Seeing Greene: How Soon Can I Refi? + 11 Other Real Estate Questions

David:
This is the BiggerPockets podcast show 501. Every one of you has a different position that’s different. I want to buy, but my spouse doesn’t want to buy. I want to buy, but the area that I live is too expensive. Whatever it may be, you’re in some form of a choke hold. There’s principles that work in jujitsu, I just haven’t learned this one yet. Just like there are principles that work in real estate investing that will get you out of that choke hold. So never, ever give up, and don’t assume that you need to tap until you’ve looked at every single opportunity.

Intro:
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David:
What’s up everybody? It is David Green here with another episode of seeing green. Today, it is just me. The beard is away so Green gets to play, and I’m going to be answering your specific questions regarding real estate, wealth building through real estate and all things BiggerPockets encapsulates. Have you ever been listening to an episode of BP and thought, “This is so good. Why don’t they ask the guest this question?” I know I used to feel that way before I was hosting it when I was listening, and it would drive me crazy because I had a specific thing I really wanted to know. They just never got to it. BP has heard your cries and they have provided you with this platform to get your question answered.

David:
Please, all you have to do is go to BiggerPockets.com/david and you can ask the question that never got asked on the podcast and get your answer, and what more, everybody else gets to benefit from the beautiful things going on inside your head, so please do that. On episode 501, just like your favorite pair of worn in Levi’s jeans, I’m here to provide comfort and durability on your real estate investing journey. All right, today’s quick tip is going to be go to BiggerPockets.com/david and ask your question. Once you’ve done that, tell your friends. “Guys, you can go to BiggerPockets.com/david, and you can ask a question and David will answer it.” Not only do you get your question answered, but you also get 15 minutes of fame on the biggest real estate podcast in the entire world.

David:
I prefer a video submission. I like when we get to show your video and we get to watch your face as you ask your question, I get some contexts that I can use to answer it. Everybody benefits, we all have a lot of fun. Please go to BiggerPockets.com/david asked that question. All right, without further ado, let’s get into this thing. Our first video question.

Clayton:
Hey David, Clayton Heffler, 24-year-old real estate investor from Pittsburgh. I have six units. One of them is a house [inaudible 00:02:39] three unit and another one is another three unit. I hope to have 12 by the end of the year. But my question is, I’m going to be moving to Denver, Colorado at the end of 2022, and I’d like to be a real estate agent out there, a wholesaler and investor, very similar role to what I am now, like what that’s Nick talked about in his podcast with you. My number one question is, how would you approach easing into putting yourself in a good position to be a star real estate agent, investor, and wholesaler in a new market, much more competitive market, over a year and a half period, which is what it’s going to be from now until then?

Clayton:
The number two thing is, how would you approach skill development? I’ve never been an agent but I am a wholesaler and sales person at heart, to transition into a much more competitive market. Would you sell real estate in the meantime, get your real estate license? How would you do that to put yourself in a good position?

David:
All right. Thank you, Clayton. All right. If I remember correctly, you had two parts to your question. The first is, how do I break into a hot market, doing both investing, being an agent and being a wholesaler? The second part of your question was, how do I build the skillset to do that? Both very good question. So let’s break into this. This would really be applicable for anyone listening who has an entrepreneurial bug, which many of us real estate investors do. First off, the things you want to be careful of when you get into being an investor, an agent and a wholesaler. You don’t want to spread yourself too thin to where you’re good at none of them. Now, I don’t think that that’s as big of a concern for somebody that appears to be as intelligent and hardworking as you. I think people can do this.

David:
They’re not wildly different in the sense that you’re building two completely different bridges. You’re actually building lanes on the same bridge, so this is one of the circumstances where I would advise you, yes, this is okay to go ahead with. When Brandon and I say, “Don’t build too many bridges,” that doesn’t really apply to your specific situation. If you said, “I want to go be a doctor and I want to be a contractor,” that could be a problem. The next piece I would say is you want to look for what all three of those things have in common, and really focus your energies on that, because that will benefit all three, and they’ll just come along naturally. Or if you like buzzwords, organically, holistically. That’s really what you’re looking for. The thing that those three pieces have in common is leads. You need leads as a wholesaler to get properties lined up and signed up, so you can dispense them to a buyer.

