Seeing Greene: Investing in Paradise, Timing the Market, and House Hacking

David:
This is the BiggerPockets Podcast show 582.

David: I bought properties that didn’t cash flow because I got them significantly undervalue. I bought one in Florida probably five years ago, maybe six years ago that I was able to buy for around 195, and it was worth almost $260,000. It was an credible deal from a wholesaler, but it didn’t cash flow. I didn’t care, I basically bought myself $150,000 of equity, and it’s only gone up since then. Am I okay to lose a couple hundred bucks for a couple years so I can get that? Yes. Now in what circumstance would that be a bad idea?

David: What’s going on everyone? It is David Greene, your host of the BiggerPockets Podcast here today with a scene green episode. On this show format, we take questions from people just like you that have submitted them to biggerpockets.com/david, and I’ll do my best to answer them for everyone here. Hoping to give you some practical advice and maybe some insight into how real estate works so that you can further your knowledge, your perspective, your education, and ultimately your success.

David:
Now, if this is your first time here, BiggerPockets is the company that teaches you how to build wealth through real estate. We’ve got an awesome website so check it out at biggerpockets.com. We’ve got a forum where you can ask just about any single question you can think of, and somebody will answer it. We’ve got an agent finder where you can get connected with real estate agents that are also BiggerPockets fans. We’ve got this awesome podcast and a whole bunch of other things.

David:
So if you’re looking for a community of over two million people on the same journey as you, you found it. Today’s episode is awesome. So we get into some pretty deep stuff. We talk about what an agent can do to get their business started and what you as a client should look for in an agent. We talk about zoning issues and what things to be aware of and what things probably aren’t going to be as big of a problem for you. We talk about Hawaii real estate and the approach, the strategy that you should take if you’re actually interested in investing in Hawaii like me.

David:
We talk about how to have a conversation with your spouse if they’re not wanting to invest in real estate or they’re debt averse. And we talk about when cash flow is important and when it might not be important, make sure you listen to that one. It’s always controversial when you take on the cash flow gods, but I think I did a pretty good job of laying out when cash flow matters and when it’s not as important and what the best use for it is, as well as when that applies to house hacking.

David:
Now, I also read some comments from the YouTube channel. So if you’re listening to this on YouTube, please go to YouTube right now and leave me some comments. I’d love to read yours on the next show. All right, for today’s quick tip. If you’re not a BP pro member, consider becoming one. If you become a pro member, you to every single webinar that BiggerPockets has ever done, many of them hosted by me. So when you’re waiting for the next podcast to drop, you can go check out a webinar.

David:
I’ll give you a second quick tip. BiggerPockets has a YouTube channel that has content that isn’t the same as the podcast where me and other people interview different guests, oftentimes in a shorter format where we just go right after the meet and potatoes, and we try to make those fun. So check out some of the interviews that I’m doing on YouTube for BiggerPockets, and then leave me a comment about what you thought. All right, everybody, I’m going to get into today’s show. If you like this, please go to biggerpockets.com/david, leave me a video or a written question. And if you didn’t get a chance to get your question answered, you can always send me a message on social media, I’m davidgreene24. All right, let’s get into it.

Katie Lawrence:
David, hi, thanks so much for taking these questions. I have loved this section of the BP where real people get to ask you things. So I appreciate it. My name is Katie Lawrence, I’m in Arvada, Colorado, and I have an agent-related question. So I’m a long time investor, I have a real estate investment company with my husband. We do fix and flips, We do BRRRRs, we have rentals, renovations.

Katie Lawrence:
So last November, I became an agent. So I have a few questions around the agent side of things. So we’ve obviously selling and buying homes, have worked with a number of agents. So my question is around residential clients. How do you provide value? What are a few things that you and your team do that make you stand out as real estate agents from a residential client perspective? And then the same question for an investor client because that’s why I got into real estate from a licensed perspective because I wanted to buy and sell our own properties.

Katie Lawrence:
So when you’re dealing with an investor client, how do you provide value there? What are a few things that might set you apart from other agents? Okay, that’s it. Thank you so much, and I hope you are having a great day.

David:
First off, thank you so much for such a great question, Katie. That was very sweet, very well articulated and very practical. Anybody who is in Katie’s area, if you work with Katie, I don’t know what kind of service you’re going to get right now because she’s brand new. But I would bet on the fact Katie is going to be a superstar. Why? It’s not just because she’s so nice, she’s asking the right questions.

David:
What Katie is saying is exactly what you want to hear from anyone you work with. What do I have to do to be better? There’s two kinds of approaches to life. One is how do I find an environment that is easier for me to be myself and I can still be successful? These are people that frequently change relationships. They frequently change jobs, they frequent jump from investing strategy to investing strategy.

David:
They’re trying to figure out how do I avoid change and stay comfortable, but still be successful? Then you’ve got people that say, “What do I need to change about me to be successful in this environment?” Now, my personal belief is that there is no way you will not be success if you ask the question Katie is asking. Unless there’s some physical deterrent, like you’re four foot tall and you want to play in the NBA or something where the competition level is so high that you just can’t get there, you’ll be fine, and the competition is not so high in almost everything in life that you won’t be successful.

David:
In fact, most people are not competing with you at all because they’re not asking that question. Now, I’ll give you a practical example for both because you’re asking the right questions and Katie, when you get this down, you should hit me up about being on the David Greene team, I’d love to talk with you about it if this is your attitude. When clients come to us, me, my team, we say the exact same thing you do.

David:
What do we have to do to help this person be successful? And the entire system that has been created has been what we found people need in order to be successful. Either buying residential real estate to live in or are investing in properties that are often residential as well. First off, there’s this misnomer that because I’m an investor, I only work with investor clients or want them, not true. I really, really want people that just want to buy a regular house.

David:
The job is so much easier and I feel like we could do such a better job working with someone that just wants to find a place to live. We actually Excel at that, and then the same comes for selling homes. We’re even better at selling them than we are helping buyers believe it or not. So if you’re listening to this and you’re wondering about that question, I really want to work with people that want to just buy a house. Now, you also will work with investors when they come across your plate, but you need to understand Katie, they’re a lot more difficult to work with because they have a higher expectation, they have a harder standard to hit.

