Is a Headache Seller Worth Losing a Deal Over?

David:
This is the BiggerPockets Podcast Show 612. Rather than trying to find a seller and convince them that their numbers don’t work when the market’s probably telling them that their numbers do work, I think you should take those efforts and put them into finding a different seller. This is a mistake a lot of people make as they try to change the mind of somebody who doesn’t have to change their mind. Just go look for somebody whose mind you don’t have to change. You’d be way better to take that same effort and put it into a different property.
What’s going on, everyone. This is David Greene, your host of the BiggerPockets real estate podcast. Here today with a Seeing Greene episode, as you can tell from the green view behind me. In Seeing Greene episodes, we answer questions directly from the BiggerPockets community regarding real estate, what to do about real estate, how to finance real estate, what’s going on in this crazy real estate market that we’re in, and I do my very best job to answer them. If you’re not listening to this on YouTube, consider checking us out there where you can read and leave comments about today’s show.
Today’s show is very good. We get into some very trendy topics that are on the front of everybody’s mind. We talk about if you should get into a cash flow or an appreciation market, what the difference is between the two and how to know which one is right for you. We talk about the fact that you’re not going to get comfortable before you do something. So what a good process is to get comfortable in the process of starting something new.
And we talk about how to understand debt-to-income when you leave your W-2 job and go full-time into investing or a side hustle plus real estate investing. We get into some really good relevant stuff, and a lot of wisdom is shared here. So thanks for joining me. I’m excited for you to hear it.
Before we get into the show, today’s quick tip. Consider getting your tickets to BPCON 2022 in San Diego this year. You can go to biggerpockets.com/bpcon2022. That’s BPCON2022. I’ll be there. Lots of other BiggerPocket personalities will be there, lots of other investors will be there. You can learn from other people about what’s working in their market, what market you might want to invest in, and then meet people in that market that can help you get started.
It’s also a great time. I’ve never seen a person there that had an unhappy look on their face. Everybody is super cool. It’s a lot of fun. There’s tons of knowledge being shared, and it can really get you invested in this community and jumpstart your career. So, consider being there. I’d love to see you there.
All right, let’s get into today’s show.

Ahmad:
Hi, David. Thank you so much for all the knowledge, insight, and information that you share with people every day. It’s been extremely paramount to my growth as a new real estate investor. My question is, my girlfriend and I are both new to real estate investing and we’re trying to build our real estate portfolio. We each have a property in our name already. We want to acquire the next one together.
However, our original plan was for one of us to take in that mortgage separately. That way the other person is freed up in terms of the debt-to-income ratio. And then down the road when we go and get another property, hopefully it would be a little bit smoother because one person still doesn’t have that new debt on their record. Now, with the rising interest rates and inflation and just cost of everything being so expensive nowadays, I’ve been rethinking that and thinking about going in on a new mortgage together, combining our income so that we have more buying power.
Now, my question to you is would that be disadvantageous for us? The reason I ask is I know from your previous podcast when we acquire that new debt, we both acquire it like we’ll both have that new mortgage on both of our debt-to-income ratio. And I wasn’t sure if with that in mind that the rental income would also, if we would both acquire that rental income or if only one person gets to say, “Hey, we’re making $2,000 in cash flow every month,” if I get to claim that, or she claims that, or if marriage changes all of that, so it’s all kind of confusing. And I was just wondering what your take on that would be. Thanks, David.

David:
All right. So thanks, Ahmad. This is a good question. Let’s break it down. You’re thinking about buying with your girlfriend. First thing I want to say, you didn’t ask this, but I would just recommend that you maybe hold off on taking title together with someone that’s not your spouse. I’m sure your relationship is great now. You never know what’s going to happen. And if you’re buying something with your girlfriend and only one of you is on title, if the two of you split up, the other one might not have any protection.
You’re going to put both of you on title. There’s ways to do it without having both of you on the loan. But in general, you’re going to end up both being on the loan. That’s the smoothest way to make it happen. And now you’ve eliminated the ability to have the mortgage and only one of your names. So just in general, whenever you’re buying with a partner, which is what this is, I advise people to probably try to not invest with a partner unless they have to, unless it’s your spouse.
