Seeing Greene: FHA Loans, Cash Flow Shrinkage, & Bidding $200k Over Asking

David:
This is the BiggerPockets podcast show 594. Focus on what you learn way more than what you earn. Okay? I don’t think you should work your life away. I do think you should work your twenties away. Years 20 through 30, you need to go gangbusters and give it everything you have and work as hard as you can. And then in your thirties, you will be making incredibly good income based on what you learned.

David:
What’s going on, everyone. It is David Green, your host of the BiggerPockets real estate podcast, here today with a special Seeing Green edition, as you can tell from this green light. If you are here because you want to build financial independence through real estate, you are in the right place. Here at BiggerPockets our goal is to help you do just that. This is a community of over two million people that are all focused on the same journey as you. Giving themselves a better life, adding to their freedom and finding financial independence specifically through using real estate as the tool of choice to do it. We help you by bringing on different people who have walked this journey before you, experts in certain niches and strategies that will teach you what they do. People who have made mistakes, so you can avoid them. And then specialists in different areas of wealth building that you can benefit learning from so you can go do the same.

David:
Today’s episode is a format where you get a solo show from me, David Green, where I answer your questions directly. Today’s shows awesome. We have people that ask questions about, “Hey, I’m 20 years old and I have an opportunity to take the safe road, or I have the opportunity to take a road that is real estate related, but feels a little riskier. What should I do?” We have questions about if we should use conventional financing or if other loan products would work better? We have questions about, “I’m having a hard time getting started in the market that I’m in. Should I go another market or should I stay where I’m at now?” And our first question is awesome where we get into, “Hey, yeah, I know my cash flow is going to go up over time by owning real estate, but isn’t my purchasing power going down to the same time? Am I actually getting ahead or am I just going to be stuck on a hamster wheel where I’m not getting anywhere?” I love that question and I would love for you guys to hear my answer on it.

David:
Today’s quick tip is simple. Go to biggerpockets.com/david and leave me your question. And I am happy if you want to leave being the most challenging, difficult, hard question that you could ever think to ask. You can ask me what came first, the chicken or the egg. You can ask me why the chicken crossed the road. You can ask me anything. I’ll try to figure out a way to keep it real estate related, but here’s the thing. If something’s stopping you from taking action, this is the show that you should be using to get over that hurdle. Tell me why you are scared. Tell me what you’re worried about, tell me what your challenge is. Tell me if this was different, I would take action, but I don’t know that it’s going to be different. And let’s talk about it together because at BiggerPockets, that’s what we want to do. We want to make it easier for you to take, take the action that 10 years from now, 20 years from now, will lead to you being a millionaire and you’ll be very glad you did. All right. Let’s hear our first question.

Quintin:
Hey, David. I first also have to say thanks for you sharing your insights and expertise. It’s really helped me in my real estate journey as many others. So, thank you. My question is how do you forecast the spending power of your properties and their cash flow for five or 10 or 15 years from today? So, if say your properties are supplying maybe 25% of your lifestyle needs today, do you forecast that they’ll go up over time or stay about the same? I’m also curious if you have any ideas for ways to increase that growth if there is any. And is there things I can do today to have a more spending power in the future from my properties? Thank you.

David:
All right, Quintin. First off, great question. Second off, thank you for asking this because this is the question I think more people need to be asking, but they’re not. And why are they not asking it? Because it’s very uncomfortable and it’s harder to understand when you want to turn real estate into something that can be understood through a spreadsheet, it loses some of its magic and its power. Now it feels safer when we can do that. So there’s always a temptation to want to turn it into something that analytics can understand. And there is a role for analytics in real estate. You obviously want to understand what your expenses are going to be with the property and what your income is going to be. And analytics can help with that. The problem is that every year after you buy that property, your expenses will change a little bit.

David:
In general, they’re usually the same. So most mortgages are for a 30 year fixed rate, most property taxes and most areas don’t change unless you sell the house. Your insurance could go up a little bit on the expense side, but that’s probably your smallest expense of everything. And your property management fees will go up. But the rate that you are charged eight, nine, 10%, whatever it is, will usually stay the same. You just pay them more when you collect more rent. So you don’t mind that. Now, to our income that has the biggest changes and that’s what makes investing in real estate difficult. When you’re trying to anticipate the future, you don’t know what your rents are going to be. You don’t know ways you’re going to be getting income from that property, what to expect. So, I’ll just sum up where we’re at so far. Expenses are more or less something that you can anticipate and put into a spreadsheet with relative certainty.

David:
Income’s not the same. Now your question is related to this fact that I just made. You’re recognizing, “Hey, rents are going to go up, but at the same time, inflation is going up. So while I’m making more money every year with real estate, the value of that money is also going down.” And that is the million dollar question. The reason I’m glad you’re asking it is there’s too many people that are not considering this. This is my opinion that I don’t speak for the company, BiggerPockets. And I’m not trying to tell you guys, I have a crystal ball, because I don’t know. I could very well be wrong. But we all got to make a bet. We either bet on the fact that prices are going to go up or prices are going to go down. If you’re not buying real estate, in a sense you’re making a bet that it’s in your best interest not to. Maybe you think prices are going to come down, maybe you want to wait to save up more money, but still it’s a bet.

David:
Here is the problem. And this is why I’m going gangbusters right now and trying to buy as much and as nice of real estate as I possibly can. I believe the dollar is losing value because the government just keeps printing more of it. That causes inflation. And, and I’ve been saying this for about two years. It took about two years for the effects of the money that we printed to actually filter their way through our entire economic system and hit you where you feel it. So you notice gas prices are up. If you’ve been to the grocery store, you notice how expensive groceries are. You notice that real estate and other income producing assets are much more expensive now than they were two years ago. Well, the answer is because of inflation. As the dollar loses value, the people that have more of those dollars tend to be more financially savvy, want to go after assets that will hold their value in an inflationary environment.

