Seeing Greene: Is My BRRRR a Bust If Cash Flow is Low?

David:
This is the BiggerPockets Podcast show 633. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate. And then you can be investing more often with better resources and more support. Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner, and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time.
What’s going on everyone. This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene edition. In today’s show, you the audience of BiggerPockets will submit questions, and I will do my best to answer them for everybody to hear. Today’s show we get into some really cool stuff, including questions about how much reserve should someone have for their first property, when they should focus on building a business versus investing in real estate to grow wealth.
And if low cash flow on a BRRRR deal is a good thing or a bad thing. All that and more in today’s show. If you would like to be featured on the BiggerPockets Podcast, here’s all you have to do. Go to biggerpockets.com/david and submit your video question for me to answer on the show. I’ve actually met people that I hired from this format. The girl that I have that is now my asset manager of my rental portfolio was found on this show. And I was so impressed with her that I reached out and ended up hiring her. And that can lead to today’s quick tip. If you would like to work for BiggerPockets, you can, a lot of people don’t realize this, go to biggerpockets.com/careers, and you can actually apply to work there. Our show’s producer got his job that way.
And the dude is a godsend. I wouldn’t be able to make shows like this if he didn’t make this whole thing happen. A lot of people think this is David Greene’s show. Absolutely not. I’m the face you see, and the voice you hear, but they’re the ones that make everything happen. And you can get more involved in real estate, as we also talk about on today’s podcast, one of the ways to ramp up your investing career is to make your money through something that is involved in real estate so you stay around it and develop a competitive advantage. I’m also going to be hiring more people, specifically someone that can manage short term rentals from a remote location in the country. So I’m buying them all across the country and I need someone with a lot of experience that can manage them for me, that is looking for a job that I can pay to run my portfolio.
If you’d like to work for me in that capacity, join The David Greene Team, join The One Brokerage, just go to davidgreene24.com/careers, and you can apply there as well. Look, we’re living in a world where everything is shifting and changing very fast. It’s very likely that jobs are going to be laying people off if we continue down the path we are into a recession. It’s also very likely that more opportunities to build wealth are going to be making themselves known than we’ve seen in a very long time. Don’t let fear paralyze you and get worried about losing your job. Be proactive and start looking for the next thing where you can take your skills, help somebody else grow their business and make yourself more money, and get in the right environment where you can hit your investing goals. I hope that everybody strongly considers what I’m saying here. Because if you’re listening to this podcast, you probably love real estate and you’d be much happier if you could be around it more. I know that’s the way it is for me. All right. Without any more ado, let’s get to today’s show.

Jennifer:
Hi David. This is Jennifer Sokalski from New Jersey. My partner and I, he’s walking around over here, we are both real estate agents and we have been for a little over three years now and we are just now really starting to up our game. We are building a huge business. We’re growing very fast. We are currently obsessed with this More Money, Less Hustle by Jess Lenouvel. We actually have a whole bunch of them because I’m giving them out to my mastermind group.
So my question is, our focus right now is very heavily on our real estate business and growing that, and making that so that it can really become a team, like a team that grows with us. And my question is, when do we really get into investing? Because we’ve been looking at it and researching it for a couple of years now, but it never seems to be the right time because we have to build our business and we’re afraid of splitting ourselves in two directions. So is there a time sometimes when people should not invest and maybe wait to get that started if they’re working on something else that they’re really into? Thank you.

David:
Thank you Jennifer. This is a great question. I’m probably going to take a little bit longer to answer this one, because there’s a lot to cover and it’s good stuff. First off, to the question of, are there times where it’s okay not to focus on investing and build your business? Well, of course the obvious answer is yes, nobody has to focus on investing. But I think what you’re really getting at is, from a financial perspective, does it make sense to not focus on investing? And on this podcast, we talk mostly about how to build wealth through owning real estate. So from that perspective, I can understand the questionable, is there ever a time where that’s not okay? Because I keep hearing all the experts say, you got to buy real estate to build wealth. So let me share with you a little bit of story in my own journey.
I have had several periods of my life where I bought a lot of rental properties and then other periods of time in my life where I didn’t buy any rental properties. Now, when people hear this, they’re always trying to figure out what the secret sauce is. Why has David stopped buying? Does he know something we don’t know? Is the market going to crash? Is there something coming down the pipe that he’s not telling us? It’s not that at all. It’s almost always because of what’s going on in my personal life. So sometimes I will get so busy with businesses, particularly when you’re trying to scale, you’ve got a bunch of new hires. You’re trying to teach them. You’ve got a bunch of clients that came to you and say, we need to buy houses. This happened to me early in my career when I was starting The David Greene Team. I had just hired my first assistant Krista.