Now, let’s get into the details of what you’re asking here. I like where you’re going. You’re trying to keep the mortgage in one of your names not the other, but you’re realizing you might have to combine incomes in order to get the property you want. That is sort of the conundrum. I think I mix conundrum and quandary together and made up a Voltron word that doesn’t exist, quanundry. Ignore that part. We’re probably not going to edit it out and everyone’s going to see what it looks like when you’re trying to record a podcast and you end up making up a word.
The good news is if you buy investment property together, you don’t have to worry about the debt-to-income ratio taking a hit, because you’re bringing in income from that investment property, just like you’re bringing on debt. So it usually ends up working out more or less to be equal. And in time, it actually helps your debt-to-income ratio because you’re making more income than what you’re spending on the debt.
Now if you’re buying a house to live in, that’s an exception. Usually, you cannot use income from a house when it’s your primary residence. There’s a handful of very small exceptions, but in general, it doesn’t work the same way. So I would say, if you have to combine incomes to get the property you want, make sure it’s an investment property. But you’re probably going to want to buy it in an LLC that you’re both half owners of to make sure both people are entitled. And that brings us back to the issue of buying a house with your boyfriend, girlfriend, not always the best idea.
So I would ask you, is there a way that you can afford this one on your own and you buy it, and then you work with her so that she can afford one on her own? I just think overall, when you’re looking in the future, that’s probably going to be a better approach. The other option you have is a debt service loan. These are loans where you take the income from the property not from yourself, so you don’t have to worry about the effect that this is having on your personal debt-to-income ratio.
The other questions that you ask are this is a good example of, this is best asked to a CPA, a title company. You can ask your agent or you can ask someone like me, but I’m probably going to refer you for the nuance of this to go talk to an expert. So if you’d like, feel free anybody to reach out, I’m happy to connect you with my CPA. If you end up signing up with them, they can answer questions like this one right here, because they have a better understanding of how to do this legally the correct way.
Thanks, Ahmad. All right, our next question comes from Haruka from the East Coast. Haruka says that she has bought a single family home. She’s renting it out. She likes it. And now she wants to expand. She wants to get into 5 to 10 multifamily properties or clusters of single family homes in areas with steady population growth.
The problem is she’s been looking in hot areas like Raleigh and Atlanta, where houses are super expensive that don’t really cash flow much. And then in other markets, which she calls medium like Indianapolis, she sees that she can find relatively decent cash flowing properties, but you’re not getting the growth that you get in one of the hot markets. Should she focus on one market and try to get as many deals as she can there or spread her attention over several markets?
Thank you for this, Haruka. Here’s what I’m hearing behind what you’re saying. You’re very frustrated because it’s very hard finding cash flowing properties in today’s market. And that is a thousand percent true. This is from what I’ve seen in my investing career and from what I’ve talked to some of the older investors, the most difficult time to find any cash flowing asset.
And it helps if we understand why that is, I won’t go into it too deep, but a lot of it has to do with the fact we printed too much money. That money needs to find a home. Real estate investing is the easiest way to deploy a lot of capital and capitalize on leverage without a ton of work. So more and more businesses, companies, hedge funds, institutional capital investors like us, everybody’s flocking into this space because it’s the best place to put money with the lowest overall risk and the highest return.
At the same time, the increase in education in real estate investing has taken a lot of the mystery out of this. That used to be a barrier to entry for a lot of people to get into the game. So now it’s easier to get in than ever, and there’s more people getting in than ever, and there’s more capital getting in than ever. And boom, you’ve got a very hot and competitive market.
Here’s something that I’ve come to understand when it comes to how I look at real estate. It’s a spectrum. But in general, you have cash flowing markets and appreciation markets. Now that does not mean speculating markets. What it means is you’re going to make more money by the value of the asset going up in some markets. We call those appreciating markets. And you’re going to make more money through cash flow in other markets where your property is not going to appreciate as much.
The problem is when we want both, there was a time you could get both and many people set their expectations that that’s what they should get through real estate investing. But I don’t see it like that. Now, I understand that when I’m buying a property, what I’m really doing is buying an income stream. Some income streams are very difficult and take a lot of time and effort to manage. Other income streams are easier to manage.
The income streams that are easier to manage are in higher demand. And therefore, they tend to have a lower amount of income that comes out of them because there’s more people looking to buy them pushing up the prices higher. So what you have to ask yourself is what is more important? Are you playing the long game? In which case, appreciation is usually better because you’re going to make more money over the long term or are you playing the short game where you want cash flow right off the bat?
