If you know how to use your home equity, you can retire MUCH faster than most Americans. For the majority of homeowners, equity is just something to sit on, not something worth using. But what if you could convert your home equity into rental properties, cash flow, or even more appreciation? Where would you be in a decade if you used your equity to make even more equity in other properties? You could retire early, make more than you’ve ever imagined, and KNOW that your wealth is working FOR you.
It’s Sunday, and David remembered to turn his green light on…you know what that means. We’re back with another episode of Seeing Greene, where real estate investors, rookies, and business owners shoot some of their most pressing questions at David. In this show, a young business owner wants to know how to sell (without sounding salesy). Then David describes how to use your home equity to buy even more properties, the best way to pull “wealth” from your rentals, how to retire in ten years, and why no one talks about the “BEAF” strategy of real estate investing.
Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!
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This is the BiggerPockets Podcast show 822.
If you want to make sure that every property you buy will fund the next property, you have to focus on equity because equity is financial energy kept within a real estate asset and you draw that energy out and then go use it as the down payment on your next one. And this is the way you scale a portfolio.
What’s going on, everyone? It’s David Greene, your host of the biggest, the best, and the baddest real estate podcast in the entire world where we arm you with the information that you need to start building long-term wealth through real estate today. This is where you’re going to find current events, new legislation, new strategies, and what’s happening in today’s market so you can stay equipped and up to speed to crush it with the information that you need to navigate what’s, quite frankly a very tough market. But I don’t need to tell you that. You’re out there feeling it yourself.
Today’s episode is Seeing Greene. And if you haven’t seen one of these, these are shows where we take questions from you, the listener base, and I answer them directly. They can be anything from specifics to generalities. It’s really good stuff. In today’s show, we’re going to focus on strategies that work today, primarily what buying equity and forcing equity means and how you can make money in any market if you understand those two things, what to look for so that you can buy in the right area that accelerates your own wealth building. Yes, the location you choose does matter. How to make money in real estate even when cashflow is hard to come by, and advice for starting a small business and increasing sales. All that and more in today’s Seeing Greene episode. I can’t wait to get into it.
All right. Before we do, today’s quick tip is simple. When making decisions on what to spend money on in your property, there’s the goal of saving money and then there’s also the goal of increasing revenue and you want to balance the two. I tend to lean towards wanting to only replace items that will last for a very long time. I don’t like to put carpet in rentals and I don’t like to put in things that look nice but get beat up really easily. When it comes to short-term rentals, I’m willing to budge a little more if I think that guests are going to choose my rental over other ones. So when you’re making decisions on what to replace, what to upgrade or what to buy in your short-term rental, remember to think about it from the lens of how the pictures will look because that is the primary thing that most people will be looking at when they’re choosing what to book.
All right, that was today’s quick tip. Now let’s get to our first question.
Hi David. My name is Jed Forster. I’m 19 and I live in Green Bay, Wisconsin. My question is more of a business question. I have a small gutter contracting company and I’m looking to grow and scale it. I know what’s holding me back is being inexperienced in sales, so my question is, what is some advice you have for someone looking to become a better salesman and what are some books that have helped you improve as a salesman and a real estate agent? I really appreciate all the advice and the great content that you guys put out. I’ve listened to every single BiggerPockets episode, literally every single one since Josh and Brandon’s first episode. So I really appreciate you taking my question and answering it. Thank you and have a good one.
Well, Jed, first off, kudos for asking what might be my favorite question that I’ve had in quite some time on Seeing Greene. I freaking love this. I love it because you’re asking about self-improvement. I love it because you’re focused on making money the right way. You’re saying, “How can I be better at sales?” I love that you’re a small business owner and you have your own gutter cleaning company, I believe you said at 19 or 20, 21 years old. Very young. You’re doing everything that I would tell someone to do, man. So you should feel really good about yourself. Kudos for that.
And as a side note, I really think in the future on Seeing Greene and maybe in BiggerPockets in general, you’re going to be hearing more advice that’s not just about how to acquire the next property, it’s about a stronger financial position in general. You hate the job you have, you hate your commute, you hate your cubicle. There are lots of options for you other than chasing the cash flow that is very difficult to find. We here at BiggerPockets want you to have a life that you enjoy more that we can help you build, and financial freedom is a part of that. So let’s get into your killer question.
All right, how to be a better salesperson. The first thing that you have to understand is sales does not need to be convincing people to buy something that they don’t want. That is the wrong definition of sales. We all hear it. We go, “Ew, slimy salesperson.” That’s not what you sound like, Jed. It’s not what I want you to be. Sales is more, in my mind, healthy sales, the way that I teach it to my agents, is about understanding how to communicate and articulate why what you have is best for the client, which means a part of sales is listening to said client. It is not showing up and saying, “Here’s why you should buy my vacuum cleaner.” It is finding out what is their problem, determining what your solution for the problem would be, and communicating effectively why it’s in their best interest to take it.
