Seeing Greene: I Can’t Find Tenants! Should I Sell or Lower My Rent?

David:
This is the BiggerPockets Podcast show 9 69.
I am David Greene. He is Rob Abasolo. Today we will be your guides taking you down a journey of real estate investing knowledge and wealth, hoping to make you a little richer, a little smarter, and a little better. Before this is done on today’s show, we’re going to be getting into questions from you, our listener base brought directly to us via bigger p.com/david, and sharing our experience, our knowledge, and what we would do in your situation. So buckle your seatbelt and get ready. This is a fun ride. And Rob, welcome to the show. How are you today?

Rob:
I’m doing well. I’m I got to sneeze. Give me a second. All right, I’m back. I didn’t have to leave, but that may not be the case. Later on in the show,

David:
Rob does have the sniffles. I brought a sneeze of sours Rex with me onto today’s show.

Rob:
Yeah, I was in my studio in la, like my little studio apartment that I’ve decommissioned and it’s got spiderwebs everywhere and it’s super dusty. So my allergies are on high alert today.

David:
He’s sneezy, he’s breezy, he’s beautiful. Cover girl.

Rob:
Yes. And really fast. Before we jump into the episode, if you want a chance to ask your question, please head on over to biggerpockets.com/david. The link is in the description down below. Pause this, send us your questions and let’s jump in. David,

Xander:
I’m Xander from Mil Island, Florida. I have 15,000 saved up and I like to hear some of your real estate wisdom as to how to best use it. As for myself, I’m a creative director by Dave with a homeschooling wife. Last year we dove into real estate using A-F-S-J-A 2 0 3 K loan to do a living, perhaps a flip. We’ll see how the market pans out within the next 14 months. Some of the details around that, we bought the house for 300 5K and we spent 107 K in renovations, but we have not refinanced it yet. So here’s the deal. Within the next five to seven years, we want our mortgage to be gone. We’re thinking about doing a duplex house hack, and then we also want to own a business in a building that we purchase, perhaps do a syndication of something like that. That’s more on the seven year mark maybe. Anyways, so here are the options that I’m weighing as to how to utilize this 15,000. Number one to refinance the house, buy down some points, perhaps do another in addition to that, open a whole life policy and then get my real estate license while keeping my day job, not quitting that. Thanks bp. Want to hear your wisdom as to what you think I should do?

David:
All right, Xander, thanks for this. I got Rob Abba solo with me to tackle this tag theme style. All right, so you’ve got 15 K. That’s not a lot of money, but we have a way that we can get some equity out of a deal. You did. You mentioned that you have a hundred something thousand dollars into a rehab on a brrrr project that you haven’t refinanced yet. So when you refi, you should be pulling some money out of that sucker it sounds like, and you’re probably going to get a lot more than the 15 K. So this is where we’re going to have to start. Before you pull the money out, we want to know do you have a place that you can put that money into another deal? Could you do another house hack? Could you buy an investment property? Could you do a house hack and keep a lot of the money by using a low down payment to go into the next deal? So I think you’re in a pretty good position here. You do have equity and as long as you have equity, you have options. Rob, what were you thinking?

Rob:
Okay, so I guess I don’t know what his RV is, so this is really hard to guide him because he put in 305 to buy it 107 in renovations. If he got a 75% cash out on it, it sounds like he’ll maybe walk out with like 30, 40,000. He’s asking if he should buy down his points with 15,000. I would say, I mean it kind of feels weird with such small numbers here to pay so much to buy down points. Personally, I would rather him, if he has to buy down points, buy them down the minimum that it takes for him to cashflow on this property as a rental. So he’s trying to bur out, turn it into a rental, whatever it takes for him to cashflow on it, and then if he can take the rest of that chunk to then redeploy into another loan like this or another, I guess duplex house hack like he’s wanting to do, that’s probably where I would steer him because he’s already got his first property. This is his first time in real estate. I’d hate for him to just sell a house and I know getting money from it, but the idea is buy and hold and build wealth. If he gives away his first house, he’s kind of starting over again with a little bit more funds. But nonetheless,