Now, there is no right or wrong way to do this. Some people like their job or already have a lot of money. They’re able to play the long game. And so they go into the hot markets like you talk about where there’s very little cash flow in the beginning, but over time, they start to develop more cash flow as well as a higher appreciating asset.
Other people don’t have that luxury. They have a need for supplemental income. They just had a baby. They need to get some more money coming in. They don’t have their job. They lost their job. They’re not happy where they’re at. They need cash flow in order to get them a platform to get to the next level in life. So when it comes to choosing what the right market is for you, Haruka, do you want to be in an appreciating market, which is long term or a cash flow market, which is short term, what do you need?
So here’s the way that I’m doing it right now. I’m overall looking for the long term approach real estate investing. I know I’m going to make way more money buying in an area where people are moving to, what you call the hot market. There’s to be more demand there, businesses are going there. People are going there. Over a 5, 10-year span, those houses or those assets are going to appreciate a lot.
So I’m looking in the markets like you’re talking about. The Raleighs, the Atlantas, the South Floridas, the Arizonas, places where I think wealth is going to move and I’m buying there for the long term. Now, to balance out my portfolio, every time I buy a property or a set of properties that are more of an appreciation play, I’m also buying a series of properties that are a cash flow play. So then I may go into some of the, what you called medium markets like Indianapolis. And I’m looking for something that’s going to cash flow very steady, but probably isn’t going to go up a lot.
It’s kind of like if you use a fitness analogy. You need to eat protein for your muscles, that’s long term. But you need to eat some carbs, so you have energy for the short term. If you’re trying to grow, you have to have a balance of both. Now, if you already have massive muscles and you don’t need to work out a ton or whatever, maybe you just eat more protein.
That’s the question you have to ask yourself, where are you in life? If you need cash flow right now, go to one of the markets where you can still get it, the medium markets like you said. Build up a steady stable of cash flow. And then once you’re good, consider going into one of these hot markets and playing the appreciation game.
Also, let me just add this one piece because I always get comments if I don’t clarify this. When I say the appreciation game, I am not saying the speculation game. I am not telling anyone to go buy a property that they cannot afford in the hopes that it goes up and they can sell it later. I am talking about buying a property that you can afford that may produce less short term cash flow for the delayed gratification that comes from more cash flow later in the game or a higher appreciation value.

Jesse:
Hey, David, love BiggerPockets and all you guys do. So I have a scenario. I just kind of wanted to see how you would tackle this. I have a property in Green Bay, Wisconsin. It is a duplex that I used to live in. My understanding of the tax code, I lived in it two of the last five years. I moved out of it two years ago. So I would be able to sell it without paying capital gains, which is very enticing.
The problem is what I’m looking to buy is basically what I would be selling, small, multi, my units in that area, or I could get adventurous and do something different. But that’s kind of what I’ve been looking for, is two to four unit properties in that market that cash flow and also have done well with appreciation.
So how would you tackle this situation? How do you figure out if this is a wise move to sell it or to just refinance it and keep it, but especially with the caveat of the fact that I would not be paying capital gains if I did sell it. So, I don’t have to mess around with the 1031 or anything like that. I look forward to hear what you have to say. Thanks.

David:
All right, Jesse. Great question here. And what I love about this is it is a philosophical real estate question. So I get to break down the philosophy of real estate, not just here’s a tactical answer to a specific situation. First off, your understanding is correct. According to the current tax code, if you’ve lived in a property for two years out of a five-year-period, you can sell it and avoid capital gains. There’s a limit on that. I believe it’s $250,000 is exempt as a single person, $500,000 for a married person. Again, I’m not a lawyer or a legal advisor. This is not legal advice. You should look that up, but that’s my understanding of it.
Now you’re also asking a very good question and it comes to the fact that in real estate, when we sell and then look to buy, we typically are doing it in the same market that we just exited. So if you sell high, you buy high. If you sell low, you buy low. And this gets a lot of people tripped up because what they’re looking for is a situation where they can sell high and buy low.
Now, when I wrote Long Distance Real Estate Investing, this was one of the issues that made long distance investing great, because you could sell high in a certain market and then find a market and then you could go buy low. Unfortunately, we’ve had such a flood of interest in real estate investing since we at BiggerPockets have done such a great job of getting the information out there that now there’s very few markets that you can actually go buy low.