Now, that’s not slimy. My favorite book of every book I’ve read when it comes to doing this is called Pitch Anything by Oren Klaff. It looks like this and I read this book all the time. I teach on this book all the time. I use the concepts that are in this book when I’m teaching people how to retreat, an event I’m having my own sales team. I’ve referenced it constantly. There’s lots of things in the book that will help you, but let me talk about the three main things that I think you should understand.
When a human being is receiving information, perhaps I’m saying, “I’d like to sell your house. I’m a real estate agent,” or “I’d like to buy your house. I’m an investor,” or you’re approaching a tenant that’s already in a property and you’re saying, “Hey, we’re going to have a new property manager” or for you, you’re going up to a potential new client saying, “Hey, I’d like to clean your gutters,” there are three ways that their brain is going to receive the information that you are giving them. You’d think of them like gates. And in order to get to the second and the third gate, you have to get through the gate before. And where most people mess up with communication is they don’t respect the way that other people process the information.
The first gate is what they call in the book the croc brain or crocodile brain. This is also called the amygdala by other people, but basically it’s a part of your brain that functions like a reptile. It thinks, “Everything’s going to kill me.” This is the first way that all information will come into anybody’s mind. So you hear a loud sound, everybody jumps. Ever noticed that? Everybody jumps when there’s a loud sound. Nobody jumps and thinks, “Yay! Santa Claus is coming down the chimney to bring me presence early.” We always think, “Oh God, it’s going to kill me.” Human beings are wired this way. So your first step in communication is making sure people understand, “I am not a threat. I am here to be helpful to you, not to take away from you.”
The second step of the brain that the book talks about, it’s called the mid-brain. Now, the mid-brain’s job is to take the information that’s being given whatever stimulus that is and evaluate it through a social context. What that means is it wants to look at all of the other times it’s seen something like this and say, “Well, where does this fit in?” So this comes up with door-to-door sales. You go knock it on someone’s door, somebody sees you’re there and you look like a solicitor. What do they think? “Every solicitor before that knocked on my door was trying to sell me something, therefore I don’t like this person.” So if you’re going to do door-to-door sales, you got to figure out some way to look different than the other people if you want them to even open the door at all.
Now, the last part of our mind that analyzes information is what we call the prefrontal cortex. This is the part of our brain that analyzes things logically, uses math and uses reason. This is where you can communicate to people the most effective. If you can get into the prefrontal cortex, they’ll really listen to the thing you’re saying. This is where you can make your argument, “Hey, if you don’t clean your gutters because you’re trying to save money, it can cost you more money in the future.” Or, “If you don’t hire me, you’re going to pay more money paying for somebody else.”
Now, I’ll sum it up by saying the mistake most communicators make is they start the conversation at the prefrontal cortex level. They show up and they’re trying to say, “Hey, person I’ve never met before, let me tell you why you should give me your money because if you don’t, you’re going to lose more money later.” The person doesn’t trust you. They think that you sound just like every other salesman they’ve seen. They’re not listening to a word you say because you walk around in your own prefrontal cortex because you know yourself and you know you’re safe, but that doesn’t mean that you’re in theirs.
So remember, when you’re meeting somebody, you start off with the croc brain and you show them you’re not a threat. You move into the midbrain where you have to stand out from other people and the human has to believe that they’ve seen all of their other options and you are the best. And then you move into the prefrontal cortex where you could actually give your pitch, your slide deck, your PowerPoint presentation, whatever it is that you’re using to try to close that sale.
Thank you for the question. I hope that this information helped you. Go check out Pitch Anything and then Google sales advice or YouTube sales advice and listen to everything you can get your hands on. Sales is all about psychology. If you would like to listen to the interview that Rob and I did with the author of Pitch Anything, Oren Klaff, you can check that on the BiggerPockets podcast show number 663. And keep an eye out for BiggerPockets podcast number 827 where we interview Keith Everett as he covers a few of the sales books that he used to grow his sales-based business.
Our next question comes from Tiffany in Ohio. Tiffany says, “My husband and I are using our savings to pay off my mother-in-law’s house. We will double our net worth by doing so. We want to use the equity to purchase an Airbnb in Florida. This is our first time. I’m worried about the ability to get a home equity loan on the house to purchase an investment property. I’m also looking for advice on the next steps. How should I set up my first deal to continue to finance my next? And when do the lenders start to see my W2 income is not funding my future investments, my investments are funding each other? Hope this makes sense. Thank you.”
All right, Tiffany, good question here. First off, this is pretty simple. If you want to make sure that every property you buy will fund the next property, you have to focus on equity. Now, I know this sounds different than what you’re used to hearing because typically, especially when people are new, we teach them how to analyze cashflow, but we just stop there. “Here’s a calculator. Here’s how you determine the cash on cash ROI. Go.” Right? And that works for a deal as long as it’s done well, but it doesn’t work for a portfolio. If you want to build a portfolio, you really have to be focusing on building equity because equity is financial energy kept within a real estate asset and you draw that energy out and then go use it as the down payment on your next one. And this is the way you scale a portfolio.
