missouri and brought this non-indigenous word into the region where it then took off in this isolated Petri dish of Missouri where it went unchecked. And now much like when you have a non-native species that gets into an ecosystem with no predators, all the Missourians started saying hella all the time. I know UFC fighter Michael Chandler is a fan of the podcast and he is from Missouri. I have to ask him if he is ever said hella and how he feels about it. There’s also a very good chance that the cartoon South Park has had some influence in this. If anybody has a theory on how hella has made its way into Missouri, let me know in the comments. I would like to know how this could have happened.
All right. We hella love and we so appreciate the engagement on this show. So please remember to comment about what you would like to see on Seeing Greene, what you’d like to change and how you feel about the show in today’s YouTube comment section, and also take some time to give us an honest rating and review wherever you listen to your podcast. That will help us a ton. Let’s get back to taking more questions. Our first video comes from, Bryton Daniel in Texas.

Bryton:
Hi David. This is Bryton Daniel from Houston, Texas and I’m in a bit of a pickle. I’ve been following and listening to BiggerPockets for a few years now, and I’m ready to start my first house hack. I went and got an FHA loan and was approved for less than 100,000, which is challenging in any market. My question is, how can I best use this loan and amount to set myself up for success moving forward? I’ve considered getting a second lien with owner financing or possibly a 203K product. Would you suggest any of these ideas or is there a perspective I’m missing? Look forward to your thoughts. Thank you and the BiggerPockets community for everything.

David:
All right, Bryton, great question there and I do have a perspective that you’re probably missing. First off, I’m going to tell you to go to biggerpockets.com/pillars and buy my new book, Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom. Now, here’s the reason that I’m telling you to get that book. It is the only book I know of that I’ve ever seen because I wrote it, that explains not only how to invest in real estate with strategies for how to do it, especially getting started, but also how to budget your money better and how to actually make more money.
So if you took me out of this position on the podcast, I lost everything and I was dropped off in the middle of Chicago with nothing, I would go get a job at a convenience store. I might work for free for a couple days to show how hard of a worker I am. I would work my way up to the top and I would slowly go get a better job that paid more money to do the same thing over and over. There is actually a blueprint to getting ahead in business. Now, many people are listening to podcasts like this if we’re being frank because they don’t want to do that. And I just take a different approach. I say, yeah, invest your money in real estate, learn how to do it, but also work really hard and improve your skills so that you can increase your earning potential because that makes investing a whole lot easier.
So here’s my advice to you, my friend. Pick up that book and practice the principles in it, particularly the first two pillars, defense, which is having a budget and saving money as well as paying down debt, and offense, which is making more money. Now, doing that is going to improve what we call your debt to income ratio or DTI. This is a ratio of how much money you make versus how much money you are spending, and the more favorable you can get that, the higher the pre-approval amount for the real estate that you can buy. That’s what’s going to make this journey a lot easier for you, sure. You can go use the gimmick strategies of trying to find someone else to partner with you or trying to find some way of creative financing. I’m not against it. If that’s going to work for you and you can do it, go do it. But it’s not practical.
For the vast majority of people listening, the best thing that you could do if you want to buy real estate is to change your life to fit the mold of a real estate investors. And a successful real estate investor saves their money. You need to pay down your debt, you need to put more money in the bank and increase how much you can put on a down payment. This is going to be very helpful for you as well as very financially healthy. At the same time, you need to ask yourself what you could do to make more money at your job or what job you could get that’s going to pay better. Now that’s going to push you, it’s going to test you. You’re going to feel some pressure, but if you handle it the right way, that’s going to be overall net benefit in your life. Let real estate investing the third pillar, be the carrot that causes you to improve your performance in the first two and have a well-balanced approach to investing in real estate.
All right. Our next question comes from Kate in Cape Cod. Kate says, hi David. I have a property that is in a living trust. My mom happily lives there now and I hope she does for as long as she’d like. But after she passes, I’m interested in possibly renting out the property and taking out some equity loan to buy another investment property. Does this even sound like a viable plan? I’m currently broke. How do I even start in the meantime? All right Kate, so here’s the good news. You’ve got a property that has some equity and you’re not in any a rush, which is also good because your mom lives there.