David:
You need leads lined up as an agent so that you have people that you can represent both selling and buying. Then you need leads as an investor so that you can wrap something up to put in contract for yourself. Where I say you should put the majority of your effort into is lead generation, create a marketing machine, direct mail, sphere of influence, use a CRM to put all the people together and organize that you know, so you can start reaching out to them. Maybe you learn some SEO of how you can get people that Google, “Hey, sell my house in Denver,” to find you first. Another thing you could do would be join forces with someone who already has leads like an established wholesaler, and say, “Can I work in your company and pay you for some of the leads that you’re not closing, or you’re not working,” or something along those lines where you can jump into a system somebody else has already made.

David:
If you’re talking about trying to break into a saturated market, this method would usually work better. You’re going to go in there competing against whales when you could just join up with a whale and eat some of the food that comes out of that shark’s mouth. I know I just said whale and shark at the same time. I don’t want that to be too confusing of an analogy. I suppose that happens when you bring Marine biology into real estate investing. The second piece of your question had to do with what skill sets do I need to develop. I love that question because if you really think about it, being a wholesaler and being an agent have very similar skill sets. You have to be persuasive, you have to be trusting and you have to be creative. That’s what I would start working on, is I would learn psychology.

David:
I would literally be trying to figure out how do I get a person who doesn’t know me and doesn’t trust me to feel comfortable with me and trust me with this. You’re going to need to get people who own properties to sell them to you directly. That’s going to be psychology skills. You’re going to have clients who want to have you represent them buying or selling. That’s also going to be psychology skills. The first piece of starting any business is how you generate revenue. If you can’t generate revenue, you don’t have a business, period. It’s catching fish. That’s the first thing you got to learn. Now, the next piece that you didn’t ask me about, but I’ll just give you this as a bonus, is going to be leveraging the cleaning of those fish. Guys as you’re listening and gals, if you want to start a business, you have to learn how to generate revenue, Then you have to learn how to leverage the servicing of that revenue.

David:
If you catch fish, but don’t clean them, you have rotten fish that are useless. If you’re great at cleaning fish, but you don’t catch any, you sit there all day with nothing to do. You got to have both. You can’t have one without the other, but the easier part to leverage is the cleaning. Once you get a lot of properties under contract, once you get a lot of clients in your pipeline that you’re going to be working with, that’s when you have to learn how to hire buyer’s agents or hire staff to take that lead that you’ve locked up, and walk it all the way to the closing table. Very good question Clayton, thank you very much for asking that. I’m hoping that this probably set up a couple of bells and whistles in people’s brains as they listen to my answer. Go to BiggerPockets.com/david and ask me the follow up questions that you’re thinking as we get into that.

David:
For those of you that are not comfortable, or just don’t want to submit a video question, that’s okay. BiggerPockets has forums where you can go to ask any question about real estate that you could possibly think of and people will answer it. Make sure that if you’re not submitting videos, you are still asking your questions in the forums. We will take questions from the forums to answer as well, and even if you don’t get your question picked to be on the show, there’s a very good chance that somebody else will answer it. You’ll get your answer and everybody else can read it too. If you’re a person who doesn’t like asking questions, but you do like answering them, you should be in the forums as well. There’s tons of people that have a lot of questions about real estate.

David:
If you have some experience and you have some good knowledge to share, please go there and answer some questions and spread that knowledge around. Our next submitted question comes from Haley Sills. Question about loan, interest rates and using points. I am pending on a rental property that is currently rented, but I plan on rehabbing in the future. Should I use points to get the lowest interest rate I can on my loan? How will this play into if at all refinancing the property in the future after the rehab is done? Thank you, Haley. This is a great question and allows me to elaborate on loans. Now, that I’m a mortgage broker, I understand a lot more about these, and I often guide my clients through these very same questions. Here’s what I want you to understand overall about how loans work.