David:
And real estate is one of, or the best one that I know of. Especially when you throw one that you can borrow money and leverage it so easily. And you’d rather borrow money and pay it back with cheaper dollars. So borrowing money becomes more attractive in an inflationary environment. Lending money becomes less attractive. So, you don’t know how much those dollars are going to be worth when you actually go to spend them in five, 10, 15, 20 years, it’s relatively safe to assume you’re going to be getting more of those dollars and that you will be better off having bought that property than not buying property. What you can’t know is how much that dollar’s going to be worth. And there’s nothing we can do about at that because we don’t control the money supply. What you can do is make sure that you put your dollars in the best place possible, which for most people is going to be buying real estate, which is why we’re back to me buying so much of it.

David:
So it’s true. Your cashflow is going to increase because your income’s going to go up and your expenses are going to stay relatively the same, but the dollars you’re collecting are going to be worth less. That is also true. So to make up for that, you need more of them. This is why I want to buy more real estate, I want to have more cash flow, I want to have more buoys in the ocean when the tide rises, because the dollars that I’m going to be getting back are going to be worth less. There’s literally nothing you can do unless you’re collecting your payments in something other than dollars. That might be some option. Maybe you collect your payments in cryptocurrency or something that you think will be worth more than the dollar. That’s a much more complicated answer than we could get into right now. But I do want to commend you for asking the right question and for noticing what’s going on around you.

David:
Here’s the way that I understand it. And I’ll wrap it up with this. I don’t know how to stop the dollar are from becoming less valuable. What I do know, is that if I do nothing and I just keep my dollars in the bank, I am guaranteed to lose. If I invest them wisely in real estate, I am virtually guaranteed to win. I just may not be winning as much as if those dollars were worth the same as they are today, but there’s nothing I can do about that. So doing nothing means I lose, doing something means I win. I just might not win as much as what I was hoping for because of inflation. Very good question. All right, next question comes from Damien W24 on BP. Hey, fellow 24 person, nice to meet you. “Me and my wife created a real estate investing LLC in 2020 and have not been actively using it. Last year we moved to Florida and relocated the LLC. We sorted all the paperwork and are now in the process of getting our first property.

David:
We were thinking of using an FHA loan since we don’t have much down payment and get the property as a primary residence, and then transfer to the LLC after closing. We are currently in the process of finding a lender for pre-approval and got a realtor from BiggerPockets to help us find something. My question is what I mentioned above possible?” Okay. It sounds like what you’re saying is I want to buy a property in the name of an LLC, but I want to use an FHA loan. That would be a question that you would have to ask your loan officer and they will be able to get that answer pretty quick if they know their guidelines. If they can’t answer it right away, they’re probably going to say, let me look into this, which means they’re not a very experienced loan officer and I might be a little hesitant with using that person. That’s okay though. That just may be something that they’ve never had come up before.

David:
Most likely you’re not going to be able to buy a property using an FHA loan if you put it in the name of your LLC, but I can’t tell you no for sure. In different cases, you could be able to do it. But this is one of the reasons that I don’t recommend that everybody start with an LLC before they start buying property. It’s the most commonly asked question. Should I get an LLC or not? And the reason that I tend to lean towards, it’s usually not worth it, is because the financing becomes so much harder. If you do buy it in your name and then try to transfer it to an LLC later, that could be okay, but it might trigger something in the contract where the lender who let you buy the house, never said they were going to lend to the LLC. So then if you then try to transfer it and they find out about it, they might say, “Hey, you need to pay this loan off in full.” These are questions that you should be asking your loan officer or the broker who’s putting your deal together.

David:
So for everybody listening, this is a question I highly recommend before you make your strategy and say, I’m going to go get an LLC and I’m going to put property in it. Talk to the person that’s going to be doing your loan to make sure that’s something that will work. Now, if you’re using our company, this is a great question. It’s different in different states, we lend in different states, but ask us that. “Hey, this is what I want to do will this work?” And then we will come up with a strategy that would allow you to do it. And if there is no strategy, we would tell you that ahead of time. But please a few things about LLCs I just want to make clear. They’re not a guarantee that if you’re sued that the lawsuit will stay inside the LLC. On BiggerPockets, we’ve been interviewing legal experts lately that have all been saying the same thing, whether it’s Tom Wheelwright or Brian Bradley, that we just interviewed, it’s not a guarantee, they can still pierce the corporate bill and go after your other things.

David:
And the other one is that financing becomes much harder when you’re lending to a legal entity instead of you as a person. So don’t make the mistake of just assuming that LLC is the way to go. It could be the way to go, more than likely. It will be the way to go when you hit a certain level, but for most people starting off, that doesn’t make sense right off the bat. And if you want more about this topic, just listen to the very next episode that’s going to be coming out. That’s where we have Brian Bradley on and he gets into legal entities, how to use them to save taxes as well as how to use them to protect yourself from the horrible lawsuits that eventually could come to a real estate investor.

David:
Now on this same topic, let me give you a couple ways that you can vet your loan officer to know if you’re going to be getting a good one. Right? Now, I know this I have a loan company now, the One Brokerage and people call us vetting us. And I see the questions that they’re asking and sometimes I’m like, that’s a really good question. I’m glad they’re asking. Other times I think that is completely irrelevant why are they asking that question? The first thing you want to find in a loan officer is the ability to tell you no. My guys are trained if we can’t do the loan to tell you that ahead of time. Most loan officers are going to tell you they can do the loan when they don’t know that they actually can. And any of you that have been in the situation, I’ve been in many times where they said, “Yep, we got you.” And then it turned out, “We don’t got you.”

David:
You know the frustration of all the money, time and energy that you spent to get there only to be told at the end we can’t do it, or it’s going to be more expensive. Now, there’s always going to be an element of that to getting a loan. You can’t ever predict with 100% certainty if the loan’s going to go through. But here’s how the process typically works. You speak with a front facing person that would be your loan officer or LO. They don’t know exactly what’s going to happen and they’re probably not super experienced because most people that work in this industry don’t do a ton of business. It’s really hard to make it in this world. So, you tell them what you want to do when they say, “Okay, yes.” Because they just want to get you on the hook. They want you as a client. They don’t want to give you a bunch of advice and have you go somewhere else.