Now, there’s different ways that you can create equity in the properties you buy. The first is what I call buying equity. This is a framework I have about the 10 ways you make money in real estate. Buying equity just means buying the property for less than what it’s worth. Next is forcing equity, and this is the one you should really focus on. Forcing equity is all about adding value to the property. So buying a big house, an ugly house, adding square footage to it, adding bedrooms or bathrooms. Doing something to make that property worth more will give you more energy to draw out later when you want to continue to scale.
And then there’s also something I call natural equity and market appreciation equity. Natural equity is just what happens when the fed prints more money, makes real estate become worth more. And market appreciation equity is when you’re very wise and you buy in a market that grows faster than the national average. So my advice would be to take a combination of those four different approaches and apply it towards whatever you’re buying. And as long as you do that, the equity will grow. You’ll be able to buy the next house.
Now, I’ll also add a caveat. You probably heard us talk about this five, six years ago when everything was exploding in value very quickly because there was so much natural equity occurring because of the Fed approach of basically quantitative easing and economic stimulus. We’re not seeing as much of that right now. So I would not expect to have the growth happening as quickly as it happened in the past. I mean, it literally used to be you put a house in escrow and before it closes, it’s gained $20,000 in value. It was insane for a period of time there. That’s not the market we’re in now. So if you’re not buying a new property every six months or every 12 months based off equity from your previous one, that doesn’t mean you’re doing something wrong. You’re just working in a different market. So instead, I advise people to focus on forcing equity and buying equity since the natural equity is a little bit harder to come by.
Now, another part of your question here was, “When do the lenders start to see my W2 income is not funding my future investments, but my investments are funding each other?” The first part of my answer to that will be when it reflects on your tax returns. When you show income from the property that you netted cash flow, you can use that as income to help you buy future properties. Unfortunately, there’s no way to track equity on a tax return, so lenders will not even look at it. It doesn’t mean that it’s not valuable, it just means that it’s not going to show up on your tax return when it comes time to helping you get funding. So it usually is a couple years before a property is cash flowing strong enough that that will help you to buy the next one.
But something else to think about would be different loan products like the DSCR loans. This is something that my company does a lot. We find people who are buying property, we help them find properties that are going to cashflow positive. We use that positive cashflow to approve them to buy the property, and now their personal debt to income ratio isn’t slowing them down, especially during that couple year timeframe that I was telling you where your income needs to show up on your taxes. Once it is, we can switch you back to a conventional loan and you can get a slightly better interest rate that way and still have plenty of income coming in to help you get approved.
And if you were wondering what a DSCR loan is, it’s an acronym that stands for debt-service coverage ratio, which is a very fancy way of saying it’s a loan that’s based off of the income that the property makes, not the income that you make. This is the way that we have financed commercial real estate since as long as I’ve been in the game. Commercial lenders don’t really care what you as a person makes. What they care about is what the property is going to make. And there are now products that use that same analysis method with residential real estate, but it’s even better than commercial because we have 30-year fixed rate terms. Whereas with commercial loans, you’re typically going to get a three or four or a five-year period before a balloon payment is due and you have to start all the way over with a new loan at a new rate. And as you’ve seen as rates have gone up, that’s really bad news for a lot of commercial investors like apartment complex owners or triple net investors.
Hope that that helps to answer your question. Very, very happy to see that you asked it. Keep us in touch with what’s going on with you and your husband’s journey. All right, let’s take another video question.
Hi David. It’s Tyrone here from Basel, Switzerland. My question is about your future strategy. You always say that the idea is you build long-term wealth via property, and my question is how do you get access to that wealth? Do you intend to sell your properties in the future? Do you tend to remortgage and pull out that wealth and live off that? Or is the idea that you pay down your mortgages enough that you can then live off the rent? So my question is, how do you actually intend to use and leverage that long-term wealth you’ve built up if maybe you intend to sell or maybe you don’t intend to sell? Thanks a lot and keep up the great work. It’s fantastic listening to. Thanks.
Tyrone, what a great question. And awesome that this is coming from Switzerland. Good to see that the BiggerPockets arm has reached all the way over there. I love your question and it proves to me that you are listening to the stuff I’m saying and you’re really trying to understand the framework or the philosophy that I’m sharing with our listeners about how to look at wealth. Sometimes understanding how to look at it is more important than just having someone say, “Tell me what to do. What’s the step-by-step color by number approach?” Because that doesn’t work for everybody the same. And as market conditions change, the step-by-step approach would change too. So if you’re listening to content from a year ago, it might not even apply if you’re looking at things that way. But if you’re trying to understand the fundamentals of wealth building, well that’s timeless. That’s always going to apply.