David:
There’s an inverse relationship between the rate and the points. Now, when I say points, what we’re doing is we’re referring to 1% of the loan balance, but it’s just a closing cost, so look at it like rates and closing costs. As your rate goes up, your closing costs go down. As your closing costs go up, your rates go down. They work like this. A lot of people get in trouble when they try to push both of them down at the same time. It does not work. Did you ever have one of those pens when you were in school that you could click, this might show my age, to make it blue or red or green, and if you’d push the green, the blue would pop up, and we always thought we were smarter than the pen and we try to push both at the same time?

David:
It never worked. It just broke the pen. That’s the same thing that happens when you try to get lowest closing costs and lowest rates. If you are finding some way to make that happen, you end up usually getting really bad service. The question is, should I worry about points? Now, if Haley was going to be locked into this loan for a really long time, I would tell her, pay more points and get a lower rate. That’ll be better for you because over a long period of time, that low rate is going to save you a lot of money. But she admitted or acknowledged I should say, that she’s actually going to be refinancing after the rehab is done. That means it’s going to be a shorter term loan. In which case, a higher rate isn’t going to hurt you because you’re not paying it that long, but lowering the money you put into the deal, the closing cost is actually going to help you quite a bit.

David:
When you find yourself in this situation, you want to do exactly what Haley did. You want to say, “Hey, how long am I going to be in this loan?” We need to do the same thing when we refinance a property. When you’re refinancing, you’re trying to get a lower rate, you’re still adding money to the principal balance that you owe because closing costs get wrapped back up into the loan. There’s what we call a breakeven point. There’s a point where if you’re saving $300 a month on this loan, and you are going to be spending $3,600, in one year you would break even. The 3,600 that you added would have been saved by the 300 a month that you saved for that first year. We would say, if you’re going to own the property for more than a year, boom, this makes sense. That’s really the logic, the perspective that we look at when we have this. It’s much simpler than what people think when they’re like, “Oh, is rates more. Is closing costs more?”

David:
You just ask yourself how long you’re going to own the property, and that should make your decision. Haley for you with what you’re saying, you should go with a higher rate and lower points, or a lower closing costs, and when you refi switch it, pay more money on the refi to get a lower rate since you’re going to have it for a really long time. Thanks for asking that question. That was really good. Next question. How do you inform an inherited tenant of changes in ownership after you close on a property? All right, thank you very much. Here’s what I can deduce from your question. You are planning on managing this property yourself, and that becomes challenging for many reasons, but one of them is that, if you go tell that new tenant, “Hey, I’m the new owner,” first off, they didn’t sign up with you.

David:
If the previous owner was managing property, they signed a lease with that person, so there’s always a little bit of, this is being forced on them and they’re not going to love it. That’s going to leave you in a position where you feel obligated to be extra nice, or maybe to cut corners where you shouldn’t or give them more slack than would be good for this relationship. So you got to be very careful that you don’t go in there and shove this down their throat, but at the same time, you don’t get pushed around by that person. My personal recommendation is that the owners shouldn’t be going to the tenants and saying, “I’m your new landlord.” You want a division in those responsibilities between owner and landlord. I would probably either hire a property manager, or introduce myself as the property manager and just say, “Hey, I will be managing the property now.” Or even better, have someone else introduce themselves to the tenant and say, “Hey, I will be managing the property.”

