Rising Rates, Rentals vs. Primary Residences | Coaching Calls

David:
This is the BiggerPockets Podcast show 574.
Part of why I think that, even though the market is hot, it is the best time ever to buy real estate is because the rules changed. It’s not going up and down like it used to. We basically made a decision, our political leaders at least in this country, that we will only accept one result, which is prices going up. While that will make housing more expensive, it will also make food more expensive, and gas, and cars and all the things that people need. Which means if you’re listening to this, there is no more important time in history than you invest your money better.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast here today with an amazing episode that’s made amazing by people just like you. On today’s show, we do coaching calls with several different real estate investors who are hitting different hurdles in their business, or having apprehension, or just trying to figure out how do I navigate today’s complicated market, and we answer their questions for you to hear.
Now, this is a podcast where we teach you how to establish financial freedom through real estate. If that’s what you’re looking for, you are in the right place. We do that by bringing on other successful investors and interviewing them to hear what they did well as well as interviewing different investors to figure out what questions do they have that they’re facing because you likely are as well, and then offering insight from different people about how we think that they could handle facing those challenges.
These are a blast for me because I never know what’s coming and people ask really, really good questions that many of you are probably thinking in your head. I think most people who listen to this one are going to walk away feeling really good because the questions that are causing apprehension with them moving forward are the same things that people are wondering. So, make sure that you listen to this one all the way through and hear the best insight that I can possibly offer on how to navigate the market and how to win in today’s real estate game.
All right, for today’s quick tip, I’m going to say consider getting a BiggerPockets Pro membership. If you’re looking to get serious about your investing, it is a pretty small investment financially but it gives you and empowers you the ability to analyze properties very quickly as well as a host of other benefits.
The biggest reason why I became a BiggerPockets Pro member was I wanted access to calculators that I could run through and figure out what would this property give me back on my money if I bought it. If you don’t have a tool like that, when a deal crosses your path you’re probably not going to take action on it because you just don’t know what to do. That’s a great first step for many investors to take when it comes to empowering themselves to act on the opportunities that come their way.
All right, that’s it for today’s quick tip. Let’s bring in our first guest.

Jackie:
My question today is, I own a house, it’s already rented and I want to [inaudible 00:02:54] it and get my money out of that house to buy another house. Actually, I just came back from the appointment, it’s $100,000 and it needs about $22,000 of work. I just came back with my contractor and he needs $22,000 in work. So, the after repair value would be of 140, $150,000. With the current rental market, I think I could get 1200 in rent. I’m thinking about renting it out or moving into the house myself because I’m paying $900 in rent. I guess my question is, would it be better for me to just rent it out or move into the house myself and just save myself the money in paying rent?
Also, I don’t have much money right now, so I’m only working with the money that I have from my first property. I haven’t gotten an appraisal yet. Actually, yesterday I contacted my loan officer and he’s taking care of how much I could get out. I asked him if I could get 70% of it out. I don’t have the rest of the money in cash, so I wanted to know if I should do a bridge loan if I did decide to go the rent route and just get the amount of money that I have in the property and then if I don’t have the rest in cash, if I could do a bridge loan?

David:
Okay, so for the first question of should I rent it out or should I move into it, we’re going to assume that we’re only looking at it financially. Correct? We’re not going to factor in the emotional side of do you like it as much as the house you’re in.

Jackie:
Right.

David:
Okay. How much are you paying for rent right now where you live or do you live in a house you own?

Jackie:
No. It’s my mom’s house and I rent it from her.

David:
Okay, so how much are you paying for that?

Jackie:
900.

David:
900 a month, all right. Now, if you buy this house, have you calculated what your mortgage, your tax, your insurance are going to be?

Jackie:
It’s estimated about 780.

David:
Okay. So, let’s bump that up to 800. And then you said you could get about 1,200 a month for rent, is that correct?

Jackie:
Correct. Yes.

David:
Okay. So, what we’re really talking about here is if you buy it and rent it out that’s $400 a month. If you live in it, you’re going to be paying 800 a month instead of 900 a month, which is what you’re paying right now.

Jackie:
Correct.

David:
All right. So, based on that numbers, moving in would make you about $100 a month because you’re paying 800 instead of 900. Okay? Renting it out would make you 400 a month. So, from a financial standpoint, you’re better off to keep renting with your mom and buy that house and rent it out. Now, can I give you a couple other reasons why, from a pure financial perspective, I think it would be better for you to stay where you are?

Jackie:
Okay. Yes, absolutely.

David:
The first would be, would be when you go live in that house, if you were to live there, that $800 a month is going to be counted against you as debt when you want to buy your next property.

Jackie:
Okay.

David:
You said you don’t have a ton of money coming in, so that would make it harder to buy the next house. If you stay living with your mom, that isn’t going to be counted as debt against your debt-to-income. It’s actually going to look like you’re making $400 a month instead of losing $800 a month. Am I saying that in a way that makes sense?

Jackie:
Yes.

David:
You’ll have $400 of income because you have rental income. They’ll probably take 75% of that, so that would actually rent out to $300, or you could show that you’re losing 800. That’s a swing of $1100 to your debt-to-income that you’re going to keep if you stay living where you are. That’s only important because it makes it easier to buy the next house. We’re assuming you’re going to want to keep doing this. So then, you can save up the money, you can go buy your next property next year and do the same thing again.
And then we just ask the same question, would it be cheaper to stay where you are or cheaper to move into the property? We would keep buying properties until you get to the point that it would be cheaper to move into it, it’d be less than $900.
Let’s say you bought a fourplex and you said, hey, if I move into it, the net out of my pocket is only going to be $200 a month. Right? Now that becomes cheaper than living with your mom, right? We just keep letting the math make these decisions for us, and that’s how you’re going to build up your passive income as well as how you’re going to build up your net worth. Any questions on that?

Jackie:
No, no questions. That makes sense.

David:
Okay. So, are you feeling a little bit better?

Jackie:
Yes, I am.

David:
All right, that’s good. Here’s the next question we got to figure out, can you get that house? Can you get the property if you can’t pull a knot out of the refi of your current property? Correct?