I had left being a cop. I went full time into real estate sales and my clients were flooding me. I had tons of people coming that wanted to buy houses and sell homes, and they were relying on me to get this done. So I was doing the BRRRR method at that time, I’d been buying a lot of properties in Jacksonville, Florida. I was up to five a month at one point, but on a slow month I was still buying two properties. Then I got to manage the rehabs and I got to get all the utilities turned on, and all the work that goes into it. Well, I had to stop when I got more clients on The David Greene Team. So it made sense for me personally to stop investing so I could get the business going. Well, I started to do a lot of business. I became a top producing real estate agent.
I hired more agents. I grew the team. Then I had to train all those people. Years went by and I didn’t buy real estate. And in fact, it was in some of the best time ever to buy it that I didn’t buy real estate. This is when the market was climbing and climbing, and climbing. Now, do I look back and regret that I didn’t buy more real estate? Of course. But if I’m honest with myself, I don’t think I could have bought real estate, at least not in a responsible way, and ran the business that was growing at an exponential rate. And when I look at the money that I made by helping clients buying and sell houses, and the residual income that now comes from the work I did before, it’s much more than I would’ve made simply from having equity growth and cash flow investing in real estate.
You see, business is one of the few things that I know of that you can make more money than in real estate. It just takes more time. Real estate is more passive than business is. So let’s tie this all together to your question. If your business is going well, there are times where I would say, yes, it’s okay not to focus on growing a real estate portfolio. And I’ve actually thought about this a lot. So some people will come and they’ll say, hey, I’m a full-time investor. I’m buying this many properties. And I’ll sit down with them and I’ll talk with them and I’ll see, well, how much equity growth did they have that year? How much cash flow did they make that year? Adjust that for the tax benefits that come to the real estate. And I come up with a number that I see that they added to their net worth by being a full-time investor. In every scenario that I’ve come across so far, that’s less money than I made in the businesses that I’m running.
Now, we’re both full-time workers. So I’m running full-time businesses, they’re doing full-time real estate, but in those cases I still came out on top. So if you’re in a situation like that, yes, building your business will usually be more profitable if it’s going well than investing in real estate. But you don’t want to miss out completely on the passive benefits of real estate ownership. So here’s my advice to you. Under the assumption that your business is doing very well, that you are growing, you’re making good money. There’s good cash flow coming in and you are saving that money to invest in real estate at some point. You need to be buying a primary residence at least for yourself, at least once a year. That means that you should be putting a low down payment on a house, in a good neighborhood, that you think is a good deal, that has a value add opportunity.
Something that you can fix it up while you’re living there. Something that has a garage that can be converted. Something that can be functioning in some way to benefit you, that you’re not held to a timeline of getting it fixed up and ready to go right away, that you can work around your schedule. Now, you didn’t say it in the video, but I did see in the notes here, you’ve done this before. You just did a live and flip. Do a live and flip every year, but you don’t necessarily have to sell it, buy it, move into it, fix it up while you’re there. Get your next one, move into that one, fix it up while you’re there. I call this the sneaky rental tactic. Because when you move out of the house you bought with a primary residence loan, you turn it into a rental property.
You ended up with a rental that you put 5% down or 10% down, or 3.5% Down. So if you work this method, you’ll keep making money, but you won’t miss out completely on real estate opportunities. The other piece of advice I’ll give you, because you said specifically that you’re a real estate agent. There’s some agent on your team that can function as a form of a project manager or a property manager. So as you’re training your team, you’re selling your houses, you’re hiring new agents. You’re getting deals closed. You’re keeping clients happy. You’re putting out fires. Identify who you have on your team that if you put something in contract and gave them a list of what needs to be done, they could make sure the deal closed. They could make sure you knew when the money needed to be wired.
They could order your home inspection. They could represent you as the agent in the deal. And then once it closes, they could get it set up as a rental property. So you’ve got some synergy here. You’ve got your real estate team and then real estate investing. And these worlds can be combined pretty easy. That’s kind of what I’ve done. I’ve taken the real estate agents and the loan officers, and the home insurers, and my own investing, and our clients, and I brought it all into the same ecosystem. So that 80% of the work is the same. It’s only the last 20% that changes a little bit. And I think you can do the same thing. Now, what you’re going to be focused on is 80/90% business, 10/20% investing, but you have some investing still going on. At a certain point, the business will start to take care of itself and you’ll shift from 80% business, 20% real estate to 70/30 to 60/40, to 50/50, and then 40/60.