David:
Then they run to the underwriters that they speak to for whoever they’re going to be brokering the loan to and say, “Hey, this is what he said, can we do this?” They get some form of answer from an underwriter, then they come back to you and say, “Well, here’s what we can do.” And then you don’t hear from them for a week or two until you give them the next round of paperwork they need. They give it to the underwriter, the underwriter comes back and says, “Well, now we need this.” So what you don’t realize is you’re kind of in this game of hot potato, where your loan officer’s going back and forth between you and the underwriter and the underwriter’s the one that actually knows what’s needed, but you’re not allowed to talk to them. That’s why you get so frustrated. That’s when you hear people saying, “Why didn’t you tell me this in the first place? If you would’ve said that I never would’ve done these things.” It’s literally because your loan officer doesn’t know. They haven’t done enough loans.

David:
And oftentimes the ones who are going to give you the lowest rate that are making the least amount of money are doing it because they have the least experience and that’s their only way to get business. And so sometimes by chasing the lowest rate, you get the worst service, just like sometimes wanting to pay the littlest amount of commission when you’re selling your house, gives you the worst agent and you leave way more money on the table. Now, I know about this personally, because I personally eat those agents for lunch. I spot out these bad agents that are discount agents that are representing clients on listings and I out negotiate them and take so much money from those sellers when we’re going after this because I dance circles around that agent who isn’t very good. The seller always thinks that they’re getting a deal with a discount agent, but it rarely ever works out.

David:
What you want is a good representative, whether it’s your loan officer, whether it’s your agent, they’re usually not going to be the most expensive, but they’re never going to be the cheapest because they’re good. And they spend a lot of time getting good at this. So the first thing that you want to look for is a loan officer that will tell you, “No, we can’t do that.” The next thing that you want to look for is a loan officer that will give you clarity on what to expect. So, oftentimes they have different loan products. What you want is someone that says, if we go with this loan product, your rate will be the best, but you’re going to have to collect all this paperwork, you’re going to have to do all this work. Now, this loan product might be a little bit higher, but there won’t be as much documentation. And they let you sort of make the choice on which one makes the most sense for you. But they present you with options.

David:
So I’m buying several houses right now. And I just spoke with the partner of my company, Christian, and he was laying out the loan options that I would have for this house. And the one that was least appealing as far as rate and terms was 25% down to be buying the property. And the rate was about the same as everybody else, but it was a higher down payment. Also, did not require me to get the insurance policies, the mortgage statements, every single piece of documentation, the leases for every property I own. I realized I’d rather put more money down and pay a higher rate than go through the hell of trying to get all that paperwork together. So we’re going with that option. Now, that’s how this business works. So you want a person that’s going to present you with options and be real with you about what’s going on. The third thing is you want to find someone that you feel is honest and that you can trust, especially in the loan industry this is very, very important.

David:
It’s common for loan officers to tell you just enough that they’re not lying, but not so much that you actually understand what you’re getting into. So look for the person that’s willing to share more information rather than less. Now they’re taking a risk when they do that, because sometimes giving you more information will now let you go shop them with someone else as you try to go find the lowest rate. So in many cases in our industry, loan officers get punished for being honest. And that’s why many of them are not. So when you do find an honest one, don’t punish them for that, reward them for that with your business, because you can trust him. All right, next questions from Brandon C in New York. Brandon’s from Georgia, but lives in New York. He’s bought a duplex in Alabama a year ago and is now looking for his next property, but this time as a primary, who’s looking for appreciation over cash flow because they make a good W2 income. Very, very helpful to understand there.

David:
First question, “I’m looking at a new build single family home in a neighborhood that’s been appreciating rapidly. I understand that means I’ll pay a premium. However, the pre-sale asking is $200,000 over comps, meaning they’re wanting 725, but comps show about 515. Isn’t the builder eating up all the investment opportunity by selling at this price in anticipation of the market going up and kind of making it not worth it to buy? All right. So let’s start with this question. The question really comes down to how do we value real estate? Now, the way that we like to look at it, because like I mentioned earlier, it fits in a spreadsheet better, makes it easier to feel like it’s safe is by looking at comparable sales. So, if the comp shows 515, it’s worth 515. Period. We like it when real estate works that way. The fact is, that’s the science approach, it’s not only science, there’s also art.

David:
Here’s the most accurate definition of value I can give you. It’s worth whatever someone’s going to pay for it. Now, while that’s the most accurate, it’s also the most general. And it doesn’t sit well with any of us because who can know what that actually is. And that’s the reality of how real estate works. It’s much more art than it actually is science. If someone’s willing to pay 725 for that property, and there’s comps at 515, it’s worth 725, and you would sell it for 725 if you were in the builder’s shoes as well. If they price it too high, more than what it’s worth, nobody will buy it. Then they’ll have to drop the price to what it’s worth, because somebody will buy it. Now, in practical terms, if it’s worth it to you to buy it for 725, and we typically come up with that understanding by looking at what 725 can get us everywhere else. If there’s nothing better than that, or the same as that at 725, that does become your best option and that’s what you’re going to pay for the house, or somebody else will pay for it.

David:
It may not appraise at 725. Now, if that happens, you want to make sure that you have an appraisal contingency in your contract with that builder. And if you have an agent representing you, they should be the one telling you this. So if I was representing you in this deal, I would look over that contract and I would tell you, we need an appraisal contingency, because this is more than $200,000 over what the other comps are going to show. And if you don’t have that, you’re going to have to fork up the difference in cash or lose your deposit. That’s the actual practical reality of when you don’t want to be paying so much more over asking, it’s okay if it’s worth it to you as long as there’s an appraisal contingency in that contract that lets you back out. What you don’t want is to put $100,000 deposit on this house or $50,000 deposit and you pay 725. And when it’s done being built, it’s gone up to 550 from 525, but definitely not to 725.

David:
And you have to pay the difference between 550 and 725 in cash. That would kill your ROI, it would kill a lot of the money that you have. You probably had plans to buy three or four more houses with that capital. Now you can’t do it. That can be debilitating to your real estate investment career. You also don’t want to lose the down payment that you put on the house. So, my advice to you when you’re in a situation like this, is the first question you ask is, is the house worth it to me? Meaning is there anything better that I can buy at 725? Now, I’ve paid over what I thought a property was worth. This may blow your guises minds, but I’ve done it before. When the property itself was unique and had things that made it worth it to me.