Jackie:
Right. Exactly. There’s five other offers, and mine doesn’t look so good because I don’t have all the money out. I’m not pre-approved. I’m getting the money from my house because I’m refinancing the other house that I have, so I don’t look very good. I also don’t have the rest of the cash. So, I guess, what could be my option if I were to get the house?

David:
What could be your option as far as how you could close on it with financing?

Jackie:
Correct.

David:
You don’t have the down payment. You have to refi your first house to get that, right?

Jackie:
Correct. Yes.

David:
Is that house a rental property right now? I’m assuming it is because you live with your mom, you said.

Jackie:
Yes, it is.

David:
Okay. First question is, do you mind spending the time that you’re spending looking at these properties, walking them with the general contractor, doing that work if you’re not going to be able to close on it? Are you happy to do that because you’re learning or is that something that’s irritating or draining to you?

Jackie:
It’s a learning experience so I don’t mind.

David:
One of the things I tell newer people is that sometimes doing it the most efficient way isn’t always the right thing to do. Let’s say you’re an agent who joins my team and you don’t know anything about selling houses, those agents, I would say, you should work with the buyer and go show them homes even if they’re not super serious about buying because you need the experience of opening a lockbox and seeing what houses look like and calling other agents to set up a showing and filling out the forms. There’s some benefit in just the repetition of doing the job. And then you hit a certain point where you’re like, “Look, I know how to do that.” It actually becomes detrimental to you to continue working with buyers that are not serious because you don’t need the experience, you don’t need the reps anymore. Now it’s just your time is not being used correctly. You shift how you approach it.
What I want to highlight from this for everyone listening is I think it’s great that you’re out looking at properties and you’re walking in with a general contractor. You probably learned a ton about rehabs just today when he gave you that bid of 22,000. Now you get to look and see what it costs for everything, all right? You don’t want to do that for your whole career. At a certain point, you’ll have a decent idea how this works and your general contractor will just quit working with you if you keep looking at houses that you’re not actually going to get.
That’s the first point, I would say. You’re doing the right thing right now but don’t assume that’s always the way to do it. Because the most efficient way would be if you had already been pre approved to buy the house before you started looking and if you had already refinanced the house you have so you knew how much money you had and we would work backwards.
If I was your loan officer, what I would recommend is that we do the refinance of your original house first, we see how much of a down payment you’re going to have. We then say, all right, with that much of a down payment, that is 20% of this number, we can look at houses that cost this much or less. Then you don’t end up in this situation where you’re trying to figure out, can I use a bridge loan, can I borrow the money? That type of thing.
But since you’re newer and we’re sort of not doing it in the ideal way because you’re learning from every step, I think you’ve got a couple options. Did your loan officer tell you about a program they have for a bridge loan?

Jackie:
No. Not yet.

David:
Those are typically used with commercial properties, really big multifamily type stuff where there’s a lot of equity in the deal. You’re talking about buying a house that might have 20,000 to $40,000 in equity depending on how much you’re putting down. By most lending standards, that’s not a huge amount. I don’t think you’re going to find a lender that’s going to do a bridge loan of that amount on a single family house.
These are more a situation where you raised $10 million and the property is worth $15 million, you’re going to borrow $8 million to buy it, and then you need a bridge loan for the difference where it’s a 12-month term, and they know you’re going to be rehabbing the property during that time. There’s already so much equity in it that it’s not risky. It’s probably not going to work for a single family house.
What would be more like for you would be if you found another investor who let you borrow whatever your shortfall was in exchange for an interest rate you’d pay him on that money or maybe you give him a piece of equity in the house. Maybe you say, “Look, I’m going to need…” What do you think you’re going to be short? It sounds like, off the top of my head, somewhere in the 10 to $15,000 range maybe?

Jackie:
Yes.

David:
Okay. You say, “Hey, I’m going to need somewhere between 10 and $15,000. I can give you 10% of the equity in this house,” make them a 10% owner on title in exchange for that money, and then you refinance it a year later or whatever. They get paid back and they keep the ownership in the property, which is still a win for you because it’s better than not getting the house at all and you know you’re walking in with likely, if you’re going to be all in for 122 and the ARV was 140, you have close to $20,000 in equity. This isn’t like you have no meat on the bone to give around.
Or you can say to them, I will pay you X amount of money as far as debt on the money that you let me borrow. Now, probably that won’t be the best thing for you because you mentioned earlier you don’t have a ton of cash right now.

Jackie:
Right.

David:
When you have a lot of cash, usually you pay in debt. You’re like, “Hey, I’ll give you a return on your money.” When you don’t have a lot of cash, you typically will give them equity. But if you were involved in a real estate investment meetup where you find another person who’s in the beginning of their journey, maybe they have a little more cash than you but they don’t really have your… It sounds like you’re from New York. Is that right?

Jackie:
I’m from New York, but I’m in Pennsylvania.

David:
All right. What do they say in New York? Moxie, right? Isn’t that a New York phrase?

Jackie:
Yes.

David:
Maybe a little old term, right? They don’t have your moxie, they don’t have your gumption, they’re not out there making things happen like you are. They might love the idea of letting you borrow $15,000 to get 10% and then they get to look and see how the deal worked out. They get to walk it with the general contractor, they get to take videos and post it on their Instagram so that everyone around them sees I’m doing something right. There’s lots of ways I think you can add value. That would make a lot more sense than trying to find a lender to give you a bridge loan for $20,000.

Jackie:
Okay. Perfect. Yeah, okay, thank you so much. I appreciate it, David.

David:
Yeah. Anything else you want clarity on before we let you go?

Jackie:
No. Actually you pretty much answered all the questions that I had. I’m definitely going to look into contacting the investors that I’ve worked with before. Actually, I work with my mom usually, so I’m trying to see if she’s able to get in on it with me.

David:
This is what I like, that you’re thinking the right way, right? I didn’t have to give you all the answers. I just got you on the path, and now you’ve got things popping in your mind.

Jackie:
Right. I had an idea but I’m so nervous because I’m so new at it, so I didn’t know whether that would be the right choice. But you speaking to me and you confirming that, that really just helps, so thank you so much. I appreciate that.

