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The Easiest Way to Invest in Real Estate in 2024

The Easiest Way to Invest in Real Estate in 2024

by | May 8, 2024 | Investing, News Feed

There’s one way to invest in real estate that’s cheaper, easier, and more efficient than almost any other strategy. It allows you to get the best mortgage rates with the lowest down payments and buy properties in the best areas. And you can do it every single year until you grow a massive real estate portfolio. Real estate millionaires have been made using this strategy, but most Americans have no idea about it. What’s the wealth-building secret that savvy investors are taking advantage of? Of course, it’s house hacking.

If you’ve never heard of house hacking before, the concept is simple: You buy a single-family home or a small multifamily property and rent out the space you’re not using. This not only allows you access to the best mortgages but also keeps your mortgage cost lower than living on your own. This strategy is so good that expert investor Dave Meyer and today’s lender guest, Terrence Terrell, have used it repeatedly to build serious wealth.

If you’re a first-time homebuyer or have a home but want to get into rental property investing, this is THE strategy to try first. Terrence gives a beginner-friendly masterclass on house hacking, showcasing the huge benefits of house hacking’s low-money-down loans, what you need to have to qualify for a mortgage, the common misconceptions most people get wrong about house hacking, and how to use this strategy to build wealth fast.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
For those of you out there listening, maybe you’re someone who doesn’t yet own a home. You’re renting right now and you want to get into real estate investing. I can imagine that you’re looking at home prices, higher interest rates than we’ve seen in quite a long time, and you’re feeling a bit discouraged. I talk to people who are feeling this way all the time, so don’t feel like you’re alone in trying to figure out what strategies work. But rest assured there are strategies that work in today’s market. And on this episode, we’re gonna talk about one of the most reliable strategies that honestly most prospective investors can use to get started, which is House Hack.

Dave:
Welcome to the BiggerPockets Real Estate Podcast. I’m your host today, Dave Meyer. Today I’m gonna have a conversation with Terrence Terrell, and he’s a lender and he specializes in working with a special niche of investors. It’s investors who are also first time home buyers. Because whether you’re house hacking or buying your first condo, your first primary residence, every real estate purchase is an investment. And this is really Terrence’s sweet spot. And today he’s gonna give us all a masterclass and everything you need to know if you’re considering house hacking from loan options to common misconceptions that trip up a lot of new investors to the smart house hackers checklist. I think you guys will love this episode. If you’re just trying to get started, let’s bring on Terrence Terence, welcome to the BiggerPockets Real Estate Podcast. Thanks for being here,

Terrence:
Dave. Thank you so much for having me. I’m excited to be here. All

Dave:
Right. We’re gonna start with something very basic. Most of our audience has probably heard the term house hacking, but for those who haven’t yet, can you give us a brief overview of this strategy?

Terrence:
For sure. So house hacking is essentially someone that buys and owns a home and rents out part of it for income, whether it’s a single family home and they’re renting out rooms, couches, basements, attics, whatever that may be. Or they’re buying a multi-unit property, 2, 3, 4 units and renting out the other units. That’s house hacking.

Dave:
And why is this such a popular strategy, particularly for new investors?

Terrence:
It’s the easiest thing to do, you know, because there are so many benefits to house hacking. I mean, obviously you’re buying the home as an owner occupant. When we’re looking at, you know, from a lender perspective, financing, owner occupied financing is always gonna get you the best terms. So if you can do anything with that to reduce your own financial commitment monthly, there’s a benefit there. If it’s a multi-unit, I can actually use the qualifying income from the other units that you’re renting out to help offset. So people will actually qualify for more home if they’re buying a multi-unit than they would if they were buying a single family because you have extra income.

Dave:
I just wanna point out to everyone that the reason Terrance has specifically listed duplex, triple Lex and Quadplex is that that is the limit. Four units is the limit to what is considered quote unquote residential financing. Right? Anything above that. So if you go five units or higher, you’re gonna need to go to a commercial lender or a private lender, something different. And so that’s why when we talk about house hacking, most of the time we talk about four units or fewer. In addition to that one benefit of being able to add rental income to your DTI for the two, three, and four units, Terrence as an investor. Mm-Hmm. , what are the other benefits of residential financing? Because this is, and owner occupied financing, because this is sort of the one way that you can buy multiple units, right? And still get owner occupied residential financing.

Terrence:
Yeah. So the big benefit there is like I was talking about a few minutes ago, with the benefits of buying as an owner occupant. So the main benefit, especially for first time investors, I mean everybody’s financial situation is different, but it’s the initial cash investment. So buying as an owner occupant, your down payment commitment is a lot lower than it would be if you were buying non-owner occupant, a straight investment property. So, depends on the program, right? So if we’re looking at FHA financing, you can put three point a half percent down of the purchase price up to four units. If you’re doing conventional financing, you can go into, again, up to four units with 5% down. If you’re buying a single unit property and you’re a first time home buyer, you can go into it with 3% down. There are programs to where you can even put down 1% on a single unit property.

Terrence:
So buying as an owner occupant, especially for your first property, is a huge benefit. Even if you’re considering, okay, I want to become an investor, buying a property is an investment, I don’t care if it’s a one bedroom house, a townhouse, a condo, that’s an investment because you can then think 1, 2, 3 steps ahead. What’s my plan for this? So when I’m having a conversation with someone that says I want to be an investor, what do I do? First step, okay, you wanna buy a condo two steps ahead. You wanna buy a multi-unit, a single family, whatever it may be. What’s our mortgage payment gonna be for the condo? What is the market rental income for these condos in this area? Will it cover your mortgage And some when you move out, does your building allow rentals? Is there a rental cap? You know, these are the things that you want to ask. When there’s condos, single family homes, there’s no cap, right? But you still want to make sure that the rental income that you’re gonna get when you move out of it, because again, that’s an investment, is gonna at least cover the mortgage because you don’t wanna be in the red when you move out. That’s a bad investment.

Dave:
That makes sense. So it’s advocating for thinking ahead. Uh, so that, I think, I guess there’s two strategies, right? One is just making sure that it’s a positive, probably a cash flow positive deal if you move out. Mm-Hmm, . The other one is, if you’re using an owner occupied strategy for that first deal and you move out and you wanna maybe do another occu owner occupied deal into a triplex quadplex, you’re gonna have to refinance that first deal because you obviously can’t get two owner-occupied deals at the same time. Well,

Terrence:
Not necessarily. You don’t have to.

Dave:
There’s a seasoning, right?

Terrence:
Yeah. You don’t have to refinance it. So when you’re buying an owner occupied property, your commitment to that property is one year.

Dave:
Okay?

Terrence:
You at closing, you sign a document that says, I intend to live in this property for one year, but if you’re going conventional financing and you buy one this year, you can buy another one next year owner occupied. You don’t have to touch the financing for the first one.

Dave:
Got it. Okay. And I just wanna get back to something that Terrence said earlier, just so everyone knows, is like there are programs right now where you can put 3% down, 5% down, 10% down and buy four units. Like that is one of the most powerful ways to start your investing portfolio out there. It’s, it’s really why so often when investors are asked like, what’s the best way to get started? Ask a lender, what’s the best way to get started? So many people say this because it’s really just kind of a little bit of a cheat code. ’cause you can put less down, you can get more units. And if you live in a state or a area where cashflow is difficult to come by, one of the cool things about house hacking is you don’t actually need to have it be cashflow positive in order for it to be a positive financial decision for you.

Dave:
If you can reduce your housing costs. Like imagine you’re renting and you’re paying 1500 bucks a month. If through house hacking you’re only paying $200 a month, right? That is $1,300 a month that you’re saving. And it’s actually after tax money. So it’s even better. Mm-Hmm . And so you have to think about what kind of financial situation that would put you in. That’s not true of everyone. Like some, for some people it would still be better to rent, but it just give you a little bit more flexibility. So I do wanna just talk to you a little bit about Terrence, like who this is good for. ’cause we’ve been talking about how great house hacking is, but like is it good for everyone or what are the types of clients you think do best with house hacking?

Terrence:
Well, I mean, I’m a little bit biased because I’ve done it for many, many years myself. But I mean, I think it’s good for anybody.

Dave:
Yeah, me too. I did it myself. That’s how I got

Terrence:
Started. Exactly. And you know, if, like you said, if the numbers make sense to where it’s reducing your housing costs or housing expense, or even if it’s the exact same as it would be if you’re renting your benefit, there is you’re owning a home, you’re building equity. So there’s the win there. But like you say, it’s not for everybody. Not everybody wants to be a landlord. Not everybody wants to deal with tenants. That’s understandable, right? So if someone is wanting to and willing to be a landlord or they’re used to having roommates, it’s a win-win. I don’t see any negatives to it. If it’s someone that is capable and willing to be a landlord,

Dave:
I think that makes sense. I, there are certain personality types, right? Where like, if you don’t wanna live next to your tenants, like, I personally don’t think it’s as bad as people make it out to be. Like, I, I did it for several years. But I, I, I understand that if that’s something you really don’t like, it might not make sense for you. Alright, so now that we know what house hacking is and who should consider it, what do you need to know before you go after your first house hack deal? Terrence brings that down for us right after the break. Welcome back to the BiggerPockets Real Estate podcast. I’m here with Lender Terrence Terrell and we’re walking through everything you need to know before you start that first house hack. So let’s just jump back into it. Let’s talk about, you know, some common misconceptions that happen with house hacking. Like what are, where do people get confused during this process?

Terrence:
One of the biggest ones I have when I take phone calls from people is number one, the down payment. You know, it’s that misconception that I have to have 20% down to buy a house. That it’s, you know, so expensive. You know, saving for a down payment. It’s so hard. Like we just talked about. There are other options, especially now that Fannie Mae has changed their guidelines back at the end of last year to allow 5% down on two to four units. That’s huge. I mean, you, you’ve not needed 20% down to buy a house for quite a while. I mean it’s, you can get into your first home with 3% down. Multi-units is where it gets a little complicated. But the down payment is a huge misconception. The difficulty of being a landlord is a little bit of a misconception. Um, it’s not as hard as people make it out to be.

Terrence:
Like you said, you’ve done it before. I’ve been doing it for years. I have tenant that live above below in other units. It’s not terrible. If you’re willing to put in the work, you have to make sure you vet the tenants. People think that not even just from a house acting standpoint, from a home buying standpoint, that it’s hard that the financing is hard. It’s not if you have a good lender that’s gonna make sure that everything that you have is in place and if it’s not tell you what you need to do to get there, or that I can house hack and I can make money every single month on every purchase no matter where I am. Like you touched on a little bit ago, there are differences depending on where you are, the market that you’re in. I talked to a lot of people, thankfully through BiggerPockets ’cause I’ve had a presence on, on the platform for almost 10 years, 12 years now, that when they’re listening to podcasts, when they’re reading articles and they’re talking about, oh, cashflow positive.

Terrence:
I bought a house for $50,000 and I put $10,000 into it and I’m gonna sell it for 400,000. Like, that doesn’t work everywhere, you know? So I work with, like I said, I’m in Chicago, I, I do land in multiple states around the country, but you know, I’m primarily working in a major metropolitan where those numbers aren’t necessarily the fact. So we have to kind of back up a little bit and say, okay, if you’re looking to buy a multiunit on a two unit, you’re probably gonna do what you said Dave. And you’re gonna reduce your monthly payment just with a two unit, three unit. You’re probably gonna break even four units where you’re gonna be cashflow positive. Then you think about the numbers when you’re gonna move out. So those are the biggest misconceptions that I have to deal with.

Dave:
Do you find that most clients that come to you fully understand what they’re getting into? Are there any things that perspective or potential house buyers should be thinking about before approaching a lender?

Terrence:
Well, to answer your first question, no. A lot of people have no idea what they’re getting themselves into. . Alright? Um, you know, they say, okay, I have, you know, X number of dollars to put down on a house. I wanna buy a million dollar house. I’m like, Hey, hold on, let’s back up a little bit. Let’s, let’s work backwards into what that needs to look like. Um, ’cause people know that they need a down payment. What that down payment is, they don’t know. But we educate ’em on what that is. But one thing they’re not thinking about is CapEx on a house. Mm-Hmm . They’re not thinking about closing costs on a house. You have to have those. I mean, there are ways for closing costs. There are ways to ask for seller credits to kind of help with those. One question I do get a lot of, oh, I’m just, I wanna roll in my closing costs.

Terrence:
I’m like, well technically that’s not a thing. The way that you do it is you get a credit from the seller to then reduce those closing costs. That’s how you can get the seller to pay for closing costs. But there are limits, you know, there are limits on how much you can get with FHA financing. You know, you’re capped at 6% depending on the down payment. Conventional financing, you know, if you’re less than 10% down, which most first time buyers are, you’re capped at 3% of the purchase price. But that goes a long way that can help you almost eliminate your closing costs. So then you can come to the table with just your down payment, but then also, okay, well what, what’s my CapEx on this place? You know, what am I gonna have to put into it? What am I gonna have to put into it years to come?

Terrence:
This is why you have a home inspection. So you can have a general idea of what that looks like. One thing people don’t think about is reserves. Yep. Reserves are key. You know, if you’re buying a two to four unit and we’re using conventional financing, six months of reserves at your minimum. And what that means is six months of your mortgage payment put away, we have to show it. We have to source it, we have to show you have, it doesn’t have to be liquid, it can be 401k, it can be stocks. We just have to show that you have six months of reserves.