David:
Now they’re going to build more wealth because they’re taking on a more difficult endeavor. That’s absolutely true. And that’s why I encourage everybody to go ahead and do that and use us when you can, but you need to know going into it. It’s harder to make an investor happy, it’s harder to get them what they want because what they’re looking for has more dimensions to it. So the people who want to buy a regular house just to live in want it to be a good house and a good area at a good price.

David:
Investors want all that, plus cash flow, plus a rehab that has to happen, plus they’re going to compare it to every other house that might be better. Plus, they’re looking for ways that they can use creative financing, there’s all these other elements. So in general, if you come to work with my real estate team and you want to buy a house, the first thing we do is sit you down and explain to you, “This is what goes into buying a house. It is a full presentation.”

David:
Now, if we’re going to sell your house, we give a listing presentation that explains, “Here’s our technology, here’s our marketing, here’s how we negotiate, here’s our plan to sell your house, here’s how we’re going to make you as much money as pot possible, and here’s our track record of where we’ve done it before. This is why you want to use us.” Not every agent does that, but many of them will give some form of a listing presentation if they’re good, and if they’re professional, hardly anyone does it for buyers.

David:
We do it for every buyer. If you’re going to work with us, we have to explain, “This is what the process looks like. The contract, the inspection reports, the appraisals, the loan, how the down payment works, how the earnest money deposit works, what a contract looks like, how the system will work when we’re showing you homes, how we’re going to find them, what to worry about an inspection report versus what’s not as important, what the market is like, what different homes are, how fast they’re selling.”

David:
We want you to know when you walk into this exactly what you’re going to be getting. Then we assign you with an agent that we think would be the best fit for your personality. Now, they’re all going to be working with you. So all you have to figure out when you’re new is, is this a person who I mesh well with? My personality works well with theirs, and I believe that I can help them. Setting their expectations is something that many agents shy away from because it can be confrontational, but it absolutely has to happen if you want to be successful.

David:
They’re coming to you because you are the expert. You know the market, you know which houses they can get, you know what price they can get them for. Don’t be afraid to give them the truth upfront and then back it up with facts. Now there’s also going to be an element of customer service, but that’s the easiest part for agents because they’re all really likable people that want to work with others and help others. So you’re probably just from your demeanor on this video, not going to struggle with having a good attitude and being cheerful.

David:
It’s going to be more giving people direction that you want to focus on. Tell them what it looks like and paint a picture as accurately as you can for what to expect, and then they won’t freak out when they actually go on the journey. As far as investors, you’re going to have to be pickier because the word investor is never defined. Just like the word deal is never defined. Everyone’s a real estate investor if they buy a property, even if they live in it, they still invested their money into it.

David:
So when they tell you what they’re looking for, you have to help narrow down with them specifically if it can happen or if it’s not going to happen. And maybe that won’t work, but this would. That’s what I do with investors is they often come to me after listening to this podcast and say, “Okay David, I heard you and Brandon talking and I want to deal at 70% of ARV in the best school district that’s going to cash flow 25%, and I want light rehab. I don’t want a complete fixer upper, and I want to be able to take my time when I see it. I don’t want to feel rushed and I’m okay to wait.”

David:
And the problem with that is those properties don’t exist out here. And if you did find one, it would go so fast, you wouldn’t be able to wait. So I have the unfortunate job of having to educate them on the fact that that strategy won’t work, but this one would. Now, many times that’s just difficult for people to swallow. They don’t want to listen to me, they want to go find another agent that’s going to tell them what they want to hear. So many of those people end up losing money because they don’t take action for a year or two as they’re trying to find that one unicorn that’s out there and prices go up.

David:
Conversely, we have a lot of people that I had to push on and say, “You have to make the decision to buy this house, but if you pass on it, here’s what’s likely to happen.” And those people did trust me and move forward, and they’ve now made hundreds of thousands of dollars over a two to three year period. If they bought even earlier, they have even more. Many of those clients are now coming back and saying, “Hey, I want to sell this property and I want to buy a better one or a couple of them or I want to buy a new primary, and I want to invest out of state.” They have all these options that they can get into.

David:
They never would have bought those properties if I wouldn’t have relied on my own expertise and confidence to firmly stand when I said, “I know it’s scary, but I think that you should do it.” As an agent, you have to have that confidence Katie. You can’t let the client go tell you, “Hey, this is what I want.” Unless that client actually knows what they’re doing. If they have experience, if they have a firm understanding of how the market works and they have a crystal clear criteria, yeah, that makes your job easier, you just go find what they want.

David:
If they’re coming to you, they don’t know how real estate works, assume that they’re going to be wrong about a lot of things and educate them about what they can expect. And then they’ll be able to make the right decision for themselves. I think the best thing you can do is to get deep into what their goals are. So we have a system that I call going three levels deep. So if somebody says, “I want a house with a pool.” Most agents will say, “Check, I’ll find you a house with a pool.”

David:
And then there’s only two houses with pools that are in there, and neither of them are in the right market that person wants to buy in. What we do instead is I’ll say the first level is, “Well, what’s important about a pool?” And they’ll say, “Well, when as growing up as a kid, my grandparents had a pool and we’d have family gatherings and all of us, my cousins and I would swim in that pool and some of my best memories ever were for that time, and I want my kids to have that.”

David:
And I’ll say, “Okay, what was it about that pool that made those memories happen?” And they’ll say, “Well, I guess it wasn’t so much the pool as it was just a place to meet. I guess I don’t need to have a pool, but I do need a big backyard, and I need a big enough home that I can entertain where everyone can feel comfortable. We need to have a bathroom close to the backyard that the kids can go in and out of, and it needs to be in a safe area.” And I’ll say, “Okay, if you can have that, what would it mean to you?” And that’s the third level.