David:
Rule of thumb, rule of green thumb, is that what you call it when you plant plants and you’re good with gardening? The green thumb? Yeah. Yeah. My rule of green thumb here on seeing green, if you’re going to sell a house, you only do it if you’re going to put the money into another house. So you’re never actually selling a house. You are trading equity, you’re moving it from one property to another, and the only time that we think you should really do that is if you’re going to get a significant step up in cash flow or you’re moving into a market where you’re going to get more appreciation than you’re getting right now. Or the third exception would be you’re buying something that you have value add or the opportunity to buy equity in. So if you’ve got a property that’s maxed out, you sell it and you could go buy another property that has 50,000 of dollars of equity when you’re walking into it and then rehab potential where you can add maybe another 50 grand, it makes sense to sell a house to move into another one. So it’s basically three things. Step up in cashflow, step up in equity or a better market where you’re going to get equity growing over time, which is one of the things that kind of makes it fun when you’re a active investor is you’re always checking out new markets. You’re looking at new opportunities. You don’t always have cash in the bank, but you do sometimes have equity in real estate that you can move from one property into another. What do you think, Rob?

Rob:
Yeah, that’s true. I would say also, maybe this is covered in one of those three that you said, but I would say considering the amount of capital is on the lower end, right? 15,000 bucks, he’s kind of got to snowball his way into a portfolio and I like the idea of if he’s got this house now, sell it. He still needs to live somewhere, so get the money from this, turn it into a rental and snowball that into another live and flip where he adds value, adds equity, and he keeps stepping that up with every new purchase for the next few. That’s probably what I mean. It sounds like that’s going to be the best scenario for him because if he sells this property, where’s he going to live?

David:
Yeah, that’s right. Now what you could do is you could sell the property, put 3% down on another property, and that’s even better. If you can get a good deal, get into a good location, keep a lot of the money set aside because if it’s a primary residency, he’s not going to get hit for capital gains. Now you’ve just basically moved it from equity in a property to cash in the bank. Now you’re locked and loaded so that when the next property comes up, you can move on it and if nothing else comes up, you just buy another house hack in a year and you’ve already got your capital sitting there and then maybe you’ll have some money to play with what he was talking about with the infinite banking. So you’ve actually got some cash that you can put towards this life insurance policy. Neither Rob nor I are experts on this, so we’re not going to give our opinion because we just don’t know. It could be great, it could be terrible. We only speak on things that we understand, but I’m guessing if you’ve got that money in the bank, he could put it towards some of these ideas that he has and then pull it out to buy the property when the property comes along.

Rob:
Yeah, I’m not going to speak to, I don’t know. I like to use real estate money to buy more real estate. Don’t. I’m not going to learn a new skillset nor advise on it, but I will say his last point here, he’s thinking about getting his real estate license. Now I know you have a pretty pointed response on this type of thing, and if I remember correctly, unless your POV has changed in the last five years, which hey, we all change. We all grow. You don’t really like when people go out to get the real estate license unless real estate being a realtor is what they want to do. It’s not really like a side hustle. It’s not going to be a successful venture if that’s how you treat it.

David:
It can be a side hustle. I don’t like it if they say I’m getting my license just because I think it’ll help my investing. I don’t think it does. I like it if you get your real estate license because your intention is to make money as a realtor so you don’t have to be full time, but you have to be full effort, right? It’s that whole, well, I’m just going to get a license and then I’m just going to fall into some money because it’s so easy just to write an offer for someone and make 10 grand that never happened.

Rob:
Okay, what about this? What about when someone’s like, Hey, I’m going to get my license so that I can save 3% every time I buy a house.

David:
That’s not terrible, but you have to look at the money you’re going to spend to get a license and hold the license and ask yourself if it’s the 3% you think you’re going to get. And you also have to realize in my entire career, I’ve never as a buyer site agent got a 3% commission, two and a half has been the best that I ever got, and it’s now getting into the two percents and with the new ruling, it’s probably going to be become even less than 2%. So you’d have to be able to represent yourself on a lot of houses. If you wanted to make enough money in commissions after taxes to make more than you were going to spend on your licensing on your MLS membership, on your lockboxes, on the dues, you’re going to have to have the local associations. It ends up becoming more expensive to hang your license with a broker and your desk fee, your tech fee, your office fees, and the commission that they’re going to get out of it too. So I just think people think that there’s more money at the end of the real estate agent rainbow than there actually is. That pot of gold is not really so goldy,

Rob:
It’s just the pot right now, just an empty pot. It’s the hardest time to be a realtor, I feel like. I’m not saying don’t be a realtor, it’s just you got to work for it really, really hard in 2020. I mean, it’s a tough time. So I wouldn’t casually make that decision, especially if you’re a creative director. Creative directors at ad agencies, they tend to make six figures at some point in that trajectory. Sometimes multiple six figures, if that’s what you’re good at, if that’s your skill, make money there and use that money to invest in real estate.