Dave:
Yeah. And that just makes sense from a risk mitigation perspective, right? Like everyone needs to be able to weather financial downturns. Like you know, everyone knows this life happens and mm-hmm you might face a month where a boiler breaks and then something happens your personal life totally unrelated to real estate. You have to have some money in the bank, uh, to both literally and figuratively to actually uh, be able to weather those storms. Because as we talk about a lot on the show, real estate works when you hold it over the long run, what stops you from doing that is not properly having reserves to weather these down storms. That’s when some people have to sell, uh, at an inopportune time and take a loss. Whereas if you just keep the right amount of reserves, you can hold on as long as you need to make the return that you’re looking for. Right. So let’s talk about qualifying for a house hacking loan. Like for an owner occupied mortgage for let’s say a duplex. Like what are the main things you as a lender are looking at?

Terrence:
We’re gonna look at credit score, we’re gonna look at assets. We need to make sure you have sufficient funds to close. So your down payment, your closing costs, your reserves. We’re gonna look at your debt to income ratio. This one is huge. So your total monthly debt, because everything we look at from a lending perspective is monthly. So your total monthly debt as a percentage of your gross monthly income. And that is inclusive of your mortgage payment. So if we’re looking at a duplex, we’re gonna look at your gross monthly income plus the rental income that we can get from the other unit and we can use 75% of that. The appraisal is gonna tell us what the market rental income is. We use 75% of that and we look at your debts. So your minimum monthly payments on your credit cards, your car payments, your student loans, any other monthly debt that you have plus the housing expense.

Terrence:
Those are your monthly debts. And we look at that percentage with conventional financing, most of the time your cap debts somewhere between 47 and 49% of your gross monthly income. We’re gonna wanna see a credit score of at least six 40. Okay. And then when we’re looking at scores, you know, below 700, we may also be looking at FHA financing because FHA financing will probably give you better terms of financing. When I say by that is your interest rate and your mortgage insurance, because when you put down less than 20%, this is lending 1 0 1, when you put down less than 20%, you’re gonna pay private mortgage insurance. Mm-Hmm. . So that factor, that mortgage insurance is probably gonna be lower with FHA financing the rate is probably gonna be lower with FHA financing, if your credit score is a little bit lower, still a way to get into the property, but it’s a different way we can finance it to keep it as favorable for you as possible. So those are the big things we look at. So when I’m qualifying someone and something is off, one of those things don’t fit. We figure out a plan so that they can get there. Got it. Because there, there are ways to get there.

Dave:
Yeah. That, that totally makes sense. And so much of it is trade offs. Like you’re talking about like the ways to get there. You know, if you wanna put 20% down, great, you’re gonna probably cash flow better because you’re not gonna be paying that PMI that private mortgage insurance. If you put down less, if you have less money saved up, that’s also perfectly fine. But you have to understand that that’s going to reduce your cash flow a little bit. Right. For first time investors, for people who are just getting started, like you sometimes just need to make trade-offs and you’re not going to get the perfect loan because just to be perfectly honest, you’re not the perfect borrower to the bank. Right, right. Unless you have 20% down. Um, and so you have to just think about that and that’s totally fine, right? Like not your first deal doesn’t need to be a home run. A lot of times house hacking can turn into a home run, but even if it’s just a, you know, a single, a double, a triple kind of deal, it can really work out for you. And that’s why you wanna just work with your lender to sort of consider the trade offs, what your priorities are, what your goals are, and construct the right loan for you given those parameters.

Terrence:
Absolutely. People just have to understand and okay, well here’s where I am right now. Like you said, I may not be able to buy this right now, but right now I can buy this and still be comfortable and be happy. And then later on I can upgrade to this when I have more money, more equity, more salary, whatever the situation is.

Dave:
Alright, we do have to take one more quick break, but while we’re away, if you have a friend or a family member who wants to get their first property but needs some information, some inspiration, some encouragement to get started, go ahead and send this episode their way. We’ll be right back. Welcome back investors. Let’s pick back up where we left off. So that sort of brings me to my last question here, which is, you know, you’ve already given us some advice on how to sort of start thinking one step ahead, two steps ahead. But do you have any thoughts on how house hackers who are looking for their first deal or maybe their second house hack can think strategically right now and set themselves up for lability, which might be a word I just made up , but lend ability in the future.

Terrence:
So it’s honestly the exact same things that we go through when qualifying them the first time. So I wanna say, okay, well what is the plan? What do you want to do? Um, when you already own something? Like if someone that’s looking to buy something in the future that they already own, you want to think about your tax returns because this is, I mean this can be a whole new conversation, but I’ll kind of shorten it. We’re gonna look at your tax returns to tell us what your income is on your current property. So depending on the expenses that you have for the property, depending on what the rental is, depending on how many months of vacancy you have, you may not show very well on your tax returns. Which is always the fun part. Another fun part when I’m having conversations with people because they say, oh yeah, I have a really good accountant.

Terrence:
I’m writing off all this stuff. And I’m like, great, you’re in the red on this property technically, so that may hurt you for qualifying for your second property. This is only for a multi-unit. Again, I, I can go on about this all day, but on a single unit property we can use departing rental income when you’re buying another one, which is awesome. So we just have to show that your current home is rented. We have to show that you have received two months rent or first month’s rent and security deposit and then we can use again a percentage of that to offset your current mortgage. So when you’re looking to buy your second property, it’s almost like you’re starting over again. We don’t have to hit you with any additional debt.

Dave:
Terrence, do you have any final thoughts or final advice for those who want to house hack and how they can just be as prepared as possible for their conversations with their lenders and to be a successful house

Terrence:
Hacker? Absolutely. Well, number one is talk to your lender. It’s

Dave:
So true. It’s funny ’cause it just seems like people are always like, well I don’t know if I’ll qualify. And I’m like, well did you talk to a lender? And they say, no,

Terrence:
No, exactly. I’m

Dave:
Like, it’s free. Just go talk to a lender. They’re gonna tell you exactly what you need to know and you’ll save so much time knowing what exactly what you qualify for, exactly what your position is. And you could start honing in on the properties that actually work for you.

Terrence:
Absolutely. I mean, I would say make sure that they’re talking to a lender that understands investors. There are plenty of great lenders that understand investors on BiggerPockets on the platform. Um, same thing with the real estate agent. You wanna make sure that you’re working with one that knows investing, knows, invest in your market. Um, ’cause that’s key because that’s gonna help you set yourself up for success. It’s not just someone that says, okay, yeah, here’s what you qualify for, here’s how you can close the deal. It’s someone that’s thinking about it with an investment mindset. So that’s thing number one. And when you’re going into that conversation, have the essentials with you know what your income is, know what your assets are, know what you’re willing to spend on the home monthly, know what you’re willing to put down and then they can help you work into the purchase price so you know what you’re doing.

Terrence:
There are plenty of people to talk to. Just people that have done it. Plenty of investors that aren’t. Lenders and realtors that are on the platform, that are on the forums, have conversations with them. Those that are in your market, you know, go to some of the meetups. Those are key. I go to a bunch of them. It’s fun, you know, it’s great to just talk to people. ’cause I, I started investing before I even started lending. Oh, nice. So yeah, it’s, it’s just one of those things where there’s so much knowledge out there, but you wanna make sure that it is specific to you as possible. But step one, talk to a lender. ’cause you don’t know what you don’t know. All

Dave:
Right, well that’s just very candid. Good advice. I appreciate that .

Terrence:
I do what I can.

Dave:
And obviously for anyone listening, if you want to meet a lender, uh, we’ll put Terrance’s information in the show notes of course below. We also have a lender finder on BiggerPockets. If you go to biggerpockets.com/lenders, put in some information there. You can find a lender to talk to Terrence, thank you so much for joining us. This was a really great, fun conversation. We appreciate

Terrence:
It. Dave, thank you so much for having me. This was a blast.

Dave:
And thank you all for listening for BiggerPockets. I’m Dave Meyer and we’ll see you soon.

Watch the Episode Here

https://youtube.com/watch?v=mwdtOu3ZIIE

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In This Episode We Cover:

  • House hacking explained and why it’s the easiest beginner real estate investing strategy 
  • How to buy your first investment property with as little as ONE percent down 
  • Qualifying for a mortgage and what first-time homebuyers must know before they apply
  • The free way to find out whether or not you’ll be able to get financing for your house hack
  • The easy, low-money-down way to build a real estate portfolio by house hacking
  • And So Much More!

Links from the Show

Books Mentioned in the Show

Connect with Terrence:

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

The Easiest Way to Invest in Real Estate in 2024

Seeing Greene: Is Losing $800/Month in Cash Flow Worth $200K+ Equity?

by | May 7, 2024 | Investing, News Feed

Would you buy a rental property that loses money every month? What if, in a few years, that one property could make you hundreds of thousands of dollars? Would the negative cash flow be worth the massive appreciation upside? Today, we’re answering that exact question from an investor who could be sitting on a wealth-building opportunity but doesn’t know what decision to make. Should he buy the “bleeding” property at a steep discount or give up this needle in the housing market haystack to avoid a cash flow trap? Let’s find out!

We’re back on Seeing Greene as David and Rob, your go-to real estate investing experts, answer questions directly from BiggerPockets Real Estate listeners like you! First, an investor has a rare opportunity to buy “Grandma’s house” with over $200K+ in potential equity upside. The problem? It will LOSE $800/month! Next, a new property manager wants to know how to raise rents on a twenty-year tenant. Do you pay capital gains on the profit of your home sale or the entire amount? We’ll show you how to know how much you owe. Then, an investor debates selling his C-class cash-flowing properties in exchange for appreciating assets, and we explain the “sneaky rental” tactic that’ll take you to ten rental properties in no time!

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 jump on a live Q&A and get your question answered on the spot!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

David:
This is the BiggerPockets Podcast show, 9, 4, 9. What’s going on everyone? This is David Greene, your host of the BiggerPockets podcast. Today we have episode 9 49, and if you don’t know what a palindrome is, go check out Google because you’re in one right now. We’ve got a great show for you on Seeing Green episodes. We get into listener questions from you, our base, we’re going to be talking about what you could do to build wealth through real estate with Rob adding his little spice into the seasoning. Rob, how are you today?

Rob:
Oh, sounding like a gremlin because I lose my voice so easily after I go to conferences, but I’m hanging in here, man. I’m excited to answer some questions.

David:
Yeah, well, we got some really good ones. So in today’s show we get into a lot of different things, including how to allocate capital when you’ve got a bunch of properties but they’re not performing super well. What asset classes you can consider moving into if the one that you’re in right now is struggling, how capital gains work and how you can use a cash out refinance to sort of get money out of properties tax free. And we start to show off with a great question about if somebody should buy a property that they know is not going to cashflow when they first buy it. All that and more in today’s seeing green.

Rob:
And most importantly, if you want a chance to ask your question, please head on over to biggerpockets.com/david. The link is in the description down below. Pause this, send us your questions and let’s jump back in.

Tony:
Hi David, I’m Tony. I’m from San Jose, California. My wife and I have an opportunity to buy her grandmother’s house off market for about eight 60 and it’s worth about 1,000,050. It does need about 190 repairs. We’re looking at possibly making it a long-term investment due to the equity and appreciation value that it has gained in the last couple years. Unfortunately, the rents aren’t going for what the mortgage will be. I would be upside down about six to $800 a month, but long-term, would it be a good investment for us to maybe take the hit now without cashflow and potentially have a good investment later? We would have to make it our primary home, so we will offset some rent, but it’s not going to be the full mortgage payment. What do you think, David? Thank you.

David:
Ooh, Tony, man, I love questions like this. We are going to get into some good real estate investing conversation right now. This is the age old question of which has caused me to be labeled a heretic and blasphemer of real estate sound advice. Rob, I just want to thank you for always sticking by me, even as people have criticized me for saying there is more than just cash flow when it comes to investing in real estate. And questions like this, highlight the age old question, STH versus Jedi, orc versus elf and cashflow versus equity. So let’s break this down. Tony’s got an opportunity to buy his grandmother’s property in San Jose, which is a high appreciation market in the Silicon Valley area of California where all the tech companies are. If you have an iPhone, it was probably made down there. He could buy it for significantly under market value, which I call buying equity.

David:
So he’s going to be in for eight 60. It’s worth about 1,000,050 needs $190,000 worth of work, but I am assuming if he spends the money to fix it up, that will also increase the ARV by at least that same amount. Otherwise, when it makes sense to do the work, not really, the problem is it’s not going to cashflow. He’s going to be bleeding 600 to $800 a month when he first buys this property. So I’ve got a way of looking at deals like this and we’re going to get into that in a second here, but we’re going to be talking about if someone should ever do something like this, a few other details to include if he buys it from her. According to California’s prop 19, he won’t have the property taxes readjusted. He’ll be able to take over whatever the property taxes are currently if it’s grandmother or grandfather or father, mother to, did I say that wrong?

Rob:
You could say no. I was going to say you could say if it’s grandmothered in,

David:
That’s probably exactly where that phrase came from. That’s exactly right. So he’ll get to keep those old property taxes, but he’ll be bleeding 600 to $800 a month. Alright, Rob, let’s start with you. Is this a hard no?

Rob:
Well, I have questions. I have questions about this. So let me ask this clarifying question. He mentioned that he may move into it as a primary residence and so if he moves into it as a primary residence, do we know how much his, I dunno his monthly rent or his monthly situation would change?

David:
He didn’t say anything about that. He just mentioned he’ll be bleeding 600 800 a month. So let’s take this question from the perspective of it would be a pure rental, how most of our listeners are going to be assuming.

Rob:
Okay, so generally I’m very anti cashflow. Sorry, I’m very anti anti cashflow, meaning I don’t really like inheriting properties that are going to lose me money every single month. But I would say considering this isn’t the one most prime market in existence, which is San Jose in terms of appreciation, this is a very rare scenario in which I’m like, okay, I do actually think there’s an appreciation play there because historically San Jose has paid off really, really, really big for anyone that inherited or ever got property at any point in the past. So I think as long as he feels like he can afford it, bleeding gives the impression that maybe he can’t afford it. And so if that six to $800 is going to be detrimental to his financial situation, absolutely not. I would probably just sell it, take the money and go. But if it’s an expense that he is willing to put up with for 2, 3, 4 or five years, then it’s definitely up for consideration. How do you look at it?