David:
That’s when you’ll start to see tears coming out of people’s eyes. That’s when they’re going to say things like, “I’ve been feeling like I’m a bad mom for the last five years because my kids are living in this apartment complex or the park isn’t safe, and I hate myself every night that I go to bed. I feel like I’m screwing up in life. If I could find a house where I could give them that, it would take so much pressure off of me, it would mean the world to me.”

David:
And they’re just like the water works will just start pouring out. That’s where you’re finding out what actually matters to your client. They think what they want is a pool, what they really want is to feel like a good mom or to feel like they’re making a good financial decision, to feel like they’re leading their family in the right direction. The best agents don’t just to become order takers and say, “Okay, you got it. I’ll go find you that.” Because then they come back and then goes, “I don’t know, it just doesn’t feel right.” And you play that game forever.

David:
Don’t be afraid to establish yourself as a trustworthy person, go three levels deep, find out what matters to them and then propose a strategy that you can actually make it happen for them. They will love you and your business will thrive. All right, next question comes from Kevin B. “Can you go into more details on buying a house for your five year old kid so the house is paid off when they’re 20? Are you getting the loan and property in the kid’s name? Are you using a trust or LLC to make the purchase and get the lending? Are you just buying it in your own name with plans of giving your child the funds in the future? I love this strategy and will love some more info on what Brandon has done for kids and what you have seen happen before I proceed completely from a blank slate.”

David:
Kevin, so cool that you’re looking to do this. I don’t want to speak for Brandon, but I feel confident enough from the conversations that I’ve had that I’m pretty sure I know what he did. And even if it’s not what he did, what I’m about to tell you would work for you. You’re overthinking it when it comes to should I put it in a trust? Should I put it in my kid’s name who’s five years old. You’re probably not going to find a lot of lenders that are going to give your five year old a loan.

David:
So all you need to do is buy the property in your own name with the intention of giving it to your child when they 18. That can be selling the home and giving them the money, that could be transferring title from your name into their name, that could be putting on them on the title and helping them to build credit so that eventually they can refinance it out of your name, you’ll have a lot of options. What’s important is that you create those options by building equity.

David:
What you want to do is get that property and put it on. If you have a five year old and you want to give it to them when they’re 20 paid off, it needs to be on a 15-year loan. So you’ve got to go find a property that you can afford with a 15-year loan that will grow over time. When you get there, all of these questions can be answered relatively easily. You won’t have to worry about it. Transferring title is not that difficult especially if that person is able to refinance the house from you or you could sell it and give it to them.

David:
You just add them to the title and let them take the cash flow and let them do what they want with the equity through your name. I think as long as it’s your child and you trust them, you don’t have to worry about it. Don’t put this much pressure on yourself to get it down right. As is you’re building equity with that property and you don’t lose it to foreclosure because you buy it wisely, you’re going to be fine, and your kid is going to be set for life.

David:
Plug, check out Scott Trench’s book Set for Life about how you two can help set yourself and your kids for life, biggerpockets.com/store. Okay, next question comes from Gemma Silva. This is a two part question, part one. “Hello David.” Hello Gemma. “First of all, thank you for your work at BP. I always listen to your podcast.” Oh, well thank you. “I do want to buy my first rental property. I currently own the house that I live in so I was trying to buy the second property to move into it, house hacking, but the bank doesn’t give the option of conventional 5% down. It says that it is an investment property and I have to put 25% down because I already own a property. I do not know how that specifically works.”

David:
Okay, so I’m going to have to basically speculate for the bank, but I can give you an idea of why this could be happening. And I also want to encourage you to reach out to us at the one brokerage. You can email me on BiggerPockets, you can look up my website, whatever you want to do, and I can have one of my team members look at this for you. Here’s what I think is happening. When you own a primary residence and you try to buy another primary residence with a primary residence loan, this is the 5% down conventional loans.

David:
Bank underwriters will often look at that or I say bank underwriters, it could be any form of lender. And they would say, “Well, we don’t think you’re actually buying a primary residence. We think you’re buying an investment property because why would anyone move from where you are to where you’re going?” And they will often deny loans for that reason. And so they’re telling you that if you put 25% down, you can still get the house because it has to be a investment property, but that doesn’t work for you.

David:
This happened to me when I bought my house. So I was moving from one city to another and I was trying to buy a primary residence. And the bank said, “Well, he’s moving further away from work. Why would he be buying this to live in if it’s further from work than where he’s actually at right now?” And this was before I even owned a house. I was renting a house. And so we had to write a really long explanation that explained I couldn’t afford to buy a house closer to work.

David:
I had to buy this house that was further away and then it happened to be a second time when I tried to move from that house into another one where I had to make the argument that my work location changed from one place to another and I was buying my next house to be closer to that work location. It was always a big pain. Now, that may happen and you might not be able to get around it, but sometimes you can if your loan officer is diligent and hardworking enough.

David:
You need one that’s going to fight for you. You need one that’s going to write a letter to the underwriter and make a case that says, “No, this is absolutely why she’s changing from one house into the next.” She needs more space or she needs to down space or there’s something that isn’t working about your current house. Maybe you need a bigger yard, maybe you got a dog and you have to find a different place.

David:
There needs to be some explanation that your loan officer give. So for part one of your question, that’s what’s most likely going on. And my recommendation to you is that you have your loan officer fight for you a little harder. Part two. On the other hand, let’s say that’s okay. I will buy anyways, and as an investment property and I have to put 25% down. Here’s the question. This house that I’m looking at is this single family home from an investor who owns a couple properties in the area.

David:
This specific house that I want to buy, he or she is renting the bigger part of the house to a person and the smaller part to another person, but the zoning of this property is R-1, legally described as a single family house. So the real estate agent that I’m working with says that if the appraisal comes as a different zoning that it has now, because the current owner is renting out to more than one family, the following could happen.

David:
The bank could deny my loan even given a 25% down. If for some reason I get approved and can make to the closing, the city could sue me of make change the zoning of the property or the neighbors could sue me because I’m using a single family house as a multifamily house. The current owner listed as a multifamily even though it is a single family house legally and he or she won’t … The legal process to change the zoning so the buyer will assume all responsibility.