David:
That’s exactly right. Now if you’re the right personality for it, you have a ton of friends, all these people are coming to you, you’re referring people to agents everywhere else. Yeah, you want to do the work, keep that business for yourself. But if it’s like Rob said, anything other than the example that I gave, don’t waste the money or the time of getting your real estate license. You’ll lose more than you make, but congratulations to you Xandr for having the equity and the property you are ready to move forward. Just don’t go too quick house hack one property at a time.

Rob:
So use that 15,000 to get into another house hack. Is that the

David:
No? Do the refinance on his brrrr, get some money out of it that you put into it and use that money.

Rob:
Great. And then should he buy down points?

David:
I’d have to see how much he’s spending to get the better interest rate, but in most cases, the interest rates the thing everyone gets excited about, but it usually takes maybe like 10 years before you break even on some of these with the money you got to put down where you could have just used that money to buy a house which bought you another house which bought you another house.

Rob:
Next up we’re going to be getting into an investor loan paydown question. This investor has three properties and a newly renovated home that just isn’t renting. So stick around

David:
And we’re back folks. We missed you. Thanks for sticking around. Rob and I are going to be getting into another question. This one comes Joscelyn. Hi David. So I’m just starting off building my real estate portfolio after years of being leery of the market and being burned in the oh eight crash, I currently have two long-term rentals and I’m moving into a new homestead that has two dwellings, one of which will operate as a short-term rental. The first two cashflow just fine, but I do have a mortgage on all three. Why have two mortgages when you can have three, right? Anyway, my question is should I focus on paying down the new homestead first even though it’s the highest ticket item, or should I focus on paying down house number two, even though it’s rental, I even thought about taking out a HELOC at some point when rates are lower on the first house to pay off the higher 6.87% mortgage entirely instead of refinancing for another 30 year note. Does that make financial sense? What strategy would you use and how would you handle this? Thank you.

Rob:
Interesting. So they’re basically saying, I’ve got a couple of mortgages here, which do I tick off first?

David:
Yeah, and Rob, you live in the good old state of Texas. Would you like to explain to the seeing green audience what a homestead is?

Rob:
Well, basically a homestead, I’m going to read a definition here. I know what it is, but it just sounds better. A homestead is an owner occupied residence that provide homeowners with certain financial and legal protections. So in Texas it’s basically like your primary residence and you just have a lot of, I think it’s harder to get foreclosed on and yeah, I just think it’s a little bit harder to get foreclosed on because of that designation.

David:
Well, is there any benefit to having a mortgage on a primary residence in Texas tax wise?

Rob:
Yeah, you get a tax break, you get a tax exemption for it being is that not a thing anywhere else?

David:
You do get a tax break on interest of a primary residence, but you also get to write off the interest on a rental property because it’s a business, right? So when you have a rental, you claim the income from your rent and then your interest becomes an expense with a primary, there’s no income, so you’re getting to write off the interest as an expense even though there isn’t income on it. That’s why it’s beneficial.

Rob:
So that’s a little different. So in Texas when you have a homestead exemption, I don’t know the exact percentage or whatever, but let’s say that your property taxes are 5,000. If it’s your primary residence and it’s your homestead exemption, it would be less, it would be like $3,000 a year for those taxes. So you get a little bit of a break there.

David:
Okay, so if I’m hearing you correctly, it doesn’t make financial sense to pay off the interest on the primary residence because you’re getting a tax break from having it, right?

Rob:
No, because your interest is still going to be what it is. It just, it’s your property taxes that you’re getting a tax break on.

David:
So then it doesn’t matter which one she pays off first, we should just tell her to pay off the one, the higher interest or the lowest balance. Right,

Rob:
That’s what I was going to say.