David:
So, if all the houses in a neighborhood are selling for 900,000, I’ll pay a million dollars for one if it has the ability to rent out the areas of the home, or it has more parking than other houses do, or it would work better for what I want it for than the other homes would. And even though I paid $100,000 more than what the other houses are worth, the income that it generated was more than what I would have to pay to borrow an extra 100,000.

David:
So it was still a win for me. These are all the things that you got to kind of balance out when you’re making the decision, especially if it’s in a rapidly appreciating market like you’re saying. There’s a very good chance that you’re going to pay 725, but then everyone else is going to end up paying over 800 and this whole question’s going to become a moot point, because then you will have comps at that level. All right. Second question from Brandon. Outside of recognizing neighborhoods with increasing home prices, are there any other tips for investing for appreciation? Yes. So the first one is you can tell if there’s increasing home prices. That’s the first indication that you’re in at an appreciating environment, because homes are appreciating. Right? But that’s not the only thing to look for. Go backwards from there, ask yourself why are homes appreciating in this neighborhood? It’s usually for several reasons.

David:
One, the most one right now when I’m recording this, is that people from California or New York who sold their home for a lot more money than that market is worth, are happy to pay more than what the other houses are selling for because they have a ton of cash in their pocket and they’re used to prices being even higher than that. So. When people that value money less than you. Just let’s that you’re in like Tulsa, Oklahoma, and $400,000 is a lot of money and for someone to pay $500,000 for a house, seems really expensive. And someone’s coming from New York where they just sold their condo for 1.5 million. To that person, the difference between 400 and 500 is pretty much doesn’t exist. It doesn’t matter to them.

David:
They don’t value that money the same way someone from Tulsa does. So, the Tulsa people see the New Yorkers coming in and spending a $100,000, 20% more than they think it’s worth. The New Yorker thinks it’s incredibly undervalued because what they got for 1.5 million in a condo, now they’re getting a ton of land and a big, beautiful home. And it’s like a mansion to them that they would pay more to get that. So, what you have are differing ideas of what it’s worth and it really does help to step outside of our own shoes and try to look at things objectively before we get upset that we think other people are overpaying when to them they’re actually underpaying in their own mind.

David:
So looking for people that are moving to an area from more expensive areas is a great way to identify this market’s going to appreciate. Another one is looking for businesses or companies that are moving into that area that have high wages. Now, there’s a lot of things that affect the value of a home supply and demand is the best place to start. But assuming that there is not too much supply and there’s healthy demand, meaning that people want to buy these homes and there’s not too many of them, the next thing people are going to ask is, “Well, how many other people are trying to buy the house? And if more people are moving to that area, you have more buyers than sellers, you’ve got extra demand. The third question then becomes can people afford to pay it? And that’s based on the debt to income ratio of the people that are trying to buy these homes in most cases.

David:
Now, if companies are moving to the area or people are moving there that work in companies that give higher wages, now they can also afford to buy the house that there’s more demand for. And that means that they’re going to pay more for the house in order to get it over everyone else. So, if you see companies moving to a certain area, we’ve seen this in Seattle, we’ve in Austin, we’ve seen this in Madison, Wisconsin. We’ve seen this in Miami, all of the really, really… Denver, Colorado, the appreciating markets that have just exploded. San Francisco, California, San Diego, California parts of Los Angeles, California. It’s almost always because tech companies that pay really good money have moved into those areas. Those industries have come in bringing high wages with them that have pushed up how much people can afford to borrow.

David:
So if you’re looking for an appreciating market, that’s another thing to look for. Are people able to pay more? The first part was really, are they willing to pay more? And for the New Yorker who’s sold their place for 1.5 and they’re moving into your neighborhood, yes, they’re going to pay much more. So, are they willing to and then are they able to? And then look at the factors that would drive whether people are willing and able to pay more. And if they’re there, those markets are going to go up and you’d be better off to buy now than waiting for a crash that probably isn’t coming. All right. We’ve had some great questions so far, very pleased with how this is working out. So, thank you all for what you’ve in doing. Before we move on some more questions, we’re going to take some comments that you guys have left on YouTube.

David:
This is one of my favorite parts of the show where I get to see what everybody here thinks about the show that we’re doing, what they want to see more of and maybe even what they don’t like. Because we can improve from that too. Comment number one from Zoynkin. “You always keep it 100 real no matter what. I love how blunt you are. Keep it going. You are on the border of your channel becoming the number one real estate resource.” Well thank you for that. That’s very sweet. I try to keep it 100. Not everybody likes that. So I’m glad that there’re some people out there that do. I think that’s probably one of the more common forms of criticism that I get is that I’m a little too blunt, I’m a little too direct, but I’m glad there’s people out there that still appreciate that. Next is from Bruce Banks. “I remember I stopped watching BiggerPockets podcast episodes, but since the new format, I now watch 80% of them.”

David:
First off, glad to hear that. Glad we’re doing better. You notice I have the green light on behind me now for the Seeing Green new format. Second, that’s remarkably accurate that you know that you watch 80% of the podcast. I’m guessing that you are a high see on the disc profile. And I think that’s really funny. So thank you Bruce for leaving that comment. And our next comment, “David Green by far hands down the best episode and I’ve been listening for years as a BiggerPockets member. This is your format. Keep it going.” That comes from Ramona Pecuer. Thank you so much. Ramona left that comment on episode 577. So if you guys want to check out why Ramona thought it was so fire, go check out episode 577.

David:
All right. If you guys like this show, if you like listening to me, answer these questions, do me a favor. Go to biggerpockets.com/david and leave questions of your own because I can’t make the show if you guys don’t leave questions and the better questions I get, the better the show is going to turn out. So please take a minute to go to biggerpockets.com/david and leave me your question there. Additionally, take a second right now and go follow us on YouTube. Subscribe to our channel, like us, and most importantly, leave a comment about what you like about this show, what you want to hear me expand on. So I know when I’m listening to podcasts, I will usually hear the host say something that I thought was gold or intriguing and I’m like, “Oh, I wish that had gone deeper into that.” Well, you have your chance to actually communicate with the podcast host, me and tell me what you want me to elaborate more on. So go in the comments, say, “Hey, I’d love to hear your take on this, or I wish you’d expand more onto this thought.”