David:
I have a framework that I look at these deals through involving 10 ways you make money in real estate. We’ve already talked about buying equity, that’s one of them. He’s buying a buttload of equity here, so that’s a really good deal. I don’t love buying a property that’s going to bleed money if it’s always going to bleed money. So I wouldn’t want to do this in the Midwest $70,000 house rents are not going up. That’s a different story, but I talk about something called market appreciation cashflow, which is buying into a market where rents are likely to continue appreciating every year more than the national average as well as market appreciation equity, which is buying into a market where the value of the property is likely to continue increasing over the years at more than the national average. San Jose is very strong in both of those.

David:
So barring any unforeseen circumstances, those rents are going to be going up a lot and after a couple of years he’s not going to be bleeding money and after a couple more he’s going to be making money and after a lot more he’s going to be making a lot of money and have a lot of equity. So this is really a question of delayed gratification versus immediate gratification. He’s going to feel some pain in the immediateness because he’s going to be not covering the mortgage, but he’s probably going to make an insane amount of money over the long term. So now we move into how do you do this wisely if you’re going to do it well, there’s a couple ways we talk about portfolio architecture. Do you have other properties in your portfolio that are cashflowing solid? Maybe something you bought years ago that also benefited from market appreciation cashflow that provide cashflow that would cover the money that you’re losing on this one.

David:
Now you’re balancing your portfolio. I’m taking some cashflow away from these houses to get a long-term equity play with this one. So I’m getting all the benefits of long-term equity without the risk of losing the property foreclosure, pulling cashflow from somewhere else. Do you have a great job and you live beneath your means? Well, you’ve got cashflow coming in from work, even if it’s not coming in from your portfolio, in which case this becomes less risky to someone who is living beneath their means versus someone who’s living paycheck to paycheck. And it’s these details that stop you from being able to just tell people always buy cashflow or always buy equity. You have to look at your specific scenario and my advice is to construct your life in a way that you can buy amazing deals like this one that he’s being offered without having to turn them down because you’re in a financially strong position.

Rob:
Yeah. Okay, so something else to consider here is that he said that he’s losing six to $800 every single month. I mean I’d imagine that he’s probably not exactly losing that because of debt pay down too. Do we think that he’s buying this with a brand new 30 year mortgage or do we think he’s kind of walking into, I don’t know, a subject two or something like that?

David:
No, I think he’s probably going to be getting a new mortgage from the way you described it.

Rob:
Okay, so he’ll have a little bit of debt pay down, but probably not in the amount of time. It probably won’t be that significant here in the first five years.

David:
I like where you went though. Another one of the 10 is loan pay down. If he could take over a mortgage that’s already 15 years into being paid off, he’s paying off principle every single month, which makes, even though he might be losing six to $800 a month in cashflow, the principle reduction could be two or $3,000 a month, which means he’s actually gaining wealth.

Rob:
And then the other thing to keep in mind is that he does have the equity, so while he’s quote bleeding six to $800, when you think about what you’re actually losing over the course of let’s say three years, so if it’s 600 bucks times 12, what is that, David?

David:
600 times 12? Yeah, that would be 3,600 times two. There you go. Okay,

Rob:
So he’s going to lose $7,200 a year and that’s 7,200 times. Let’s say three, he’s going to lose about $22,000 in the next three years. That’s what he’s going to bleed. However, he is walking into multiple six figures of equity. So if he does kind of like that overarching math, he’s actually not losing any money at all,

David:
Not at all.

Rob:
It feels that way every month and maybe technically from his bank account standpoint he is, but from the net worth side of his entire life, he’s not actually losing any money. He’s walking into a pretty good situation. So if that’s something he feels like he can weather for a few years, then that’s definitely a deal I’d take because it seems like if he can hold onto it until he’s maybe even in a stronger financial situation, eventually maybe he can do a value add and he can put $180,000 into this property, how much he says it needs and repairs. And if he does that, then can he increase the equity from 300 k to four or five or $600,000 and that’s where the wealth really starts compounding.

David:
Well said, Rob. You’re actually speaking right out of the framework of my last book, pillars of Wealth. People can pick that up at biggerpockets.com/pillars where I talk about how we typically only look at energy in our bank account or in our wallet, but there’s actually energy in your stock portfolio and there’s energy in your real estate. We just call it equity. And like you said, when you look at it from the big picture, you’re like, all right, I’m going to be losing $21,000 over three years to gain $250,000 or so. That’s an incredibly good return, and that’s not even considering the fact that rents are going to be going up over time and real estate investing is this is what it’s really like to do it. It is more complicated than purely a cash on cash analysis, although that’s very important. It’s a fundamental, it’s understanding it. It’s not the only thing you have to be good at. Maybe like playing basketball, you got to build a dribble the ball, but it’s not all about dribbling. There’s other things you have to take into account to be good at basketball. Same thing for real estate investing. So well handled. Rob, I really like your perspective there.

Rob:
Yeah, well good for you Tony. Sounds like a great house. Keep us updated, come back with another question when you have it update.

David:
Yeah, Tony, and if you’re looking for some good Mexican, I recommend La Victoria in San Jose. Make sure you get that orange sauce. Alright, everybody coming up after this quick break. We’re going to be talking about portfolio architecture as I put on my asset manager hat as well as how to handle a rent increase from a tenant that has been in place for 20 years. Stick around. All right, welcome back everyone. We’re going to be talking about how to handle my portfolio and a capital gains question after that. All right, our first question comes from Lauren who writes in the real estate rookie Facebook group. I am a first time property manager for a long-term duplex. The first floor tenant has been living in the house for 20 years without any lease as the former owner of the house was her sister and her rent is only $600, which is basically free. The new owner, my boss has already told the tenant that there would be a lease incoming and the rent increase once I arrived. The market price for the apartment in its current state is about 950. I’m looking for advice as to how to best handle the rent increase. It seems unfair to me to ask someone to pay $3 more without a lot of notice, but it’s also unfair to expect to pay so little and I know she’s expecting to pay more. How would you go about a timeline in rent increases and creating the lease?

Rob:
Interesting. Yeah, so this one seems right up your alley. You’ve probably come across this a few times in your career, I’d imagine, huh?

David:
Oh god, all the time. One of the biggest mistake investors make is thinking that they’re helping somebody by keeping the rent low and then later on they need to increase it or that person, maybe the property falls into disrepair and they realize I need to spend all this money to fix the place up, but I’m not getting rent. I have to charge more rent to make up for this, and the tenant is upset about it. So Rob, I know that you love conflict and you love hurting people’s feelings. How would you go about handling this

Rob:
With the baseball bat in my hand? No, I’m just kidding.

David:
It’s a tricky scenario, right?

Rob:
Yeah, I’m a softie man. I’m not good for this. This is why I go into short-term rentals. I don’t have to deal with this ever, but typically it kind of lands as a one-two punch. So I would have the conversation over the phone, I would let them know that there’s going to be an increase, which sounds like Lauren did, and I’d say, Hey, just so you know, the new property manager, the new boss, new management, whoever you want to call it, they’re in place. We will be increasing rent. I’m not sure what that is right now. I’m going to get you an answer. At the end of the day, I’m going to send you an email and then we can check in afterwards. That way they understand and you can have time for them to process it, you can process it, then send it in writing formally that same day so that you can kind of get all the numbers out there, let them digest it. You can digest it. I think what you don’t want, in my opinion, you tell me if I’m wrong here, but you don’t want to be like, Hey, I know you rent 600, we’re going to actually increase it to 900, and then it becomes an instant tense negotiation where someone’s going to back down or it’s going to end very poorly. Whereas I think if you send it in an email, it’s in writing, at least people can both process it on both ends and then you can discuss it. What do you think?

David:
I love it. And it has nothing to do with the fact that an email allows you to avoid the discomfort of this conversation at all, right?

Rob:
No, no. I think you can still have it. I think you can still have it, but it at least gives them their opportunity to come up with maybe more non-emotional rebuttals that you’re probably already going to be prepared

David:
For. So it’s like drop the bomb and let everything kind of settle before you actually have the conversation. Yeah,

Rob:
Say, Hey, just checking in. I wanted to talk. I know it’s a lot, but let’s get into it and then you can kind of explain it a bunch.

David:
Alright, Lauren, here’s what I’m going to break it down. First off, Lauren and anyone listening who finds themselves in similar situations, even if you’re not a real estate agent, check out my [email protected] slash skill. There’s something that I call baseline adjustments and it has everything to do with what we consider fair. So if you think about what makes you happy in life, it’s when you got something better than what you expected or what you thought was fair. You go to La Victoria, a Mexican restaurant and you order a burrito and they put in a little street taco cost ’em 45 cents, but you’re like, that is so cool. I was not expecting that. But if you happen to go and buy a burrito that you thought came with two tacos and they only gave you one free taco, you feel like you just got ripped off even though objectively that’s not the case.

David:
Expectations determine how happy we’re, if you can exceed expectations, you’ll be happy and if you fall short of them, the person won’t be, rather than fighting with someone over a free taco, it’s so much easier to just adjust expectations. Here’s what that would look like. I would go to the tenant and I would say, Hey, here is a list of other units in similar condition in your area and what they’re renting for, and I would use the best cases with the highest rent. So I’d probably be showing, she said it’s around nine 50 ish, I’d find the ones around 9 75 and I’d say this is what current market rent is. However, you’ve been a great tenant, so we are willing to rent to you for only $900. You’ve set a baseline at 9 75 and then you said, I will give it to you at 900, which looks like a win for them, but the person who’s receiving this is thinking 600 is fair market rent.

David:
Maybe they were expecting to go to six 50, so the 900 looks like a big jump. If the baseline is 600, you start by moving the baseline up to 9 75. Then you give them your number, which is significantly less than the baseline making it look like it’s a better deal for them and it is still $50 less than the nine 50 she thought she was going to get. Now if the tenant says I cannot afford it, it’s not a matter of them thinking that they were ripped off because they see what fair market rent is. It’s them of their own volition choosing, I don’t want to pay that higher rent and I’m going to move out on my own. Much better than just saying, Hey, here’s what the rent is. Now the tenant has to figure out is 900 fair is nine 50 fair? Am I being ripped off? Can they even increase rent by 50% at one time? All of that makes them think they’re the victim and they’re being ripped off versus if you start with setting the baseline where you want it and adjust from there.

Rob:
So I got a question. So do you think it is better to show properties that are more expensive, like you said, like a thousand bucks, 9 75, or do you think it would be better to show what they could actually get for $600 and say, Hey, by the way, $600 apartments in this area, this is what they look like?

David:
I think you do both. That’s a great point. That’s a great point. I mean you’ve sort of set the ceiling and the floor by bringing in what you did. I like that Rob dropping a little bit of that orange sauce salsa on my taco.

Rob:
I’d imagine that the benefit of doing something like that would be that you’re showing them not necessarily like, Hey, you’ve got nowhere to go, but hey, if you decide to not move forward with us, if you want to stay in the same budget, you’re going to be taking a pretty drastic dip in quality. And so it’s best to kind of work with us through this.

David:
That’s exactly right. You’re showing them, Hey, this is market rent and so I’m giving you a discount. And then you’re also saying, but if you don’t want that discount, here’s what you can expect to be walking into. You’ve now set two very good baselines for that person to see. The obvious right choice is to pay that $900 and be grateful that it’s still 50 to $75 under fair market rent. Alright Lauren, so cutting to the chase. I say, you go right for fair market rent right away. I don’t like the idea of building up to what fair market rent is and if she can’t afford to pay it, then like Rob said, she just looks at what apartments she can get for $600 and I don’t think you need to feel bad about that because she was getting a discount the entire time. Theoretically she’s been saving $300 a month for God knows how long off this rent and so that’s a win for her. There’s some gratitude that should be there if the person understands what fair market rent actually is. I

Rob:
Think there’s a little tricky kind of thing that we sort of glazed over. Maybe it’s not as big of a deal as I’m thinking, but I feel like it is. She said that this tenant doesn’t have a lease and has been in this property for 20 years, so they’re a tenant. I’m sure if they were like, Hey, I’m going to stop paying, it wouldn’t be that easy to just get them out of there. So there is something to be said about how can you diplomatically approach this in a way that’s going to basically not make them squat, right?

David:
Well, I think you have to treat ’em like a new tenant. Can this person afford the rent? Do they make enough money to be able to pay that rent? Right? You still have to screen them if you want to take them on as the tenant moving forward the same way you would if it was any other tenant, you’re not going to treat ’em any differently than your next tenant. If their debt to income ratio can’t afford that rent. You’re going to have to come up with a plan for how they can move out and get somewhere else before you put a lease together. But Lauren also did ask about how could I put a lease together because this person hasn’t paid one at all. Start with an estoppel certificate where the tenant’s basically going to say, Hey, here’s what I’ve been paying for rent and here’s what is in the apartment is mine and here’s what belongs to the owner as far as appliances or other things like that. Once you’ve got that in place, you can construct a new lease, but again, screen this tenant the same way you would a new tenant that you’d be putting in there. Use the same standards for everyone. Make sure you’re abiding by fair housing laws. You don’t want to get yourself into a situation where you’re expecting more from this person than you would from a different tenant.

Rob:
But I mean are they buying this house and they get to keep the tenant or not keep the tenant?

David:
Yeah, they don’t have a lease then they don’t have a right be there.