David:
Alright, so you got two ways that you can approach this. Jocelyn and I talk about this in pillars of wealth. When it comes to debt pay down, you’ve got the snowball method that Dave Ramsey preaches or you’ve got the interest rate method. The snowball method is more geared towards those who want to stay excited and passionate about paying off their debt. And in that one, you pay off your lowest balance first and then take the money that you used to have on that note and put it towards paying off the one that’s the next lowest balance. It doesn’t make the most financial sense to do it that way, but it does keep you sort of psychologically engaged because you see the progress that’s happening more. The other method is you just take the highest interest rate and you put all your money towards that, you pay that one off and then you tackled on with the next highest interest rate. People like me are kind of naturally motivated to want to pay things off and make progress, so I don’t need the snowball method to stay interested in it, and so I would go towards the higher interest rate. Rob’s probably the same, but if you find yourself getting distracted easily or it’s hard to stay focused on this, I do think the snowball method is more useful than doing nothing.

Rob:
Yeah, I would say this, I guess thinking this through because is pretty nuanced. I mean I guess if they’re similar, the higher interest one for sure, the benefit of paying the higher interest one is that you may see more progress on that loan balance a little quicker if it’s higher interest, most of that it’s going to be going towards interest anyways. So if you’re making extra payments towards the principal, then that just means that you’ll start actually advancing your equity in that property a lot faster the more you pay towards the principal.

David:
Now, Jocelyn, you did say that you’ve thought about taking out a HELOC at some point and using the money to help pay off your 6.87% mortgage. The problem with doing that is you now have a HELOC at a rate that’s probably higher than the 6.87%. Now you got to pay that one off. So I’m trying to see if there’s any reason where that might make sense. And all I’m coming up with is you would just be paying off a 6.87% interest rate with money that you took out at probably a seven, eight or 9% rate. Now you got to turn around and pay that off.

Rob:
So she’s basically saying can she do a little HELOC arbitrage? So if she’s able to find a HELOC that has, I mean if she finds a HELOC that has a three, four, 5% interest rate, is it worth her taking that HELOC to slice off her 6.87% interest rate principal balance? And I don’t think they would make sense to do that unless she could completely pay off that balance. Otherwise, if she pays off, like let’s say 70% of it, her monthly mortgage is still the same and then she’s also paying her HELOC payment on top of it and then she’s going to actually end up paying a lot more every single month. So I like the idea, but I don’t think it actually works in play.

David:
Yeah, you’re right. I don’t think that it would make sense. You don’t take out a HELOC to pay down debt, you take out a HELOC to buy more property or in a market like this to improve property that you already have. Maybe if you can take out a HELOC at an interest rate and then buy something like bonds or stocks or etf, something where there’s a delta, you could try to play that game, but even that doesn’t work great because when interest rates go up, the money on your HELOC goes up. So in general, I don’t like the idea of using a HELOC to be fancy when it comes to paying down debt. I like the idea of using a HELOC to improve a property. You use it for the renovation funds of another project that adds equity to a home, or you use it to flip a house that you’re making a big chunk of money, then you can pay the HELOC

Rob:
Off. Yeah, yeah. I think you get into this world of trying to get clever with HELOCs and unless you’re super dialed in with your analysis, you could end up making a very, very costly mistake

David:
And you don’t want to do that. So Jocelyn, let’s avoid using HELOCs creatively and just for everyone listening in general, let’s not entertain that thought when you’re trying to get ahead. Let’s just stick to what works. How do we make more money? How do we save more money expenses? Can we eliminate how do we take the money that we saved from budgeting and put it towards paying off this debt? How do you make it a game of how quickly you can pay this off if that’s what you want to do? Now, we’re also assuming here, Jocelyn, that you don’t want to buy any more real estate and that’s why you’re paying these off. If you do have the goal of buying more real estate, this would not be a great strategy. You’re not going to have cash to do it, especially if the market crashes. Rob, do you have any thoughts on that? The people that are chasing paying down their debt and then you get a great opportunity to buy real estate, you don’t have any money to do it.

Rob:
You’re saying they’re doing just, lemme clarify, making great progress on their debt, but before they can actually achieve paying it off, another opportunity comes up and they’re like squirrel and they buy more real estate

David:
Or they’ve paid it all off so they’ve got a paid off property but no money because they didn’t save anything. They just put it all towards paying off debt.