David:
And if I’m able to, I am happy to talk about that more. All right. Next question comes from Celine Dujuik. “BIG fan.” Big as in all capital letters. “Love the show. Not sure if the question is for David or for a lender.” Well, I could be both. “My question in regards to house hacking. Is it possible to house hack through a direct relative? To be specific, my mother-in-law is currently struggling with her housing situation, I was thinking maybe we can get a property where she can live and we can hack the rest. More likely she will not qualify for a loan or even be willing to go into it alone. But I’m guessing that if we were to co-sign then it would be a possibility. My question is if we were to co-sign, are we not required to live in it, is okay for her to live in it alone? Thank you in advance.” Okay, love this question. Let’s break it down. First off, when you’re getting a loan, there’s a few things that they’re going to look at to qualify for your loan.

David:
The biggest ones are going to be your credit score and how you’re going to make the payment. Okay? So typically they look at your debt to income ratio to decide can this person afford to make the payment we’re going to give them of the house? Now in general, that’s going to come from you having a job, which is why a lot of the time we say, “Don’t quit your W2 if you want to keep making money, because it’s easiest to get a loan that way. My company will do loans for people that are not based on the income that they make, they’re based on the income from the property, but this doesn’t work in every single property.

David:
So if you buy a single family house and you plan on renting out the rooms, we probably can’t use the income from that. If you buy a triplex and you’re going to rent a out two of the units, we probably can. If you’re buying a short term rental and you’re going to be renting it out on Airbnb, we probably can. But let’s assume that we’re talking about buying a single family residence where you’re going to rent out the rooms to people and keep one room for your mother-in-law. In that case, what we have to figure out is does she have income that we can use so that she can get the loan and she can be on the title and you can co-sign with her, which is basically just like, “Hey, she doesn’t make enough income, so we will add our income to what you’re using to qualify for and then we’re going to be on the hook for the debt.” Or can you buy it in your own name and then have her rent it from you?

David:
Now there’s quite a few ways that you can structure this. So you probably do want to talk to your lender about this question, but there are ways that this could work. It’s just going to depend on if it’s her primary on the loan and you co-signing, then you’re not going to have to live there in most cases, it’s going to be okay that she is. If the loan’s primarily going to be in your name but she’s going to be living there and sort of renting from you, that would be a little bit different and we would want to talk to you deeper to figure out if you’re going to be buying this as an investment property, if it’s going to be a primary residence, what your options would be there. So in general, I’ll say this about co-signing. It does solve a lot of problems. If you’re looking to buy a house and you can find a co-signer for you, let’s say your credit isn’t that great or maybe more specifically your debt’s income ratio isn’t that great, it will help you. But co-signing for someone else will almost always not help you.

David:
And the reason is it doesn’t split the debt up between both parties. So, if you’re borrowing 500,000, the bank isn’t going to say, “Well, you’re on the hook for 250 of it and they’re on the hook for 250.” No. It goes on both of your debt as $500,000 and the payment that is made on that will count against your income. So, if you are an inspiring real estate investor, you’re better off not co-signing for someone else, unless you make a whole bunch of money. Hope that helps Celine and reach out to me directly if you want me to have one of my people look into that, but this is a very good question. And thank you for trying to help out your mother-in-law.

Sean:
Hi David. Thanks for taking my question. My name is Sean and I’m a smalltime investor in the Charleston, South Carolina area. I started listening to the BiggerPockets podcast in 2020, and it’s changed my life and shifted the way I think about money. So, I really thank you for that. My question is about LLCs and debt to income ratio. So, I have a well paying W2 job, but I’ll be leaving job in two years. I don’t really have a choice, that’s just what I’m going to be getting out of the military. I have three properties, I’m looking to purchase more this year. One is a long-term rental that I’ll be converting to a short-term rental in a couple of months. It’s in a good area in the comparable support. I’m still small enough where I can qualify for conventional loans in my personal name, because of my low DTI. All the lenders I’ve talked to though have said that I must have two years of reportable short-term rental income before they’ll consider it as income for DTI purposes.

Sean:
This seems pretty universal across lenders I’ve talked to. So I’m guessing it’s a Fannie and Freddie requirement. On the flip side, they’ll consider 75% up to a 100% of income from a long-term rental, regardless of how long it’s been lease. So, a short-term rental will shoot up my DTI, at least in the short-term because lenders will only consider the mortgage not the income that the property is making. So, I’m planning on getting around this by signing a long-term lease on my intended Airbnb property with an LLC that I also own. That LLC will be the management company for the Airbnb. So, from the lender’s perspective, the property has a short… Has a… Correction. The property has a long-term lease and it’ll be counted as a long-term rental instead of a short-term rental. So, would underwriters verify the owners of the LLC? And if they did, I could structure the LLC so it’s owned by another LLC out of state, like in Wyoming where my name is on the public record.

Sean:
My lenders told me to consult with my CPA. My CPA told me to consult with my lenders and my attorney said, that’s an interesting idea. I just wanted to hear your thoughts on this. What am I missing? What am I not thinking about? I know there’s other options for loans, but conventional Fannie, Freddie loans seem to have the best rates and make the most sense in my position. I’m just trying to maximize my leverage while I still have my W2. Thanks.

David:
All right, Sean, you’ve got yourself into quite a little dance here where everybody is asking you to go talk to somebody else. The advice I was going to give you would be, you should probably look to avoid the conventional loan, but you wrapped up your question by saying that’s what you want to stick with. And you’re right. With conventional lending, you typically get the best rate and that’s why most people want to go there. The downside is that the rules are much more rigid with these conventional loans because they’re insured by the government, those are Fannie Mae, Freddie Mac companies that are government sponsored enterprises. And you are obviously a smart person, which is why you haven’t given up on this problem already and dancing back and forth trying to make it work. You are going to have whatever LLC you’re trying to buy the house in and they are going to verify that you are the owner of it because they’re going to be looking at who’s making the payment and that’s going to be you, the manager, owner of the LLC.