David:
I think she means they won’t apply to change the legal process or won’t apply the legal process to get the zoning changed. The seller is not going to do anything. I am scared. I don’t know anything about zoning, I don’t know what to do. Do you have any thoughts on this situation? All right, I do have some thoughts here Gemma. I’m not a lawyer and you are asking legal advice. So we have to be careful about how we handle this.

David:
The best course of action would be to talk to an attorney about this and say, “Can I be sued by my neighbors by the city? Under what circumstances would they sue me? Is there any case law for this happening before? How did the judges rule?” So you want to know what you could be getting into first off. You also want to make sure that it’s not breaking the law. Then there’s a practical component.

David:
People are doing this in many neighborhoods all over the place because we have an extreme housing shortage. If this person is living in the home and it’s their primary residence, and then they’re renting out a part of their home to someone else. A lot of the time, these zoning rules won’t apply if you live in the house and every municipality is different. You have to check in with their specific codes.

David:
I’m sad because your realtor should be doing that for you. Instead of telling you might get sued which sounds like it’s their way of saying, “I don’t want to deal with this.” They should be digging into this to find out if that’s actually the case because in many neighborhoods that I’ve come across, if it’s a single family home, it’s true that you’re not allowed to rent it out as a duplex because that would be a zoning violation. It’s not a two unit house, but if you’re living in it and then you have another person that’s using it, a lot of those rules at that point stop applying.

David:
You’re just renting out a part of your own primary residence. The last thing I would probably say is some cities care about zoning more than others. It typically only comes from a neighbor complaint if they make a big deal that the city may come and say, “Hey, you’re not supposed to be using this as a rental property.” Oftentimes though that just isn’t the case that your neighbors aren’t going to complain unless you give them some reason to and many people in your neighborhood might be doing the same thing.

David:
So I can’t really tell you, “Yes, go forward and do it.” And I can’t really tell you, “No, don’t do it at all. You shouldn’t do it because people are doing that all over the place.” I think that the best case in this situation is to get advice from an attorney, tell them what your concerns are and then call the city. I wouldn’t give them the address of the house, but I’d say, “Hey, I want to buy a house and I want to rent out part of it while I’m living in it. Can you put me in touch with the zoning department so I can ask them if they care?”

David:
And then just talk to somebody from the city and say, “Hey, if I buy this house and I live in it and I rent out the back part or I have an ADU or something, is there an issue?” And most of the time, they’re going to tell you no. That’s what happens with my team. We call when we have these questions for our clients and we ask the city, we tell the client what they said and then the client gets to make the decision.

David:
So I wish that I could be a little more particular. The problem is once you’re getting into legal grounds like that, I can’t be super specific, but I would imagine that in many cases, this is something that you’re thinking about more than the city actually would be themselves. It’s not exactly the same as if you’re going to try to do construction on the house and not pull permits. Then the city does get involved, they’re actively looking for stuff like that.

David:
Okay, we’ve had some great questions so far and I want to thank everyone for submitting them. On previous episodes that we’ve done, we’ve reviewed the comments. And in this section of the show, I’m actually going to go over the comments that people have left and share some of my favorites. The first one comes from Paul Richardson or maybe it’s Richardson Paul, I don’t suppose Richardson is a first name, that sounds like a last name.

David:
So maybe this is just, maybe Paul is very fancy, and he likes to introduce himself with his last name first. “Aside from the knowledge given here, I commend this approach on assisting those in need on their journey. I listen to many podcasts and love the patience and attention given to the quest. I have not once heard a guest being rushed through their question or multiple questions. Thank you.”

David:
Well, thank you for that, I appreciate it. It is a lot of podcasts that we’ve done with a lot of different guests and some of them are nervous and we do try to make them feel more comfortable. Sometimes they get to rambling. And so we have to get them right back on the right path. But in general, we want to share the stories of the people that are just like you so you can get their perspective. And then the host just keep everybody on the path.

David:
Next comment comes from Jake Hufine. “Great conversation here. I really have found the Q&A style podcast the most helpful as they are jam packed with golden nuggets of information. Golden nuggets or green nuggets. The ability to have multiple subset conversations on different topics is valuable compared to typical BP podcast style where we are typically focusing on one topic the entire time.” Well, thank you for that, that is a good point.

David:
Usually when we bring in a guest and we have a topic, they Excel in one niche or they have some strategy or they’re an expert in some area. So you’re getting a deep dive on that thing. But these shows are definitely more practical answers that you can take and go apply into your journey right away. So I’m glad you’re liking it. This one comes from someone who called himself the best thing that never happened.

David:
“David, I’m loving the style of videos the last few months. I’m also in Hawaii, can you discuss strategies for real estate investing on Oahu or at least your Maui strategies?” Yes I would. Now this is something that comes up a lot because I have a partner in Hawaii who helps the clients that want to be investing there, an expansion partner. And a lot of people know I’m buying in Hawaii so they come.

David:
Here’s a few things that you need to know about Hawaii real estate. One, it typically works on Hawaii time which is not like a New York minute. Things go slower, and who you know is incredibly important when it comes to getting things done. Two, getting people to do work out there is typical that in many other markets on the mainland, there’s not as many contractors that are there and there’s not as many people I found that are hungry for work.

David:
You don’t go to Hawaii because you want to work your butt off. There are hard working people there, but in general, I would say that finding labor to do work is more difficult. Three, in Hawaii, the short-term rental laws are strictly enforced. For a long time, people have been buying short-term rentals and they’ve been playing fast and loose, right? Maybe it’s not zone to allow, but nobody’s checking, that’s not the case in Hawaii, you don’t want to play over there.

David:
They have city officials that will drive around actually investigate you. And have you taken to court if you’re using your property as a short-term rental, meaning less than 30 days. And I believe the fine is $10,000 a day for the time that you’re doing that. There’s lots of reasons why there’s some political pressures in Hawaii that are a little bit different than in other areas, and it’s understandable.