Rob:
That’s interesting. Primary or rental either

David:
Way. Just the idea that if you are paying off your debt, you’re likely sacrificing the ability to buy more real estate in the future. You don’t have the money to do it.

Rob:
That’s true. I mean that’s definitely a really, it’s not wrong. I mean if someone paid off their, let’s say investment property, I mean it’s not the investor forward way of doing it. Traditional real estate is like leverage, leverage, leverage, cashflow, cashflow, cashflow. But if someone paid off their debt, now they’ve got a paid off house where they just have 100% cashflow on that property, which would then in turn allow them to save a lot faster because not only are they saving the amount that they were saving initially from paying off the debt, but now they’re actually making cashflow on that property. So I don’t hate it. I like it actually for some people, but it depends on how risk averse you are. There

David:
You go Jocelyn. So if you are motivated, which it sounds like you are, because submitting this to seeing green, just go for the highest interest rate you have and tackle it with everything that you’ve got. As you pay down interest rates, you’re not only paying down the loan, you are also shifting in the amortization schedule, a higher chunk of every subsequent payment to go towards the principal instead of the interest. So you’re actually getting geometric progression going on where three years into paying this down, you’re getting even more progress with every single extra payment because a bigger chunk of that payment goes towards the principal and not the interest, and so it’s not going to be paid off in a linear fashion. It seems like you’re not making any progress and then the next thing you know you’re making big progress and I think in the future we’re going to see more and more people focusing on paying down interest rates, especially if they keep going up.
All right, thanks Jocelyn. Good luck with that and keep us up to date. If you would like to submit a question to this or Jocelyn, if you’re listening to this and you want to update us on it, head over to bigger p.com/david where you could submit a question that we will review and help you build wealth through real estate. Alright, moving up next, we are going to get to the portion of the show where we review comment from previous episodes or questions directly from the BiggerPockets forums. The first question comes from someone seeking advice on a newly renovated home in Akron, Ohio. They say, I recently closed on a newly renovated 900 square foot single family home with three bedrooms and one bathroom in East Akron. I initially listed the property for rent at 1100 but had to reduce it to a thousand. Unfortunately, the only serious applicants I’ve received either have a criminal history, poor references from previous or current landlords or have faced evictions in the past three years with almost two months of vacancy.
I’m growing increasingly concerned should I consider lowering the rent even more, renting to these concerning candidates or pivoting to a short term or midterm rental strategy considering that I live out of state, any advice is much needed and appreciated. We’ve got several responses from the forums that we’re going to be reading to you right after this quick break and we’re back at this segment of the show. We like to read YouTube comments and then get into some questions from the BiggerPockets forum. We’ve got one comment that I want to read and then we’re going to move on to the forums. This came from me asking everybody listening to make sure that they comment on YouTube. It comes from Patrick G and Patrick says, I stopped mowing my lawn to comment on this episode. That’s all that he says.

Rob:
That’s great. Best comment ever. Thank you man. You are

David:
The real MVP. Thank you very much. If it wasn’t for people like you, we would not have a show this. Great. All right, let’s get into the question from the BiggerPockets forum. All right, Rob, you want to kick us off with responses from the forums on this Akron conundrum?

Rob:
Brendan Taylor local agent to the area asked where the property was located as that area code can vary greatly and then he replied after confirming that specific area, I thought that might be the case. I have a few small three bed ranches in 4 4, 3 0 6. They all go for $1,100, but they are better located. Yours is in a worse area. My recommendation is to try to find someone through a MHA section eight list the house on am ha’s home search, better shot at getting the rent you want and maybe a better quality tenant or drop the rent and wait out for a quality tenant, but no matter what you do, do not sacrifice tenant quality. That was as they asked that I was like, yeah, I feel like that’s an obvious one. Never take the bad tenant, right?

David:
Yeah, but it’s so tempting, man, especially when you’re a cashflow investor and you bought it for cashflow and you’ve already made all the plans of what you’re going to do with that cashflow and you’re like, oh, I don’t want to drop the rent and get a better tenant because the whole purpose of doing this was to get cashflow. Now we are looking at it like, well obviously don’t do that because the money you’re going to lose from a bad tenant dwarfs whatever you could have made. But it’s hard to get that perspective when you’re just thinking about the cashflow.