Rob:
Yes. I guess I feel like that depends on the state.

David:
There could be some laws that don’t apply to contract law. There could be some specific protections which Lauren didn’t mention which state there is in or how that would go. So I usually talk to property managers to get a background on that. We’re having to assume that there’s not additional protections outside of what would fall under standard contract law.

Rob:
Fair, fair, fair,

David:
Fair. And if you want to know more about ways to use what we call the binder strategy, we talked to Old Dion McNeely, great head of hair on that guy. Head over to BiggerPockets, episode 4 48 or the BiggerPockets Rookie Podcast episode 360 9 to learn how Dion handle situations just like this. Alright, thanks for sticking with us. We’re going to get into some capital gains questions in just a moment, but first let’s get into some of your comments and remember, as always, make sure to comment and subscribe to our channel. Let us know in the comments what you think about today’s show if you’ve ever been to live Victoria in San Jose and like their food. And if you want to be featured on an episode of Seeing Green, head to bigger p.com/david. Alright, our first comment comes from episode 9 41 where Hardy KH said, I love your shows. It’s hard to know what to do in the current real estate environment and I always appreciate your wisdom and guidance. Clearly Hardy was referring to Rob on this one. Thank

Rob:
You Hardy, I appreciate that. Next we’ve got Shibby 1, 8, 9. I feel like I sound like a DJ at 97.9 because I’ve got my conference voice. Great content. I really enjoyed the comedic portions of the show. Good balance of education and light comedy. I about died when David quoted eight mile laughy cry emoji.

David:
I’ve never heard a person say out loud laughing cry emoji. Is that like when Siri reads your text back to you? Yes.

Rob:
Laughing cry emoji.

David:
I wonder who at Apple names the emojis. We’re going to call this one the gas queen. We’re going to call this one dancing ballerina who has that job?

Rob:
Someone has it, which is interesting like emoji

David:
Namer. If anyone works at Apple and knows how this happens, we want to know. All right, up next we have Mitchell Blot 2, 3, 9. Quick question, do you pay capital gains on your net profit or the sales price of an investment property? And second, if the answer is net, why don’t you cash out refinance prior to sale? Thanks. Oh, this is a great question. Our producer Eric crushed it here. What do you think, Rob?

Rob:
Okay, so you are going to pay capital gains on your net profit, not on the sales price. And the reason that you don’t want to do a cash out refi prior to the sale because it’s not about being in debt, it’s about the cost basis of the property. Meaning what is your actual cost to get into that property and what is the profit on it regardless of if you took out cash out and you took out debt. Because I know a lot of people say, well if you have debt, you don’t pay taxes on debt. I know that’s what kiyosaki’s main thing. He always kind of emphasizes that point. But cost basis

David:
Is the thing to keep in mind whenever you’re selling a property. Very great. I actually had a client who ran into the same exact problem. We were trying to sell her property in Oakland and she had done a cash out refinance first. Mitchell, you’re mixing up the net profit with the equity in the property. They are often the same thing. So that’s a normal thing to get wrong, but they’re not the same. So let’s say someone buys a property for $500,000, sells it for a million, okay, that’s a $500,000 profit. Assuming there weren’t realtor expenses and closing costs, you could write those off as well as improvements that you made. Okay? But if you paid the property down to 400,000 before you did it, you’d actually have $600,000 in equity, but you’d only have a $500,000 game. They just look at what you bought the asset for and what you sold the asset for.

David:
The cash flows that it made have already been taxed. The loan paid down is not included in the game here they’re just looking at the sale price and the price that you paid for it. The cash out refinance confuses things because if you took out a loan and now you owe $800,000 on the property and you sell it for a million, what Mitchell’s thinking is, is you’re only going to get taxed on 200,000, but you won’t. You’ll get taxed on the full 500,000 and the government will say, well you already got that money out of the property, right? You don’t get to avoid paying taxes on it. Okay, let me just clarify that. You’re right, I was wrong. I said it’s net, but I did eventually correct myself and say it’s more on cost basis. So we got there in the end. We know what you meant.

David:
Net after all of the expenses, those are included in your net. Yeah. Good job Rob. Thank you. Thank you. Alright, up next we’re going to be talking about how to get up to 10 conventionally financed homes and what to do with a situation involving portfolio architecture and asset management. My favorite thing to talk about right after this quick break. All right, well good back everyone, and thanks for taking the time to support our sponsors that help bring this content to you for free. All right, let’s talk about what to do with a portfolio and another question from seeing green repeat guest to about steps to take to get 10 finance properties.

Brad:
Hey David, my name is Brad Hunton from Granbury, Texas, and my question is what do I do with my current portfolio? I currently own 16 long-term rentals across Texas and Louisiana with 11 of them being class C properties in west Texas. While on paper the cashflow looks amazing, I rarely hit the projected numbers. I have an opportunity to sell the sea properties for a substantial profit and I’m seeking advice on what to do. I have private money loans totaling around a hundred thousand dollars at 10% interest for the next four years. So my two-part question is do I keep these properties now that most have been renovated and use the cashflow to pay back the private money loans or do I sell and pay these loans back with the profits and use the remainder to buy into class A or B properties in the Dallas Fort Worth area? A third option is do I keep the loans and roll them into a higher class property with little to no cashflow but substantial appreciation with a plan to cash out refi in four years to settle the debts. Thank you.

David:
Well, thank you Brad. You got yourself in a pretty good scenario here. You’ve got a lot of equity, you’ve got a lot of cashflow, and you’ve got plans to grow your portfolio in the future. So Rob, what was jumping out at you when you were listening? Okay,

Rob:
So I guess here’s my thought. He answered it pretty beautifully himself when he was giving us his options, but he said that he’s buying in C class properties. He’s rarely hitting the projections, but it does sound like maybe he’s cash flowing. Maybe there’s a lot of expenses that come along with these houses that are unexpected and that’s why he’s not hitting his cash flows. And then he said, well, I could sell them at a substantial profit and then get into more A or B class properties. I think that’s probably what he should do because he may get into less properties, but given that he is kind of interested in the whole high appreciation thing, I think he’s going to see more appreciation in the A to B class properties and neighborhoods. And lastly, he also mentioned that he has a lot of private money debt at 10% and it seems like he’s maybe in the mid middle slash backside of his investing career. I don’t want to be too presumptuous here, but I feel like at this point the faster he can get out of some of his high interest debt, the better. And he can start, I dunno, rounding third base on his investment structure.

David:
Did you play baseball?

Rob:
I quote played football in the ninth grade.

David:
Well, apparently you watched SportsCenter before we recorded today, so well done.

Rob:
That was me, man. I used to work for Gatorade and when they interviewed me they were like, so how much do you love sports? I was like, love ’em. And then when they hired me they’re like, this guy lied.

David:
Didn’t you come up with names for professional athletes like Peyton Manning, like nicknames,

Rob:
I mean occasionally

David:
That was part of your job. What was his name? The sheriff or the Marshall or something like that?

Rob:
Yeah, the sheriff. I didn’t come up with that. Someone else did, but I came up with the cartographer.

David:
For who?

Rob:
For Peyton Manning. He makes maps, he’s a map maker. Routes, I don’t know. It didn’t really work. It didn’t get picked.

David:
You found your place hosting the BiggerPockets podcast. Let’s

Rob:
Just, I guess so

David:
Say that our win Gatorades lost. Alright, getting to Brad here. First off, Brad highlights a very important point. The properties that look great on a spreadsheet often don’t work out that way in real life, and this happens more often than not in the bad areas. Brad referred to these as C areas. It sounds like they might be more C minus type properties. And this is especially true when your properties are lower priced and you have to think about the fact that things break in real estate, whether they’re cheap or expensive, but a new roof, a new air conditioner, a new water heater are a small portion of the overall value of the property and rent when it’s an expensive property, they’re a big portion of it when it’s a cheap property, and this is one of the reasons that people think that they’re going to go get cashflow and then they find out that it’s more like cash.

David:
No, it doesn’t actually come in. So I’m inclined to think that Brad should sell those properties and 10 31 them into some of the areas where he’s going to experience higher growth. That’s not only in equity, this is also cash flow growth. So I’m working on a book right now that talks about how you identify those areas. And if I’m going to sum it up, it’s basically a function of tenants that are willing and able to pay higher prices. So if you buy in markets where jobs with higher wages are being introduced and there is constricted rental supply, rents have nowhere to go but up and your tenants can still afford to pay them. So identifying those markets and moving your portfolio there basically guarantees that you’re going to see increased rents every single year. And with that increased cash flows, if he leaves a portfolio where it’s at and there’s no reason for rents to go up, he’s going to have the same problems in 10 years that he’s got right now. What do you think, Rob? Yeah,

Rob:
Yeah, that’s exactly right. What are your thoughts on the high interest debt? Do you feel like he should get out of that or are you cool with him cruising on that for now?

David:
I was wondering why he’s got 10% debt if he could just catch out, refinance some of the houses at like 7% or 8% and pay it off that way. Maybe he’s not showing income so he’s not able to do that. And if the properties aren’t cash flowing, I was wondering why he had debt at 10% when he could get a mortgage that would be less than that. My thoughts would probably be move the properties into an area not cash flowing anyway, meaning his expenses, sorry, his maintenance and his CapEx and his vacancy are probably too high. You move it into an area where you have less of that and even though your mortgage could be higher, I’d rather be paying money towards a mortgage than I would be just throwing it away to maintenance and vacancy. And then you start taking the cashflow and paying off the debt. Maybe you take some of the properties that you moved over or you do a cash out refinance then and you pay off half of that a hundred grand and then you tackle the other half with the cash flows from the properties that you bought.

Rob:
Yeah, I like that. I think I’m a little bit more in favor here of just consolidation. If he’s got a lot of long-term properties that aren’t really killing it for him, I mean it sounds like he’s got some cash cashflow, but yeah, I’d say triage and get into something that’s going to treat you better over the course of the next few years. From an appreciation standpoint,

David:
I mean it’d be wonderful if he could sell 16 properties and buy two fourplexes in a really good area or two short-term rentals in a good area and then he could just manage those short-term rentals and get a lot more cashflow with a lot less time and then use the money from that to pay off the a hundred thousand dollars and find himself into new asset class. So Brad, let us know, are you open to the idea of a new asset class like short-term rentals, medium-term rentals, small multifamily, or even an apartment complex, right? What if you sold 16 single family homes, bought 1 24 unit apartment complex or something with the money and managed that? I bet you that would be less of a headache than having 16 individual homes. Man, I remember my single family portfolio got to like 60 properties and you would think that it was passive income, it was anything, but it was very frustrating pretty much every two to three days. It was another maintenance request coming in, another problem happening with the property. Another thing that I had to try to figure out and I realized it was very inefficient to scale with that asset class.

Rob:
Well, as we often say on the pod, the cheapest houses are the most expensive.

David:
That’s really good. Thank you. Our next video question comes from our old pal, Tony.

Tomi :
Hey David. This is Tony from San Antonio again, following the steps as you laid them out. Love house hacking. We closed on the duplex, so now I have two properties on my VA loan going forward trying to stack up to 10. I was wondering, can you give me three actionable steps to make sure that I can fill up using conventional loans multiple times over and over, ideally moving out every year. Is it just bringing in the most income that I can in each year or what particular guidelines? Any suggestions you have would be appreciated. Keep rocking it.

Rob:
Okay, so I think I know what he’s saying here. Basically we always talk about on the show how house hacking is the ultimate catalyst for wealth. And you often talk about how, hey, you can buy a property for three and 5% down and then you can live in it for a year and then after that year you can put three and a half percent down again on another property and move into that one. So I think he’s looking for more of a bulleted action plan on how someone would actually achieve that.

David:
And I’m going to recommend the sneaky rental tactic to our old buddy told me from San Antonio, the sneaky rental tactic. I mean a lot of these strategies are really simple, but we give them cool names like Brrrr and House hack. It basically just means you buy a house with a primary residence loan, which is incredibly powerful, you get a slightly better interest rate, but you get way lower of a down payment. I mean, if you just think about the difference between putting 3% down and 20% down, you can buy almost seven houses with 3% down than you could buy one with 20% down. It’s crazy. You don’t even have to save that much money. And often if you’re house hacking and saving on your mortgage, that is going to provide the 3% in savings that you would need to buy the next house. So you house hack one time, keep your mortgage lower, that provides your down payment for the next one, and you just move every single year.

David:
That’s why people don’t do it. They just don’t want the discomfort of having to move. Instead, they’d rather have the discomfort of working a job that they hate for 40 or 50 years and going into retirement broke. But if you can live like no one else, now you can live like no one else later. Dakota, our old buddy, Davey Ramsay. So that’s what I say is you buy the house with the primary residence loan, you live in it for a year, then you move out and buy another one and make the one that you bought into a rental just like to did with this duplex. And we just call it the sneaky rental strategy because you bought a rental property, but you did it completely legally with a primary residence loan being sneaky.

Rob:
Yeah, I think, I wonder if there’s anything to say about obviously three and a half percent. The reason that this is such a good strategy is because it really, on most houses, let’s say they’re between two to 400,000 bucks. I mean on the high end of that, lemme do that math really fast. On the high end of that, it’s like 12,000 bucks, right? So that means you have to figure out how to save an extra thousand dollars every single month for the next year to save up enough money to put down on the next property. So figure out what kind of side hustle can you take extra shifts? Can you work an extra job? Is there something you can do? Can you sell your time? Obviously that’s not the best approach when you’re trying to scale, but considering you’re closer to the beginning of this, maybe your only option. But what can you do on an hourly basis? What can you build? What can you sell? Can you consult to make an extra thousand dollars every single month so that you actually have enough runway to buy a new house every single year?