David:
There’s a lot of people that don’t live in and are not from Hawaii to buy properties there, they rent them out, it drives up the price. It makes it harder for the locals to be able to afford real estate. So you need to understand the political environment if you’re going to want to invest there. There’s also a very strong hospitality industry that’s a little protective over some of the people that are using short-term rentals that guests can get around having to book in those expensive hotels.

David:
Now that’s the downside. Let me tell you about the upside. It’s freaking Hawaii. It’s one of the most desirable locations in the entire world. The weather doesn’t get bad there, the amenities don’t go bad, it’s paradise. Anytime you can buy a property in paradise, you’re probably not going to regret it. There’s also a lot of development that’s happening on that island, it tends to just keep getting better and better and better.

David:
So a lot of the properties that were built 30, 40 years ago have only improved in both price and quality because they’ve built around them. Other properties, other stores, other shops, other entertainment, there are certain areas in Hawaii that are zoned for short-term rentals. So the properties that I’ve bought out in Maui are in a very specific location where it’s legal to do short-term rentals, and that’s one of the reasons that I bought them.

David:
If you buy outside of that area and you try to do a short-term rental, that’s where you get in trouble, that’s why I have an expert in Hawaii that knows Oahu and knows Maui. They can help you avoid some of the mistakes that people make and also fight hard to get you into contract when not every agent out there is willing to put in that same kind of work. Lastly, the financing is different in Hawaii.

David:
The lenders work off of different regulations and rules in many cases, and in general, I’d say they’re a little behind the times. Things move a lot slower, it’s very hard to get escrows to close quickly, so I’m working on that too. I now have licensing that we’re working on in Hawaii, we can do loans out there. That helps our clients somewhat and it helps people close deals that normally couldn’t, but don’t expect to have the exact same experience with your loan in Hawaii that you would have in some other areas.

David:
And the last thing that I will say is when you’re buying in Hawaii, you really are taking a long term approach. You’re probably not going to crush it with incredible returns right off year one because that’s not normal for that market. What’s normal for that market is the demand continues to increase. The building is very limited, the city restricts how much properties are actually able to be built, and the zoning is pretty tough. So the value of the existing properties just keeps going up.

David:
If you’re going to buy in Hawaii which I recommend that you should just like I did, take a long term approach. Look five years out, 10 years out and look at how much wealth you can build. And then compare that to maybe somewhere in the Midwest that might get you quicker cash flow returns, but see if they’re going to be able to maintain that advantage over Hawaii. In most cases, the answer is they won’t. All right, are these questions and these replies resonating with you?

David:
Have you too wondered, “Where is David Greene investing? Can I invest where he’s doing? Can I invest with him? What would David do? What would Brandon do? What would anyone at BiggerPockets do?” Well, that’s great. You should be thinking those thoughts and you should be asking your questions at biggerpockets.com/David. I promise, everyone thinks that they’re the only one asking the question, but everyone else is always thinking the same thing.

David:
So please give us your submissions, let us know what you’re thinking. We will pick the best ones and we’ll put them on this show. And before we move on, take a minute to scroll down the comments and just leave one there for me. Let me know what you think about the show, what you’ve liked so far, what you liked on past shows and what you hope to see more of. We read those. We may pick your comment out to read on the show, especially if it’s funny or unique. And we also adapt the show based on the feedback we get from people for what they’re looking for.

Chris Rila:
Hi David, Chris [Rila 00:30:17] from Irvine, California. My question is what do you if you would like to accumulate good debt in order to buy real estate property when your wife is fully against accumulating any debt? Thank you for your time. Appreciate it.

David:
All right, thank you for that submission Chris and nice to know you’re in Irvine. I know that’s a great area. We sell property up that way. All right, your question is how do you get your partner, in this case, it’s your spouse, but this could apply to anyone who wants to buy real estate with somebody else on board with the idea of taking on debt.

David:
Here’s the first thing you have to understand, and I’m glad you pointed out good debt. You didn’t just say any debt. My guess is the person, in this case, your spouse is interpreting all debt as the same debt. You called it good debt, you’re probably doing that because they’re having a hard time seeing it as good. I have to speculate here, but my guess is your partner looks at this as debt equals risk. If you can take less risk and have less debt, life will be better.

David:
It’s a moral thing for people that are in that position, and it makes sense. I was that way at one point too, borrowing money from someone is usually bad, especially because you now are indebted to the person that you borrowed the money from. You’re losing some freedom in some ways. And frankly, for many people, borrowing debt is not the best thing for them to do. If they’re not educated on real estate, if they don’t have the means to pay it back, if they’re taking out bad consumer debt, they probably shouldn’t be taken on debt.

David:
They should be saving up money and buying the things they want in cash. Now in my mind, real estate and other asset classes are different. And what makes them different is if the thing you are buying with that debt is going to pay you a return. I would recommend having your wife listen to the episode that I did with Tom Wheelwright who is a CPA, and we talk a about how debt actually lowers risk.

David:
It may take a couple listens and a couple conversations to get that point across, but that’s a really good place to start. I would also listen closely to what she’s saying when she tells you, “I don’t want to take on debt.” I talk about going three levels deep on my real estate team. So what a lot of people make the mistake of doing is I hear someone say, “I don’t want debt.” And they say, “Well, debt’s good.” And they just argue.

David:
What’s better is if you said, “What is it about debt you don’t like?” “Well, I don’t want to lose our house.” “Okay, so what I hear you saying is you don’t want to lose security.” “Yeah, I want to feel secure and debt makes me feel nervous and insecure.” Okay. So what would it look like if we were able to find a way to take out debt that was not putting us at risk?

David:
If it didn’t jeopardize our security, would you still be against it? Maybe they’re going to think a little bit more. And then your third question could be if I could figure out a way that we could do take on debt, but it would grow wealth and make us more secure, would you be interested in it? What you’re really dealing with is likely a security issue, not a debt issue. And if you can paint a picture for your wife of how taking on debt will help set a stronger foundation for your family’s finances, will protect you against downturns, will protect you against job loss, will help you build wealth that is tax free that you’re not going to lose, and it basically could become a reserve of equity that you could tap into if there was an emergency.