Here’s the bad news. Getting a loan to get equity out of that property, whether it’s a cashout refinance or a HELOC, is going to require you just like Bryton to have a debt to income ratio that will support that loan. Part of getting a loan is having the equity to pull out of it, but the other part is having the means to pay that loan back. Loans are not free money. Loans are being given money in exchange for a promise to pay that money back with interest, and if you can’t pay the money back because you’re broke, that’s where we need to start. Much like Bryton, you need to check out biggerpockets.com/pillars and get the book and start working now on what you can do to start making money so that you are no longer broke and saving that money so that you’ve got a down payment on the next property you want to buy.
This is exactly why I wrote this book and it just so happens to be hitting at a time in the economy when it’s very important to read. These are principles, these are fundamentals that people need to get back to. For the last 10 years, we’ve printed a ton of money. The value of real estate has gone up. NFTs have gone up. Crypto’s gone up. There’s been a whole lot of strategies that you could create wealth easily, and then when you head into a bad economy, all that stuff goes away. Now’s the time to get out of being broke, to develop some good healthy financial fundamentals and strategies and habits so that you can get that loan when your mom passes and you’re able to be a real estate investor. Let me know in the comments what you think as well as what you think when you read the book.
And if you’d like to learn how to be better, be sure to listen to BiggerPockets podcast 844 with Rob and I where we interview Jib Quick and he explains exactly how to do the stuff I’m saying at a higher level. It will be the episode that comes out right after this one. And from, Mike Rendon in Georgia.

Mike:
Hello David and the BiggerPockets team. First of all, thank you for all the content you guys put out. Love the podcast. Rob was a great addition to the team, been following him for a little over a year, so thank you for all you guys do. As for my question, I wanted to see if you guys have any strategies or ideas how I could get a mortgage for a home to live in. The reason that it’s difficult right now is because I put 20% down on a short-term rental about a year and a half ago approximately, and that place is cash flowing. It’s doing great. It’s got about 19 months of rental history. I also have another short-term rental that I purchased 13 months ago. I’ve been living in the home. It’s in Blue Ridge, Georgia, so I actually moved my family from where we are used to in Florida and we moved to the mountains middle of nowhere to be able to only put 5% down in this cabin and fix it up, which we’ve now completed and it’s been cash flowing for one month.
So we’re having a difficult time now finding a way to get a mortgage on a third home, ideally back in Florida so we can get back home. We now have these two great cash flowing properties, but one only has one month of history, one has 19 months of history, so it’s making it difficult to get another mortgage because my DTI is maxed out. So just looking at referring ideas, thoughts. One issue that is getting in the way just to throw this out there is I’ve got a 3.75% rate on both these mortgages, so if I refinance any of them, it pushes my DTI high. It’s already about 55% now. So yeah, just looking for any ideas that you guys might have. Thanks.

David:
All right. Thank you, Mike. This is incredible that we’ve had three questions in a row with very similar issues. Apparently many of you out there are in the same boat. Now, let me just take a stab at why I think that this may have happened. You’ve been listening to real estate podcasts, maybe even this one, maybe other BiggerPockets podcasts, maybe stuff you hear on YouTube that have been telling you how to scale, buy, pull equity out of something, buy the next one. Now, that has been a good strategy when the value of real estate and the rents were going up. The problem is many of you were doing this because you wanted to quit that J-O-B, and as you’ve had success and you’ve been able to scale just like Mike here has, you realize I need that J-O-B because I can’t get approved for financing of additional homes, which is something for years I’ve been saying.
There is a contingency of people that can quit their job and be full-time investors, but it’s not the majority of us. The majority of people should continue working. Now, the obvious answer is because you need a debt to income ratio that will allow you to get future loans. You have to be able to show the lender that you can pay it back and having a job helps. But it’s not just that. Having a job is also very useful when things break in a property that you didn’t know would. Being able to save money and put it away is something that you need when you’re real estate investing and many of the gurus out there won’t tell you that part. They’ll just tell you that if you give them your money or your attention, you can get a portfolio that allows you to quit the job.
Now, you’re stuck between a rock and a hard place here, Mike, because like you said, you have some cash flowing properties that have really good interest rates. So you don’t want to sell them, but you’re not going to be able to buy another house if you want to move back home because your debt to income ratio is maxed. So a couple options for you here. One, consider taking the knowledge that you have and applying it to something that will earn you money. If you’re self-managing these properties, consider managing properties for other people. Consider getting a job for a property management company to earn some extra money. That will make a huge positive dent on your debt to income ratio.