Also, keep an eye out in October, October 17th for Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom. That is a book I wrote that was the trickiest book I’ve ever had to write. Kicked my buttocks trying to get that thing done. But I did my best to really articulate analogies and visuals of how you can look at building wealth so that if numbers and words and log run-on sentences tend to confuse you, this book will really simplify what the process is like. Now your question was, once you’ve built up all of this wealth, how do you access it? What’s the plan? There’s basically two main roads that you can take and that shouldn’t be surprising because real estate tends to build wealth in two different pathways, the equity pathway and the cashflow pathway. So let’s get into that.
And this isn’t unique to real estate by the way. This is all businesses. Business have a value of what they would sell for to somebody else, which is equity. And then they have cashflow that they put off, which is obviously cashflow or net operating income. So real estate follows the same principles as other businesses. If you’re taking the cashflow method, your best option is what you said to pay them off. So this is buying them, slowly paying down the loan or putting extra money towards the loan to pay it off quicker so that when you get later into life and your income producing ability has decreased, you don’t have as much energy, you’re not interested in being super ambitious and building up a business like you once were, your priorities have shifted to family, to children, to grandchildren, to maybe giving back, and you’re not this young hungry business woman or businessman that you were at one point, that you’re still taking care of financially.
That is probably the easiest, safest, most boring pathway. It doesn’t mean it’ll be the biggest, but it’s probably the one that no one can mess up. So that is a pathway that I’d recommend for a lot of people. Just plan on that. And then if the second one I’m about to describe makes sense, well then pivot and you can look at some of those techniques or strategies. But the just buying real estate and paying it off over time is a really solid way to ensure that you do have cashflow when you retire.
The second pathway is the equity model, which I like because you can scale it faster, and that’s just because I have more control as an investor over the equity that I build in a property and in a portfolio than I do over the cashflow. I don’t control rents. Rents are going to be whatever the market determines. I don’t control when rents go up. I can’t control if they stay the same. I also can’t control what my tenants do to the house, if they decide they don’t want to pay, if they leave after being in there six months and they trashed it and I got to go put in new flooring and new carpet. I can’t control a lot of the variables that are tied with cashflow, which is why it tends to be less reliable than equity.
Now, equity is not completely reliable. There are market fluctuations where the market goes down and your equity evaporates. That can certainly happen. But in general, there’s more things that affect equity than just the market going up or down. You can buy properties below market value. You can pay attention to when the Fed is printing money and you can buy more real estate at those times. You can choose the market you invest in and determine which markets are more likely than others to go up in value. And my favorite, you can force equity by changing the structure of the home and improving its value itself. You can add extra bathrooms, extra bedrooms, extra square footage. You can add ADUs, you can refinish basements, you can refinish attics. You can build new properties on the same lot. [Inaudible 00:18:44] the lot have two different properties. There’s so many options, which gives you more of an influence in creating wealth over equity.
When you’re trying to access the equity that you’ve built or the energy that we call equity when it’s stored in real estate, because that was your question, you’ve got, basically I can think of like two or three main ways. One, you can sell it, that’s inefficient because you’re going to pay taxes on it unless you do a 1031 to defer those taxes. But then again, you’re not actually exceeding the wealth. You’ve got to reinvest it into something else. So while 1031s are great tools, they aren’t a cheat code. There’s still a price that you pay when you do a 1031 exchange and you will not get the energy out of that property.
You’ve also got a cash out refinance. Now that is probably the most efficient way because when you sell, you’re going to owe capital gains taxes, you’re going to owe closing costs, you’re going to owe realtor commissions. There’s going to be some inefficiencies as you take the energy out of the equity in the home and into your bank account.
I like this visual of I have all of this water in a bucket and I call that equity. Well, when I move the water out of my equity bucket into my savings account bucket, a lot of it’s going to spill. That’s just an inefficient way. These are closing costs. These are commissions, these are taxes. So in order to avoid that, instead of just dumping the water from one bucket into the other, which would be selling, you can do a cash-out refinance. That is putting another lien on the property, refinancing it and pulling some money out. You’re only going to spill a little bit of water when you do that because you’re going to have some closing costs that are associated with the cash-out refinance. The money you pull out is tax-free. You don’t pay any taxes on that. It will usually decrease your cashflow. So that’s a downside of if you want to take the energy out that way because you’re not actually creating wealth, you are transferring wealth. I should say you’re not creating energy, you’re transferring energy.
You’re taking energy you’ve already created within this equity bucket and you’re transferring it into your savings account, and so you’re not creating something new. So even though you’re not taxed, there’s a price to pay. It’s not a cheat code. You still got to pay a higher mortgage payment in most cases because you’ve taken out a higher mortgage balance.