David:
So I don’t think you’re going to be able to sort of trick them by making it look like you’re not involved in it. If you’re going to try to go conventional, the sticking point here is if you’re trying to use short-term rental income, they want to see it for two years, which isn’t going to work for you. And if you want to use long-term income though, it typically takes 75% of what you’re collecting in rent if you have a signed lease for the property, which you are going to be able to use for your income. And you’re probably not making a ton of income if you’re in the military, which is why you’re so tight here. Here’s the advice I’m going to give to you. While you are in the military, you’re going to have these problems, because you’re not making a ton of cash and you’re younger, so you don’t have a ton of experience owning properties for a longer period of time, which Fannie Mae and Freddie Mac are going to want to see.

David:
My recommendation is you don’t try to go the conventional route when you’re in the position you’re in. I do think that you should look into some debt service loans like the ones that we offer, because they’ll be much easier and you’ll get the property. Now, don’t have a crystal ball? Odds are in the next two to five years, those properties are going to increase significantly. You’ll going to end up with a ton of equity as well as your rents are going to go up really fast from what we’re seeing with inflation. And even though you didn’t get the best loan ever, it’s not going to matter because the properties are going to be performing very well in this environment. Once you’ve got some sort of established income, because you bought these properties, maybe then you rented out as a short-term rental, you can refinance into one of those conventional loans that you’re talking about really wanting to be in or you’d be like me and you just sort of get over it.

David:
We’re not going to get the very best rate all the time once we become experienced investors or if you’re in the military, if you’re in anything other than ideal life circumstances where you make great W2 income, that’s just not where you’re at. I think from what I’m hearing you say, you’re making this harder for you than it needs to be by really trying to make it work in that conventional box when all the evidence is telling you, this is not the best road for you. Now, if we were in sort of a stagnant environment where home prices were just staying exactly where they are, maybe they’re just taking up a tiny bit, frankly, I wish we were in that environment. I think it’s better and healthier for the country as a whole, when that’s the way that homes are appreciating and other assets. I would say, just keep banging away at this thing and eventually you’re going to get it figured out. The reason I’m giving you the advice that I am right now is we’re not in that environment. Homes are becoming much more expensive. Institutional investors are gobbling them up.

David:
Other people like me that are looking at can’t keep my money in the bank, the stock market isn’t very trustworthy, there’s not a whole lot of options. Got to buy more real estate. We’re going in there and buying these homes that you’re looking at right now. And the price of the home is going up so fast that the price of your financing becomes less and less important. So, the longer that you’re waiting to actually get in the game, the harder it’s becoming for you to build wealth and the less that rate that you’re really trying to find starts to matter. So, I wish I could give you better advice with what your plan is. I think you’re going to lose money trying to make that work. I think you’d be better off to just get a loan that you can get. Get in there, buy the rental property, start building the track record of collecting rents, like what they’re wanting to see.

David:
And in future deals when you’re not in the military, when you have a better paying job, when your W2 position is stronger, you can buy all the conventional properties that you want. All right. Question. Number five is from Victor Lopez in my hood, the Bay Area, California. Everyone of us that’s from the bay area always has to tell everyone we’re from the Bay Area. I don’t know why we do that. Victor says. “I’m from the Bay Area, California. I’ve had a mentor, but he is all the way in Southern California.” Side note. If you guys don’t live in California, a few things you should know about us. Number one, nobody in California calls it Cali. For some reason, that’s only things that people outside of California actually call California. Number two, when you live of here, Northern California and Southern California literally might as well be different states. Those of us in Northern California, like me have no idea what’s happening in Southern California and people in Southern California don’t have any clue what’s happening in Northern California. We are very, very different.

David:
So whenever you’re talking to someone from California, find out if they’re from Northern or Southern California, because if you’re talking about what’s going on in Los Angeles and they live in San Francisco or Sacramento, they will have no clue what to tell you. Back to Victor. “I’ve had five wholesale deals. I closed one and I bought one of them in Missouri. I’m investing in a few different markets, but specifically in Missouri, Kansas, and Texas, but I’m looking to do more in the Bay Area, but it seems like good buyers are hard to find. I want to scale up and build capital for rental property so I can take time from real estate for a bit and watch my kids grow up and be financially stable. I would rather own and make the money in the long run than a 5K assignment fee. What should I do to pivot in this expensive market or who should I be looking to reach out in order to better learn my market?”

David:
All right. Victor’s question is from a wholesaling perspective, it sounds like he’s trying to figure out how to get more wholesale properties under contract in California. But I think that there’s the principle that he’s getting after will apply to everybody. Here’s how I see investing in 2022. You’ve got the stuff that’s easier to get that makes you less money. You’ve got the stuff that’s harder to get that makes you more money. It can really be summed up like that. The reason Victor’s able to get these properties under contract in Missouri and then assign them to someone else for $5,000, is it’s not as hard to get them under contract because people there don’t know our house is worth, don’t care what their house is worth. And there’s not as much at stake. The price points are just lower. So you have an easier time getting the fish to bite the hook and getting it in the boat. The problem is it’s a smaller fish.

David:
And you spend so much time trying to catch these small fish that when you actually sit down to eat them, you might have burned more calories catching the fish than you get when go to eat the fish. And that’s probably what you’re experiencing, you’re having some success wholesaling, but to get a 5K assignment fee, a 10K assignment fee plus all the money you had to spend and the time you had to spend to get it, you might as well have worked a job, plus there’s no security in it. Then you look at what’s happening here in the Bay Area and you might get $100,000 assignment fee out here, but it’s so much harder to get that fish to bite because most people out here know that their house is worth a lot of money. When you’re dealing with an asset that’s a million dollars, $1.5 million, even $800,000, people aren’t caught off guard when you say, “Hey, I’ll pay you this much for your house.” They know their house is worth a lot of money because everybody’s houses are worth a lot of money.

David:
That’s where your challenge is going to be, Victor. Is you have to decide between working harder to make more or working less to make less. Now, this is one of the reason why I buy houses with real estate agents because the areas that I like to buy in, or should I say the markets I like to buy in, are typically where I think we’re going to see the most growth. Right? So I invest in expensive markets because I think those are lower risk. A lot of people think lower price equals lower risk. I don’t think so. I think that the more expensive the market is, if there’s a very strong economy and infrastructure there, if we do have a correction, those places really, they have a blip in the radar. It’s a tiny dump, or a tiny bit to go down. It’s not a total dump or a total dive like some of the more cheap markets. Okay? So think about the most expensive market where you live and try to go back to 2010.