David:
That way, the question of who owns it doesn’t even come up. They don’t need to know who owns the property. What they need to know is do they agree to the terms of the lease, and do they want to rent this property? That’s really the extent of your business relationship and how far that it should go. Rather than saying, “Hey, I just bought this place. I’m going to be the new person you write your check to,” just go in there and say, “Hey, I’m the new property manager. The owner has put me in charge of this,” or have somebody else do that. That’s even better. Here are going to be the terms of our relationship. Here are the things that I think we need to get right, what concerns do you have? Let them say, “well, I want to make sure this doesn’t happen, or I want to make sure if I have a problem, this can be resolved.”

David:
Then you’re addressing those problems from the position of property manager, not the position of owner. That one change will make a huge difference, and it will give you as the owner, a layer of protection as the property manager is who the tenant has to go to before they get up to you. Hope that helps. Jomar Lockwood says, “How soon can you refi investment property if you buy with cash?” Very good question there, Jomar. This answer is going to come down to, it depends on the lender. Now, I’ve done refi’s on properties that I bought with cash as soon as the rehab was done, sometimes a month or two. Boom, as soon as I had an appraisal, the lender would let me do the refi. Other lenders have conditions where they say, “You have to wait six months after you’ve purchased the property before you can.”

David:
Others will say, “You have to wait six months from the time you paid off the loan.” Now, there’s a subtle difference there. Many times when you buy a property with a loan, you are paying off somebody else’s loan, and you have to wait six months before you can refinance because you took a loan out when you first bought that property. If you bought a property in cash, you didn’t take a loan out to buy it. That six month rule will sometimes not apply, and they’ll let you refi right away. Here’s the rub. The loan officer you’re dealing with, is often just a person who does what they’re told. If they’re told, you have to wait six months from when someone buys it, that’s what they’re going to tell you. If you talk to the broker themselves or the lender that’s going to be giving the money that they are brokering you between, if you paid cash, sometimes that rule doesn’t apply.

David:
What you have to do is either have a really good loan officer. This is why sometimes chasing the best rate can shoot you in the foot, because those are usually the people that aren’t the most experienced. Who knows the rules and can get around them legally, or you have to force that person to go find the answer to the question that you need, and oftentimes they can do a refinance within that six month period. First off, ask the broker or ask the loan officer, and if they say no, ask a couple others, find one that can. If nobody can, go and say, “Look, I paid cash for it, there’s not an existing loan on the property. Does that change things?” If they still say, “No,” say, “Can you go ask your supervisor if that’s the case?” If they still say no, then either you got to wait the six months or you have to find another source of capital. All right, let’s go back to the videos and take another video question.

Todd Barry:
Hi David Green. My name is Todd Barry. I have a couple of questions. One of my first question is, for short-term rentals, what are the different factors that you look for as opposed to a long-term rental or a flip, for locating and evaluating short-term rentals? My second question is, my debt to income ratio is not very good, so what are your recommendations as far as that goes, when you’re trying to get look for financing? Does it necessarily mean that I’ll just need a higher down payment or should I look into, I don’t know how I would change my debt to income ratio other than trying to get some short-term rentals, which is what I’m trying to do. What do you do when your baby has band-aids? Okay. Bye bye.

David:
All right, Todd, thank you very much for that video, and thank you for including the little girl. I’m assuming that’s your daughter. She is stinking adorable, and we’re all over here wishing her a speedy recovery for that nasty booboo. All right, Todd, I love the questions that you asked me here, and I’m liking that I get to dig into this. The first question is basically, how do you evaluate a short-term rental compared to how you evaluate a long-term rental? I could talk about that for a whole podcast episode. I’ll try to keep it brief. The next question was, what do you do if you have a low DTI. DTI is a gateway into getting a loan. We’ll talk about that. It stands for Debt To Income ratio, and I’ll give some advice to you Todd, for how you can overcome that.

David:
First off, when you are evaluating any property, the best piece of advice I like to give people is to take the end result that you are looking for, and work backwards from that. Now, the end result of a short-term rental is different than the end result of a long-term rental, so your analyzation is going to be different. That’s the easiest way that I can give you to explain this. If you said David, I have a basketball team, how do I find a good center instead of a good point guard? Will they play different roles? The first thing I would say is, what do you want your center to do? I want him to block shots, I want him to rebound, I want him to guard the other team’s biggest player, and I want them to be able to pass the ball from the inside of the key to the outside.