David:
I’m really glad. That’s something that I’m looking at doing in 2022 myself, is borrowing money to buy property, buying it, refinancing it, paying the people back with interest on the money that they let me borrow, and then giving them a small piece of the equity as well so after they get their money back, they continue to get basically a return on nothing. They don’t have any money left in the deal, but they still get a check or they still get a piece of the equity so that they sort of win on both sides. And so, the advice I’m giving you is something I’m going to be doing myself.

Jackie:
Perfect. Thank you so much, David. I appreciate it so much.

David:
Thanks, Jackie. DM me on Instagram @davidgreene24 and let me know how that’s going.

Jackie:
Thank you.

Mike:
David, how are you man?

David:
I’m good. I’m silently judging your background because I heard that’s the thing people do on Zoom. You’ve got the plant, which apparently is like a must have, it’s like the flower of baking; you’ve got a collage of pictures behind you showing that you are a family man. You don’t have much else on the wall showing that you’re like me, a dude who’s not very good at decorating things. I think there’s maybe a picture for him in the corner there that’s not actually making its way into… It’s like, no it’s-

Mike:
It’s making its way, oh no. There you go.

David:
Okay. And his wife is making a cameo on the podcast with him scoring major points. All right, Mike, now that you have been analyzed, tell me what do you have from a real estate perspective.

Mike:
Hey, David, first of all, I want to say thank you. I’ve been a huge, huge fan of the podcast for years. I’ve hit you up a couple times on Instagram and you’ve been so generous in replying and giving such great advice. A podcast, really, makes me feel like I have a mentor between you and Brandon. It’s every week, I turn it on once or twice a week, and it just keeps my wheels going for real estate, so thank you.

David:
That’s awesome to hear. Thank you for saying that.

Mike:
For sure. Okay, so my current situation is I have seven single family homes/duplexes/ triplexes that we rent out as single family homes and I have been generating enough capital to take the next step into multifamily. I have an opportunity to go in on a 22-unit here in Fargo. I’m wondering, analyzing this deal is a monster compared to just analyzing a single family home strictly because I likely won’t be able to have all of the capital for the down payment, and so I’d have to bring in a partner.
Now, I have a few partners ready to go, lined up. But for me, the trouble I’m having is I’ve downloaded a few Excel modules to help me calculate and really run different scenarios for the waterfall structure and, let’s just say for me, the Excel spreadsheets and modules are overwhelming. And so, what I’m wondering… I always try to apply who not how. Is this a scenario where I apply who not how or, as the sponsor of a deal, should I intimately understand the numbers inside and out?

David:
Wow, that is really, really good. I’m not going to be able to answer it as quickly as I want to because I’m afraid if I do, people will take my answer and misapply it in other areas. I obviously don’t want to say as a sponsor of a deal you don’t have to understand what’s going on. That’s not the right answer. At the same time, I’m also not going to tell you from a practical perspective that you need to become an Excel whiz and understand this. I’m going to give you what I would do when I’m in your situation, and I frequently do, and I want to empower other people to consider this.
What I think I do different than other investors… I don’t think I’m the best real estate investor in the world, but I couldn’t be because I don’t only invest in real estate. I also run a couple other companies, I also do this podcast, I write books. The environment that I find myself in has shaped me towards instead of focusing on just being the best investor I can be, how do I articulate what investors do and simplify it so more people can do it?
Typically, what my day looks like is complex problems hit me in all these different businesses that I have, and I have to reduce that problem to something simple enough that a who could do it. Because there’s a handful of people in the world that can work Excel like a Formula One race car driver, the rest of them don’t. And so, if my system depends on someone being a genius, like some MIT graduate to make this work, I won’t be able to grow. So the first thing I would say is, especially on something as small as a 22-unit that doesn’t involve a ton of limited partners, throw the waterfall out. Okay? This is the opposite of the Blue Lagoon. I don’t want any waterfalls.
I did this once when I first hired somebody to help me manage my portfolio. They spent six months building this intricate waterfall system, and we never used it because it’s too complicated. You don’t need it. What it actually does is it makes it harder for you to pitch this to other people. When I say pitch it, I just mean present it, explain it. Because they can’t understand the waterfall either. That only becomes relevant when it’s a deal that is so big that you need to justify why you’re getting a certain cut and they’re not, and that is not the case on this 22-unit.
Based on that, can you throw out the waterfall and can you just say… How many partners do you think you need to bring in? Let’s start with that. To buy this thing.

Mike:
I think just one. I think we can get away with one partner.

David:
Are you trying to keep more of the equity to yourself that’s why you’re thinking about this differentiating preferred return scaling system?

Mike:
I think maybe I’m getting over excited about the future knowing that after this deal, the next step would be potentially like a 200-pad mobile home park where I would need to raise a significant amount of money. Maybe, maybe I’m getting ahead of myself and maybe just a straight split would be better.

David:
Way better. It will be easier to raise the money on a straight split than a waterfall, believe it or not. Have you ever heard that phrase, “A confused mind doesn’t buy?”

Mike:
Absolutely. Yeah, for sure.

David:
Right? I’ve seen this so many times in life, even when I was in law enforcement. When you’d get a cop that was in a high stress situation and they’d never been there, they would just vapor lock. Their brain could not process what they were seeing, and they were no use to me because they were overwhelmed. That is the case with so many things in life. You walk into a gym and everyone’s using machines that you don’t know how to use. You don’t just find the first machine you can and jump into it and throw yourself. You freeze and you’re like, I don’t know what I’m supposed to do.
Your job is to take it and make it as simple as possible so if someone wanted to invest with you, they could very clearly see here’s the money I’m going to get, here’s why I believe it’s safe, here’s my upside, here’s my downside. Then the next step is here’s how I protect against your downside and here’s how I amplify your upside. It’s like two steps, right? Here’s the upside and downside and here’s how I’m protecting it. That’s all you want to do.
So this partner, decide if you’re going to give them debt or equity. That’s the first thing. Am I going to pay you a percentage of your money to borrow your money or am I going to give you some debt in the deal? All right? Once you’ve got that worked out, that’s your big chunk. If they’re still not happy or if they want to tweak it, tweak it a little bit.
Like on our last caller, I gave her advice that you can borrow money from someone, pay them interest on that money and give them a tiny piece of equity if they really want to be in the upside. You see this happen when businesses are bought all the time. If I wanted to sell the David Greene Team, real estate team, maybe someone buys it from me but I keep 10, 15, 20% of the ownership of the company. So, just in case they blow it up, I get a piece of that upside. Does that make sense?