So you have to change the way you’re looking at it. If you’re going to sell, one of the benefits is you can avoid capital gains. But I wouldn’t look at it like you’re making a bunch of money and then reinvesting it so that you can make even more money. That isn’t exactly true because you’re selling high to go buy high. In a lot of ways, you’re just going to get a reset basis on your property taxes. You’re probably going to get a higher interest rate than you had before. I’m not deterring you from doing it. I’m just asking you to look at it differently.
Here’s how I look at it. When I sell in one market and then buy again in the same market, what I’m really doing is I am adding leverage to my portfolio. So if I sell one property and I take a $500,000 game and then I go buy two or three properties with that, what I’ve really done is increase the amount of money that I have borrowed. My equity didn’t necessarily change because I took 500 grand from one and turned it into 500 grand over three others.
My cash flow might have changed some or might have changed maybe not at all. I might have taken $2,000 of cash flow over one property and traded it out to, say, $800 of cash flow over three properties. So maybe I got one from $2000 to $2,400, but that’s largely insignificant. You don’t have a huge, huge bump in your cash flow when you do this. What you’re doing is betting that prices are going to continue to go up and therefore, leverage is in your advantage.
When you’re trading in one house for three, if prices raise, you are making three times as much equity and you borrow money that you’re paying back with cheaper dollars. Now, if you think the market is going to go down, this would be the worst thing you could do. You don’t want to have one house and turn it into three with a bunch more debt. And that’s the question that you really need to be asking yourself. Do you believe the market’s going to continue to rise in the market you’re talking about, or do you believe that the market is going to fall?
Now I don’t believe you mentioned the market you’re in, so I can’t give you any specific tactical advice on that specific market. But what everyone listening needs to understand is when we buy real estate, we’re always making a bet. We’re making a bet that tenants are going to continue to pay. The market is going to continue to go up. Rents are going to continue to go up. Businesses are going to continue to employ people. And therefore, we want to own assets that are dependent on tenants.
And when we’re not buying, we’re also making a bet. We’re betting that prices are going to come down or our money would be better put somewhere else. So what everybody needs to understand is you’re going to make a bet one way or the other. Once you make up your mind, which way you think you’re going to go, that’s where these strategies that we’re talking about today can come into place.
We’ve had some great questions so far, and I want to thank everybody here for submitting them. Please make sure as you’re watching this on YouTube to like, comment and subscribe to the channel so you get notified when BiggerPockets comes out with some new stuff. I got all dressed up for you today. I’m trying to dress to impress. What do you guys think of what I’m wearing?
This segment of the show is where we take comments from previous episodes. And I read them to you, hoping that you will also go comment on our YouTube channel and let us know what you think about today’s show. I want to know. Should I answer longer or should I answer shorter? Do you want to get more commentary from me or would you rather have shorter answers with more questions?
Also, how do you like me to dress? Do you like me more in a T-shirt? You like me more in a realtor specific button-down type of a shirt? I want to know what you guys think. Leave your comments below. We will read them on one of our shows.
Our first comment comes from Giselle Morales. “I totally agree with you on cash flow. To be able to live off of it, two to three properties only is pretty risky. In my case, I had my goal and numbers aligned to get nine houses and that will cover my budget times two. And I was able to do it. So now I cover my budget with half the houses and what I do with the cash of the other half is keep saving to keep investing.”
Thank you, Giselle. This is an awesome comment. And what you’re hitting on is the philosophy that you should buy a handful of properties, quit your job, go full time into investing and figure out how to make it work. For some people that may be the right move. For others, it becomes much more difficult in the market that we’re in.
So 10 years ago, that advice applied to a bigger segment of people than what it applies for today, which is a much smaller segment. And I’ve lately been saying, you shouldn’t be looking at cash flow as a way to replace your income. You should be looking at cash flow as a way to supplement your income in today’s market for most people.
Next comment comes from Miguel Montreal. “Hey, David, great episode and questions from listeners. I just wish, and maybe you can recommend this, that those asking questions can get right to the question. It seems to take forever just to get back to you to give an answer. Thanks.”