David:
There’s a lot of ways that you can show how real estate investing is not just increasing risk for no reason. It’s actually reducing risk in other areas of life. And then just make sure you’re listening when they’re telling you why they’re nervous about it. That’s the advice I’d give to everyone else. When someone says they don’t want to do something, don’t try to change their mind. Keep asking questions to get to the bottom of why they don’t want to do it.

Scott:
Hey David, my name is Scott. I am living in California. I have a rent property back in NC, North Carolina. My question is since the price of these rentals have increased and it’s really hard to make them cash flow, should I just accept some negative cash for a rental property at this moment and get in and then lock in some really low rates? Or should I wait until they drop the price? And whenever the cash flow makes sense and then make the investment.

Scott:
However, I am sitting on some cash and I don’t know if I should go in now or wait. I might never be able to find a positive cash flow probably anytime soon. And I don’t want to wait until the mortgage rates increase. So yeah, let me know your thoughts. Should I look somewhere else or should I just go into these markets?

David:
All right. Thank you very much Scott, we’re neighbors in California so it’s nice to meet you. Okay, I’m going to guess that the majority of listeners as they heard you asking that question were screaming at their phone or their car or wherever they’re hearing this. “No, don’t buy. If it doesn’t cash flow, don’t buy it.” Before I make a broad generalization like that, I think we need to clarify what cashflow is, what purpose it serves, and if that’s the right thing for you.

David:
First off, let’s just be honest with ourselves. Cashflow is one way that we make money in real estate. It’s often our favorite way, but it is not the only way we make money in real estate. We make money in real estate by paying our loan down. We make money in real estate by the value of the real estate going up. We make money in real estate by refinancing and tax free and reinvesting into other assets without having to sell the one we have.

David:
You can often make money in real estate by avoiding paying taxes on other ways that you made money in real estate using depreciation. There’s a lot of clever ways that we make money in real estate. And yes, cash flow is absolutely a very important one. I don’t want to discredit that. Let’s go a little bit deeper. If I look at all the money I made in cash flow in the last 10 years, and I compare that to what I made paying the loans down and growing the equity, especially if it’s a combination of having the property value go up and the loan being paid down, I made way, way, way, way more in equity than I did in cashflow.

David:
So over a long period of time in almost every single circumstance, you are going to make more by buying and letting the property appreciate. Here’s the other thing we don’t talk about. Rent appreciates too. Buying now might not cash flow right away, but what if it’s a circumstance where it’s going to cash flow later and in 10 years, it will be cash flowing much more than something that somebody bought right now that cash flowed today?

David:
I’m just setting the table, don’t crucify me yet. I’m here to make a point. Where is cashflow important? Well, cash flow is important for several things. If you don’t have income coming in from other areas of your life and you need it to live on, cash flow is incredibly important and you shouldn’t buy anything that doesn’t cash flow. If you don’t have healthy reserves, or if you don’t make a really good income and save your money, otherwise you’re not financially responsible, cash flow is incredibly important.

David:
If we look at the ways that real estate makes money, the key is time. Time to pay down your loan, time to let it appreciate, time to let your rent grow. Time is a crucial, crucial ingredient in the wealth building element of real estate investing. Cash flow helps make sure you can make the payment so that you keep the property over time. I’ve said many times, cash flow is best used for defense. Cashflow makes sure you don’t lose a property, it’s not great for offense.

David:
It’s very difficult to build any significant form of wealth by saving the couple hundred bucks or even the thousand bucks a month that you might be saving in cashflow. Just think about if you have a property that cash flows a thousand dollars a month, $12,000 a year, that is really, really good in most cases. Then compare that to properties that might go up 50 to a 100 to $150,000 a year. That 12,000 doesn’t look that amazing when you’re putting it next to a $100,000 of growth, and many people will say, “Well, the growth isn’t guaranteed.”

David:
And I will say that is absolutely true, and neither is the cash flow. Anyone that’s invested in real estate for a significant period of time has seen cash flow is not guaranteed. You don’t know what your tenant’s going to do. You don’t know what’s going to go wrong in the property. It takes one tenant trashing a place or not leaving or needing to be evicted. It takes one air conditioner breaking or roof leak to destroy cash flow sometime for years.

David:
So it is fair that we need to talk about cash flow is important. It is not fair to make it sound like that’s the only thing that matters in real estate investing or that it’s somehow safer. Now, prudent investors do look for cash flow and I think that you should. Let’s talk about a scenario where cash flow isn’t as important. I’m about to drop a bomb here. I bought properties before that don’t cash flow.

David:
I’ve bought other properties that cash flow very strongly, but for someone in my position, cashflow is actually relatively unimportant. I have revenue coming in from probably 25 different income streams of different properties, different businesses that I own, different royalties, different things that I’m involved in. So the cashflow from one of those streams, one property in an income stream is not as important to me as others.

David:
In my overall financial position, the cash flow of a property does not mean as much. I bought properties that didn’t cash flow because I got them significantly undervalue. I bought one in Florida probably five years ago, maybe six years ago that I was able to buy for around 195, and it was worth almost $260,000. It was an credible deal from a wholesaler, but it didn’t cash flow. I didn’t care, I basically bought myself $150,000 of equity, and it’s only gone up since then.

David:
Am I okay to lose a couple hundred bucks for a couple years so I can get that? Yes. Now in what circumstance would that be a bad idea? If you can’t make the payment, this is what I’m trying to get at. Cash flow is used to make sure your mortgage payment gets made. If you can make that payment from other means, it becomes less important. So my question to you Scott, with this money that you’re sitting on, and you’re thinking about investing, are you doing anything to make cash flow with that money currently? Because inflation is eating it up.