Now, the third way that you can get that energy out is what we call a home equity line of credit or a HELOC. For now, these products are around. It would suck if in five years or 10 years people stopped offering these, and now you don’t even have that option. But that’s another way that you can get the energy out. However, you’re going to pay for that too. Whenever you take the energy out that way, there’s still a payment that has to be made on the energy that you took out. So as you can see, if you’re using the equity pathway, there’s going to be inefficiencies. There’s going to be closing costs, there’s going to be capital gains taxes, or there’s going to be reduced cash flow. That’s the downside. The upside would be that you could create more equity in that path and more energy therefore in general.
And on the cashflow side, the downside is it takes a long time to pay off a mortgage and you have a ton of energy that’s in that asset versus the teeny tiny bit that you get out every month in cashflow so it’s less powerful. But the upside is that it is more efficient. You’re not losing as much of that energy because it stays in the asset. Your equity stays in the home as you paid off the mortgage, you’ve actually increased that equity, but the only part you get to live on is small. So as you can see, the upside to real estate investing in general is you can create big energy. This is why we recommend people do it, and you create energy in many ways.
The downside is it’s not the same as energy that you have in your bank account. The upside is that the energy in real estate isn’t taxed as much as your W2 job, which is where most of the energy in your bank account came from. The downside is it’s not as useful when it’s in real estate. So useful way of looking at this would be to understand that there aren’t necessarily better or worse ways. There are trade-offs. And ask yourself the question, what are the trade-offs that you are most comfortable with and how do you design a life around those trade-offs so you can get the most out of the work you do building your portfolio?
By the way, my man, great question, Tyrone. Thank you so much for asking this. Thank you for being a student that’s on the pathway of trying to understand how to build wealth. And feel free in the future to submit another follow-up question, I’d love to hear from you again.
Thanks to everybody who has submitted a question so far. We’re going to get to more of these questions just like you heard in one second. But before we do, I’d like to take a minute to read comments from previous Seeing Greene shows so you can hear what other BiggerPockets listeners are saying about the show. If you’d like to leave me a comment to possibly be read on a future show or just to let us know what you think about this show, please do go to YouTube and leave a comment. Let me know what you think, what you liked, what was funny, what you wanted to see more of, whatever’s on your mind.
All right, here is a listener comment from episode 798 where Rob and I interviewed Alex and Leila Hormozi from BrandonSmith6663. “Love this episode. Each jump at business is really hard. Even if you’re a handyman and you hire another handyman and turn it into a handyman company, it is difficult. I love this insight.”
Such a good point. BrandonSmith6663, if you’re listening to this, this please go to biggerpockets.com/scale and buy my book that I wrote to teach realtors, but really it works for any business person, how to take a job and turn it into a business where you’re hiring other people because like you said, it is very difficult, but it is also very rewarding and is a much better life once you get it right.
All right, here’s a review from another Sunday episode number 810 that we did with Tom Brady’s performance coach Greg Harden. Bishop51807 says, “I rarely leave a comment on this channel, but this has got to be one of the best episodes since I subscribed.”
Well, awesome, Bishop, thank you for that. What nice comments that you guys left me here. Again, if you would like to leave a comment, head over to BiggerPockets’ YouTube channel. Listen to the show there, log in and leave us a comment. We appreciate the feedback and mostly we appreciate the work that all of you are putting in to pursue your goals and your financial freedom. If you would like to leave me a comment to read on a future show, head over to the BiggerPockets’ YouTube channel and leave a comment on today’s show.
All right, let’s get back into it. Here is another video question. This one comes from Cole Peterba.
Hey David, this is Cole from Shanghai, China. Well I’m from mid-Florida, but I’ve lived in Shanghai for about 10 years even through COVID and all of that jazz. We’re selling one of our houses here. We own three properties here. I’m under contract for one place in the States, a multifamily unit in Ohio. Our house here that we’re selling is worth about $350,000. That’s what we should net from it. It’s fully paid off. We’re going to take all that to the states, dump it all in real estate. Let’s say we have a 10-year plan of retiring. How can we leverage $350,000 cash in whatever real estate markets we need to in the states and what would be our game plan to make that play out so that we can retire in 10 years? Thanks for taking my question.
Thank you, Cole. All right, first step is I recommend you read Chad Carson’s book, the Small and Mighty Investor. He’s got some strategies in that book that help detail if you’re not trying to be a super-duper deca millionaire, but you do want to have enough money coming in from real estate to fund your life so you can retire, check out that strategy. It’s going to be basically two pieces because the name of the game is how you build up cashflow. That’s what you’re looking to do.
My advice would be, step one, you build as much equity as you can because in the future you’re going to convert that equity into cashflow. How do you build equity? You buy real estate in markets that are going to be appreciating. You don’t focus on cashflow right now as much as you focus on where you’re going to see the most growth. You pay the lowest price possible for the house. You buy in the best areas and you add value to every single thing you buy. Remember, not only do property values appreciate, but rents tend to appreciate when you buy in the right area.