And that’s the way that the business cycle tends to work out. So you don’t want to ever stop buying real estate, but you just don’t do it as often. And that principle is true for everybody listening to this. I don’t think it’s healthy to say, is this a market to buy or is this a market to sell? Because it’s rarely ever that simple. I buy in every market and I would sell in any market. I just do more buying in some markets and more selling in other markets, or more holding in other markets. And that’s kind of what we’re entering into now. So I bought properties last year. I bought properties the year before, but I didn’t buy a ton. Now that we’re seeing the market softening, I’ve put 11, no 12 properties now, because I just got a text right before I started recording that another one went into contract, in the last 30 days.
So in this market, I’m seeing it as a great buying opportunity. Now, I’m not paying asking price, of course. I’m getting stuff under market value because I know that the market may continue to dip. But my point is, I ramp up my buying in certain seasons in life and I just sold a bunch of properties so that I could buy these ones. Same principle goes to you. So thank you for submitting this question. I love that you’re asking it. I would love for more people listening to this podcast to start or join a real estate related business. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate and then you can be investing more often with better resources and more support.
Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time. The next question comes from Rob Foley in the Four Corners area. Rob says, I have successfully BRRRRd about 10 different single family homes. After the refi on several of my houses, using the BRRRR calculator, I’m seeing that the cash flow is not that great. Maybe $100 to $200 a month max, but they were great deals where I pulled 30 to 40K of forced appreciation out at refinance. How should I view these properties now? As a very successful tool that grew my business or as a poor use of my capital that should be sold?
Portfolio snapshot. I have 12 single family homes, one mobile home park with seven pads and a duplex, five acres to be developed into mobile home park pads and I’m in the middle of my first 1031. Okay Rob. If I understand you correctly, you’re saying that after you pulled 30 to $50,000 out of the deal, more than you put in, it still cash flowed $100 to $200 a month. And you’re asking me, was this bad. This is not just good. This is astronomically good. Would you buy a home if you put zero money down and it cash flowed $100 a month, and it was going to go up in value while you paid off the loan? Just about everybody would say yes. So if it makes sense at zero money down, why would it not make sense if someone was going to give you 30 to $50,000 to get cash flow?
Now, the only reason that I could think that this is even a question in your mind is because the cash flow seems small as it’s only $100 to $200 a month. And I want to address that idea first. This is a symptom of what happens when people become cash flow obsessed. In 2010, a lot of homes went into foreclosure that were bought in 2001 through 2008. These homes went into foreclosure because the people buying them did not cash flow. That started this trend of saying, cash flow, cash flow, cash flow, because that was the right ingredient in the recipe to keep people healthy. This was the medicine that our market needed. Stop buying homes based on speculation and start buying homes based on numbers. And I agreed. I was one of those people that was constantly talking about cash flow and I still talk about cash flow.
I still buy properties that cash flow. I still run numbers to make sure they cash flow. But what I don’t do is zoom in only on cash flow and ignore all the rest of real estate. And I think because this is going around in our industry, it’s causing you to have second guesses about your decisions. The cash flow is only $100 to 200 a month. That’s not a huge number. Pulling 30 to $50,000 more capital out of the deal that you put in, and this does not include the equity that stayed in the house. So on top of that 30 to 50K, let’s call it 40K to make it average, you also have 20% to 25% equity in the house you didn’t have before. Your net worth is probably going up on every deal by most people’s salary that they make in a year.
And you’re not being taxed on this. And then on top of that, to sprinkle a little bit of sugar on top, you’re getting $100 to $200 a month. Rob, you are absolutely crushing it and there’s no other adjective to describe how good these deals are. You should keep doing this over and over, and over. It’s the cash flow thing that’s throwing you off. Let me bring an outside perspective. Let’s say you do this on four deals and you pull an average of 40 grand out per deal. That’s $160,000 in cash that you’ve taken out that you didn’t have before. And we’re not even talking about the equity in the properties. And you take that 160,000 in cash and you go buy another one of these homes in cash. Well, that one may cash flow $1200 to $1,400 a month. You let those first four homes that only made $100 to 200 a month buy you a home that cash flows $1,200 a month.
Does this still seem like a bad deal? The reason it doesn’t jump out is when we only look at one element of real estate investing. When you look at all the components put together, the appreciation, the forced equity, the market equity, the loan pay down, the money that you’re pulling out, the capital that you’re bringing in that you can now go buy new houses with, the cash flow, the tax benefits. That’s where you can see clearly what the right moves to make in your portfolio are. And with the portfolio that you have, these mobile home park pads you have, the property to be developed, you have to start thinking big picture. So my advice to you Rob is to stop talking about your deals to newbies. This is where this comes from, because they’re all going to ask the same question. What’s the cash flow?