Rob:
I mean, this really does bring up the topic of reserves and why it’s super important to have vacancy reserves, maintenance, CapEx built up for this exact thing in case you have a two month streak of not having a tenant. Another response on the forums, Ryan Arthur investor says, when you have the best product at a given price point, you shouldn’t have to wait for the best applicant at that price. Point two months at an affordable is a long time. The market is giving you feedback. Unfortunately, the neighborhood can outweigh the product, which is the case it looks like, and this is what’s happening. So basically just because you believe you should get a thousand dollars in rent does not mean that the market is willing to pay a thousand dollars in rent. And that just comes down to, I hate to say it, but probably bad analysis pre-purchasing this property

David:
And the bad analysis probably came from what you were told from somebody else and what the spreadsheet tells you. Spreadsheets just tell you anticipated or projected numbers. And if you think you’re going to get $1,100, the spreadsheet does a very good job of saying if everything that you inputted is accurate, this is what you can expect.

Rob:
Yeah, it’s objective,

David:
It’s subjective. That’s exactly right. When you actually go do it, you find that it doesn’t matter what the spreadsheet says because what you projected is not always what you get. And as you’re finding tenants in Akron have more options than they do in other parts of the country oftentimes because investors flood to these lower price point areas and buy a bunch of rental properties and now they’re all competing for the tenant base. And I’ve said this before, the tenant is your Achilles heel. In real estate investing, you only get income from one place and that’s going to be rent money. And so if you can’t get a tenant or the tenants you have to pick from are not very good, that’s where you can lose a lot of money in real estate investing. You just don’t hear people talk about that on their YouTube videos. They always talk about the deals that worked and that they made money on. So what’s your advice? Should they keep the property? Should they sell the property? Should they drop the rent or should they use a tenant that’s less desirable?

Rob:
Well, other question was to make it a midterm rental or a short-term rental. And I guess I’m going to say just because you can make it a midterm rental or short-term rental does not mean that you should. That’s not really, A lot of people oftentimes throw out the midterm rental thing. Oh, well, I’ll just, yeah, I’m thinking about making a midterm rental as if they can just snap their fingers and place a tenant for two to three times market rent super, super easily. It’s not that easy. And also keep in mind that there’s operational expenses with the short-term rental that make it really expensive. And so a lot of people think, oh, well, if a long-term rental brings me a thousand dollars and I cash flow at that amount, if I turn it into a short-term rental that’s going to gross $24,000. I’ll make way more money.
But they don’t understand that cleaning fees, utilities that the owner pays and all of the operational expenses can make it to where you still either break even or lose money. So if you want to do that, make sure you analyze and make sure that the juice is worth the squeeze because you might find that you’re going to work way more to turn this into a short-term rental to make like a hundred bucks a month. And at that point you may as well take a smaller, long-term rental amount and maybe even lose a little bit of money. It’s not going to be worth it. For the short-term rental side of things,

David:
Rob, that’s some great points there. I mean, even if you were going to be getting a thousand dollars a month for a regular tenant and you were able to get a 50% increase going medium term rental, which is $1,500 a month, taking on just utilities, the garbage, the trash, and the water and the sewer alone could be more than the extra $500 you’re making. You might make less money with the medium-term rental, and that’s before all the work that you put into it. So it’s not an obvious, okay, I need more money, let me go. Or short-term, if you’re having a hard time finding a long-term tenant in that neighborhood, you’re probably not going to get a lot of people that want to rent it as a medium term rental either, and you’re going to spend a lot of money to furnish it. So my thoughts would just be sell it, either sell it or section eight, which they did mention my thoughts when they were describing this was like, should I go section eight? If I was going to keep it, that’s probably going to be your only option. But if your only option is like you’re just trying to catch a Hail Mary out of the Section eight program, I’d rather they sell the property, take the equity, put it into a better neighborhood and get a long-term buy and hold that will cashflow in the future after several years of rent increases.

Rob:
Yeah, but do you still feel that way? I don’t want to drag this on, but do you still feel that way? If they are, I feel like I feel better about that if they’ve built the equity and they don’t really have to, they’re basically playing with house money. But what if they don’t have equity or they’re going to take a small loss?