David:
I would say, “Okay, well you want somebody tall, so let’s start with people that are six foot eight or bigger.” You don’t want a point guard that’s that big in most cases, because that stops them from the job they’re trying to do. It’s that simple with real estate. When you’re evaluating a longterm rental, you want it to be in a location where a person wants to live, all the time. This is where they want to go when they get home from work. It’s got to be in close proximity to jobs. It’s also going to be a place where people are going to be living, so they’re going to be shopping. They’re going to be taking kids to school. That’s why these are metrics that we all start to say matter with long-term rentals, because the people that live there care about those things. This sounds simple, but a lot of people don’t even put two and two together and understand that is why these are things we look for in real estate.

David:
When you’re buying a short-term rental, you’re not buying a place people are going to live, you’re buying a place people are going to visit or a vacation. While that might have a lot of things in common with long-term rentals, other things won’t, like school districts. People that visit a short-term rental property are not going to be putting their kids in school in that area. Right off the bat, the quality of the school district doesn’t matter as much to the person. Now, it might still affect the overall value of the property. I’m not saying we throw it out the window, but it definitely loses weight in the algorithm of our minds that we’re putting together. When you’re buying a longterm rental, you want it in proximity to places where people work. We just went over that. People want to drive to work from their home.

David:
But when you’re buying a short-term rental people, aren’t going to be driving to work. That’s why areas like vacation destinations are a whole lot more important. Tony, from the real estate rookie podcast invest in Joshua Tree. Now, I don’t live there, but my understanding is there’s not a whole lot of jobs in the Joshua Tree area. That’s a place people go to vacation. While that might make a very bad area for long-term rentals, because nobody can work from their house, it can be a great area for short-term rentals that people are visiting. These are the things I want you thinking about. If you’re renting a short-term rental, you’re renting it for a short period of time, what makes it desirable? The location in regards to amenities that people want when they go on vacation. Like Scottsdale, Arizona, that’s a big one, because baseball teams will send their teams there for spring training and people like to go watch the games.

David:
That’s a short-term thing. They don’t do that year round, and you don’t need to have a place in Scottsdale this close to your job. The next thing I would say is the actual quality of the property usually matters more in a short-term versus a long-term. In a long-term rental, people don’t need to be wowed by a house. They like it, but it doesn’t have to happen. They’re going to beat up that stuff as well because they’re living there. In a short-term rental, they want to be wowed. This is more of an experience that they’re on vacation. Think about the mindset you’re in when you’re on vacation. You could stay at a motel six or you could stay at a four seasons. You could probably sleep the same in both of them, but you liked the four seasons because of the experience, the ambience, all those little things.

David:
That’s why those matter more in a short-term rental. If you’re going to get into that game, be prepared to put more effort and time into the design that goes into the property and the quality of the materials, and the aesthetics that you use, as well as the comfort. You also don’t have to worry about people beating it up quite as much as a long-term rental, because they’re not living there all the time. They’re there for a shorter period of time, then they leave, and somebody goes in there and they clean it up and they fix it, and if major damage was done, it’s much more likely to be found when it’s a short-term rental versus a long-term rental. I hope that those practical pieces of advice help you there. But in addition to that, I also hope that they start everybody’s minds thinking about what asset class am I trying to buy, who is my client base, and what is those people want?

David:
Now, regarding your question about DTI, Debt To Income ratio, a very brief understanding of what that is. Your debt to income ratio is exactly like it sounds. How much of debt do you have compared to the income that you bring in? The less debt and the more income gives you a better DTI, which means that banks are more likely to lend you money because you are more able to pay it back. It’s very common sense. DTI comes up a ton when the person that you are lending the money to is responsible for paying it back. Now, I know that sounds very simple, but just hear me out here. If I’m giving you a loan, and the only source of income that you have to pay me back is your income, I want to know how much debt do you have that you have to pay other people before you pay me, and how much income do you make?