What’s the cash flow? And that’s normal. Most newbies ask that question because that’s how they don’t lose money in real estate. And it’s also how you get out of the job you probably don’t like, which is where most newbies start. They don’t love working a job and they think real estate’s going to be their savior to get them out of it. Start talking about these deals to more sophisticated investors, people that have a more balanced portfolio. And then you start to make the connections that I don’t look at cash flow and they don’t look at cash flow as being attached to a property.
It is the overall cash flow of your entire portfolio. It is the overall equity of the entire portfolio. And you can start seeing where you can move pieces around to maximize efficiency and minimize risk. I just want to tell you, Rob, you’re absolutely crushing it. Don’t stop. Keep doing this as much as you can. If you’re getting cash flow and you’re pulling that money out, keep a healthy amount in reserves to prepare for a downturn. But man, if you’re pulling 40 grand out of every single property, that’s reserves that’s going to last you for a long time on every one of these deals. So congratulations.

Matthew:
David, great deals aren’t found, great deals are made green. I appreciate you taking my question. David, my question is, how can I prove to a hard money lender the ARV of a home that I’m going to convert to a short term rental? I have it under contract for 257,000. It’s only appraising at 220,000 because appraisers here of course don’t give any value to my short term rental business. And they also haven’t even caught up with normal market values. So they’re only given 220 on the appraisal, even though I feel that this home is worth at least $350,000 as a short term rental. With furnishings, management, decoration, I projected that it will yield $4,500 a month in net operating income. And so I plan to buy it and hold it. The cash flows will be amazing, but I’m having to bring a ton of cash to the closing table if I go with a conventional lender, because I need to bring 20% down plus cover the appraisal gap, and this is going to be before I furnish the home.
So I’m looking to go with a hard money lender instead to improve my cash on cash. I’ll pay extra interest, that’s okay. I just would rather bring more like $14,000 to the closing table instead of 85,000. So I want to convince this hard money lender that the ARV of this home will be $350,000. Get them to fund 75% of that ARV. So I’m bringing much, much, much less to the closing table. But back to the heart of the matter, how can ARVs for STRs be determined?

David:
All right. Matthew, thank you for your question. I see exactly what you’re getting at. You’re trying to get the appraiser to see it from your perspective and your perspective is based on the revenue that this property would produce as a short term rental. There’s a few issues with the way you’re going about it that are just going to make your job harder and I want to clarify those, because you’re always going to be in an uphill battle in real estate if you take this approach. First off, when we’re talking about what a property is worth, that is actually a subjective phrase. There’s a lot of ways of evaluating what something is worth. What you’re saying here is that it’s worth $350,000 because it will bring in $4,500 a month when I use it as a short-term rental. To you, it is worth that. The appraiser is operating under a different objective set of circumstances.
The appraiser is looking at this thing saying, I don’t really care what it brings in as a short-term rental. I’m not allowed to care. What I want to know is, how does it compare to the other houses around it? And the comps I’m seeing of previously sold properties are selling for 220,000. So that’s the value he’s going to give the property or she’s going to give the property. The issue is that you’re using a commercial standard to evaluate this property and they’re using a residential standard to evaluate the property. But because they’re the one working for the hard money lender, you actually have to go by their criteria. Now, if you can convince the hard money lender to understand that the property’s going to bring in more cash so that you can make the debt service, you have a shot here, but that isn’t going to help your down payment scenario.
They’re still going to say the property’s worth 220,000. Because to an appraiser, it’s worth 220,000, to a person who’s going to buy that house to live in, it’s worth 220,000. To you, it’s worth 350,000. Now, this is a problem investors often fall into because we always do our underwriting assuming that we’re going to be taking a loan on a property. If you were paying cash for this thing, I would agree. It is worth 350,000 if that’s what it can make and no one would stop you for paying cash for it for 350. But what would you say if a seller came to you and said, hey, the comp showed 220, but I want you to pay 350 because you could use it as a short term rental? You’re probably going to turn around and say, well, it’s worth that to me, but on the market, it’s only worth 220.
So I’m going to buy your house for 220 even though it’s worth 350. The seller may want you to see it from their perspective, but when you’re the buyer, you want to get it at the price that is better for you. The same is going on with the appraiser. The same is going on with the hard money lender. My advice would be, stop fighting this uphill battle. They’re not going to see it the way that you’re seeing it. That hard money lender is going to give it the lowest value possible because that’s how they minimize their risk when they’re giving the loan. The appraiser is going to give it the value that the comp show because that’s how they minimize their risk when they’re trying to keep their job and not get sued. And you’re going to give it the highest value possible because that’s how you’re going to maximize your profit.