What’s the right area look like? Pretty simple. You want to find something with constricted supply so you have less competition where wage growth is going up, so jobs that pay more are moving into that area and that population increases are going up as well. What you’re trying to do is own properties in areas where there are less other properties to rent and the people that are renting from you are wealthy themselves and they can afford to pay higher rents and you’re trying to time this so that 10 years from now you maximize the rents. Now, where people make this mistake is they go buy a bunch of cheap property where rents don’t go up because the cashflow looks better right off the bat in year one. Then they find that 10 years later their rents have risen by $11 a unit and they’re in roughly the same position they were in when they bought them and they can’t retire.
So remember the tortoise and the hare. The hare came out the gates fast, they got cashflow really quick, but it was the tortoise over the long term that ends up winning that race. So when you’re buying the real estate you’re buying, I want you to think about the future, looking into the future, delayed gratification. Where are rents and property values going up the most? The other thing that you’re going to do is you’re going to have to pay these properties down. So that’s another thing I want you to think about. As you’re forcing the equity that you’re building right now, you’re going to have to keep working hard. You’re going to have to have a lot of money that’s coming in so that you can pay those mortgages down and you’re going to have to balance, “How many new properties do I buy versus how much do I pay off?”
My advice I’m going to give you as much like everyone else, and I’ve been saying it to everybody that will listen, for some people it makes sense to quit their job and focus on real estate investing, but for the majority of them it doesn’t. Don’t quit your job right now. In fact, work harder. Start a business. Keep a job and start a side hustle. Once your business is taking off and you have revenue coming in, like earlier in the show when we had the young man who started a gutter cleaning business, if he busted his butt for 10 years and built that thing up, maybe four or five years into it, he could quit a W2 and he could focus solely on that business. You could do the same thing, but you’re going to have to do that.
You are going to have to create a massive amount of energy over a 10-year time period that can then be converted into cashflow later, which means you can’t just rest on your laurels and trust that the real estate that you bought previously or that you’re buying now is going to magically turn into what you need it to if you really want to retire in 10 years. So start a business, develop something that could be sold to somebody else. Create systems so that you’re not going to be working incredibly hard forever. But you are going to be working incredibly hard in the beginning. I would also recommend that you check out my book, Scale, to learn how to do that better. Keep us in the loop with how things are going. And remember, if you want to retire in 10 years, you’re going to have to sprint right now, but it’s totally worth it and I’d love to hear how that works out.
All right. Heidi asked our next question. “Hello. I’m currently living in my fourth house. The first three were live-in flips. I bought them, lived there while fixing them up, and sold them for a profit. I bought this house specifically to live in while finding a forever home for my growing family, which will also need TLC since that is my comfort zone. But for the first time I’ll keep this house to be a midterm rental, although for the first year it may be a self-managed short-term rental for the bonus depreciation.” And I love that you were taking notes from Rob Abasolo on this one.
“Since I’m new to rentals, what repairs do you make on renting that you would not make on a flip and vice versa? I’m thinking function is more important than cosmetics on a rental, so fix the toilet that needs to be plunged every 100 flush, but not the brass doorknobs. Do you have anything you always or never update?”
Wow, Heidi, this is a very insightful question. Great job. You’re asking the right questions. And you’re exactly right. On a rental, you’re not making improvements for cosmetics as much as you’re making improvements for functionality unless for some reason improved aesthetics would lead to increased rent. So if your property’s in Beverly Hills, California, updating those brass doorknobs might make you more money. But if it’s in a traditional rental market, you’re exactly right, you probably don’t want to do that.
Here’s the advice that I give people when it comes to what money to put into a rental. Rather than just thinking about what it costs, I want you to think about how durable it would be. When you put in tile somewhere, it’s very unlikely your tenant’s going to ruin that. When you put in carpets, you’re constantly going to be replacing it. Yes, if you have a toilet that needs to be plunged constantly, you’re better off to replace it. But can you replace it with the low flow toilet that uses less water so you can advertise that when you’re renting the property out to tenants that their water bill will be lower? Are the cabinets hideous and need an upgrade? Painting them makes plenty of sense on a rental. You don’t need to take them out and put brand new cabinets in that are also going to wear out.
Most of the time when you have someone show up at your house to fix a water heater or an air conditioner or look at a roof, the professionals tend to tell you the whole thing needs to be replaced because the cost to fix it is going to be more than what it would be to buy a new one. My experience when I push back on that is it’s rarely actually the case. Of course, sometimes you do need to replace it, but that’s not the rule. That’s the exception. I’ve had many people that said, “You need an entire new roof,” and when I pushed back, it ended up being an $1,800 repair, not a $28,000 roof like the roofing company wanted.
Remember with the rental that you need to keep it safe, but that doesn’t mean that you need to replace everything with brand new stuff. The name of the game is to keep the costs low and to find tenants that are not going to continue to push you to put in upgraded things into this rental property, especially because they may end up leaving after you spent the money. So I think you’re doing things the right way.