David:
Because your source, your monetary source of repayment is your job, or wherever your income comes from. That creates a problem in residential lending. When somebody wants to get a home loan and they either have a lot of debt or not a lot of income, which gives them a less desirable DTI, which is the problem that our caller here is mentioning. You can avoid that in a few ways. The first is you can improve your DTI. Now, this sounds stupid. Why would you submit a video where they just tell you, improve your DTI? But to be fair, that’s what I did. I saw that my DTI needed to be higher and I started working more and I got better at making money, and then it really, what’s the word I’m looking for here? It incentivize me to put more effort towards things that were going to get me towards my goals and less effort towards things that were just a distraction, and it made me a better version of David.

David:
A lot of people say, “How do I get real estate to get me out of the rat race?” To me real estate was the carrot that made me get myself out of the rat race, and that’s where it’s most beautiful. It’s not as good if you’re looking at it as a magic pill. The first one would be just find a way to improve DTI. Get a better job, get another job, work more overtime with the job you have, lower the debt you’re paying, pay it off. I would listen to the BiggerPockets money podcast. They have a ton of content on there that talks about how people have gotten rid of debt to put themselves in a stronger financial situation. The next thing I would say is look for a co-signer. A co-signer is someone who says, “Look, I’m not going to be necessarily owning the property, but I will be responsible for the debt. If this person can’t pay it back, I will pay it back for them.”

David:
Many times the lender will let you use that person’s debt to income ratio instead of yours, and you can still get the loan. The third thing I would say is consider commercial property. Now, here’s why I’m saying that. Commercial property does not look at your DTI to repay the debt you took out. That’s what residential loans do. Commercial property looks at the property’s ability to generate revenue itself as a way to pay that lender back. If you’re buying a commercial property and you can show it makes this much money, the lender doesn’t really care what your DTI is, because the money’s not coming from you, it’s coming from the property. If you have a low DTI, but a high IQ when it comes to real estate investing and a high drive to get it done, just shift your attention away from residential and into commercial, and start the process of learning over there. You can avoid the DTI choke hold altogether. All right, moving on to the next video submission.

Nicole Martin:
Hey David, this is Nicole Martin from Pittsburgh, Pennsylvania. Recently my client didn’t want to wholesale his land, so I did pass on the lead to a local land realtor, and I’ve done a majority of the light work and the client and I have a really good rapport now, and I know I’ll be helping out with the rest of the deal. I was curious what my commission would be from the realtor, for the lead and for doing some work? What’s a realistic request from me for this deal? I’ve never done this before. Thank you so much. Bye.

David:
All right, Nicole, thank you very much for that question. I think we can all empathize with you as we know we’ve done work, we know we brought value, but we don’t know how in this market, that value is valued. What can we expect to get in return? Now, I’m going to take a minute to bring a sobering perspective to the situation, and I’m doing this Nicole, just because a lot of people had the same question, and I want to be very careful with the way that we present the information. This is why people say wholesaling is a gray area. This example illustrates it perfectly. Part of the problem is that realtors have to operate under a lot of restrictions. There are regulations, they are licensed and the people who oversee their licensing can be Nazis with the way that they control the way that realtors actually do their job.

David:
It makes it difficult. Realtors have to pay a ton of money. They have a lot of regulation. They have to operate in very, very thin lines, and it’s super easy for them to accidentally cross a line that they didn’t even know that they were supposed to cross. I’ll give you one example. If you’re a realtor and you’re working with a client that was working with a realtor before, and they switched that realtor because they didn’t like them, and they came to you and they love you. Then you write an offer on a house for them and it gets accepted, but that house was shown to them by the realtor that came before you, that you had no idea about. You actually can be in a position where your commission could be forsaken because that other realtor is what they call the procuring cause of how that property went into contract.