Miguel. I really appreciate. And here’s the dance that we’re having. I want you guys to submit questions, so I don’t want to discourage anyone or make them feel bad because they took too long to ask the question. And I also recognize that many of you don’t talk on a microphone like I do for a living, so speaking can be hard. It can be hard to get to your point. Maybe you didn’t think about what you were going to say before you started talking. Maybe you were just super nervous and that’s why it took a long time to get to the point. But I do see it as well.
What we would love would be for more of you to ask questions, but just be a little more succinct. So if what you really want to know is, “Hey David, what market should I buy in?” Start your question by saying, “I would like to know what market I should buy in. Here’s where I’m concerned.” What we typically get is someone that tries to explain the background of what they’re thinking. And then at the very end five minutes in, they get to the question and that’s just harder for the listener to sit through. And so oftentimes, we don’t air those questions.
So Miguel, thank you for offering some advice. When you guys submit your questions to BiggerPockets.com/david, be more succinct. Get to the point. Maybe practice a few times before you record it, and you get a higher chance of getting put on the show.
Jeff Mueller. “David, what is a good return on equity on a property I want to buy and hold, 15%, 35%?” All right, Jeff, it’s very difficult for me to tell you what the right return on equity should be. And what you’re talking about is for the equity in a property, how much cash flow is it generating? Those numbers are huge. 15%, 35% are typically very high because return on equity is usually lower than return on investment.
In fact, it’s almost always lower, assuming a property is going up in value. You can only get an ROE that is higher than the ROI if your property’s actually losing value, which would be bad. And since most people aren’t hitting anything close to a 35% ROI, that wouldn’t happen on your return on equity. But you’re asking the wrong question. Don’t say, “What is a good return on equity?” What you need to be asking is, “Is this return on equity close to the return on investment?”
So, if you buy a property and you’re getting a 20% return on investment somehow, but then the property goes up a ton in value and you’re only getting a 3% return on your equity, that difference between 20% ROI and 3% return on equity, the higher the difference is, the more you should look into selling that property and reinvesting your equity to get a better return on investment. The closer that your initial ROI is to your ROI, the more likely you should keep the property and hold it.
Are these questions and comments resonating with you? Do you like hearing my take on this stuff? Well, guess what? This show is only as good as the questions and comments that we receive. So comment on the YouTube channel. Tell me what you’re thinking. Am I talking too fast? Am I talking too slow? Do you want me to talk in different accents? What kind of close do you want to hear? Let me know. This is for you. And then also, I need you to submit more questions that I can answer on the show. So, go to BiggerPockets.com/david, and leave me your question there.
All right. Let’s take another video question.

Bill:
Hey, David. Bill from Charlotte here. Just a quick background, I’ve got a high paying W-2 job in the tech industry here. And then I’ve sold a couple long-term rentals and I’ve currently got one long term and five short-term rentals through a combination of myself and some partners. Pretty close to being able to pay for my expenses through the rental income and would like to no longer work in my at least current W-2.
Concern I have is my debt-to-income is pretty shot with the loans I’ve currently got in my name. And after potentially leaving W-2, I don’t think I’ll have really any room at all to purchase a new primary home. I’m wondering how others or you’ve seen others deal with this in the past after they’ve quit their W-2 and have lived off their rental income. Thanks.

David:
All right, Bill, great question here. Let me see some different steps I can give you that you could possibly take, paths that you might take. Number one, you don’t quit your W-2 job, but you look for a different position within that company where you can work less hours or work on something that you enjoy more, so you have more time to put towards real estate investing.
Number two, you work in the same industry you’re in. I don’t believe that you mentioned it. You just said it was a high paying job. Can you get a consulting job? Can you be a freelancer? Can you do some way to earn money, but on your schedule where you have more flexibility to focus on real estate investing, but you haven’t wasted all the skills that you’ve built in the industry and now you’re not making money. You’re still making money, but more in an entrepreneurial position. So even if it’s less than the W-2 income, it’s still more than nothing that you’d be getting if you quit.
Number three, you said your debt-to-income ratio is pretty much maxed out from properties you’ve already bought. I don’t quite understand that because if you’re claiming the income that you’re making on your taxes, most lenders will let you take 75% of the gross income that you’ve collected and use that as income for yourself in your debt-to-income ratio.