The problem here is that all of your interests are not aligned. So I would look for a different hard money lender, give them the pitch and see if they actually bite on it. And if you can’t make that work, you’re going to have to borrow the money from someone else. So someone that you can sway in this situation is a private money lender who will be open to hearing your logic that this property is worth $350,000 because of what it will cash flow. That private money lender is not an appraiser that’s held to a certain code of ethics and not a hard money lender that’s held to a certain set of criteria for approving loans. You can sway that person to see what you’re trying to say. You can get the extra money for the house from them to buy it, and then you can refinance out.
Now, when you refinance out, you can use a loan like I’m using. I get approved based on the income that the property is bringing in so I don’t have to go through the headache of showing all the different businesses I have and all the different income for those businesses. So I’m buying properties right now. I think I mentioned earlier in the show, I’ve got 12 in a contract. All of those are getting approved based off of the short term rental they’re going to bring in because my brokerage is able to do that. So when you get to that point that you’re ready to refinance, that’s what you want to look for, is a lender that will let you use the short-term rental income to approve you for the refinance loan. And then maybe you get approved for up to $350,000. All right. We’ve had some great questions so far, and I want to thank everybody for submitting them.
Make sure to like, comment and subscribe on our YouTube channel because we love these comments and we read them daily. At this segment of the show, I like to pick out a couple of the comments from our YouTubers and see what they’re saying and read them to you on the show. The first question comes from Jenny Lee. I love this new format of David’s tax, marriage and legal advice brokerage. That’s funny. In all seriousness, I love the long form in-depth explanations to these brilliant video questions. Keep up the great work. Well, thank you for saying that Jenny, but to be fair, I’m only able to give a brilliant answer if I get a brilliant question. So I need all of you to continue submitting really good questions to me here for the show. You can do that by going to biggerpockets.com/david and feel free to put in something funny, something quirky, something entertaining, not just the pure question, because that makes the, I think the pastor of my church once said that if you put a little bit of sugar on it, it makes the medicine go down easier.
That was also probably Mary Poppins’ quote. Now, that I think about it, my pastor was quoting Mary Poppins. That’s slightly less cool than I was thinking. Next comment is from Kyle Kotecha. David, this was excellent. In regards to a mentor, you’re exactly correct. People ask me what I would do if everything was taken from me. I always say that I would find what industry I want to be in and have a business in. I would find the best person for that and go provide massive value to them. Thank you for that Kyle. This is in regards to one of the shows where someone was asking how to find a mentor and I gave some advice on the best way to go about doing that. Next question or comment is from Misha Henderson. I love these shows. David, thank you for the great and consistent information you provide on every show.
I’ve learned so much over the last year since I started listening to your show. I’m a pro member and I hope to gather the nerves to ask a video question one day soon. Misha, you’re way overthinking this. Go ahead and submit your question. I will give you a little piece of advice though. If you all listening are thinking about submitting a question because I want you to. I got this comment on my Instagram from Watershed Property Services. They said, in all caps, please, on the Seeing Greene episodes, if the person cannot articulate a question in under three rambling minutes, don’t include it on the show. It’s so painful to listen to their stream of consciousness struggle session. But what if this, and also maybe that, but don’t want to forget about the other … Thank you. First off, I said dot, dot, dot, and I believe the technical term is ellipsis.
I think that’s what those three dots are called. Not positive on that. Maybe one of you can leave a comment in the question. So let me know if I’m right. Second, I thought that comment was really funny because what they’re getting at is when somebody submits a video that they didn’t think through what they were going to say before they started recording. Look, I want you to send me your comments and your questions, and I like your videos, but if you make one and you stumble through it, just rerecord it again. Here’s a little bit of advice. Whenever I’m going to record something, I take bullet notes of what I want to say, then as I’m recording it, I look down at those bullet notes if I get lost, and I say, oh yeah, this is what I wanted to get out. Little bit of advice to make a better video when you send it in.
And then for those of you that still end up with a lengthier video, we do have a new video editor who’s going to be editing these down. I just thought that that comment was funny and I appreciate you guys submitting that. Our last comment comes from Phil. Phil says, I really do like this format. It could be even better if you can find experts in different areas of the country or different facets of real estate to tag team with every couple of weeks. Phil, listen, next week, I think I’m going to take you up on that idea. So stay tuned and make sure you subscribe to this podcast so you get notified when it comes out.