Mike:
It does.

David:
Maybe I get a little less money upfront in exchange for that. So, start with the big thing and then see, do I need to give you something else? And if I do, you’re negotiating over a small adjustment, not this really complicated waterfall system. Hearing that, is anything coming to mind of how you could offer this to the potential partner?

Mike:
Yeah. I mean, I think both debt or equity would work. I think I’m leaning more towards equity because this partner is also in real estate, an agent looking to get into investing. I think the equity would help build and generate that interest and that passion to help with future deals.

David:
Okay, so here’s the next piece that I’m going to say. When I partner with somebody, most people look at it from a situation of, well, how much money are they going to give me and how much do I need and how much will I pay for it? Another thing to add into that that isn’t too complicating but still really powerful is, yes, you need his money but can you also use his skillset or his resources?
As a real estate agent, does he have connections to property managers or clients that couldn’t get pre-approved to buy a house that might need to rent an apartment for a period of time, or short-term rental leads, or anything that would help you run this place better? I would bet, if he’s an agent, he probably knows some handyman that can do work on listings that aren’t general contractors, that don’t charge as much, that might help you with some of the smaller repairs or maintenance that you need.
What I’m getting at is when you look for the partner, don’t just say I need money, who has money? Also say, of the people who have money, because there’s a lot of people that need a place to put it, they’re looking for a deal, who has resources that will help me make this thing better?

Mike:
Wow. That’s great, David. Thank you so much.

David:
That’s where I’d start. I’d sit down with him and I try to get a feel for, well, what could he do to help you run this thing? And now, if he’s got some good ideas and some good resources, you just say, “Okay, well, would you rather have debt or equity? Here’s what I’m thinking, I give you X amount of equity,” and base that off of whatever percentage of the down payment he is giving you.
People always ask the question, “Well, how much do I give them?” Well, start with if they’re giving you 50% of the down payment, maybe you start at 50% of the equity and you see if you can do less. Like, I’ll give you 30% of the equity because I’m going to be doing the work and you’re going to be doing this, but your help in these areas will make this more successful. We’ll help protect your investment.

Mike:
Yeah, it’s a great idea. Because he likely does have access to some resources that I don’t, so maybe I can leverage that as well.

David:
Everyone makes that mistake, Mike. They all think they have to learn everything about all investing, that’s why they spent seven years before they buy a property. And then that property appreciates $500,000 over those seven years. It’s much better to say who’s already doing this thing that can help you, and go look for them.

Mike:
Yeah, for sure. Awesome. David, thank you so much, man. I really appreciate it.

David:
Thank you.

Baja:
Hey, David.

David:
Hey, [Baja 00:23:36]. You look familiar.

Baja:
Hey, how’s it going? Yeah. You were talking about the previous caller for the background, and here I am with a painting of a guy in his underwear, so I apologize.

David:
All we can see is his naked leg and a sock.

Baja:
Oh, is that right?

David:
That’s all that’s showing.

Baja:
Believe me, you’re not missing much. This is what you’re missing.

David:
Wherever you draw your inspiration from, Baja.

Baja:
Well, anyway, thank you all so much. I just wanted to say I really, really like this new format because, one, it’s like a wild card. You listen to one episode and there’s 10 different things. The second thing is whenever I listen to a question, I try to see what would I have answered to that question, and then I will compare that answer to your question and then I would look into what did I miss that, let’s say, David Greene looked into. That allows me to start thinking like you. So, it’s not only the answer but also starting to think like what you guys and the professionals like Henry Washington start looking into a problem. That is really, really helpful. I just wanted to say thank you. I love this new format.

David:
I think we need to have that as the clip for the intro to this episode, because that’s awesome. I mean, one of the things that we constantly preach is that when you’re learning something, you want to learn it with the belief that you will be having to teach it to someone else. It’s what reveals the gap to your knowledge faster. What you just described is a version of that. You think, all right, here’s how I would answer it if I was to teach it. Then you hear what I said and you go, “oh, I missed it because I wasn’t looking at it from this angle,” and then that new perspective benefits you in all the other areas of what you’re working in. Thank you for pointing that out.

Baja:
Yeah, absolutely. Here’s the question that I have for you. In one of your episodes, you talk about a flock of bird movement, which is basically when everybody panics, like beginning of the pandemic, it creates a very short period of time which is fantastic opportunity to jump in. You can, let’s say, buy a real estate at cheap price and cheap interest rate like a unicorn, if you will, and that’s really, really important to basically be on lookout for.
Now, here’s my question for you, we know that Feds already signaled that they’re going to change, which is more likely increase the interest rate three times in the next year. Now, that might probably have some impact on real estate, and most likely it will impact the price. Now, here’s my question for you, what are the tools, and what are the skills, and what are the things that you would look into to identify whether this is a flock of bird movement when something like that happens or whether this is a more serious situation that you might want to, let’s say, back off or not enter into the market? Hopefully that makes sense.