So when I’m buying real estate, even though my debt is going up, my income is going up with it because I’m collecting rent. And my income actually goes up higher than the debt if they’re making me money. So when you’re cash flowing, you should have more income, not less income. So unless you’re having a specific loan product that won’t let you use income from rental properties, then the only reason you’d be having trouble is if you’re not claiming the income on your taxes and then just start claiming your money on your taxes like you’re supposed to be and that will go away.
I’m not sure if the lender you’re working with is telling you this, or it’s just maybe a false impression that you’re under that you can’t use the income from your properties, but definitely reach out to us at The One Brokerage if you’re willing. And we’ll figure out what is going on with you there.
The last thing is use a different loan product. Use a debt service coverage ratio loan that says, “Hey, this property is going to make this much money. We’re going to qualify him based on the income the property is making not on the income that he is making. We do these loans. They’re third-year fixed rate. They’re not risky. The interest rate is a little bit higher, but if the deal works, it doesn’t really matter.”
What is more concerning to me is when people get into adjustable rate mortgages and what’s even more concerning than that is when they’re short-term adjustable rate mortgages. So if you have one or two-year period before it adjusts, very scary.
You didn’t ask this question, but I’ll throw it in for the audience. I’m not super opposed to an adjustable rate mortgage if it has like a seven-year period or even maybe a five-year period before it adjusts, because the odds are over seven years, you should have seen increased rents and increased profit. You should have stabilized it and had more income coming in so that when your interest rate adjusts, if it does go up, you should be okay because theoretically, you’ve seen rents increasing. I don’t like them over a short period of time like two years. That’s not giving you enough time to stabilize a property, reduce expenses and let rents increase.
So, I think that this could really be solved by having a good conversation with a good loan professional that should be able to look at this and give you some answers. I’m guessing maybe you haven’t talked with one of those yet. So reach out to me, or one of us, or find another one of these amazing people on BiggerPockets that lives to serve the investment community. Get some answers from them and you could be that much closer to quitting your job.
Now, specifically to you saying Bill, “Hey, I want to buy a primary residence.” On a primary residence, you’re not going to use a debt service coverage loan like what I talked about. You’re likely going to use a conventional loan or you’re going to use a portfolio loan through some credit union that you might be involved with, whatever it may be.
But it’s the same fundamentals. If you’re claiming the income that you’re getting from your rentals and your long-term rentals and your short-term rentals are profitable, you should be able to use that income to help you qualify for the primary residents that you want.
Next question comes from Nathan Holt in Ohio. “Hey, David. I’m a 23 year old college student, a full-time worker at Capital University. I’m looking to buy a small multifamily in Central Ohio east area. I had received a tip that there was a guy looking to sell a triplex unit in Johnston. My realtor contacted him with an offer of $200,000. He said he’s looking for closer to 370. I do not have the funds at the moment for that, and the numbers don’t make sense for a house hack. It would only be profitable if I didn’t live in the building and rented all three units, but then I have to put more than the 5% down on the mortgage, which I don’t have. I’m wondering if it might be a good idea to try and sit down with him, the seller, and show him how the numbers really don’t work and see if I could persuade him into moving the price down to more affordable area and go from there. Do you have any ideas or recommendations?”
All right there, Nathan, I do. Your realtor really should have told you this. It sounds like your realtor is not very experienced. If you’re being told to write an offer at the price you did and the seller wants that much more, one of two things is going on. Either he has ridiculously unrealistic expectations, or you do. And that’s really what it comes down to.
What’s the house worth? Whatever the market says it is. Now what is the market? Well, basically that’s all the other buyers. You’re not going to be able to convince this seller that his numbers are unrealistic because what it really is, is they’re unrealistic for you. Your situation makes this the bad deal. It’s not a bad deal for everybody, but it probably is a bad deal for you.
If you’re looking at house hack and you need it to cash flow and you only have 5% to put down, there’s only a handful of properties that are going to work because you got a lot of ands that are in there. There’s some other investor out there who doesn’t have all those ands. Maybe they’re in a 1031 and they need to find a way to park their money. Maybe they’re trying to take advantage of accelerated depreciation. Maybe there’s reasons why they would want to own that property because they don’t have the same situation as you. They’ve got more money to put down and they can make a cash flow.