If you’re listening on your podcast app, take a little bit of time to give us a rating and an honest review in the Apple Podcast. Those help a ton. We’re action oriented, and we want your constructive feedback. We want to get better and stay relevant. So drop us a line and let us know what you think, what we could do to improve the show, just like Phil said, or what you love. Please continue to comment and subscribe on YouTube also, and then leave us your rating or review wherever you’re listening. All right, let’s take another video question.

Logan:
Hey David, my name’s Logan. I live here in Columbus, Ohio area. The house that we are in currently, my wife and I, we owe about $60,000 in the mortgage. And the house is probably worth right now as is 110,000. But I’m pretty confident, I have a little bit of construction background so I’m pretty confident that if we put $30,000 into the house to fix it up, comparable homes in the area are selling for around 200,000 on the low end. So I guess my question is, should we try to take the aggressive route and get hard money or private money, or whatever we can to fix up the house now to get that $200,000 appraisal for what it’s worth? Or should we take the conservative route, which is what we’re doing right now and just trying to save up money slowly until we can use our own money to do it?
If we used our own money it would probably take us another year to get that $30,000 that we’re going to need. So I’m just a little bit worried that with inflation and I’ve heard you talk about the price of things, everything going up, that by the time it would take us to raise that $30,000, maybe a contractor is then trying to charge more because materials are going up and stuff like that. And then we’d be kind of out of luck. Our long term goal is to fix up this house that we’re living in, refinance out of it once it’s all fixed up. And then move into a house hack, maybe a duplex, or maybe a house where we can turn into a duplex or something like that, and then rent out the current house that we’re in, because it’s in a great area. It’s a three bedroom, two baths, very desirable town. So thank you so much.

David:
All right. Thank you for that question Logan. I’m going to go into real estate agent mode and treat you as if you are my client. And I’m going to tell you exactly what I think you should do. First off, you said you owe 60, you think it’s worth 110. It might be worth a little bit more than that. Get a HELOC on that property. You could reach out to me. I can have my brokerage do it for you. Or you could find a local bank credit union or a mortgage broker in your area. But get a HELOC, you have more than enough equity to pull out the $30,000 you’re saying that you need. Tell them that the purpose of the HELOC is to do a home improvement and they’re more likely to approve you. Take that $30,000 and do the work yourself since you have a construction background or get your buddies to do it for you at a possibly discounted rate.
If you have advantages that you can take advantage of, do it. Get your house fixed up. Now it’s worth $200,000. You can refinance it into a new loan or you can pay the HELOC off slowly over time. Depending on where rates are, we should cross that bridge when we come to it. I don’t want to see you do a cash out refi to pay off your HELOC if you’re going to lose the great rate you have on the first 60,000 to get a much higher rate. But if rates are only a little bit more, it’ll be cheaper for you to refinance it and pay off that HELOC. Then you mentioned that your goal is to move out and house hack. Well, the good news is you can then get preapproved for another loan and go buy your next property. Do a duplex, do a triplex, do a fourplex, do a house with a floor plan that could be functioning that way.
Do a house that you can add an ADU, maybe convert the garage. You’ve got a construction background, so you’ve got to a edge over your competitors in making that happen. Move into the new house, putting a very low down payment on that house. If you can get an FHA loan or a five or 10% down loan, if we can help you with that, that’s what I’d have you do. Rent out the one that you just left. Also consider making a conversion out of your garage if you live in an area where people want to live. If it doesn’t have a high rental demand, don’t do that. But if it does, you can sort of make your first house that we’re talking about here, function as a duplex, because you can convert the garage into an ADU or maybe another part of the property into an ADU. Now, with the new house, do the same thing with that one that you did on the first one. Buy something that needs some work, buy something that you could add value to. Buy something that you can live in and rent out the other parts of it.
Move out of that house once you do it, doing exactly the same thing that you did on the first one and do this again. Look, real estate investing does not need to be complicated. I know we get to talk about these cool, fancy, shiny bells and whistles, subject to mortgages and wrap around mortgages, and wholesaling, and off market opportunities. It doesn’t have to work that way. Use the skills that you’ve got. I was pretty good at numbers and I was pretty good at seeing opportunities. So I was able to build houses and help people as a real estate agent. You’re good at construction. Use that to your advantage. Buy a house every year doing what we’re talking about. In 10 years, you will have 10 homes. And this first house that we were talking about will probably be significantly paid down on the loan side.