David:
This is an amazing question. I’m going to take a minute to describe what I mean by flock of bird movement to the listeners. I’m going to need you if I forget what your actual question was, because I do this sometimes, to remind me after I go into it, all right?
When I’m describing the flock of bird mentality when it comes to investing, if you’ve ever seen a flock of birds, it’s very impressive where they’re all flying in one direction and then they all change in the same direction at the same time. It’s super cool when you see this happening. This also seems to happen when it comes to investing. What you see is somebody sees that crypto is going well, they talk about it, the reputation of crypto is going well, it catches on and then everybody at the same time all moves in that direction.
Now, there’s a couple of reasons why that happens. One is the psychology behind safety in numbers. The way that safety in numbers is presented typically is if you’re a gazelle and you got to cross the river and you know there’s crocodiles in there, well, if you all cross at the same time, that one crocodile can only eat one of you. If you’re part of a big group, it makes you feel safe.
If that is the way that it worked in real life, I would totally agree to safety in numbers. In some cases in life, it does work. But let me posit that there may be a scenario where there’s a lot of crocodiles in the river but they’re not all in the same place. If one gazelle crosses the river, it doesn’t make enough ripples to draw any crocodiles. But if thousands of them do, all the crocodiles that are there are all coming to that area, and being involved in the group might actually be more dangerous because of the waves and the noise that you are making.
This happens with predatory people that are going and selling courses, the guru’s the, “Hey, everybody wants to buy NFT, so let me jump in and teach you how to buy an NFT.” It doesn’t mean that NFTs themselves are bad, it means that when everyone is doing it, you get all these predatory people to start picking off gazelles because they know to go to the big noise. That is basically an argument against the safety in numbers approach. The other thing is, usually by the time you hear about how this is the thing that’s crushing it, it has already run for a long time before it makes its wave. Maybe the first couple gazelles who get in the river, they make it all the way across. But if you’re at the end of that, when the crocodiles have now had time to swim there, you’re the one that gets eaten.
So, it’s not always a great strategy to wait and see what everyone else is doing and then be that gazelle that runs to the river and jumps in with all the others because you get there maybe at the same time all the crocodiles do, and your odds of getting eaten are much higher than the original group.
That’s basically a summary of what I’m describing when it comes to investing in things, is it feel safe to be involved in what everyone’s doing. But the people that make a lot of wealth don’t do what everybody is doing. They’re playing the Warren Buffett game. Either they got in first, they got out before everybody else did, or they saw that everyone’s afraid so I’m jumping in there and when they saw everybody was feeling greedy, they got afraid, and they moved back.
Now, it was funny you said this because in the shower this morning I was literally thinking about this exact concept. My original plan when I got into real estate investing was to do the Warren Buffett strategy. It was, I wasn’t going to buy a ton, I was just going to consistently pick up a couple properties a year based on the best deals that I could find, and when we had a market crash, I was going to very aggressive with all the money that I’d saved up over the eight to 10 years in between these different crashes. That is how I wanted to play the game, and I think that is the best way to play it.
I’m sort of picking up the best deals that I find so I’m not losing out on opportunity cost, and then when I see another 2010 come, I’ve got all this money saved and I’m going to buy 30, 40, 50 houses in some of the best areas. I was planning on basically buying California at the lows and investing out of state during the rest of the time and riding it on its way up.
Why I stopped using that strategy is because the Feds changed the rules of how money works. We don’t have these ups and downs like a healthy economy should have. Recessions are actually a healthy part of an economy just like going to sleep and not being productive is a healthy part of the human body needing to rebuild itself. When the Fed saw, oh, the economy’s ready to take a nap, it needs to sleep tonight, they just started pumping caffeine into it to keep it awake, it’s when I realized that crash isn’t going to come like I’ve been preparing for. It should. It would be better if it did. It’s less likely to happen.
What I’m getting at here is the way that stimulus and quantitative easing and the overall increase of our money supply is causing inflation, which makes prices go up. And so now, I’m not waiting to buy the dip. I can’t use the strategy I originally wanted, which was when I see all of the herd going one way, I go the other. Right? Now, can you remind me what more specifically were you asking?

Baja:
Yeah, so my question was now that we know that Feds are going to change the interest rate and most likely they’re going to increase the interest rate, this would impact the real estate market. First of all, I want to know what you think the impact would be.

David:
Okay.

Baja:
Like David Greene. It’s not BiggerPockets or anything, just what you think. Second, when we see the shift, because I think there’s going to be some shifts, how do we spot whether this is a temporary shift or like a flock of birds shift and-

David:
Perfect.

Baja:
… actually an opportunity zone to jump in? Or is it something that, oh, no, you know what, this is just beginning of a serious domino effect, and you want to stay away from?

David:
Now I remember why I had to give all that background, because it’s going to make sense when I give you your answer. Well, the first thing is how are real estate prices going to be affected by the rate hikes that we think the Feds going to bring in because they sort of have to if they want to stop inflation? And then your second question that you just posed was more of how do we know if this is a temporary dip or if it’s a permanent dip? Let me start with the second one.
Do you remember when gas prices were going higher and higher and higher not that long ago, like a couple weeks or a month? And President Biden said, “Because prices are so high, I’m going to release oil from the reserves to increase the supply to help with gas prices.” Do you remember hearing that in the news?

Baja:
Yeah.

David:
Okay. So, what happened is gas prices did go down by three to five cents a gallon or something like that. I think different areas, it was different. In California that’s about what it was.
So, you heard all these people in the news saying, “Yay, gas prices are going back down. Inflation is going away.” Or another example might be when we heard the phrase transitory inflation. It was very popular three to six months ago. Two years ago, people like me were saying, “You need to get ready. Inflation is a tsunami, and it is coming and it’s going to be huge.” Maybe five to 10% of people were looking at it the way that I was, most people weren’t. Well, when it started to become something you couldn’t ignore, that’s when transitory inflation became a word we started seeing.
And so, what I’m getting at is that’s the point where you have to make the bet. Do I think this is temporary like they’re telling me or do I think this is permanent? When gas prices drop by five cents, is that the sign that they’re about to go back down to $2 a gallon? I say two. That might actually be what gas is in some places. In California, it’s almost like $5 a gallon.

Baja:
Yeah. In Arkansas that’s pretty much.