The only other piece of advice I’d give you if you’re trying to maximize the ROI on the properties is you may have to manage them yourself. Now, this is important but not as important with the traditional rental. I have plenty of those. I pay 8% of property management. That doesn’t break the bank. But on a short-term rental, they often want 25, 30, 35% of your rents, which means your cashflow typically disappears to the property management company.
The new trend I’m seeing is that people are buying short-term rentals, but they’re managing it themselves and they’re getting a new job, which is why I’m telling everyone don’t quit your job. Don’t think that real estate’s going to be passive. It’s too competitive now. It rarely works out that way. So I would love to see if you have the bandwidth for it to buy one of these short-term rentals that you talked about for tax savings and manage it yourself so that you can increase the cashflow, pay attention to what type of amenities allow you to charge more for rent versus traditional rentals where it really doesn’t matter what you put into the home, you’re not going to increase the revenue. Thank you very much for your question, Heidi, and let us know how that goes.
Hi David. My name is Brian and I’m from Morris County, New Jersey, and my question is this. I’ve recently come across the acronym of BEAF, break-even appreciation-focused, and I’m wondering why we’re not talking about this more in this market.
I’ve recently closed on a single family house in Palm Beach County, Florida, three bedroom, two bath where I put down a significant amount of money and the cashflow, as you can imagine, is very limited, just under $100 per month right now. My focus and my strategy is the appreciation play in Palm Beach County. Florida being the fastest growing state in the country and Palm Beach County being the third-fastest growing county in Florida.
My question is this, why are we not talking more about the BEAF method? One of my investor friends simply asked me why am I going to put down a significant amount of money on a deal, $141,000 to be exact, down payment on a $512,000 purchase for something that’s not going to cashflow. And I think the BEAF method clearly articulates what my strategy is, long-term appreciation, and I’m also betting on the interest rates coming down within the next 24 months where I can refinance into a cashflow position. I would love your comments on BEAF and would encourage you guys to speak about it a little bit more, especially in this market conditions. Thanks.
Well, well, well, Brian, what a great question. And you’ve walked right into my trap because I was really hoping that somebody would ask this and you have asked it. All right, let’s talk about, first off, why we don’t talk about it. Short answer is because it’s hard to sell you educational courses on anything that doesn’t evolve cashflow. And most real estate investing educators are trying to sell expensive courses, and so they have to say about cashflow. I’m literally writing a book about this topic right now that focuses on the 10 ways you make money in real estate of which one is what I call natural cashflow, which is the only one that everyone hears about and it’s why they miss out on so many ways they could build wealth in real estate.
Something else that you said that kills me, but I think I have to admit it, you only ask this question because someone made an acronym called BEAF, and this is making Brandon Turner look really smart because he’s constantly telling me that I need to come up with better ways to market my ideas, and I’m always telling him, “No, I don’t think I do. I think that my ideas stand on their merit alone.” However, nobody even asked this question until someone said, “Where’s the BEAF?” And all of a sudden it’s a thing, just like BRRRR became a thing when we called it BRRRR. I think I need to give in and I need to find better ways to market my idea so that more people will digest them. I guess the packaging does matter more than I want to admit. So thank you for asking about BEAF.
The short answer is it is harder to explain ways you make money outside of cashflow. There is less incentive to teach people about other things than cashflow because that’s usually the way you convince someone to sign up for your program, join your community, whatever it is they say, “Hey, do you want to quit your job? I’ve got this shiny cashflow over here that can replace your income.” And then the third is that it shines light on the uncomfortable truth that we don’t have full control over real estate. Everybody likes to feel safe and secure. We like to believe that the world works in a way that we can predict what’s going to happen. This is why we created spreadsheets because the human brain loves to know, “What do I put in my little box?” It’s comforting. But life doesn’t work in a spreadsheet, and this is what’s tricky because when you get into the real world, you realize that things are not stable, they’re not predictable, they are not consistent.
Over a long period of time, yes, that is the case. Imagine you own a casino. Over a long period of time, the house wins. However, individuals that come in can beat the house. You see what I’m getting at here? But I’m committed to telling everyone the truth, which means you got to be okay being uncomfortable because you don’t know what the market’s going to do. You don’t know if the market’s going to go down and you’re going to lose your equity. You don’t know everything, but that applies to cashflow. It just doesn’t get shared with people. You don’t know when your tenant’s going to leave. You don’t know when they’re going to trash the house. You don’t know when the city’s going to come along and say, “You can’t have a short-term rental here after you just bought a property where you had to put $200,000 down on.”
You don’t know a lot and you can’t know a lot, which is why my advice tends to be centered around adding additional streams of income so that when one of those streams gets shut off over something that you don’t know, you don’t panic because you got all these other streams of income. You still run a business. You have several different properties. I call it portfolio architecture, cashflow coming in from different types of assets so that if one of them gets turned off, your income streams are diversified and you’re going to be okay.