Odds are, after year three, four or five, you’re not just going to buy one house every year. You’re going to have more cash than what you had before. You’re going to have equity in these properties that you can access and you’ll be able to do one house every year to live in and one or two investment properties. So at the end of the 10 years, you probably have more like 18 to 20 homes. If you take this long term turtle versus the hare, slow and steady approach, it’s almost impossible to lose with real estate. The people that lose money in it are the ones that come shooting out of the gate, like the rabbit, and try to do too much too fast before their experience. It’s like giving the keys to a Ferrari to a 16 year old that hasn’t learned how to drive. They’re going to run it off the cliff.
What you want to do is start very slow until you get comfortable with the car, the mechanics, the principles, how things work and then progressively increase your speed. You’re in a great position Logan. I really appreciate the question that you’re asking. I’m excited for you. I hope that you are excited and I hope that getting this featured on the BiggerPockets Podcast made your day. All right. The next question comes from Kaya in Atlanta, the ATL. First, I want to thank you for all the knowledge that you share. I’ve recently upgraded to the BiggerPockets pro membership, and I’ve purchased a couple of your books to continue to expand my knowledge in real estate investment. Side note Kaya, I would recommend reading them before bed because I’m told they’re super boring and will help you go to sleep. I have two questions for you today that I’d love your advice on and or next steps.
Number one, I recently purchased a single family home in East Point, Georgia that has a detached garage that was never fully finished on the inside. The structure is in place. It even looks like at one point it had electricity and was potentially used as a workshop and it has a new roof with wood beams. I wanted to convert it into an ADU and then rent that out as a short term rental because the structure’s already in place and I’d rather use it to generate income and hopefully add to my property value than to park my car there. I was given a quote from my contractor of around 20K to convert it into a 600 square foot studio apartment. Wow. I’m just going to interrupt here. That seems like an incredibly low quote. Either this contractor is really helping you out or this studio that you’re talking about, the garage, is more converted than what you think and they only have some finishing touches.
I don’t currently have any savings. However, my mom agreed to invest 10K and the rest I plan to fund using my business credit cards. My question is, is this a good move? It seems like a lowish cost for the conversion. I would agree. And was told by an Airbnb expert that it could probably bring in over 3K because it’s 10 minutes from the airport, close to a lot of movie production studios, et cetera. Is there anything I should keep in mind throughout this process? All right. Let’s start with part one and then we’ll get to part two. I really like the idea of converting it if you can do so for only 20K. I don’t love the idea of you using $10,000 of credit card money to make this happen as a newer investor that’s not that experienced.
You got to find some other way to fund this deal than just that. Do you have equity in your current home that you could take out and use as cash to pay this contractor? Could you sell a piece of your equity to another investor and get their cash to use for the garage conversion and then pay them back? Could you borrow money from an experienced investor that could step in if you make mistakes and fix you, pay them interest on that money and let them act as a sort of project manager to make sure everything gets done well? I say this because that 20 grand to convert a garage, it almost feels too good to be true and I want to make sure you’re not being taken advantage of. And if you don’t have any cash, that means you don’t have any reserves. You’re already in a bad spot.
I want to see you saving money Kaya. I don’t want to see you making it worse by taking on debt through high interest rate means like a credit card to then go put this thing together with the hopes that you’re going to make $3,000 a month when you’re inexperience and haven’t done this before. You need to get another person who’s in that space that is familiar with rehabs, that understands short term rentals to work with you on this. But if you’ve got a potential $3,000 a month and you could get a mentor to come in and you split that with them and they get $1,500 a month for a couple years to walk you through how to do this, or they can earn some interest on their money to help you. I don’t think it’s going to be too hard to find somebody.
All right. In the second part of her question, Kaya here explains that she originally wanted to live in a condo or a town home for safety reasons, because she wanted to be around other people, but she bought this house because she felt it was a stronger investment. While it is a stronger investment and has some really good upside, Kaya doesn’t feel as comfortable living in the house as her primary residence.
So she’s curious if she can move out of this house because she hasn’t lived there for a year and the best way to go about doing it. All right, Kaya. Here’s my understanding. No one can force you to stay in the property. If you don’t feel safe there and you want to move out, you can absolutely rent it out to somebody else. You could also buy another home that you intend to live in as your primary residence with the low down payment loan options, because you don’t have a lot of money. So if you can figure out a way to get enough cash for a 3.5% down payment and you don’t already have an FHA loan, you can go buy another property that you live safe in. Move into that, put a renter in the house you have now.