David:
A lot of people know they should budget money, but they don’t. Well, you know what makes it easier to budget money when you have a goal? And for those of us that love real estate investing, that next house is a powerful motivator. So if you couldn’t get yourself to budget your money before, now that you know want to get into real estate investing, it can make it easier. You’ll build better financial habits and ultimately I think you’ll live a better life when you’re not using retail therapy to solve your problems. Now, that’s one of the reasons that I don’t share the whole, use other people’s money, do something creative for every single time. There’s nothing wrong with doing those things, but don’t make ’em your bread and butter. Don’t build your entire foundation on, I just want to go around the obstacle. Go through the obstacle. And then once you’ve got a good amount of equity and you’re someone like Rob Abba Solo who knows how to manage real estate, you can use some of these creative strategies to accelerate your gains, but not to get yourself started. So Tony, you’re on the right path, my man. Just buy a house every single year and ask yourself, what do you have to do to buy it? And what type of property do you need to buy so that we’ll cashflow when you move out in a year. Hey,

Rob:
One final question as we wrap this up, Dave. So obviously he’s trying to acquire 10 properties here and if he’s buying a property every single year, is that debt stacking up against his DTI? Is he going to actually be able to qualify for 10 houses in 10 years if he’s got a lot of debt from all these houses that he’s accruing?

David:
It is a good question. He’ll be able to use the income that he’s getting from his renters and also the debt that he’s taking on. The problem is that first year, so when he’s living in the house, he’s not going to be able to use any income that he’s receiving to help qualify for the next one. But once he moves out of it, if the mortgage is $2,000 and he’s collecting $2,000 from the tenants, they basically offset themselves. And so your debt to income stays relatively the same. Got it. And as Eminem said in the sequel to Eight Mile, I believe it was called Nine Mile House Hack to House Stack and avoid anything that’s house whack. Alright, everyone that wraps up our show for today, thank you so much for joining us and let us know in the comments what you thought about today’s show and if there’s anything you think that we didn’t cover as well as what you think we should cover in future episodes.

David:
And remember, you can head over to biggerpockets.com/david and submit your question there. If you like seeing Green, make sure you subscribe wherever you listen to podcasts. You need Apple or Spotify or Stitcher to tell you when new episodes come so that you don’t miss anything because you never know what type of education, wisdom and lighthearted comedy you’re going to get, especially now that we got Rob Abso joining me and we really appreciate all of your patronage. And if you’d like to know more about Rob or I, we sure hope you do. Head over to the show notes where you can find our information and follow us on the socials. This is David Green for Rob Taco Sauce. Abso signing up.

Watch the Episode Here

https://youtube.com/watch?v=gt62DCwQ1FM123

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In This Episode We Cover:

  • Negative cash flow and one of the ONLY times it makes sense to buy a “bleeding” rental
  • How to raise rents (the right way) on a long-term tenant
  • Capital gains tax explained and how much YOU could owe on your next home sale
  • Whether to trade cash flow for appreciation and selling your rentals that don’t have room to grow
  • The “sneaky” rental tactic that allows you to scale a real estate portfolio FAST
  • And So Much More!

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Books Mentioned in the Show

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The Easiest Way to Invest in Real Estate in 2024

10 Rentals in 5 Years by Buying in Overlooked Short-Term Rental Markets

by | May 6, 2024 | Investing, News Feed

When you think about short-term rental and Airbnb markets, what comes to mind? Joshua Tree, the Smoky Mountains, maybe Destin? We all know about the famous short-term rental markets, but what about the not-so-famous ones? You know, the unsexy markets where you book an Airbnb for a conference or when you’re going to see extended family? That’s right; we’re talking about everyday American markets like Cincinnati, Ohio. But surprisingly, these markets make some of the best investments for short-term rental investors like Jarrod Tucker and Yiwei Cheng.

Jarrod and Yiwei moved to Cincinnati for work shortly after catching the real estate investing bug. They knew they wanted to invest in real estate, but long-term rentals only came with measly cash flow that would never support their passive income goals. So, what’s the next best option? Short-term rentals! Unfortunately, Cincinnati isn’t known as a popular vacation getaway, but it didn’t have to be to support Jarrod and Yiwei’s cash flow dreams!

Now, five years after the start of their investing journey, they have ten rentals of their own and manage a couple dozen more for other investors. The question is, how do you make money with short-term rentals in an unsexy market? Jarrod and Yiwei walk through their tips for finding the right properties, keeping occupancy rates high, buying real estate when your DTI (debt-to-income) gets maxed out, and why you MUST separate yourself from the basic short-term rentals to reach your financial goals.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave :
Henry, if you were to put together a list of some great short-term rental markets, what markets would you put on that list?

Henry:
Well, the Instagram gurus would tell me that you have to have a property in the Smoky Mountains, Joshua Tree, California or some beach town somewhere. But I know there’s tons of other really cool fancy places that I’m leaving off that list.

Dave :
But what about not fancy places like, I don’t know, Cincinnati, Ohio?

Henry:
I would say that that’s probably number 472 on my list of short-term rental markets.

Dave :
Well, today I think you’ll actually learn something new and how some unsexy markets do make for great short-term rental opportunities. Welcome to the BiggerPockets Real Estate Podcast everyone. I’m your host, Dave Meyer. Joined today by Henry Washington

Henry:
And today we’re talking with iWay Chang and Jared Tucker. They are an investor couple living in, you guessed it, Cincinnati, Ohio, and they are doing highly profitable deals today in the short-term rental space.

Dave :
And when Henry and I talk to iWay and Jared, you’re going to hear about why investors who like the short-term rental model, shouldn’t overlook Midwestern cities that might not be as sexy as some of the places Henry mentioned earlier, because they have a great approach. They basically work to understand what amenities their guests want. They listen to feedback, they look at data, and they are able to use that to still make profitable deals in today’s market.

Henry:
Now let’s jump in

Dave :
IWay and Jared, welcome to the BiggerPockets podcast. Thanks so much for being here.

Yiwei:
Yeah, I am so excited to be here.

Jarrod:
Yeah, thanks guys. We appreciate the opportunity. So super excited.

Dave :
Well, I am feeling a little bit left out because you guys met Henry already at a conference just this past week randomly, and I was not there, so I’m still catching up.

Yiwei:
You should have been

Dave :
There. I should have, but I have no business. They were at a midterm rental conference. I have no business there. I have never done a midterm rental, no plans to do it, so I would be a fish out of water. But I do want to catch up on your background. And Jared, tell me about your first rental. I understand it was actually your primary residence, is that right?

Yiwei:
Yeah, so background is we used to live in California and then moved to Cincinnati for work for a corporate work. And I knew I wanted to invest in real estate, but I didn’t know what, so when I came here, I started looking for properties, but none of the long-term rental numbers made sense even though at the time it was 2018, you could buy houses for like 70, 80,000 in some neighborhoods. But I was like, even with that, a 30 year mortgage, I can only cashflow maybe 100, $200 a month. And I’m like, how am I ever going to make money? How do people make money in real estate? 30 year mortgage, $200 a month? I didn’t get it. And so I was like, well, let’s just focus on finding our primary residence. So we found a house and then we also had an apartment with a lease we couldn’t get out of.
So I listed it on Airbnb. We moved Jared’s furniture in there and literally did everything wrong from the start. We had guests who threw a party. I mean there were footprints all over the wall because I didn’t have my pricing wait footprints on the wall. I don’t even know how they got there to be honest. I was like, I don’t know if they’re doing handstands on the stairs, on the bedroom wall. It was just all over the place. But at the end of the day I was like, wow, you can really make money with short-term rentals, and it’s definitely doing a lot more than what I could have gotten as a long-term rental. So by the time we moved into the house that winter, I was like, I’m going to figure out how to do short-term rentals and I’m going to do more of it because at the same time, I also want to leave my corporate job.

Henry:
You’re telling the story of a lot of people, and what I like about your story is you just kind of jumped in and figured it out as you were going, and you did it in a way where you essentially limited your risk. You got started with properties you already owned or were stuck in a lease with. So if you don’t try something with those and you lose the money from the rent, and so it forced you to kind of learn. But let’s back up a little bit. When was this that you moved into your new house and started Airbnb, your apartment, and when did you start learning about real estate investing as a niche? And were there any other strategies you tried kind of give us paint that picture of your starting out for us?

Yiwei:
Yeah, so I think it was fall of 2019 when we got the house and started doing short-term rentals, but we started with real estate investing in winter of 2018. So I found a mentor here in Cincinnati. Jared was like, make sure she’s not a scam. So I went and met her in person and I was like, no, I think we just need to pay for experience at this point because I don’t want to figure everything out on my own from scratch. So she was like, you should start wholesaling. So that’s what we did. She also sold courses, so we did wholesaling and I was like, this is not for me. I cannot talk to sellers. I cannot look at a house and be like, oh yeah, that house is worth this much, but they want this much. It just did not work for me, for me personally, personality wise.
And then I also didn’t want to try rehabbing because I was like, I don’t know contractors. I don’t know how this rehab process goes from there. It started with the short-term rental of our own house. And then after that winter of 2019, I went to this other real estate conference and Jared was like, you should check out this person who does rental arbitrage. So basically you rent this house at long-term rate, and then you rent it out as a short-term rental. And she had 20 of them in North Carolina and we just got started with short-term rental. So I was like, this is really interesting because that I could see a way to practice more and grow into that and learn more about short-term rentals instead of making all our mistakes that we did. So that’s end of 2019 when we got really serious about

Henry:
It. Man, it sounds like you went down all the real estate guru rabbit holes, but what was cool was that you ended up landing on something that you kind of had your own experience with right through that apartment. Jared, how were you during all this process? It sounds like Yahweh was like, we should do this and then you got to go off and do it, but what role did you play in the business during this time? And maybe it was just like devil’s advocate or where did that come into play for you? How did you feel about all this new real estate investing methods going on?

Jarrod:
Yeah, I think I was nervously supportive.

Dave :
That’s a good way

Henry:
To describe it. That’s a phenomenal

Jarrod:
Description. Yeah, I mean we tried wholesaling together. We did a lot of driving for dollars. We fixed certain that was

Yiwei:
Cards. Oh

Jarrod:
My God. Yeah. We went to different neighborhoods throughout Cincinnati and we actually, we got a couple of leads. We walked through houses and just felt like, hey, we can’t envision the end product with the current state of some of the houses that we walked through. So it made more sense for us to start with Shortterm terminals. We did a few other things as well. We looked at notes, private lending, got a little bit of experience with that, but really doubled down on the short-term rentals.

Dave :
All right. So I have to admit, I’ve never been to Cincinnati where you guys invest, but it’s not one of the places that you often hear about as one of the more common short-term rental markets. So was there something about the city and living there that you gave you a good idea that this was going to work from the beginning or were you sort of taking a shot in the dark,

Yiwei:
Taking a shot at the dark? Because I also did not understand who was coming to Cincinnati because it’s definitely not on my list of vacation spots. And maybe for lots of other people around the country it’s like who would go to Cincinnati Nanny? But once we started doing arbitrage and just started buying rentals because we saw that you could make money, so it’s like why not try with? And a lot of times I feel like you really don’t know until you do it that you see who is coming. You understand the guests a lot more and what they’re looking for. So for us it was like, okay, let’s just do it because I know we can make money and I want to leave my job and then we can figure out the rest as we go. I would say now that I’ve done it for so many years, I know who the guests are that are coming, and as I start up new places, I have a better idea of what amenities to put in and what specifically they’re looking for.
But at the time I didn’t. I was just like, there’s people coming, there’s people renting. Let’s just do this. So who are the guests? So I categorize it into three different categories. The first one is more like vacation people. So they’re coming in for games, events. We’ve got the Bengals here, we’ve got the reds here, and there’s a bunch of concerts that are coming here, lots of weddings. I feel like there’s a wedding every single weekend here. And then people just coming to visit family. And then within that there’s two groups. You’ve got the couple traveling, and then you’ve got the families traveling. So there’s a lots of families that come and travel together for vacation. There’s a lot of amusement parks up north that they go to or a lot of sports tournament. That’s been a new recent thing. Lots of basketball games for the younger girls and guys and things like that.
And then the second category is the medical slash business professionals, I would say. So the people that are coming here for medical reasons, there’s a hospital that’s close by here, university of Cincinnati, and then there’s also a children’s hospital that lots of people come here for cancer treatments or different surgeries. So there’s families that need extended period of time. And there’s the traveling nurses who are coming here too. So anybody who has a one bedroom, one bath would be really great for doing the midterm rentals with the traveling nurses. And then you’ve got the actual patients who are coming in to get medical treatment. And then the third category are going to be more of your relocation business travelers. So it’s like people that are moving here for work because their company moved them here and they need a place to stay while they find a house or they’re just here traveling for work, like construction workers, even business, single person coming in, staying downtown and Ohio.
I did not know this until now. Ohio gives this huge tax abatement to anybody in the movie industry, like filming movies here in Ohio in general, they get a huge tax incentive. So Cincinnati gets a lot of films, movies get made here. So when that happens, you’ve got the actor, the actresses, and then you’ve got the film crew that’s coming in. You also get a lot of musicals that come in, so they need a place to stay. I classify that as business people are coming here for work. They don’t live here, they’re just here for work for a period of time and they leave, or it’s the people that are coming and they are moving here for work and they need some time until they find a place.