David:
They probably are going to take a loss from what’s being said here in my mind, they’ve already taken the loss, they’ve already planted their tree in a bad area that’s not going to produce fruit. So you either wrestle with it for five or 10 years before you finally accept it’s not going to produce fruit or you get it out of there quickly, you put it into a new area, you did lose some of the equity, but you started the timeline of that equity growing back faster and five years later you feel really good about the decision. It’s kind of like can you take the short-term pain for the long-term gain? Otherwise it’s your pride that’s keeping you holding onto this property. Then if it’s in a bad neighborhood, it’s not like there’s any reason to think that they mentioned that that neighborhood’s turning around.

Rob:
Yeah, it’s going to blow up. Yeah. Okay.

David:
If it was like, Hey, I really believe in this area, I’d say, well then hang on a couple years, but we didn’t hear anything like that.

Rob:
Yeah, I’m just thinking about it. All right. It sounds like they’re pretty close. They’re a little high on the rent. So let’s say they drop it down from a thousand to 900, well, they’re going to lose $1,200 a year. Now granted, keep in mind I’m not typically pro negative cashflow, but my question is, will this property appreciate more than $1,200 a year?

David:
Yeah, but other properties might also, so I’m looking at it, is it going to appreciate the same as if you move the equity somewhere else? So just based on what they’re describing and the poor tenant selection, I am assuming that the neighborhood’s not great.

Rob:
Okay, cool, cool, cool. I think you’re right. I would hate for them to have to lose. What if they bought it a year ago and they have to come to the closing table with a $10,000 check? That’s painful.

David:
Yeah, well, I think they probably will. That’s probably the case, right? Because you’re going to have closing costs, realtor fees, you probably spent some money when you bought it to get it ready. It sucks when this happens. But the only thing you can’t change about a property is where it’s located. Almost every other problem can be fixed by improving the property. Okay,

Rob:
Well hey, good luck to you. And this is also just a great example of the BiggerPockets forums. This is awesome. You go, you ask questions and then the community will come in and answer them. And the best part about it, everyone, it’s free. You don’t have to pay to be a forum member. Rob,

David:
Thank you for your pushback there. You made that conversation a lot better and we were able to get into the weeds with making decisions like this. This is not the only person in this position the last three, four years. A lot of people felt the rush to get into the market and buy something and they went to the lowest price point they could find where the spreadsheet looked the best, and now they’re like, man, I don’t know how to get out of this quicksand. That’s pulling me down. I’m just going to tell people don’t be afraid to pull the plug. Just don’t put the money in the bank and get out of investing. Get out of a bad market, get into a good market and get the clock started faster for like you said earlier, appreciating. Alright, our last question for the day comes from Tyler S you want to take this one Rob?

Rob:
Sure. So a little background, he’s in Virginia. He currently has a student rental condo and single family midterm rental in Richmond, Virginia. He says, I know that this is a somewhat unique situation, but could also apply to those who are going under major renovations on their rental properties. We had a tenant catch our fully furnished midterm rental on fire, alright? And after all the damage was assessed, it is basically a full rebuild onto the existing frame. We have had success with this property as a midterm rental and we were generating about $1,400 a month in cashflow. That’s very, very healthy. My question is, what would you do once the rehab is complete? Do we sell the basically new house for a higher price and 10 31 into something else? Or should we refurnish it, receive funds from insurance for our personal property and continue using as a midterm rental, most likely with higher cashflow since we can charge more for the new condition. My only hesitation with continuing to rent it is the risk of losing the value of our new rehab after a few years.
Okay, well that’s a good question. I mean, they’re basically getting to rebuild this for free with insurance money. I mean it’ll cost them in some capacity in the future, but I mean if they’re not super burned out, poor choice of words, if they’re not exhausted by this whole process, then I would say yeah, renovate it, make it nice and new. If it was making 1400 bucks a month in cashflow, are they really going to find another property that’s going to make more than $1,400 a month and with new renovations, could they now make 1500 to $2,000 a month? That seems to be what they were implying. If the answer is yes, they should just do that because finding something that cash flows 1500 to 2000, I mean even $1,400. Man, that’s hard.