Assuming is going to cash flow. Start saving money and maybe use some of that money to do the garage conversion. You’ve got some options here. It sounds like you’re a little afraid and kind of tied down and very nervous. I don’t think you need to be. You can move out of the house you’re in. You can buy another house with a low down payment option. You might have to wait the year before they’re going to be eligible for that. So that’s something to talk to your mortgage broker about. Can I get another primary residence loan? Can I get an exception to get another one because I don’t feel safe in my house? You can use it as a rental. So make sure you run the numbers to know that’s going to cash flow if you move out.
You can move out and then you could convert the garage into an ADU later. You may convert the garage into an ADU and move into that one where you live and then rent out the main house for even more money on Airbnb. Or we could go back to what we said before, where you buy another property, you house hack it, you save on your mortgage and then you use the money you save to convert the garage. Either way, you’ve got a lot of options. The cool thing is, you bought a house close to the airport where there’s a lot of rental demand. You just have to figure out how you’re going to get access to capital. All right. We have time for one more question. This comes from Tyler.

Tyler:
Hey David. My name is Tyler and I live in Broomfield, Colorado. I’m looking to purchase my first house hack and I’ve reached a point where I can afford to get into a property and use half of it as an Airbnb. But if I do, I would be starting off with less than three months of reserves for the house, plus three months of reserves for personal expenses, assuming the house is pretty turnkey. My question for you is this. What is a healthy target for reserves for a first time house hacker? If I don’t purchase a property soon, my alternative is to resign my lease at my apartment until I can save up enough cash to launch with more reserves. Thank you.

David:
All right, Tyler, keeping it short and sweet. There is no right answer for how much reserves you need. As I’ve said before in different shows, it depends how much money’s coming in. So if you’re someone who makes a lot of money and saves a lot of money, you can dip down to lower reserves relatively safely, because you’ll replenish your money. If you’re someone on a fixed income who doesn’t make a lot of money or has a hard time saving, you need to keep more in reserves to be safe. The general number that we start with is six months of reserves to make your mortgage payment as well as enough to make payments for yourself in case you ever lose your job or ran out of income. From there, adjust up or down, depending on how much disposable income that you have every single month. But I would also consider if you want to buy a house and you know you don’t have as much reserves as you like.
Can you talk to a family member and say, if I ran into a jam and needed 10 or 20 grand, do you have that money in savings I could access and pay you back? It doesn’t necessarily have to be reserves you’re holding in your bank. If your mom, your dad, your aunt, your uncle, someone that you trust, a grandparent, does have the money, and you said, look, in the case of a perfect storm, if something terrible happened, would I be able to borrow money from you? If that’s a yes, it’s not as important that you have the money in reserves for yourself. Now, you don’t want to make that sort of the rule that you go to every time. You want to use this sparingly and you want to be able to build up your own reserve. So you seem like a young guy, I would highly encourage you to start working overtime, start working a second job, start doing something else to work hard to build up those reserves.
That’s what I did and that’s what gave me the confidence to be investing in real estate when everybody told me not to. I knew that I had enough money saved up and I could go make more money if I needed. That in the worst case scenario, I would be okay. It’s one of the reasons that I still work today. I want to keep buying real estate and I don’t want to worry about what if something goes wrong. So I still have money coming in from the work I do and the businesses that I run. There’s also not a ton of urgency for you to buy a house right now, because at the time of this recording, the market is softening a little bit. We’re not seeing a market crash, but we are seeing that home prices are coming down. Their homes are not selling as fast. Sellers are finally getting some concessions.
They’re getting some closing cost credits, they’re able to buy down their rate. They’re able to keep more money in the bank and they’re offering at less than asking on many, many homes. This is something that The David Greene Team is doing really well. We’re getting under asking price and concessions for a lot of our clients that we haven’t been able to do in years. And on the homes that I’m buying, I’m buying them far below market value because sellers don’t really have an option when buyers aren’t buying as much. So instead of signing a year long lease at the current place you’re at, which is going to sort of lock you in there, talk to your landlord and ask them, hey, can I sign a three month lease, a six month lease? Can I go month to month? Even if you got to pay 100 bucks a month more, something like that, you’re better off to have flexibility.
So when the right deal comes across you, you can move on it rather than thinking, I’m stuck here for the next 12 months because I just signed a lease. If for some reason your landlord won’t work with you at all, see if there’s someone else you can move in with. Can you put your stuff in storage and stay with someone else while you take your time to see what the market does? I’d hate to see you miss out on a really good time to buy that could be getting even better as more time passes because you locked yourself into a lease that shuts you down and makes you think you can’t buy more real estate. Thank you for your question Tyler. Really appreciate it and good luck. Let me know how it turns out. All right. That was our show for today. Thanks again for taking the time to send me your questions.
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