Rather than trying to find a seller and convince them that their numbers don’t work when the markets probably telling them that their numbers do work, I think you should take those efforts and put them into finding a different seller. This is a mistake a lot of people make, is they try to change the mind of somebody who doesn’t have to change their mind. Just go look for somebody whose mind you don’t have to change. You’d be way better to take that same effort and put it into a different property.
All right, we have time for one more question.

Shiuan:
Hi, David. This is Shiuan. Thank you so much for your videos. I’m from [inaudible 00:29:18], and looking to purchase maybe in or out of state. My question is if I should use a HELOC to purchase or use my cash savings towards a down payment and just trying to understand about good debt. Is that always better to borrow off than to use my own name? And as a part of the question is the variable rate of HELOC. How do I make sure … How do I calculate the rental properties cash flow to make sure that it covers the HELOC well? Thank you so much. Your videos are super helpful.

David:
Thank you for that, Shiuan. Your audio was a little hard to hear, so I’m going to repeat what I remember of what you just said. It sounds like what you’re saying is you’re looking to buy and you don’t know if you should take the money from a HELOC or from your cash savings. And you mentioned that you want to make sure that you’re using good debt, so it sounds like you’re trying to figure out does a HELOC count as good debt.
Now, I can tell your heart is in the right place because you’re asking a good question, but your head might need a little bit of clarity. First off, if you’re going to use a HELOC, I look at that like giving a loan to myself because HELOCs are temporary loans. You’re going to be paying a higher interest rate than normal if you use a HELOC. So what they’re really designed for is to go use the money for a short period of time and then pay it back. If you’re going to be buying a rental property with that money, unless this is a BRRRR or a flip, it’s very difficult to get the money back to pay off your HELOC.
Furthermore, the Fed has announced that they’re going to raise interest rates, I believe, seven more times before the year ends, which means that you should expect the interest rate on your HELOC to continue to rise, making that a less desirable financial vehicle for what you’re talking about.
Now, let’s look at using cash. At first glance, using your cash savings would be a better plan because there’s no interest tied to that money like on a HELOC. So, you don’t have to pay debt yourself to this HELOC. But you need to make sure that you have enough cash and reserves to weather a storm. This is a big way that investors lose money. They end up not keeping enough money in reserves and then they can’t make their debt payments. And if the value of their property has dropped too low or there’s no buyers in the market, that’s where they go to foreclosure.
So, I would say keep 6 to 12 months of reserves of cash flow for yourself and your property in your cash savings. More than you think you need, maybe even more than that. If you have enough cash after you put a lot of it in reserves, use that to buy the house. If you don’t have enough, use the remainder that you’re lacking from the HELOC. But you don’t want to take money from the HELOC unless you absolutely have to because we’re told rates are going to keep going up and HELOCs have adjustable rate mortgages.
And then once you buy the property, get right back in there, start working hard, start saving money again, start working on a side hustle, keep your expenses low, save those reserves back up after you buy the property. This is a great question. I’m glad you asked it, and thank you for doing so.
All right, this question comes from Jason in Atlanta, two-part question. Part number one, “My business partner and I own about 60 doors across a couple states in the Northeast, in the multifamily space. Right now, we’re working on a deal that would nearly double our portfolio. My first question, have you ever heard of a bank calling the note on a commercial loan using the loan-to-value clause? For example, if we’re a 75% loan-to-value and the market dips a bit after we close and the decrease in the property’s value turns into a 77% or 79% loan-to-value, have you ever heard of a bank calling loan do for that reason? I believe in most mortgage, there’s technically able to do that but I couldn’t find any examples of it happening on the BiggerPockets forum.”
All right, let me start with that question before I get to part two of yours. My understanding of the loan-to-value clause you’re talking about is a clause in a note that tells the lender if the properties loan-to-value starts to increase, which means the property is becoming worth less compared to the amount of debt you have on it, then the lender is able to call the note due. Now why would that be in there? Well, my understanding is if you’re a bank and you see that the loan-to-value on a property is going the wrong direction, you should be able to step in and fix the problem by taking title of the property before it gets worse.
Now in multifamily property, as you know, Jason, the value of the property is based on the NOI, which means if you start making less money, the value of the property is going to go down, which is going to increase the loan-to-value. So what they’re concerned about is if you’re mismanaging the property and it’s not profitable, they want to be able to step in before it goes into complete foreclosure.