David:
Right. Yeah, so I should say that. Are gas prices going back down or is this a temporary dip and they’re going back up? The only way that you can know how to make that call is you have to understand the fundamentals of not just your asset class but macro economics as a whole. A lot of people don’t. There’s people that are either lazy or too busy. They don’t want to stop and go deep and try to understand what is making this happen. They just say is it going up or is it going down? Those are the people that get preyed on by the predators, the crocodiles, that see, “Oh, I should go there.”
That’s why stocks are so easy to lose money in, because you’re basically making your decision on what’s already happened, and there’s a ton of people that will come and say, “You should buy, and this is where you should buy and let me manage your money.”
I’m constantly, especially on this podcast, trying to call attention to the bigger factors that are behind what makes this go down. So I don’t believe that gas prices are actually dropping when we see them go down by five cents a gallon because I know the reason is that we released oil from the strategic reserves of the country. That’s not a permanent solution.
I knew inflation would not be transitory because I knew the only reason that we were being told that was because there were certain politicians, it looked bad if there was a lot of inflation and so they were going to tell you it’s temporary because it makes them look better. I should also say, I don’t think it matters which politician, Republican or Democrat, is in there. They all do that because they get voted by how well they look, okay?
I knew inflation could not be transitory because of how much of the money supply we created. I think I heard a statistic that 40% of the entire US money supply was created in the last 18 months. That alone tells you this can’t be transitory. There is no way that this can work out other than prices going up on something, and the next step you should be able to see is the dollar itself is becoming weaker.
Just like if you kept your human body awake for two weeks in a row and never let it sleep because you just kept taking drugs to keep it awake, you might be really productive for two weeks and say, “I feel great. Look, I’m working 24 hours a day. My bank account is doing great, the economy’s amazing.” Well, you’re going to collapse. Not only is your productivity going to collapse, but your health is going to collapse. That’s what I think we’re going to see at some point with what the dollar is worth.
That’s why a lot of people are getting into cryptocurrency, is they’re foreseeing this fiat currencies being manipulated way too much. I don’t trust it, I need to have a store of value that I can trust other than a dollar. I know I’m getting away from real estate, but I’m trying to show people why you need to be looking deeper into how these things are affected.
Now, I myself, David Greene, I’m not buying crypto as a different currency that I think it will be a store of value as opposed to the dollar. I’m buying real estate because I believe that if I own real estate, it doesn’t matter what happens with currency, I’m going to ask you to pay me my rent in Bitcoin or Dogecoin or Ethereum, or XRP. Whatever it is that everybody is buying, I’ll just make the adjustment then because I own an asset that I get to dictate the terms of the lease. That’s why I’m constantly encouraging people, don’t live in fear of what we’re seeing. Just be smarter. Get ahead of it.
To your more practical question that you asked earlier, is what’s going to happen when rates rise, here’s what I think is going to happen. Prices of real estate is going to continue to go up. It might go up slower than it was going up when interest rates were lower, okay? Right now we have everything benefiting rising prices. We have a lack of supply, we have a lot of inflation, we have really low interest rates, we have the tax code that’s still more favorable to real estate investing than most other forms of investing, we have an abundance of money. Everyone’s got cash and they have nowhere to put it because of all this extra money that’s been created, so banks need to make loans, regular people need to make loans, institutional investors need to make loans. There’s more capital than you ever expected.
If you go back to 2010, there was all these deals but no one had money to buy them. All their money had been evaporated before we just created money out of thin air. So, I think prices are going to continue to rise. I know a lot of people are betting on when interest rates go up, prices will go down. I think they’ll keep going up. But maybe, instead of five things making them go up, like I just mentioned, four things will be making them go up, so they might go a little slower.
Here’s the sad part. This is the other part that I feel confident enough in that I’m basing my strategy on it. While the person who was barely able to afford a house was still able to get in there when rates were low, that’s the people, it’s going to become unachievable for them. But the guys like me that have money coming in and we have money saved up, and we’ve been doing this for 10 years, I’m still able to afford that property and it’s still the best option available to me when I look at everything else. I don’t buy real estate just because rates are low, I buy real estate because if I compare it to putting my money in the bank, opening a CD, buying stocks, buying bonds, buying crypto, buying NFT’s, everything that’s out there, real estate is still the best investment for me.
So, even if it became less affordable, I’m going to keep buying it because it’s still better than all my other options, and that’s the case for many wealthy people. The sad thing is that even though rates go up and people maybe that are barely able to afford it are like, “Well, I’m going to wait because when rates go down, it’s going to be affordable.” No. It actually just going to mean that you get left behind and people that were wealthier, and that’s what’s sad to me because I love the fact that for most of the time that America has been a country, the middle class and even below middle class could get themselves out of it by buying houses.
One of my really good friends, [Daniel Dayril 00:38:34], his dad moved here from Mexico and was a landscaper for his entire career and owns eight rental properties. He became a millionaire by buying properties for money he saved mowing lawns. I love, love, love those stories. That’s what I’m afraid is going to go away.
While it’s always more popular to tell people, “Oh, just wait, a crash is coming,” no one’s ever going to be mad at you for saying that. I’m actually afraid it’s the opposite, that if you’re on the cusp and you don’t get in now, you might not be able to get it at all.

Baja:
That’s amazing. It’s funny that you mentioned that because in my country, I think I mentioned it to you, the average inflation rate is about 36%. They started to bring money in early 90s. That caused a lot of people to jump on real estate because that was the hard asset, and that created another layer of hot market on top of already a hot market. That caused the prices of real estate to go up 220 times, meaning 22,000% In just two decades, which is insane. Right now, the only people that can afford to buy a new property are the ones that already had a property, or you have to work 200 years on regular salary in order to be able to afford one, which is insane.

David:
Yeah, I’m glad you pointed that out because that’s what happens when you manipulate money too much. It’s always done from the perspective of, well, this is going to help people. We’re going to send them a stimulus check, but we’re not going to tax people to do that because that’s unfavorable. We’re just going to print money out of thin air to give it to someone. But all that does is create more money, which makes everything more expensive, and you got one month of relief with a stimulus check for the next 50, 100 years of time where your money’s worth less and you got to pay more money to get the same goods.
So, part of why I think that even though the market is hot, it is the best time ever to buy real estate, is because the rules changed. It’s not going up and down like it used to. We’ve basically made a decision, our political leaders at least in this country, that we will only accept one result, which is prices going up. While that will make housing more expensive, it will also make food more expensive, and gas and cars and all the things that people need. Which means, if you’re listening to this, there is no more important time in history than you invest your money better. If you are struggling with discipline, and you don’t want to save up money to buy an asset, the stakes are higher than they’ve ever been, that you need to be better about it because it’s getting away from us faster than it ever has before.

Baja:
Great. Well, thank you so much for answering the question. I really appreciate it.