David:
My guess is those neighborhoods did not see a humongous decrease in value. But the Detroits of the world got hammered. Right? So that’s why when I think we’re in a harder market, I like to be in more expensive areas. And that means that wholesalers, they don’t really get these like two, three million dollars Scottsdale properties that I’m interested in under contract. They’re going to get the thing in Kansas city, Missouri under contract, which to me means more risks. Some of those Midwest markets are some of the riskiest that are out there right now. So, I use agents to buy houses because they’re going to be looking at stuff on the MLS because everyone in those areas knows their house is worth a lot, so they’re going to sell it on the MLS, they’re not going to sell it directly to a wholesaler.

David:
As far as your goal to pivot in this market, you’re probably going to have to use relationships to get ahead. So you’re going to be needing to look for human beings, people that trust you and telling them when grandma dies, when you’re going to leave town because you want to move out of state. When there’s a house in terrible condition and someone needs a quick sale. When you hear about someone going in foreclosure, call me first. That’s how you’re going to get ahead. It’s not just sending out more letters, doing more direct mail. Driving for dollars could help, but they’re probably having so many other people going after the same ones. You want a relationship that gives you an advantage over other people so that your phone rings first. And as a general role, I think a lot of people trying to buy real estate for buy and hold are having the same problem as you’re having Victor, where they’re in an expensive market where they want to be, but they’re getting out bid because there’s 10, 20 offers on every property or they auto markets where they won’t get out bid.

David:
But those are some of the riskiest ones. I know this is what happens when you have a lot of inflation and when you have not a whole lot of economic opportunity. Like you can’t keep more money in the bank to get ahead. So there really isn’t an easy solution, but at the same time, the stakes are this much higher that you actually do get property. This is why if I’m buying in a more expensive market and I see there’s ways I can add value to the property, I’m okay paying more than other people would tell you. For the last two to three years, there’s been gurus out there that are saying, “Don’t pay more, wait, the market’s going to crash.” And we’ve just watched the average price point go from 500 to 600 to 700. And it’s all based on rock solid debt to income ratios and comparable values. The market still strong, it’s just climbing.

David:
And so I think that approach of just wait, wait, wait, eventually they’re going to come down. Man, they might get to two million and then come down to 1.4. But if you could be buying it now for 700,000, that’s still a big win.

Michael Nosworthy:
Hello David. My name is Michael Nosworthy. I am currently a 20 year old college student that owns one property that I am currently house hacking up until I graduate, which will be in this December, 2022. My question for you would be which route I should take after graduation? Right now it looks like I have two paths. My first would be to graduate, get my business degree and go get a W2 job where I can save a bunch of money and use those to put towards future investment properties and keep working till hopefully I don’t have to anymore. Or my mentor recently offered me a job at a firm, which basically focuses on investment properties if I were to get my real estate license.

Michael Nosworthy:
And I think that would be a really good offer opportunity as well, for me to get more familiar with just the real estate world, since I’m so young and new to everything, but I know that W2 would probably pay more. So, I’m pretty conflicted. I would love to hear your opinion on what you think I should do. And also if you had any other advice for a young, new, real estate investor. Thank you.

David:
Really good question here, Michael. And you’re taking me all the way back to when I was 20 years old and I was in a similar situation to you. So, let me take a stroll down memory lane with all the BiggerPockets here. When I was 20 years old, I was working at a restaurant called Isadore’s in Manteca. And around that time, I had been introduced to my first mentor Tim Rhodes, who we did interview on the BiggerPockets podcast. Tim was the top agent in town. He literally ran commercials on TV in Manteca. So he was kind of a big deal around here. And he called me and said, “Hey, I heard you’re a kick butt worker that you’re doing a great job. I’m looking for someone to come work with me. Do you want to learn the business?” I do didn’t know, he actually called it prospecting. I did not know what prospecting was, but I knew if Tim Rhodes was calling me, the answer was going to be yes.

David:
So I went to work for Tim Rhodes. And what that meant was I was cold calling people saying, “Hey, I see that you’ve had a notice of default issued. You may be losing your house. We want to buy it from you before you go into foreclosure, give us a call back. And if we can buy your house, we will.” I had the script that I would just do over. It was just calling and calling and calling and leaving voicemails and talking to people on the phone. And eventually I would drive to their house and I would go meet them. Now, I was the most introverted, shy. It was a horrible role for me to be in at that time of my life, but I was just stubborn. And so I pushed through it and I would get a certain amount of money if we set an appointment, a certain amount of money if we closed on the deal, and a certain amount of money if the deal was over a certain amount.

David:
And he would have the agents on his team that would start to negotiate with the people once we determined that they were interested in selling to us. Now, here’s what I did. I was working at a restaurant, I was in college and I was working for him. And then I went through a period of depression in my life where it got really hard and I had to let go of one of those three things, college, the restaurant, or working with Tim. And I let go of working with Tim, because I saw it as the least guaranteed the least safe. At the time it made sense. I really wish I could wind back the clock and not do that. So what happened is about a year after that, Tim completely retired from real estate. He had no team. He had no one to hand his business to. He ended just referring everyone to another agent in his office, built himself a cabin in the woods and became a skiing bum.

David:
I would’ve inherited his entire empire if I had stayed there. Now, I don’t know if it’s the same for you, but with my love of real estate and my knack for it, and then you gave me all of that at that age, I would’ve been a mega star if I had stuck with it. The reason I didn’t was because I wanted the guaranteed money of being a waiter. It was a little bit more money that I was making waiting tables than I was with him in my first six months or 12 months of working with him. I say that because I had no debt. I live with my parents. I had no family. I had no kids. I had no reason to value safety as much as I did. I was just scared. And if you have a mentor that’s as good as Tim was to me, who eventually got me into GoBundance, and then introduced me to Dave Osborne who got me into Keller Williams. And now I’m one of the top agents in the entire company of Keller Williams.