But I think that what you’re talking about is for intelligent investors. I don’t think it’s risky to buy in better markets. I think that’s actually the smartest thing you could do, which means you might be breaking even, or God forbid losing a hundred dollars a month. It might be the case when you buy in a really solid market with great fundamentals that other investors want the same investment, which means people are willing to pay more. That’s actually a sign of strength. You’re buying something valuable if other people want it. But that means that it might not cashflow because the price is higher. You see where I’m going with this?
When we chase cashflow, that is not wrong. It’s, “I like cashflow like everybody else does.” But when you get singular focus on just that, you end up chasing assets other people don’t want. You end up making decisions based off what a spreadsheet tells you and not what the reality is going to be. You end up tricking yourself into thinking that your results are predictable when they’re not, because you have the most unpredictable tenant base in the worst locations in the D class areas, in the stuff that people tend to have a lot of their own financial instability so they can’t pay the rent or they choose not to pay their rent. You see where I’m going with this whole thing?
The break-even appreciation focus community, if you want to say so, has figured out that more wealth is created by buying in better areas, but that often comes at the price of immediate cashflow. Now, I’m okay with that, assuming the person is in a position of financial stress. If you make 10 grand a month, but you spend three grand a month and you’re putting seven grand a month away in the bank because you live beneath your means and you’ve made smart financial decisions, if a property is losing a couple hundred dollars a month when you first buy it, but you’re saving seven grand a month and you have 50 grand in the bank, that isn’t actually scary. You see where I’m going here? If you have no money, no job, no savings, no experience with real estate, I wouldn’t tell somebody that they should buy a property where they lose money. They’re not in a position to do that. But the big boys tend to think about the big picture. They tend to look further into the future when making their decisions.
So I think you’re wise to be thinking about this. I also think that if you’re going to sacrifice cashflow in the beginning, you got to make up for it somewhere, which is your job, a business that you’re running increased savings, not spending money on dumb things, even keeping your own mortgage low by house hacking and sacrificing comfort so that you can put more of your chips on the long-term strategies.
And the reason people don’t talk about it as often is because it doesn’t pay to talk about it, but you’re wise. Thank you for bringing this up, for mentioning it. I think it should be talked about more. You just never know how the community is going to receive it. Even me saying this, there are people out there that are screaming around saying, “David Greene is a heretic who is saying cashflow doesn’t matter.” This is always a problem that we have to deal with. Please everyone understand I’m not saying it doesn’t matter. It just doesn’t matter in the way that it’s been explained to you in the past. Thanks for the question, Brian.
All right, that is a wrap, everyone. Thanks again for taking time out of your day to both send me questions and listen to the show. We would not have a Seeing Greene if it wasn’t for you lovely people, and I appreciate you. We’ve had a great response from our audience, and I encourage all of you to ask your questions, which you can do by submitting them at biggerpockets.com/david. I would’ve come up with that URL sooner. I just couldn’t think of a name for it. Just kidding. I look forward to hearing from all of you. Please do submit your questions. I would love to hear from you on a future of Seeing Greene episode. And if you’d like to follow me, you could do so @davidgreene24 on Instagram or any social media or davidgreene24.com to see what I got going on. Would love to hear from all of you. If you’ve got a minute, please do me a favor. Leave us a review on wherever you listen to your podcast, whether that’s Apple Podcasts, Spotify, Stitcher. Those reviews help a lot and I appreciate if you do it.
A couple of our listeners that have left us reviews online have said some pretty cool things. The first one comes from BooJedi and says, “Keep it up. Love listening to the podcast. David and Rob do a great job with the new material, and it’s helped me to get into the game. Currently, I have two long-term rentals and I’m looking to get my first short-term rental.” What an awesome review. Thank you for that, BooJedi.
And then from Lauren1124, she says, “Amazing resource. After semi-casually investing in real estate for almost 10 years, I’m finally taking the time to educate myself. I found this podcast after buying one of the BiggerPockets books, and I’m hooked and I can’t stop listening. Wish I discovered this years ago. Endlessly grateful for this resource.” Well, we are endlessly grateful for you, Lauren, because people like you are literally why we do this and why we provide it for free. So if I could get all of you to just go leave a review like Lauren did and like BooJedi did, I would be eternally grateful. And if you’ve got a little bit more time, please listen to another one of our shows. Remember, if you want to see what I look like, you want to see all the hand movements that I’m making and you want to see the cool green light behind me, check us out on YouTube where you can both listen and look. Thanks everyone. We’ll see you on the next episode.
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In This Episode We Cover:
- How to retire in ten years (or less) by investing in rental properties in THESE areas
- Turning your home equity into more real estate and investor-only loans most don’t know about
- Extracting the wealth you’ve built without the tax man taking your gains
- Rental property upgrades that are ALWAYS worth the money (and which to skip)
- The new “BEAF” real estate investing strategy that says “NO” to cash flow
- And So Much More!
Links from the Show
Book Mentioned in the Show
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.