David:
Okay, so we have a question that came in from somebody who submitted a question at biggerpockets.com/david. What they said is, “Hey, David, I hear what you’re saying about prices going up. What I want to know is what do you look for as a sign that prices could be going down?” I think that’s an amazing question. I love that question. In fact, that question is so near and dear to my heart that I started a real estate sales team and then a mortgage company specifically because it put me in the crow’s nest of the boat.
The crow’s nest is the area, I believe that’s what it’s called, where they send someone to climb up the mass and they can see really far ahead on the horizon and they can look for land. I like to be in that position as a real estate investor. Instead of waiting to be like, “Oh, look, all the flock of birds just went that way, I guess prices are going down,” I want to see it before it happens.
The last crash that we had, the one that happened in 2010 through 2014 or so was because banks were giving loans that were terrible predatory loans that no one should have ever been taking on, combined with foolish financial decisions motivated often by greed of people that were to be given access to credit and money that they never should have had. There was two sides that were at fault, and I’m not here to take a side. I’m just here to say in order for something that catastrophic to happen, it’s not all on one side. Both parties had a role to play in that.
So, I have to advise our clients, do I think you should buy or not and why. I have to advise our clients on what I think the market’s doing. I realized if I want to be able to do that ethically and honestly, with integrity, I got to see what’s going on. That’s why I started those companies, because I love this question.
Here’s one of the reasons I’ve been saying for maybe the last three or four years when people tell me the market’s going to crash and I say, “I don’t think it is,” and that’s why I’m still buying. The last crash that we had was based on loans that were given to people that could not afford the property.
Let’s say that you need this much money to buy a house, I’m holding at my hand at a certain point, and then you have access to this much money. Well, when home prices get higher than what you can actually afford, you get left behind, which means you can’t buy the property, which means the loan officer you went to doesn’t get paid, the real estate agent you went to doesn’t get paid. The person who wants to sell their house, they can’t sell it to you. There’s a lot of people that lose out on money when a transaction doesn’t happen. In fact, if you work in the sales part of real estate, you only get paid when transactions happen.
So, what banks started doing was they said, okay, you can’t afford that gap between what the house costs and what you can actually get eligible to borrow, let’s change the loan. Let’s make these little tricky things make up the space between what you can afford and what the house costs.
Let’s say your first two years, instead of a 5% interest rate, we’ll give it to you at a 2% interest rate. Oh, that doesn’t work? Let’s say that you actually have a negative amortization so that you’re making a house payment every single month, but it’s so small compared to what you borrowed that your principal is growing every single month. Let’s just not even verify that you even have the money. If you just tell me you have it, I’ll just take your word for it. The reason that was able to happen was because the loan was sold from one person to another, and then that person to another and eventually all those loans ended up in your mom and dad’s 401(k) and they weren’t paying attention to what was in that 401(k), and that’s how this happened.
What I’m getting at is there was a very logical, fundamental thing that you could look at and say that is not healthy. Certain people, Peter Schiff is one of them, was banging the drum saying, “Hey, this is going to explode.” If you looked, you could see for yourself. It’s one of the reasons that I didn’t buy.
Short answer is that’s the things you need to look for when you’re trying to figure out are we in a bubble. So, from my crow’s nest position, I’m watching loans go out. These loans are 30-year fixed rate. They’re not fancy things. They’re based on a debt-to-income ratio that is very consistent for everybody so we know people can afford the house.
At the same time, while home prices are going really high in certain areas, wages are also going really high in areas so these people can afford these houses. While it looks from many perspectives like this is ridiculous, in other perspectives like where I am in the Bay Area, you might have a couple that’s been out of college for three years with no kids and their combined income is 40 to $50,000 a month working in the tech industry. That eight to $10,000 a month housing payment that someone in another state says, “That’s insane. How could anyone pay it,” well, they’re making 40 to 50 grand a month. That’s not even that big of a thing. A lot of these people in the Bay Area don’t have cars. They don’t have car insurance. They don’t pay for gas. They just Uber around or they biked to work, so they don’t have an expense that everyone else has.
What I’m getting at is you need to be looking at more than just the price and saying, well, that price is higher than what I’m used to seeing. You have to understand the fundamentals that go on.
Here’s a couple practical examples of things that I think could lead to a crash. The loan situation changing to where we’re not basing it on debt-to-income and we’re not basing it on affordability. Loans started to come back where the first two or three years has a lower interest rate and then it will adjust. That’s a thing. If we see too many loans start to come out where they’re basing it on the income that the property could generate, that’s not a problem if the numbers are being reported honestly, which at this point they are.
Let’s say you go buy an Airbnb in a really hot Airbnb market. Speak whichever one you want to talk about. My company can do a loan for you that would be based off of the income the property’s generating. If your debt-to-income ratio is super high, you can still get a loan based on the income the property generates. But what happens if we stop verifying that? What happens if somebody in the area that nobody ever visits goes to apply for that loan and someone goes, “Oh, sure. Okay, yeah. Sure, it’ll generate that much income,” whatever you say, and it’s in an area that gets no vacation travel. That would be a red flag, and I’d be in the position in the crow’s nest to see, “Ooh, this is really not good.” We’re just taking their word for the fact that this property in… I don’t know, somewhere. I don’t want to say the name of a city and offend anybody, but just pick somewhere that nobody ever visits that they’re claiming that they could get an income for. That would be a thing I would look for that we see a crash coming.
Probably a more likely one would be changes in industry. If we see that certain jobs are lost because that industry becomes obsolete like, say 20% of America worked in the newspaper industry and you see that information is moving over towards blogs and online news and stuff like that, that would be very troublesome. I’d be very worried about a lot of those people are going to lose their jobs and with it, they’re going to lose their house. But these are all macro economic factors. They’re all really big things. They’re not something as small as like, well, people haven’t been making their payments for the last couple months so there’s a lot of foreclosures that are going to come. Those foreclosures aren’t going to come because prices have been going up on properties and people would just sell.
To sum this up, when you’re saying what should I look for to see if the market is going to drop, look for the things that affect real estate, the fundamentals of why people are investing in it, drastically changing. If the tax code changed a ton to where real estate investing was not as favorable as it is, they made you keep all the risk but they didn’t give you any of the reward for taking all that risk, that would be big. If taxes on average Americans went up a ton, right?