David:
Are you buying in a market where you want the asset? It’s likely to go up in value, the rent is likely to go up, it’s not going to cause you a headache. It’s an overall strong, fundamental market. Can you afford if you’re going to lose a little bit of money every month to keep that house afloat for a couple years until rents go up? Do you have a significant amount of money set aside in reserves that you were disciplined enough not to touch if you want to move forward and buy this property that doesn’t yet cash flow?

David:
Now I can already see in my mind I’m going to get some hate mail for giving you this advice. I’m just trying to broaden people’s perspectives. It is very, very good to look for cash flowing properties. I would say it’s not absolutely crucial for everyone, it depends on the person. If you’re listening to this and you’re living paycheck to paycheck, and you don’t have any money in the bank and you’re tired of waiting and you’re like, “I just need to buy something. This money is burning a hole in my pocket.”

David:
You’re not the person that should say cash flow doesn’t matter. You definitely need it to matter. If you hate your job and you hate your life and you need to just get some money coming in so that you can get out of that position and put yourself in a place where you can chase your dreams, cash flow is very, very important. If you’re someone like me that doesn’t really even need cash flow until I retire and stop working or has other streams of income, cash flow is not as important.

David:
So you have to take that approach when you’re making these decisions. Scott, I think you have a pretty good idea about what your family’s needs are and how prudent you’ve been with money. And if you feel good about it, look for the upside and be delay gratification, be disciplined. And if you can be a good manager of your own wealth and money that comes into your own household, not having it cash flow would be acceptable.

David:
The next question comes from Mark R. In Wellington, Colorado. “I recently left a W2 job, but now I’m realizing that in order to make another home purchase and put my former residents up for rent that I’ll need W2 income as my realtor pay won’t count for about two years or more since it’s employment. Do you recommend that someone in my position go back to their old job in order to keep advancing in real estate? Or do you suggest they look for off market land contract deals to get in their next property or another strategy altogether if they don’t want to wait for two full years of self-employment income? Thank you a ton for the podcast also, and former law enforcement officer.”

David:
Well, thank you very much for your service there. All right, you’ve got a couple options you could look at. One, in some cases you can get a co-signer and use their income, and if you can find someone to do that, you’ve solved the problem, you don’t have to use two years of your income. Two, you can wait and once you have two years of income, you can use that. Three, you can find alternative loan products. Now, I’m not talking about subprime loans that are shady.

David:
Our company has loans that work exactly for people like you. For whatever reason, their debt’s income ratio isn’t strong enough, or they own too many rental properties to qualify, or they haven’t worked at their job for long enough or sometimes the income that people make, they’re not allowed to use it to qualify you because it’s based on bonuses or commissions or something that isn’t consistent. And we have loan products that will let you use the income of the property to qualify for the property, and there are conditions go into that, right?

David:
You probably wouldn’t use this loan if you’re going to buy a house you’re going to live in because the lender wants to know that it’s going to be generating income. But I think you should talk to us about that and let us figure this out for you. The other thing, if you’re listening to this and you’re having these same kind of problems, it’s probably because you’re going to the wrong loan officer.

David:
If you just walk into a bank like Chase or Wells Fargo or something and you ask that loan officer, “Can I get a loan?” They’re probably going to say no because they don’t have a product that will work for that. It’s like going into an Italian restaurant and asking for a burrito. They’re going to say, “No, we don’t serve burritos here, and we are not trying to help someone that wants burritos, that’s not our job.” And then you’re going to walk away with your head down thinking, “Oh, this sucks. I can’t get a loan.”

David:
But if you go to a catering company and you say I’d like burritos and they say, “Let us go find you a great burrito truck and have it come to your house.” That’s a different story. You want to look for a loan broker in these cases, it’s their job. This is the kind of business I have where we go look at different lenders and say, “Who has a product that will work for Mark here?” And then we propose, “Here’s what your rate. Here’s what your terms would be. These are 30-year fixed rate products. You don’t want to get into anything that’s adjustable or fishy in order to try to buy real estate.”

David:
Good news Mark is I don’t think that this is as dire as what you’re probably thinking. You just haven’t been going to the right location and get the right expert in your corner and you can solve this problem. Next up, we have Rob Marks in Philly. “I love your work. Thank you for all that you do. I have a question regarding asset protection. The answer may be dependent on the number of doors. So in my case, I only have two right now, but I’m curious how the answer may change based the number of doors.

David:
My question is what’s the best way to protect my rental properties? Umbrella insurance policy, some kind of writer and LLC. This comes up all the time.” First off, I can’t give you the perfect answer here because I’m not a lawyer, and that would be legal advice you’re looking for. I will share a little bit of information that might make it easier for you to a decision for yourself. First off, your homeowner’s insurance will have protections for you.

David:
One of the benefits of going that road of just beefing up your insurance is that if for some reason you get sued, your insurance’s lawyers are the one that will handle that lawsuit and they are going to be good at this because that’s their full-time job. I talked about this when I interviewed Tom Wheelwright on the BiggerPockets podcast. Number two, an LLC is designed to limit how much access people can get to what’s in that limited liability company.

David:
So in an ideal world, if you have one property and you’re sued and somebody wins the lawsuit, they can only take what’s in the property, but it’s not idea. In many, many cases, judges have said we’re going to pierce the veil of the LLC and we’re going to let this person get assets that were not held in the LLC. So I don’t want you to get the false sense of security that an LLC is airtight and perfect.

David:
An umbrella insurance policy will probably start to make the most sense for you when you get a bigger portfolio. But this is a simple question that one call to insurance provider can answer for you. My recommendation if you only have a couple doors is start with regular homeowner’s insurance and beef your policy up to cover you in case of a lawsuit for an amount that you feel falls within the realm for what previous judges have awarded to people who made claims against the landlord and the damages they received.

Clayton:
Hey David, thanks for the opportunity to ask you a question. My question is related to house hacking in a previous asking or scene green or whatever these is called. You mentioned that one of the niches that you would get in if you were just starting out to accumulate wealth would be house hacking and going to the nicest neighborhood in any town and house hacking in that neighborhood.