David:
I think the confusion here comes from when you compare what you could do right now to what you were doing in the past, that’s the wrong way to look at it. What you’re trying to do here is compare what you have now to what else you have right now. So you’re going to get a new house from an insurance company, which comes with some equity. Just ask yourself the question, is my return on equity this house as a midterm rental better than if I sell it, pay the closing cost and put that equity somewhere else and do something there. Don’t compare it to what you did in the past. Compare it to what your options are right now. If you look around like Rob said, and you say there’s nothing else that would cashflow $1,500 a month, the answer becomes obvious. You just start over with the house, you charge more and you’re happy that you got a new house with less CapEx and you can charge more because the house is nicer.
But if you say, Hey, there’s a lot of equity here and that $1,500 a month isn’t that much for the amount of equity that I have, then you sell the house and you 10 31 into a different area with better price to rent ratios and you start over with another midterm rental since you’re good at that in that location and then you just factor into your algorithm. Well, which of these two markets do I think is going to appreciate more? Which one seems to have more jobs moving? Which one seems to have higher paying jobs moving into where are the demographics superior with the options? Does that make sense, Rob?

Rob:
Yeah, yeah. But I think their problem is they’re basically remodeling this house and they’re saying, Ooh, look, shiny remodeled house. I can sell it for more now. Versus if they try to sell it in three years, people are going to be like, oh, it’s not new. It’s a three-year-old remodel. I don’t really know if it matters that much. I think it’s less about the remodel time and more about how current the finishes are. So if the finishes and you’re chasing trends and you’re doing things that just look really bad three years from now, that’s what’s going to affect you. But if you have pretty timeless finish house, I don’t really think it matters too much

David:
From my years of selling houses and investing in them, I’ve not come across people that say, I don’t want to buy a house that’s three years old. I want to buy one that’s brand new. If they do think that way, they’re going to a builder. They’re not looking at something on the MLS to go buy. So a good point by pointing that out, I don’t think that that’s very relevant. It’s more of how pretty is the house, whether it’s one years old or three years old, isn’t going to matter to most buyers.

Rob:
And then I think this is worth asking. I have an idea, but as someone who has sold a lot of houses, is it an issue to sell a house with fire damage? I feel like there’s always a taboo there.

David:
Well, it has to be disclosed, but no, it’s not an issue because you had it rebuilt. So the house that they’re buying doesn’t have fire damage. You got rid of a house that had fire damage, tore it down, rebuilt a new home, so you’re going to get a home inspection on the new house and it’s going to be done to code. So I don’t think that that will be a factor. The fire damage issue is when you’re buying a house that has burned and hasn’t been rebuilt, that’s where you’re getting all that. Ooh, it’s got fire damage. Do I really want to take on this process?

Rob:
Yeah, I bought a house recently and it had a fire at one point and it was all fixed and someone was like, man, I can’t believe you’re going to buy that. I’m like, I mean, it’s fixed. So what does it going to smell like? Barbecue in there? What do you think? Is it going to smell like smoke or something? Yeah, it’s totally fine.

David:
No, I would feel much better about it. Especially since meeting you and you lost all that from all those 10,000 steps you’re doing every day. You are smoking hot and are a walking definition of fire damage in a human being. So I would feel fine about it.

Rob:
Fire damage to your eyeballs.

David:
That’s exactly right. I have to deal with fire damage every time I do a seeing green with Rob. Keep getting those steps in. Baby all. We’ve covered quite a few topics on today’s show, which is awesome, including paying off a mortgage faster and how to tackle that when HELOC should be used and what they should be used for. How to use $15,000 for a live-in Brrrr or a house hack, why location is a deal killer, when to hold them, when to fold them, and when to walk away. We appreciate all of you. And remember, we want to have you featured on an episode of Seeing Green. All you got to do is head to biggerpockets.com/david and submit your question there, and Rob and I will tackle it as soon as we can. We could not make the show without you, so please know you’re loved and appreciated by us a ton. And remember, if you would like to learn more, you can head over to biggerpockets.com and check out the forums. They’re absolutely free. And if you want to learn more about Rob and I, you can find our personal information in the show notes here. Rob, anything you want to say before we go?

Rob:
No, thanks for having me on. Great questions. I love it. I love seeing Green and eventually I’m going to lobby to have it changed to seeing Solo.

David:
That was your dating strategy before you got married as well?

Rob:
Yeah, it was, but it worked. It worked. I only had one set of eyes for my wife.

David:
Beautiful. This is David Green for Rob. Hotter than Texas Barbecue. Abba Solo. Signing up.