Henry:
Interesting, because typically when, especially people who aren’t doing short-term rentals yet typically when they hear about short-term rentals as strategy, they’re thinking vacation destinations, properties with tons of crazy awesome amenities, million dollar properties that you’re essentially renting out for people to have some sort of vacation experience. But there are a lot of markets where short-term rentals can do well, where you don’t have to be this vacation hub, this vacation mecca, because there’s a need for the short-term housing that is hard to fulfill with hotels. And when you think about hotel stays, if you’re coming for an extended period of time, there’s not a lot of great options that are an affordable price range because there’s really nice hotels and that’s great, but that’s not ideal. If you’ve got to stay for 30 days, that gets really expensive. But if you don’t want to stay in an extended stay either, what do you do? And so I think that it’s a really cool niche that you found.

Dave :
Now that we know why Cincinnati works as a short-term rental market, we’re going to hear about how eWAY and Jared are staying competitive despite increased supply. We’ll get into that right after the break. Welcome back investors. We’re here with iWay and Jared getting their insider tips on how to cashflow in the Midwest. Let’s get back into it.

Henry:
Are you seeing a lot of competition for properties in this short-term rental space in these markets now? Or is it really just like you can have your pick because there’s not a lot of other operators in these areas?

Jarrod:
It’s grown a lot, right, Cincinnati, since we started in 2019, the listings have grown significantly. Probably more so I’ll say at the lower bedroom counts, right? So when you look at one bedroom, two bedroom properties, obviously they’re going to be cheaper. Most of ’em probably be in condos. When we look at the market today, that’s close to 70% of the listings that are out there today. There’s probably less competition at the higher bedroom counts once you get four or five bedrooms. That’s a lot smaller percentage of the market. But the overall listings have grown significantly in the last four or five years.

Yiwei:
Yeah, I would say Cincinnati follows the same trend that short-term rentals have seen nationally, which is this huge increase in supply because lots of people are getting into short-term rentals after the whole Covid pandemic. And also what worked then in 2019 when we started is very different than what works now in terms of size and location. So now I wouldn’t even recommend one bedrooms downtown because there’s so many. And then same thing with the two bedrooms. We started going into the suburbs during the pandemic because we saw downtown shut down, but the suburbs were doing well because so many families were traveling in the 10 to 15 minute range. It’s all two bedrooms, one bath right now. It’s very hard to stand out at that size. So one of the things we’ve been doing is going up in different sizes that the guests are looking for, and I just know that because of what they asked, they said, I want a three bed, two bath. So that’s what they’re looking for. So if you have a three bed, two bath in that neighborhood where majority of the older homes are two bed, one bath, you have that as an advantage. So I would say listings have basically doubled in the last few years, but we’re still following the same trend as the nation’s rental, the national short-term rental trends.

Dave :
You talked a little bit about supply of housing, and this has been a trend that we’ve been watching on the show a bit for short-term rentals for a couple of years now that just it’s gotten so popular. You hear data about individual properties or individual cities starting to see income decline or revenue decline for short-term rentals. Are you seeing that with your portfolio or in Cincinnati as a whole that there’s more supply than the demand can handle?

Yiwei:
I would say in certain pockets, yes, there’s going to be more supply in certain pockets are more supply than demand. But there are certain opportunities in those areas too, which is why we haven’t been like, this is so oversaturated, we’re not doing this anymore. It’s like I am able to see what the guests are looking for. So for example, in that one neighborhood where it’s like a two bed, one bath where majority of the supply in that area is a two bed, one bath, there are opportunities for you to have three bed, two bath, four bed, five beds that are still doing really well in revenue. And we have this five bedroom in that neighborhood that the revenue has not changed ever since the pandemic for the last three years that revenue is super consistent throughout. Whereas some other places in general, I feel like in general, I’ve seen about a 20% decrease in revenue in 20 23, 20 24 versus 2022 and 2021 where that was the peak. So I feel like there is a decline for sure, but if you have a great product in a great location here, you can still do well.

Jarrod:
And probably one add-on to that right, is I think the increased competition has probably created better products out there in the marketplace. So gone are the days where you could go buy used furniture off Facebook marketplace in the flea market and use all your leftover linens. I mean, these are professional operators. Today we were setting up houses specifically for short-term rentals, very particular about the types of linens, the type of amenities that were offered to the guests. You

Dave :
Got to step your game up.

Jarrod:
Exactly.

Dave :
Competition is good and bad. You don’t always want it, but it makes you better in the long run,

Yiwei:
Right? It does. But on a scale from I can just put any house on the market and with my furniture that I want to leave in the house or Facebook marketplace furniture to, I need a themed house to even be profitable. In all these vacation destinations, Cincinnati is kind of in the middle. It needs to be professionally managed, it needs to be curated for a short-term rental, but it does not need extreme things that people might need to do in vacation markets to just even stand out to even be profitable. For example, people might want to put a game room in the garage and make it super cool, paint it, do a man cave or whatever. But here, people want a garage. They want to park their cars. They don’t want to carry their stuff in the rain. It rains here, it snows here. So they don’t want to be shoveling snow or trying to heat up their car in the middle of winter. A lot of people here want a garage or a garage. They’re not looking for anything fancy. It needs to be a great house, but it does not need some of the things that vacation destinations are known for.

Henry:
What I love about what I’m hearing is it sounds like a lot of the decisions that you’re making are based on feedback from tenants and data, and then you’re using that to kind of drive what you’re offering and which is super important when you’re dealing with the competition that you’re potentially dealing with, especially in the smaller bedroom bathroom counts. So what are some of the other things that you do from an amenity standpoint or maybe some tips and tricks that you do to keep your particular properties competitive? So

Yiwei:
I would say our philosophy is you have to have a great product. I’m not trying to just make a quick dollar from this guest. I want that long-term guest. So we get a lot of guests that repeat that only stay with us when they’re here in Cincinnati. They’ll say if they want to stay at one property, they’ll know that every other property is going to be consistent. So having a great product and then secondly, having that consistent five star experience every single time. And that’s how we built our portfolio on and our business on basically. And a few of the things I think through as I come up with which house is going to do well or which house we’re going to take on and which property will do well in Cincinnati and how much money it can make, it usually comes down to one, what can do to make guests want to book this house?
What is going to make this property stand out from others in the area and from others in my portfolio? And then the second thing is what are the guests want? What guests like being here? So for example, we’re getting a lot of families and kids traveling in the area a lot more than I have noticed in the past. So one thing we’ve added to a lot of our bigger homes, because that’s where a lot of the families are saying is cribs, because a lots of people are traveling with kids and we want to upgrade the experience so they’re not looking for a pack and play. It’s like a real Crip with a mattress that you can put the baby in. The other things we’re doing that I’m seeing is the beds. Before I had queen beds, I sleep on a queen bed. I’m like, everybody should be fine with a queen bed.
But no, they want king beds. So sometimes we have to go in and rebuy the bed and redo the bedding for some of our other places that have maybe a queen in the primary bedroom. So we’re taking the queen out and we’re putting in kings in a lot of these places. The mattress has to be good. And the other thing we do is all name brand products. We don’t really go for a lot of the private label. So the mattresses, the linens, the soap, the toilet paper, the paper towels is Charmin bouncy Ty Dawn, that is maybe what they would use at home. So I would create the same experience if they were traveling. It feels like they are still at home, they’re still using the same products, the same brands, the same cotton sheets and memory foam mattresses, that kind of thing.

Dave :
So Jared and iWay have built a portfolio of 10 properties over the last four years, but how have they funded these properties? We’ll get into that and how they’re finding deals today right after the break.

Henry:
Hey everyone, welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in.

Dave :
I want to talk a little bit about scaling. I do think this is something that a lot of investors struggle with and it sounds like you hit a wall at a certain point in your investing where your debt to income ratio was no longer allowing you to take on more financing and just for everyone, if you’ve never heard that term DTI or debt to income ratio, it’s basically something that lenders look at basically how much income do you have? And they compare that to how much debt you’re taking out, what your mortgage payments are going to be. And for a lot of investors, at a certain point, your income from your job is no longer enough to satisfy a lender to keep giving you more mortgages. So UA and Jared, tell us how you got around this challenge.

Jarrod:
Once we hit that limit, we started talking to other investors in the area. We wanted to continue growing. So pretty quickly we learned that we could go partner with others, we could do the majority of the boots on the ground where somebody else could bring the funding. And so that’s where we started. We’ve done a couple of partnerships with folks here in the area. Essentially what that structure looked like was we would find a property that we felt would do really well. We’ve got a pretty particular process of going through and vetting that property and then estimating what the revenue will do. And we have a really good handle on what the expenses look like, and it really just comes down to the type of financing that we can get and the down payment. So typically what that partner would do, they would bring the down payment and then we would work together on the financing. Now, the financing that we did do was DSCR loans, so it’s debt service coverage ratio that we applied for as a separate entity. So that’s one structure that we have put in place and allowed us to continue to scale. The other one is just create a financing where we’ve worked directly with an owner and they would carry back financing.

Dave :
Awesome. And just for everyone, if you don’t know what a debt service coverage ratio loan is, it’s basically a residential loan product that mimics commercial lending in that the lender is looking at the quality of the deal to determine if they’re going to give you a loan rather than the borrower’s personal credit worthiness. And this is a great strategy for scaling if you do run into these DTI debt to income issues because if you’re able to source and find good deals, lenders are going to lend to you regardless of what your job income is. So that’s a really awesome strategy. Thank you for sharing that with us. And last thing here, I just would love to know, does this still work for you today? Because all of this sounds great, but we’re in a high interest rate, low inventory environment. Are you still finding deals that make sense in your market that are performing up to your standards?

Yiwei:
Yeah, so I would say back in 2021, when we started doing the DSCR loans, it was like a new product we haven’t heard of. They were lending on, like you were saying, the rental income of that house without our personal credit. And at the time we were paying way higher rates because the DSCR loans are going to be way higher rates than what you would get for your personal residence loan. So at the time our rates were like 4.75 and everybody was getting 3.2 or something. So I was like, this is such so high. But now that I look back, it is a lot lower. But at this point I feel like the DSCR rates are like 8%, and for you to really cashflow at 8%, you have to have a really low price. But in Cincinnati, the prices have not come down so much to adjust for the higher rates.
So what we’re doing a lot more of now is looking for that creative financing deal. So the most recent one we did was end of last year where the owner had to leave, they were moving out of the country, the property couldn’t sell, and we worked out that creative leave with the owner directly. So at this point, I would prioritize creative financing if possible, especially if the owner is an investor and is more comfortable with this kind of deal because it is more about trust than it is you’re a stranger. I’m a stranger. So let’s like I just promise I’m going to make payments to you, but I feel like DSCR could still work or even a commercial loan. So one of the things I was looking into is more like a 20 year am and it’s like an arm still, but it’s not as great as the DSER because you get the 30 year fixed, but it could hold you over until the rates drop some. So if I were to get financing now, those were the two, I would primarily go with the commercial if I can’t get the creative financing,

Henry:
And for those who are unaware arm or adjustable rate mortgage is what that stands for. And so I love commercial loan products, especially in this environment because yes, the property will be on an arm or an adjustable rate. Typically that adjustable rate period is going to be anywhere between three and five years, which gives you time. It’s not like it’s going to adjust in the next six months. So if you buy a property on a three year adjustable rate, if the rates come down over the next three years, you can refinance that property and typically there’s no prepayment penalty for doing that. So I think that’s a great product as well as a lot of these commercial construction loans will allow you to finance in some of the renovation money or maybe even some of the money to furnish it. But what I wanted to do was jump back to you structuring these deals with your partners.
I think that’s a great strategy for almost any investor in any niche is you can pair what you do have, which is the ability to find the deals, the ability to operate the properties with someone who has the money, and then you can create this kind of 50 50 environment. But the question I had was when you’re structuring these, how do you factor in the things like the cost for furnishing the property? Is that something that you’re bringing? Is that something that the partnering is bringing? And then how are you ensuring that everybody kind of stays in their lane when you’re doing these partnerships?

Jarrod:
So in our partnerships that we’ve done in the past, we have purchased the furnishings for the house and then you’ve got all those the setup. So that’s how we handle the furnishing just to make the partner more comfortable, making sure that we’ve got skin in the game as well financially in terms of how do we make sure that everybody stays in their lane. One is making sure that you have a clear understanding with your partners and make sure that you have lots of conversations early on with those individuals. Nothing’s worse than partnering with the wrong person or a person that has different expectations or thinks that it’s going to happen one way. So one is just learning about one another and do you feel comfortable working with that person? And then once you do have that clear understanding is making sure that it’s all documented. So all of ours are documented in operating agreements, went to attorney, had conversations with them and they helped us document everything. So it’s in black and white, plain English to where everybody can understand.

Yiwei:
And just to be more specific on the financial, how we split it. So the partner brings the financing and everything to purchase the house, like the down payment and closing fees points, all of that. And then we bring everything that is needed to make this house a short-term rental. So if we need to paint, we need to do flooring, like any of that minor stuff we will do and all the furnishing. So we’ll pay for all that if it needs a rehab. So there was one house where we actually redid the bathroom, the kitchen, if it needs a major rehab, we’ll split that 50 50. And then like Jared said, we have that in the operating agreement and we talked that early on, how long do you want to own this house? How would it look like if one partner wanted get out and the other partner wanted to stay in?
So we also try to keep a number of partners low. So it is usually us and one other person. It’s not us and 10 other people where there’s so many opinions of what we need to do. So it’s usually just us and one person or us. And the other one we did was it was him and his partner. So we have it 50 50 that way. So really between them it’s like 25, 25. But it was because they’ve worked with us before, we managed their property before and now they want to have more money to invest with us, but they have a real job so they don’t want to be active in it. So that’s kind of the specifics on the partnership side.