Clayton:
Not really caring about cash flow and just buying in that neighborhood, buying a lot of rooms, running by the room. Number one, why did you say that? It seems like it goes against cash flow, the principles of real estate investing. Number two, for whom would the strategy be appropriate? I’m moving to an expensive market and that’s exactly why I’m asking and might even be moving to a place like veil in which the medium bills is incredibly expensive.

David:
All right, thank you for that Clayton. I would love to explain why I said that. First off, I never said house hack and don’t care about cashflow, that’s not what I was saying. I was saying house hacking is the best wealth building strategy through real estate that I know of, especially for beginners and many times, people compare it to buying a cash flowing property and it ends up being a mistake.

David:
Let me break down the numbers for you of why I say you’ll get a better return house hacking than buying a traditional rental property. Let’s say you’re looking at a $200,000 property that you’re going to buy as an investment property and put 20% down. Now there’s going to be closing costs, there’s going to be some repairs, but we’re going to leave those out of this example, and we’re only going to talk about if you had $40,000 to put towards a rental property.

David:
Let’s say you could get a 12% return on that money which is incredibly strong in today’s market and higher than you’re going to find in most areas. That amazing return would turn out to $400 a month. Now let’s compare this to house hacking. Let’s say that you go buy a property with that same $40,000 to live in for yourself. That can buy you an $800,000 property with $40,000 down.

David:
Now you might not have to go that expensive, but you could. So let’s say in this case you go to Vail and you buy yourself an $800,000 property. At a three and a half percent interest rate, putting the 5% down on an $800,000 property, your principle and interest will be 3,413. I have your taxes at right around $800 a month and your insurance will be right around $70 a month. That brings your total to right around 4,280 a month.

David:
Now I don’t know what rent is like exactly in Vail, but my guess is if the property is expensive itself, then the rent will be pretty high. Let’s say you find a property for $800,000 that’s big enough that you can either split it into different units or you find a property that’s already split into different units and you have three of them. Let’s also assume that you can get $2,200 a month in rent for each unit.

David:
Assuming you live in one of the units and rent out the other two, this property will be bringing in $4,400 a month. If we subtract the 4,280 from that, you’re making $120 a month. Now obviously, $120 a month is less than the $400 that you could get if you got that awesome out-of-state property at a 12% ROI, but here’s what you’re not thinking about. You would have to pay rent yourself if you didn’t house hack. So your rent would be $2,200.

David:
Now there’s a couple ways to look at it. You could take your 2,200 in rent and subtract off the $400 that you’re getting in cashflow, and your rent is still $1,800. You’re still losing $1,800 every month. You could take the $2,200 a month that you’re saving not having to pay rent and add that to the $120 that you’re making on the Vail property. That puts you at 2,320 a month.

David:
Now, if we’re comparing 2,320 a month on a primary residence house hack to $400 a month on a long distance, 20% down investment property, which one of those looks better. It’s roughly four are times as much money to be able to do the house hack back in your pocket which puts you at around a 45 to 48% return on your investment. Much better than that 12% that would be incredibly hard to get on a rental property.

David:
Now here’s what’s even better. You pay taxes on money that you make. So out of that $400, you might paying some taxes on that. You don’t pay taxes on money that you save. That $2,200 a month that you don’t have to pay in rent anymore is straight into your pocket, and this is what people always fail to do when they wonder why house hacking is better. They forget to include the money that they’re not spending on rent in the income that the property is producing, but it functions exactly like money that you made.

David:
In fact, it’s even better because you don’t pay taxes on it. Now, as icing on the cake, those other two units that you’re renting out on your Vail property that we just put at $2,200 a month, they’re probably going to go up every year. Let’s say they both go up a hundred bucks a year. Well, next year it’s $200 more and 400 and then 600, then 800. Five Years later, you’re making a thousand dollars more because you bought that property in Vail, that $800,000 great property.

David:
The property you would’ve bought out of state, rents are not going up nearly as much. And as even a cherry on top of that icing, the rent you would’ve been paying in a Vail would’ve been going up also. So your rent would have been going up by 100, then 200, then 300 and you would have been losing money. So when you house hack, you make more money every single year from what your tenants pay you, you save more money every single year from what you would have been paying to your landlord.

David:
You put less money down which means you can afford a more expensive property, if you do it well, you get into a better area and you get to choose where you live. This doesn’t even include paying down an $800,000 homes mortgage that you borrowed 95% of that and all the other benefits that come from buying better real estate. It’s not that it doesn’t cash flow, it’s that it actually makes you way more money. We just don’t call the money that you’re saving and making when you’re house hacking cash flow because it’s a little bit different.

David:
This is part of the danger of getting in these cash flow goggles that you’re looking at all the time as you forget all the other ways that real estate makes you money, and then you get confused. When someone like me says house hacking is a better option. Clayton, I really hope that that answers your question and I highly encourage you to find the best deal you can in the best neighborhood you can in the best place that you can, make sure it’s a place where there’s a high demand for rental property so that you can keep it rented and do this every single year of your real estate journey.

David:
All right, I hope you guys enjoyed that last question, I sure did and I love when you guys asked me the tough ones. So don’t send me the softballs. I welcome you. Please submit your toughest questions to biggerpockets.com/david. I want to know what is getting in the way of your journey. What’s preventing you from taking action because if my knowledge or my perspective or insight on anything can help make it easier for you to take action, I will be very happy, BiggerPockets will be very happy, you will be very happy.

David:
This podcast will not have been a waste of anyone’s time. And if you’ve enjoyed this episode, please be sure to like, share and subscribe on BiggerPockets’ YouTube channel, as well as tell me in the comments what you thought about my answers, what you wish I would’ve done differently and what I didn’t actually get to. You could follow me on social media @davidgreene24, and you can always email me through the BiggerPockets website by just sending a friend request and sending me a message. Keep an eye out for future episodes of The Green Scene Podcast, as well as all the other formats that we’re bringing you on BiggerPockets, this is David Greene signing off.