David:
And I’m at where I am today because real estate worked out really good for me, right? So Tim was a great mentor. If you’ve got one like that, I think you got to take advantage of that opportunity. You might make a little bit more, but that’s only in year one. And this is the mistake everyone makes, they buy a rental property looking at year one returns. You’re not buying a house for one year, you’re buying it for 30 years, 40 years, 50 years. You want to look at what’s this thing going to be doing for me in 20 years? Right? That’s the difference between buying a place in Malibu, California that might not cash flow that great, versus Kansas city, Missouri, which might cash flow really good in year one. But in year 20, they’re completely different profiles. You’re not taking a job for one year. You’re taking a career that could go for the rest of your life.

David:
So, if you take that safe job and then you don’t pursue entrepreneurship with your mentor, you may be thinking you made good money right off the bat, like the sort of the tortoise and the hair, the hair shoots out of the race and they get ahead. But then the tortoise catches them and passes them up. And that’s what I’d hate to see happen. Now, the caveat would be, if this mentor’s not great, maybe you’re using the word mentor, but what you really mean is guru. Maybe this is a person that wants you to spend $50,000 on their course and then let you hang out with them. If it’s a situation where they’re just going to stick you in a room, tell you to make phone calls and not teach you anything and not pay attention to your career, that’s different. But if they’re actually going to show you how real estate works, put you to work, challenge you, stretch you, test you and encourage and support you so that you Don quit, I think you should absolutely take advantage of that opportunity when you don’t have a lot of other bills.

David:
Keep your bills low, don’t go buy a super expensive car. Stay living where your living expenses are as low as possible, value the learning more than the earning. If I could go back to being 20 years old, I would’ve quit worrying about making the most money I could at 20, because the reality is without getting into too many details, I make more money in one month now than what I would’ve made at that wage over like 30 years. So, the money that I thought was really good money, it wasn’t, it just felt like it at that time of my life. The reason I make so much more money now, is the knowledge that I have that I can use to progress. So, if I could go back to the situation, I wouldn’t worry about what I made at all. I would just worry about what I learned. I would just beg every successful person I knew, let me work for you. I’ll do whatever you want.

David:
And I wouldn’t have had a bad attitude. I’ve had a great attitude, I would’ve believed that whatever I did for them was going to be teaching me things that I was going to be able later. I would’ve kept my heart in a really good place where I just wanted to serve other people and serve the mentors that I had and trusted them to take care of me. And then when my time was there, bam, he would’ve handed me the business like your guy may hand you that business someday. So do that unless God forbid something happens where you get your girl from pregnant or you have other responsibilities to kick in life, then safety security does become more important. But if you can keep that from being the case, focus on what you learn way more than what you earn. Okay? I don’t think you should work your life away. I do think you should work your twenties away.

David:
Years, 20 through 30, you need to go gangbusters and give it everything you have and work as hard as you can and then in your thirties you will be making incredibly good income based on what you learned. Thank you for asking that question. All right. That is our show for today. Seeing Green, meaning you guys get to see real estate from my perspective. I freaking love doing these. So thank you guys very much for submitting the questions that you do. I especially like when they’re not just real estate related, but when it’s real estate mixed with life, I don’t get to share my own story very often. And it was kind of cool to take a little walk down memory lane there, remembering what I did when I was 20 and what I wish I would’ve done differently. So with the benefit of hindsight, now I can look back and see what choices I made that were great, that led to really good opportunity and what choices I made that were bad that actually stopped me from progressing. And if I can share that with all of you, I’m happy to do it.

David:
The same goes for sharing with you strategies that will work. What I see happening in the economy, how to maximize your returns and the mindset that I’m in and that I think that you should be in if you want to build your wealth. Look, there’s no way that we can avoid the 800 pound gorilla in the room. This is a very unique and challenging economy. We’re printing a ton of money. Money is losing value, assets are going up in price, well, that makes real estate more valuable to own. It also makes it scarier to buy because it’s becoming more and more expensive and it’s going up in value so fast that we feel like we’re losing our bearings. So thank you for joining me with this and keep asking these really good questions. I want to help you. Also, take a minute if you’re following us on YouTube and leave a comment for me telling what you thought about this show, what you liked, what you didn’t like and what you want to hear more from. Lastly, go to biggerpockets.com/david and leave me your question.

David:
Now, if you want to invest with me, I help making investors money in a situation where it’s not tied to the performance of a property, they’re just getting debt on the money that they’re letting me borrow and they’re making a safer turn, you can go to investwithdavidgreen.com and you can register there, and I will get in touch with you to see if what I’m offering would work for you. And if you don’t mind, please go to iTunes and leave us a comment and a rating and a review there. That does still matter. At the BiggerPockets podcast, we want to be the biggest podcast in all of real estate investing as well as the business channel. So we need your reviews if we’re going to get there. We have the best audience in the entire world. You guys are better than anyone else’s show, period. We get better interaction, better attitude, better energy. It’s just great people. You rarely ever hear about a BP person that’s just difficult to get along with. This company, I love working with them because it draws the very best people.

David:
So we want you to get more involved, get in the forums, ask your questions there, read the blog articles, send me a message on the website and tell me what I can do to help you and your business, whether that’s getting you pre-approved for a loan, connecting you with an agent, helping you to sell your house, helping give you a strategy that will help you increase your money or helping you figure out how to save more of your money so that you can invest in real estate. Many of you don’t realize that the BiggerPockets has the Money Show, where they focus on financial independence, keeping more money in your pocket that you can invest in real estate. They have the Rookie Show, which is a podcast that’s meant to help new people learn how rookies can build money. They have the InvestHER podcast, which is real estate from a female perspective.

David:
There’s a lot of different shows the BiggerPockets is offering right now where you guys can be getting more than just here. Now, I want to make sure you stay here, but check out some of those ones too. If you want, you can follow me on social media @DavidGreen24. I’m on Instagram, LinkedIn, Twitter, Facebook, all those places, I would love to hear from you there. Give me a comment about what you thought about the show and make sure you listen to our next podcast, because we make them for you. Thanks to everybody. I’ll see you on the next one.