Henry:
No, that’s great, man. I don’t know how many people have had conversations who end up in a bad partnership because they didn’t communicate very well on the front end in terms of expectations and then they didn’t document what they talked about. I literally have an expectations document that my partner and I filled out. It’s not like an official document, but we just documented everything we talked about. We had it notarized and we signed it and we’ve called back on it multiple times to say, oh yeah, we did agree that in this situation we would do these things. And it really makes difficult conversations a whole lot easier. Partnerships are like marriages, man. I don’t know how many times I’ve had a conversation with my business partner that went something like, Hey, when you said this, it made me feel like that. So the more you can document and the more you can have those expectation conversations on the front end, it’s going to be better. So I appreciate that. Can you tell us a little bit about what your business looks like now? I know you talked about some creative finance deals. Are you continuing to expand? Are you kind of holding the line and keeping what you’ve got? And then give some advice to some of the people out who are maybe looking to invest in Shortterm in these mid-tier markets. What would you advise them to do?

Yiwei:
Yeah, so we have been doing short-term rentals since basically end of 2019. And I don’t see that changing. I feel like there’s still opportunity here in Cincinnati. So I’m recommending investors now who want to invest in Cincinnati, different sizes for downtown, different sizes for if you want to do midterm rentals. It’s specific size that I have found that worked for that particular model. And then in different neighborhoods, what sizes, what locations, what areas, what price points. So I feel like at this point, we’re still going to continue doing that here in Cincinnati.

Jarrod:
If you do want to do something hands-on yourself, do it local. Don’t try to do something five states away and manage yourself. You’re not going to know that market. You don’t know cleaners or how to get people. And it’s really easy to message people and find people on Facebook, but a lot of times once you go walk that property, it looks very different than what somebody is telling you. We’ve helped others in that instance before where they’ve been many states away and they tried managing it themselves and they didn’t necessarily get the results that they thought they were going to get. So stay local and then understand do you have the time that’s required to operate these properties? What I would say is that short-term rentals, it’s very different than long-term rentals. It’s a lot of hands-on right and time requirement that you’re going to spend on that property.

Yiwei:
Yeah, I would say do it next to you. Don’t feel like you have to go to a vacation market. You can do it in a bunch of unsexy cities that will still generate a lot of money like Arkansas or Cincinnati. It is not somewhere where people might think about, it’s not Orlando and it is not Aspen, but it will make money for you if you buy the right property. So those are the two I have. And it doesn’t have to be like a million dollar house. It could just be a 300, $400,000 house to do. Well.

Dave :
Alright, great. Well, Jared and iWay, thank you so much for joining us for the BiggerPockets podcast. We really appreciate your time and anyone who wants to connect with these two, we’ll put their contact information in the show notes below. I’m Dave Meyer and he is Henry Washington for BiggerPockets. We’ll see you Allall soon.

Watch the Episode Here

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In This Episode We Cover:

  • The three types of short-term rental guests who consistently come to markets like Cincinnati
  • How to set your Airbnb apart if you’re in a saturated short-term rental market
  • Tips for higher occupancy and what you MUST have to get more bookings
  • Scaling your real estate portfolio when you have high DTI (debt-to-income)
  • Using partnerships to buy even more properties when you’re low on cash
  • Why you DON’T need to invest in high-priced, popular vacation destinations 
  • And So Much More!

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The Easiest Way to Invest in Real Estate in 2024

2024 Deals We’re Doing with High Cash Flow and Rock-Bottom Rates (4.75%!)

by | May 3, 2024 | Investing, News Feed

Want a low mortgage rate? We mean a really low rate—like 4.75% in 2024 low. What about half a million in profit on a sneaky development deal? Or, maybe you’d settle for a quick house flip that pockets you $55,000 on a bad day. These aren’t made-up numbers; these are REAL deals that our expert investing panel is doing in today’s hot, hot housing market. And if you know where to find deals and steals like these, you, too, could be taking home huge profits like they are! Thankfully, they’re sharing all their secrets on today’s episode!

David and Rob are taking some time off to play pickleball, while Dave Meyer and the entire On the Market podcast panel join us today! In this show, we’re talking about the real estate deals getting done in 2024. Each expert brings in a deal they’ve recently done and showcases how they found it, what they bought it for, how much cash flow or profit they’re going to make, and advice to help YOU repeat these home-run real estate deals.

First, Dave will share about a cash-flowing on-market rental property he bought (while abroad!) thanks to his inventor-friendly agent. Kathy Fettke gives tips on getting a low mortgage rate on your next new construction rental and how doing so could massively boost your cash flow. Henry Washington walks through a quick flip that will make him $55,000 on the low end and the ingenious way he found this deal. And finally, James Dainard talks about the almost unbelievably good development deal he’s doing in Seattle that will profit $500,000 (yes, that’s half a million!).

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Read the Transcript Here

Coming soon

Watch the Episode Here

https://youtube.com/watch?v=FK1AxBOQA70123

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In This Episode We Cover:

  • How to score a mortgage rate in the four-percent range by buying new construction rentals
  • The three big housing market challenges of 2024 and how investors can overcome them
  • How to find cash-flowing, on-market rental properties by investing out-of-state
  • One of the smartest ways to find off-market real estate deals for flipping or holding
  • The one contract clause that is helping James make $500K+ on his new development deal
  • And So Much More!

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The Easiest Way to Invest in Real Estate in 2024

How to Supplement Your Income with Real Estate (So You Can Do What You Love)

by | May 1, 2024 | Investing, News Feed

Why are rock stars turning to real estate side hustles to pay their bills? During the lockdowns, many musicians, gig workers, and creatives saw their income streams dwindle. There were no shows to play, no tours to attend, festivals were canceled, and human-to-human contact was limited as much as possible. As a result, famous musicians began to become real estate agents, mortgage brokers, investors, house hackers, and everything in between to pay their bills. And guess what—it worked!

Now, touring is back on, but those whose job is pursuing their passions still need extra income to take care of their bills during slow seasons or to build wealth. That’s where Juliet Lalouel from Heavy Realty comes in. Juliet is a Colorado and Hawaii-based investor and real estate agent who helps the music and creative communities find ways to fast-track their financial freedom to keep doing what they love. But her message doesn’t just apply to musicians. Anyone who loves what they do but wants more financial stability can take these lessons to heart.

Today, we’re talking about how anyone from any background can use real estate to supplement their income, pay their bills, and help them build wealth. Juliet shares why you may make a great real estate investor/professional without even knowing it and the beginner investments that ANYONE can try to start building a strong financial fortress, even if you’re a real estate enthusiast by day and a rock star by night.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
Henry, did you start investing in real estate so you could quit your job or to help supplement something else in your life that you’re passionate about?

Henry:
Oh no. I started investing so I could make enough money to quit my job.

Dave:
Really, I, when I first started, I like, I was too dumb to know that that was even a possibility. I was just like trying to marginally improve my finance position. But obviously most people get into real estate to replace their W2 or 10 99 income. But today we actually have an investor and real estate agent who helps people use real estate specifically to not quit their jobs.

Henry:
Well, it just came out in Rolling Stone that many musicians and other members of the part-time and gig economy are actually turning to real estate as a means to make a living. And our guest today was one of the voices featured in this article where they are discussing why this is happening and how people can make a great income in real estate part-time to support their passions.

Dave:
Hey everyone, my name’s Dave Meyer. Joined today by Henry Washington and we are gonna be bringing on real estate agent Juliet Lalouel, who is working specifically with musicians, artists, other members of the part-time and gig economy to get into real estate to supplement their income.

Henry:
On the show today, you’re gonna learn about the many ways that you yourself can get involved Part-time in the real estate industry. We’ll talk about getting involved in the real estate services industry as a way that you can learn how the best goes. And in the second half of the show we’ll talk a lot about how you can get started investing in real estate part-time.

Dave:
Okay, let’s bring on Juliet. Juliet, welcome to the show. Thanks for being here.

Juliet:
Thank you so much for having me.

Dave:
So you specialize with working with musicians, artists, and other people who are working part-time on something other than real estate. When did you realize that this group of people maybe needed some help getting started in investing?

Juliet:
So probably during the lockdowns in 2020 is when I noticed this the most, when a lot of people that were doing maybe professional touring, A lot of my world is musicians or people in the music industry, people that had jobs that shut down, which was obviously a lot of other people as well. Um, I noticed that a bunch of people didn’t know what they were going to turn to and a lot of people wanted to maybe move into a house that had more space where they could work from home, where they could do a podcast from home where they could be creative in some way from home. And they didn’t have the living space to do that. So they were trying to figure out how would I buy this place? I don’t know if that’s an option for me. And that kind of opened up a small door to where I was just seeing a lot of nos and felt like there was a lot of answers to these problems. One of which was either getting a real estate license and getting into the business at that time, of course, as you all know, is very good then. Um, and then in addition, you know, being able to understand what house hacking could do for people and really what investing could really do in terms of getting you into a property and then getting you into a better financial.

Dave:
So this all started during the pandemic, but I’m curious if this sort of for a lot of gig workers or part-time workers existed even before the pandemic. Like have you noticed that this group is maybe not as comfortable with real estate or investing in general?

Juliet:
Yeah, and I think that’s just a lack of knowledge and education. I think that there’s a large group of people that basically aren’t being spoken to in a way that they will be able to understand and hear when it comes to being able to buy your first house, invest in properties, it seems super far away and far fetched for a lot of people when it really is possible for so many. I mean, I’m one of those people that I had no idea what was out there for me until I started talking to the right people that I could really get a grip on what investing was and what real estate was and what that would open doors to.

Henry:
Yeah, you know what? I think that makes sense. So if you think about, uh, gig worker, typically what they’re doing involves them being on the move or almost transient in some ways. And when you think about real estate, it seems very like, I should be planted somewhere and if I’m not planted somewhere, then maybe this isn’t a thing I should look into. But with technology and the internet, especially during the pandemic, like distance wasn’t a thing anymore. You could go anywhere. You could learn from anyone. And now all these tools are in place where you don’t have to even own your own home in order for you to be a successful investor. And all the tools are out there for you. And so it’s great that people like you who understand what that lifestyle is like, can put that information, that knowledge in front of people to help them realize like, hey, you can invest and continue the lifestyle that you have. Right. So it’s a, I think that that makes a lot of sense.

Juliet:
Exactly. I know a lot of people that basically own multiple investment properties and they still rent out their primary house just because they’re moving around all the time physically, whether that’s because of work or they’re just never home, all of that to good stuff. And then in agreement with the pandemic, a lot of people were able to basically work remotely and that opened up a lot of doors for people that are touring on the road or on the road in various ways. You’re never really in one place. They were able to work really anywhere.

Dave:
So what is it then about real estate Juliet that makes it a good option for this subset of the population? Because if they can invest in anything, what makes real estate attractive?

Juliet:
I think that one of the things that makes real estate attractive for certain people is that it translates really easily from maybe one job that you’re into another, the skillset that comes from, you know, professional musicians or gig workers, there’s a lot of communication with strangers. Often you have to kind of put yourself out there, you kind of have to hustle. That is the exact same thing in real estate. Whether you’re a real estate agent or investor, there’s a lot of similarities that kind of can cross over. And so what I’ve seen is a lot of these people are able to kind of take those skills and transfer them into that. And that’s been really, really nice to see.

Dave:
Tell us more about that and what, what are some of the skills that you see people, you said communication, hustling. What does that translate to in the real estate industry?

Juliet:
Well, speaking from just specifically say the music industry where things are very cyclical, um, you’re gonna be going on tour, you make a lot of money, uh, you come back and you kind of need to figure out what your next thing is. Real estate is a lot like that. Often, you know, you have a deal or something and you really kind of need to be able to adapt really well and problem solve in order to get your next thing. Another thing that I’ve noticed is also maybe just like mental toughness that comes with a lot of this type of work, basically managing your expectations. Because in real estate, there’s, you never know when the house is gonna be yours. A deal can fall through, it can go crazy in haywire. And basically the music industry is very much the same, where you’re gonna maybe be promised an amazing gig that could possibly change your life and it might not happen because this other band didn’t choose you. And so like, managing your expectations, there’s this weird, um, mental toughness that comes from those types of things that you’re able to translate also really well into real estate.

Henry:
Yeah, I mean, makes a lot of sense. And when I think about real estate investing, there is a lot of, uh, especially when you’re looking for something to buy, right? It is a lot of getting on the phone with people, talking to them in the language that benefits them, allowing them to understand who you are, what you do, how you can be of value, why this deal should be yours, maybe what ways you can make an offer or curate an offer that’s gonna make sense in that environment. I would imagine that in your world there’s a lot of the same when you’re trying to book gigs or get people to understand why you should be the person that they should be reaching out to. It’s an entrepreneurial hustle, right? It it, it, it kind of transcends all, uh, genres of types of work.

Juliet:
Exactly. That’s exactly right. I mean if you think about it, these musicians are really kind of marketing themselves. They have to put themselves out there. They really have to show up. A lot of the times you can’t have a bad attitude otherwise you’ll be known for that and people don’t wanna work with you just like you would in other careers. And so some of that kind of coincides for sure.

Dave:
Okay, so real estate can be a powerful way for gig workers to build wealth, but as Juliet said, real estate can feel really out of reach for a lot of folks. So what are some of the ways for part-time workers to break into real estate investing? Juliet has a host of options and tips for you right after the break. Welcome back to the BiggerPockets Real Estate everyone. We’re here with Juliet Lalouel talking about how to break into real estate investing even as a part-time or gig worker. Let’s jump back in.

Henry:
So with that understanding, in what ways do you think or do you encourage musicians or gig workers, part-time workers to get into real estate? Like how do you encourage them to get started?