Let’s say that we change the top taxable bracket to 75%. Well, a lot of the people that are in that top bracket are doing a lot of the business that makes this whole thing work, and if you said, “We’re going to take 75% of your money,” they just stop working. They’re like, “No, I’ll just live off the interest of what I’ve already made. I’m not going to work 40 hours a week or more to get taxed at 75%.” Well, that could cause prices to go down because there’s less demand for real estate because they’re not buying it as much.
Those are the things that you need to be looking for. Don’t just see everybody says something and then everyone goes in that same direction and then you just wonder if that’s going to make real estate go down. You should be able to put your finger on what the issue is that would cause that to happen.
All right, next question is from [Romi 00:48:34] in Australia, who has tried for two episodes now to get her question answered, and I’m glad we can get to it. Romi says, how do you best avoid a contractor walking off with your deposit? What steps can you take to avoid this?
Now, this is really funny because Brandon Turner had this happen to him. What Brandon did was he found a contractor on Craig’s List, he gave them the deposit, they never started on the job and they just took off. Now, what he was able to do was he was able to make a judgment against the contractor in court. The contractor obviously didn’t show up because they took off with the money, and he put a lien on the contractor’s home. When that contractor sold the home, Brandon got paid back his money. That worked out pretty good for him, but that is something that you don’t want to rely on having to happen.
When I’m using contractors, here’s a few of the things that I do to avoid them running off on me. The first thing is I look for someone who’s been in business for a significant period of time. I don’t want a contractor who just started three months ago or six months ago or something like that. If they’ve been around longer, they have more of an established client base that they get referral business from. It’s like a tree that has deep roots, it’s harder for it to just uproot and go somewhere else, versus a sapling that you could just pick up and walk off with very easily.
Another thing that you look for is to make sure that they’re licensed and bonded, and that they’re a legit contractor that has oversight that would stop them from doing something like that. Asking other people’s experience with them, the more business they’ve done, I feel like, the less likely they are to throw all that away and just take off.
And then the most important thing is you don’t give them a ton of money up front. They’re always going to ask for you to give as much as they can get out of you. The problem is, they take that money. I don’t want to say it’s a Ponzi scheme, but it often operates like a Ponzi system where they take your money and then they pay their employees for the job that they did three weeks ago on somebody else’s house.
Managing cash flow is a tricky part of actually running a business. It’s not that you’re not profitable, but money isn’t always coming in all the time. Sometimes it’s sitting in accounts receivable, sometimes you have a bunch of accounts payable that you got to pay. Maybe they take your 50 grand and pay off their Home Depot credit line, and now they don’t have enough money for whatever it is that you need on your job.
What I do is I do give them some small amount of money to start and then I will often pay for the materials myself so that they’re only getting paid for the labor. I’ll say, “When this part of the job is done, I will pay you your next drop.” So, it’s a little more labor intensive.
At this point in my career, I’m not actually watching it myself. I have an agent on my team or an employee on my team that’s tracking the project, but that’s how we do it. When they come back and say, “Hey, David, they laid the flooring just like they said. The next step is that they need to hang drywall, tape and texture and then after that would be paying.” I say, “Okay, here’s how much they need to pay their people for the drywall. I’ll buy the materials, have it delivered to the house, they get the drywall put up and tape and textured, and then we talk about, okay, the next drywall’s going to be for paint.”
Now, if you do it that way, Romi, what you have to understand is that you can’t make them wait a week to get paid. The second that they’re like, “All right, I need an X amount of money,” and you don’t respond right away, now they lose trust in you to do this your way, which is in smaller draws, just like you didn’t want to lose trust in them that they might take your money.
So, I’ll actually say this, the only times I’ve seen legit big problems happen with a contractor is when the person paid them the money upfront. I’ve never seen this happen when they gave them a small amount of money and gave them more when they did the job. The problem is when you give them a huge chunk of it and then they don’t do the work and you start complaining and saying go do the work and they’re like, “You know what, I’ve already got this other job I’m working on instead and I’m making more money over there, so I’ll get to it when I get to it.” You don’t really have any leverage other than trying to take them to court, which is a big pain in the butt for everybody. So, avoid that by just being a little bit wiser, paying them quickly but paying them in smaller chunks. Best advice I could give for you there.
All right, and that was today’s show. Man, I had a blast. It always feels like I just got done playing a sport when I finish these because I never know what’s going to get thrown at me. I get to vibe off of the person who’s asking questions, I get to sometimes ask them questions to get more clarity on what they were really looking for, then I get to share it with all of you so you can understand the logic and the understanding behind why give the answer that I did.
Now, what I would love is for more of you to ask more questions just like this, so here’s a few ways that you can get involved and get your question answered on the BiggerPockets Podcast. One, go to biggerpockets.com/david, because that’s my name, where you can submit a video question that we will answer on one of the Seeing Greene episodes or an episode like this. If we don’t answer your question, we might just ask you to join one of these things and schedule you to come on to ask your question.
Another way is you can follow me on Instagram, I’m @davidgreene24. Many times when we do these types of calls, I will go live. You will see it. You’ll join and then I will direct you to the website, biggerpockets.com/livequestions where you can meet with one of our producers and get brought on to the podcast live. So, you can follow it on Instagram and you can watch the podcast being recorded; but even more importantly, we can get you on the show. So, make sure you’re following me and you’re checking to see when @davidgreene24 goes live because it just might be because we’re going to be recording a live episode and we want to get you on it.
Look, I know a lot of people listen to this podcast and read our books, and that’s great. But what BiggerPockets’ biggest value to provide is the community. Get involved in the community. Get on here, get your questions answered, let people see you. It’s super cool when you’re in the forums and someone else answers your question and say, “Wait, were you the person that asked the question about investing in this state versus that?” We want you to be more invested in this and more involved, and this is a great way to do it.
Thank you all for listening, I appreciate your time. I know that there’s many places that you can get your real estate information from, and I am humbled and honored that you chose to do it through us. Keep an eye out for the next one and I will see you next time.