Now, mortgage companies like mine can actually give loans to people when they don’t have W-2 jobs. We can qualify people based off of the money that they have made in their contract or 1099 type positions, but you got to have a minimum of a year making that money for it to be eligible. So that’s where I think you should go is you don’t have to go to a job you hate, but go to a job within real estate, which you presumably love if you’re doing this. Another option is that you could house hack in Jacksonville, but reverse where you rent a room or a space from someone else. Rather than own the house and rent out parts of it. Can you keep your mortgage low by renting out from somebody else that’s house hacking. Support a fellow real estate investor, saving up your money and improving your debt to income ratio so that you can buy your own house later.
Guys, I don’t have a crystal ball. I’ve said this many times. I do my best to try to paint a picture of what I think is going to happen in the economy because those type of factors do affect investment decisions. And I feel like for the first time since I’ve been in a position of influence in the real estate investing space we are going to head into a pretty rough economy. Again, I hope I’m wrong. In the past we’ve seen bad signs, but the government came out and said, we’re going to print a bunch of money. We’re going to have quantitative easing, and I told everybody else, I don’t think the sky is falling. I think you need to go buy real estate. And I was right. The people that listened did really well.
Well, now’s a time where I’m saying, I don’t think you should sell your real estate because I don’t see any signs that the values of it are going to plummet, but I do think your ability to buy more of it is going to get significantly harder. I think that real estate overall is going to make less money and perform not as good as it did in the past, but it’s still going to vastly outperform all the other investment options, and as the entire economy slips into a recession, which who knows how long it’ll be and who knows how bad it will get. Having financial security is going to look like a positive thing, not the negative thing that it’s been painted as for so long now, where if you had a job, you were called a joke, or you were shamed by the people that quit their job to ride off into the sunset and drink those Mai Tai’s on the beach. I think you may see a lot of people going back trying to get jobs and realizing that there’s not as many jobs to be had.
Again, I hope I’m wrong, but I’d rather prepare you for the worst so that you’re in a better financial position than if you assume the best and you end up sorely mistaken. So Mike, you seem like a guy who’s smart. You seem like you got a good work ethic. You’ve already done well getting these properties. If you want to get more properties, you’re going to have to improve your debt to income ratio. My advice is you do that within the world of real estate investing, and I have a chapter specifically on that topic in Pillars of Wealth where you can go check that out and get some ideas of how you can make money in the world of real estate, but not as an investor, as somebody who’s working in the space often as a 1099 type employee.
I’d love to see the entire army or ocean of BiggerPockets listeners jump into the space and take over as the best real estate agents, the best loan officers, the best property managers, the best contractors. Wouldn’t you love it if the handyman that you hired listens to BiggerPockets. If the contractor that you hired listens to BiggerPockets. If your accountant and your CPA were all BP fans that understood the same things that you do and had the same goals as you, and we could all create a community of people that had each other’s back. That’s the vision that I’d like to see. Let me know in the comments if you agree with this and if you have considered getting out of a job that you don’t like or maybe you’ve been laid off and getting into a job and into the realm of real estate as a whole.
All right. That was our last question for today. Thank you all for being here. This is fantastic. I hope you enjoyed today’s show and we’ve had a great response from all of you. So please remember, if you’re listening to this on YouTube, to leave us a comment about what you thought of today’s show that we can hopefully read on a future episode. And if you’re listening to this on a podcast app, please go leave us a five star review and let the world know why you love BiggerPockets. Those help a ton as we’re trying to stay at the top of the podcast space in the business segments of Apple Podcasts.
All right. In today’s show, we covered what is in The Richest Man in Babylon. Remember, BiggerPockets sells that book. It’s a very short book, but a very powerful book. So go pick up on the biggerpockets.com/store, The Richest Man in Babylon and get some advice that Shelly received when it comes to taking on other people’s problems that are not yours and how you can avoid it as well as only investing in things you understand and great timeless financial wisdom. We talked about what options you have when house hack financing doesn’t come in where you would need it. We talked about when to keep your job, when to get a new job, how to improve your debt to income ratio, and why DTI is so dang important.
Don’t buy the hype. This stuff matters. And the people that build great big portfolios that retire better are people that continually worked at a job that was sustainable for them, that they enjoyed, that they did not hate, and built a portfolio up over time. As well as inheriting a property and what to do to prepare yourself in the meantime. Hope you guys enjoyed this episode. Let me know in the comments what you thought. You could find more about me at davidgreene24.com or on Instagram or other social media @davidgreene24. I will see you guys on the next Seeing Greene.