Juliet:
There’s gonna be a few different avenues. And I mean, it all kind of also depends maybe on your personality or where you kind of see yourself. Because I know a lot of people try to put themselves in a position where they’re not really comfortable and you’re not really gonna last long. Um, if you’re kind of an introvert and you’re just going to be like trying your best to do all these cold callings and all this stuff, you might suffer. If you’re an introvert and you really like backend work and maybe admin, you can do TC stuff, transaction coordination. If you have that type of ability to look at spreadsheets and timelines and you like that stuff, if you’re a tour manager and you know what it’s like to manage a bunch of moving parts, stuff like that might trans translate to you, you know, so that’s kind of where I would recommend is first what, where is your personality?

Juliet:
Where do you wanna be? And you know, where do you see yourself and what skills can you learn in order to get there? And then apply yourself to that position because there’s so many different positions in real estate, whether you wanna be a lender because you’re good with numbers and you like finances or you wanna be a realtor ’cause you’re a people person and you wanna do those types of things and you love houses and you know you wanna be an investor because you love how architecture is and you’re fascinated by design. You know, there’s so many different things. Um, alongside with ISA, you can be an inside sales assistant or doing cold calls, like there’s so many options under the umbrella of real estate,

Henry:
You hit the nail on the head. ’cause oftentimes people want to do something either because A, it’s the only thing they know or b they think it’s gonna be lucrative. But you’re absolutely right. Like I tell people, when you’re thinking about what you’re gonna do in real estate, whether it’s uh, a job or whether it’s how you’re gonna find your deals, your strategy needs to be the cross section of your personality, what you’re passionate about and what’s gonna help you hit your goal. Like that intersection is the thing that you should do if you start doing things because you think it’s gonna be lucrative, but it doesn’t really fit who you are the second you run into a brick wall. ’cause we all know, no matter what you do in real estate, you’re gonna get punched in the face, right? And the second you get punched in the face, you’re just gonna quit because it’s not who you are.

Henry:
It’s not how you’re built. And you kind of have to be honest with yourself about who you are. Like for me, when I got into this, everybody told me you need to beat the streets and you need to door knock and you need to cold call. ’cause that’s what getting, what’s getting people deals. But that ain’t me. Like, it’s just the second I knock on somebody’s door and they curse me out. Like I’m gonna, like I’m, I wear my emotions on myself. I’m a devastated, right? Like, and I won’t stick with it, right? So I had to pick a way to get into it that I knew would fit my personality, but that would also help me hit my goals. And I think too many times people, they just dive in to start doing something. It doesn’t fit who they are. They devastated and they quit. And the only thing that makes people successful in real estate is the sticktoitiveness. There’s no secret sauce. You just gotta keep pushing.

Juliet:
Yeah. And I mean, with that, with that, um, tenacity to just keep going, that’s always extremely important. And I think again, you know, people from the music industry are really good at that. You know, in order to make it, you really have to push and keep going and have, you know, keep your chin up type of a thing. Uh, and with investing in real estate, it’s just the same. But exactly, I mean, I think it’s a matter of combining your personality and maybe like what’s great for part-time and gig workers is you can see how not only with your personality, but what does your time allow for? And how can you either a, make more time to do this real estate thing, whatever that looks like, or how is this gonna kind of fit into what you’re already, what you already have going on. So if that’s gonna be, you know, maybe you’re on the road a lot and you’re not really physically somewhere, then maybe the phones is something for you and maybe you’re, and if you’re introverted, maybe the phones isn’t something for you, but maybe back in an admin paperwork or something like that, you know, and you can be helpful to other people.

Juliet:
I think another thing that a lot of people forget, uh, in real estate, whether it’s investing or being a realtor, it’s really, really smart to remember that you can’t do everything on your own and you shouldn’t. You should have a good team, you should have good mentorships. And by team I mean people that fill in the gaps. So if you are not the outgoing, super good person on the phones, teaming up with people that are in order to help you find those deals is really essential. So there’s ways that you can kind of really scale by being with people that are, have the strengths that you lack and then understanding best where you belong and then just working really well at that. And then kind of growing from there.

Dave:
A lot of the, the tactics that you’ve mentioned so far are what I guess I would describe as like real estate services, like being transaction coordinator or being an agent, a lender, all really important. Uh, but in some ways is that just another gig for people? Like why should they do real estate or should, is that like a stepping stone to an actual, an investment or how do you see that and why they should do this over any other sort of job?

Juliet:
Sure. I think that some of this stuff for some people is a really good beginning avenue where you can kind of start and your, you can get your foot in the door and you can learn the skill sets in order to become that investor. Obviously you can start in as an investor right away, you can really study that and kind of dive in. But if that’s something that you’re not really willing or able to do in the beginning, this is at least getting you into that path and that position. And then learning from people doing the thing that you want to do, which I highly recommend, you know, is, is one of the easier ways to kind of get into something otherwise for most of these people. Being a multi multifamily investor, owning all of these things sounds so far away. For some, it’s easy for some to maybe do overnight, but for others it’s a lot more difficult and then they don’t ever really get into it. Um, this is a good kind of stepping stone to kind of get in the room with other people doing these things.

Dave:
Okay. So the, the stepping stones totally makes sense to me and I think for certain people, maybe even in particular gig workers, this is a really good way for people to start learning the industry. What are some of the common ways or some of the common tactics that you see gig workers and musicians take when they’re ready to actually go buy a property?

Juliet:
I would say the common steps I I often see are people that are going to get into projects, whether it be fix and flips where they can get in and then work with kind of a team to get, get into a property, they get educated on what hard money lending is and all of those things, and kind of get their foot into the door to better understand investing that way. That has been something I’ve commonly seen other people, obviously the BRRRR method where they’re gonna buy a property, they live in it, that works out very well for them and then they rehab it themselves over time, uh, and then refinance later. Um, that method has been, uh, something else that I’ve seen quite often. Another way would be house hacking where they are probably not able to make the entire mortgage payment all on their own, but with the help of, you know, either a co-signer or if they have roommates helping supplement the mortgage payments. That’s another popular way that I’ve been seeing people get into a house, they do a house hack, they live in it for maybe a year or a few years. They move out, they hold that property as a rental and they kind of rent and repeat.

Henry:
Yeah, I think house hacking is always a great way for anybody to get started investing. And I think one of the coolest things about house hacking is the flexibility, right? Because when you, when you think about house hacking, most people think, well, I should, I should buy a multifamily and I should live in one unit and I should rent the other unit. But there are ways to house hack in a single unit home. And I would imagine with gig workers who may not be in the house all the time, there may be opportunity for them to monetize where they live, even if it’s not a multi-family. Have you seen gig workers get creative with how they can monetize where they live?

Juliet:
That is the biggest recommendation I have for them. And how I see them do it successfully with getting their foot in the door to property ownership and investing. They start house hacking because they, they come to me because they say that they are used to having a lot of roommates and they don’t wanna have to buy something on their own. All of those things. And, you know, some people like to live that way and they want to live, you know, with their roommates or, or maybe they have a recording studio at home and they’re able to kind of make payments on that by having people live with them. And I often see that, um, you often see a lot of people that are then on the road that will rent out majority of their house and basically store their stuff in one bedroom and they’re gone most of the time. That works out for a ton of people. And I’ve noticed that a lot of people don’t really think of that. Um, in the beginning they’re just like, no, why would I do that? I’d rather just rent, you know, it doesn’t really make sense. I move around so much. If you move around so much, this is a perfect opportunity and way for you to own a house, even if you’re not there all the time.

Henry:
I equate it to like a college student, right? Because if you’re a college student, you’re gonna have roommates, right? Maybe you like having roommates and being able to own a property and then have your friends or other gig workers who are doing similar work be able to come and live with you in a comfortable space around people who understand what they’re doing in their lifestyle, right? And uh, and there’s, there’s a, there is a benefit to people who are doing similar things living together, right? In terms of proximity of resources and things. And so you can have, you can curate this environment of proximity, you can share relationships, you can share tips of the trade tools, right? You’re getting all these ancillary benefits and at the same time you as the property owner are getting to house hack and live and invest and not have to spend a ton of money in order to do that instead of you guys going and living separately. And also wanted to highlight, I think what you were saying was people can create like a studio space in their, within their situation and then you can actually rent that space out to other, uh, people who would want to use that space by the hour. Is that something you see as well?

Juliet:
Exactly. Yeah. There’s a lot of that which is super smart. You know, you can, you can rent that out to other bands or other people that wanna come through and use a home recording studio or obviously you can operate your business out of the house that way and then you have benefits there. But absolutely that’s something that is, uh, quite popular.

Dave:
All right. So there are a ton of routes for gig workers to start investing or even to pick up some part-time work in the real estate industry as a way to get in the door. But if you’re trying to start investing without a full-time, W2 job, how do you get approved for loan? We do have to take one more short break, but when we come back, we have some solutions for you on that topic. So stick around.

Henry:
Welcome back investors. We are here with Juliet talking about how to strategically use real estate to help build a life of passion. Let’s pick up where we left off.

Dave:
So Juliet, I wanna ask you something because when I first got started investing in real estate, I did not have a W2 job. I was working like a couple of different 10 99 jobs. So this resonates with me, but one of the challenges I had was no one wanted to lend to me because it’s very difficult to get loans sometimes as a, as a contractor gig worker. Is that a challenge you see often with this group and how do they get around it?

Juliet:
So that certainly is a challenge and is a thing a lot of people use as a roadblock in order to no longer really go further beyond that. They think that just because they don’t have a W2 job that they can’t get a loan, which is incorrect. There are different loan programs out there that’re not based on your W2 and there’s also options for creative finance, whether that’s seller financing or others. But there are options out there that I think a lot of people don’t understand, uh, is out there for them. Yeah,

Henry:
You’re absolutely right. There are several options for people who don’t have a traditional W2. And I think what really needs to happen is exactly what you’re doing is A, the education and B, the exposure, the more people are surrounded by other investors who are in similar situations, they will be able to see what some of these other non-traditional gig workers or part-time workers are doing to get loans. It’s just a matter of education and exposure because you’re right, there are asset based loans like DSCR loans that are based on how much money the property is actually making or non QM loans, which are non-qualified mortgages, which are made exactly for have a traditional W2. Those are some of the easier things, but there’s even options with, if you’re in and around other investors, you’re going to meet people who maybe do have a traditional W2 and then you can partner with those people that makes you bankable. And yeah, you may only get 50% here, but now you’re getting 50% of something good versus 0% because you don’t think you can go and qualify. So there is a ton of options, but I think the key is, you’re right, it’s the education and the exposure.

Dave:
Yeah, that, that’s a great point, Henry. Totally. And I just wanna clear up what, ’cause this happened to me was 15 years ago now there’s so many more options now to get around this. Like DSER loans 15 years ago was not something, maybe they existed, I had not heard of them, but I don’t think that they were commonplace for investors. And what I had to do, which is still a good strategy by the way, is like I just found a partner who had a good job and who could get a loan . Um, and so like there, that’s still a perfectly viable way to do it, but just wanna call it that, like now this is one of the reasons why it is a good time, uh, for gig workers, 10 99 workers to consider this because the lending industry has really evolved. Mm-Hmm. and gotten more creative as a whole to enable, uh, people to buy these types of uh, properties. So Juliet, do you think that real estate can be a good avenue to support people doing something that they’re really passionate about? Because on this show we talk about the reverse a lot where we say real estate’s a way so that you can quit your job and people want to go full-time into real estate. But it seems like you’re sort of proposing or at least supporting a different theory here that it’s can support you staying in a job that you might really love.

Juliet:
Right? I mean, there’s a lot of people that I interact with in my world that say love what they do. A lot of them are, for example, professional musicians and they absolutely love that. Does that make you a ton of money? Not all the time, but is it something that you love? Yes. You know, and I’m all for basically following your passion, whatever that is, while also getting financial security. And I feel like real estate as an investor or as a realtor, whichever option you go with is going to help get you there and you will have more financial stability in order to do the things that you love. So a lot of people get into investing to quit their job. They hate their job, whatever that is. Maybe if it’s a, it’s an office space or what have you, they wanna leave that behind. A lot of people that I know love what they do, it just doesn’t make them enough money. So this is kind of the perfect thing to kind of support what you love by giving you that financial stability and better, stronger income.

Henry:
Amen. That is how we should view something like this. I think oftentimes people get into real estate and they think, well this isn’t really my passion. And real estate does not have to be your passion. Real estate allows you to do what you’re called to do, not what you have to do for money. If you feel like your passion or your calling is what you’re currently doing, then you can do real estate, which will give you the financial stability to be who you’re called to be. But you don’t have to make real estate your passion. And I love just having that as kind of your, your poster on the wall, your north star, your thing to look at. That’s what keeps you pushing. Don’t make it your passion, just remember that it allows you to fulfill your passion.

Juliet:
Exactly That. And something beautiful that some people might find out is that both can become your passion. I am very passionate about both worlds and you can really get involved. A lot of people in my network love having both, you know, and that has been a really nice thing to see. So yes, you may not love it all the time to get the financial income in order to do the thing that you love. You might end up finding that you absolutely love both and you can kind of live the best of both worlds.

Dave:
Awesome. Well, that’s a beautiful way to end. Juliet, thank you so much for joining us here on the show today. We will of course, put Juliet’s contact information in the show notes below if you want to connect with her. Thank you all so much for listening. We will see you very soon for the next episode of the BiggerPockets podcast.

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https://youtube.com/watch?v=FK1AxBOQA70

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In This Episode We Cover:

  • Real estate side hustles that’ll help you make extra income no matter your experience
  • Why musicians and creatives make GREAT real estate investors
  • The best ways to start making money with real estate and how to find your perfect role
  • Beginner investments for anyone to start building wealth today
  • Financing your first investment property, even if you DON’T have a W2
  • Why real estate is the ultimate side income stream to support your dreams
  • And So Much More!

Links from the Show

Connect with Juliet

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.