But something else to think about, do they want to do that? If it’s not because you’re mismanaging it, if it’s just because the market turned around, maybe cap rate’s expanded, maybe the interest rate has changed the value of multifamily property. Your loan-to-value might go up a little bit, but I don’t see why they would want to step in and take it off your hands if it’s something like that.
I would ask the representative at the lender that you’re talking to, “Hey, what would happen if rates jumped up and therefore cap rates expand and the value of the property is going to go down? We could see the loan-to-value increase from 75% to 80%. What would you do?” And they would probably give you the answers similar to what I did, but I would check with them to find out. As far as have I ever heard of that happening, no. I also have never seen this happen.
“My second question, do you have any general tips on getting more comfortable with such a big transaction even if the numbers definitely work on a multi-year horizon? I remember in the olden days of the podcast that’s back when I had a halo over my head, the golden olden days. You and Brandon once said that to grow up business, you should really be doing something every year that’s a little bit uncomfortable for you, and this definitely fits that description. Any tips on getting comfortable with the risk and uncertainty of something that looks good on paper but is bigger than anything else you’ve ever done in real estate? By the way, really enjoying Seeing Greene format mixed in with the traditional deep dive shows.”
Yeah. It’s hard, man. Here’s my advice. You aren’t going to get comfortable with what you’re going to do. You are going to do it and it’s going to be uncomfortable. And in the process of doing it, you will become comfortable. This is something we all have to understand. I want you to look at comfort like strength. You can’t get strong and then go to the gym, right? Confidence often works this way. If you wait to feel confident, you’ll never start. If you wait to get strong, you’ll never work out.
The very fact that this feels uncomfortable is a way of knowing that you’re not yet the version of you that you need to be to do this right. What you have to do is put faith in the fact that going through the process is going to turn you into that person. So I did not wait until I was super good at jujitsu before I went to jujitsu. I go and I suck, and if it’s really hard and most of the time I feel bad about myself because I’m comparing myself to people that are way better. But I’m getting comfortable through doing it. I didn’t wait until I was comfortable and then do it.
The same goes with being in shape, and the same goes with business. When I first started doing this podcast with Brandon, I was not comfortable. It was actually terrifying. At the time we were getting 250,000 downloads per episode, and the entire time I was looking at the camera saying, “250,000 people are listening to every single word that I say.”
And I started worrying about not pronouncing something correctly or saying something dumb or saying something that God forbid, someone could pull up seven years later and say, “Haha, David said something and it wasn’t accurate.” It was really scary. But all I could do was keep doing the podcast more, keep thinking about how to get better, keep listening to the episodes that I did and noticing what I did that was good, what I did that wasn’t good and improving.
And this is what the process is. If the deal looks good and you believe in the fundamentals and you’ve got enough money in reserves, do it. You’re not going to be comfortable. You’re going to make mistakes. You’re going to do things and say, “Ooh, I should have done that different.” That’s literally how I learn in everything. Jujitsu is a great example. I’m constantly making mistakes.
You’re going to do the same thing. Don’t wait to be comfortable before you do this deal. And again, I’m going to highlight, make sure you have enough in reserve. See, the cool thing with jujitsu is when I make a mistake, I don’t actually get my arm broken because I can tap. I can say, “Okay, stop pulling on it. It’s going to break. We’re good.” And they’ll stop. So, even though it’s hard, it’s not necessarily risky. Reserves are your tap. If you’ve got reserves, that means you’re able to tap. You can make through the tough times, you’re going to be okay.
That is it for our show today. Thank you very much for listening. I understand you could be putting your attention everywhere. If you’re watching on YouTube, there are people screaming at you to watch their videos instead of mine. If you’re listening to this on a podcast, there’s tons of people who would like your attention listening to their podcast. So, I want to say thank you for joining me on the journey that we are on and know that I am doing my absolute best. And we here at BiggerPockets are doing our absolute best to give you the best content we possibly can, straight shooting, hard hitting, no BS, no drama. The realest of the real is why you’re here. It’s why we do this.
So please, consider going to BiggerPockets.com/david and leaving me a question. Make sure you like this YouTube channel as well as subscribe to it, and follow me on social media. I’m @davidgreene24, pretty much everywhere. On TikTok, I’m officialdavidgreene. There’s an E at the end of Greene.