David:
You had no idea that you did something wrong, but you could still end up getting punished or your client could get punished. This is an example of how many little tiny rules realtors are operating underneath. Wholesalers are largely the wild west. Because they’re not licensed, they’re not operating under all this regulation, they can do in the most part, whatever they feel like. There’s no lines they could accidentally cross because there are low lines that are drawn. Because as far as the licensing boards are concerned, wholesalers don’t even exist. There is no overseeing position for a wholesaler. You don’t get a wholesaling license. If you ask a realtor for a commission because you were the person who found the property, here’s where you could get in trouble. It’s illegal for you to take a commission from anyone if you’re not licensed. You can get in big trouble for that.

David:
You’re not allowed to pay somebody a commission if they are not licensed. Now realtors can pay other realtors what they call referral fees. They give you a chunk of the commission because you brought the client to them. It sounds like that’s what you’re asking for. If you are licensed and I just didn’t catch that in the video, or you didn’t mention it, I would ask them for a 25% referral fee, and if you’ve done more work, I’d probably ask for a higher percentage depending on the work you’ve done. If you’re not licensed, don’t ask the realtor for anything because that could get you in trouble, and then that could end up getting them in trouble. Now, the way I understand the rule, it’s not illegal for a realtor to pay you a referral fee. It is illegal for you to receive it, but that realtors broker could definitely frown on them for paying you money when you’re not licensed.

David:
This is one of those areas where wholesaling and licensed work clash, and it leads to hurt feelings and unmet expectations because you did do a ton of work. My guess is that you should go to the realtor and say, “Look, I’m not licensed, but I would like for some way to be compensated for how I’m helping you, how can we do this legally?” Maybe they work something out where they get a client who they just can’t work with, and they’re like, “You know what, we couldn’t come to terms on a price to sell their house,” and they kick you leads the way you kicked them leads. There’s no money being exchanged, but there’s still value being exchanged. Maybe every listing agreement that they can’t get signed, they send it to you and you go there and you try to wholesale it, and every deal you can’t put together as a wholesaler, you send them.

David:
As far as I know, and I’m not a lawyer, but as far as I know, that’s perfectly fine. It’s when money changes hands that you get into that gray area. I guess to sum this up, ask how you can get value from that realtor in a way that isn’t financial, be creative with how you ask it, and let those creative skills that you build help further your career. Thank you very much for that. That’s a great question. All right. Next up is some ugly guy from Maui. I don’t even know if we have time to take this question, but I suppose we’ll just give him a shot. You never know whose career you might make if you just put them on the BiggerPockets podcast.

Brandon Turner:
Hey Mr. David Green. My name is Brandon Turner. My question for you is, if we were rolling in some jujitsu and I got you on a triangle, how would you escape?

David:
Hypothetically speaking, if I was ever rolling with somebody whose beard took up half of the frame, like we just saw right there, my first line of defense would be, don’t get caught in a triangle. A triangle is a move for those of you that aren’t familiar with grappling or jujitsu, where you choke somebody using your leg and their own arm. It works best for people that have long Linky limbs. If any of you ever played street fighter and you know Dawson, that’s Brandon Turner. Brandon asks this question because with our instructor, we never got to the point where we actually practiced how to defend the triangle. He just got practice on how to put someone in a triangle, and he absolutely abuses that every single time that we roll. He also usually waits until I’m incredibly tired before he throws it on there, which is either smart or dishonorable, or some combination of the two. I don’t know.

David:
Here’s what I’m going to say. If any of you are jujitsu practitioners that live near me in the bay area, and you’re good at teaching and you have some time, I’d love to hear from you. Help me learn triangle defense, as well as some other things. Maybe we can get a good little relationship going on, so the next time I’m in Hawaii, when Brandon throws a triangle on me, we turn it into a pyramid or something like that, and I can escape. Because as you can see, he’s really got this thing in over my head, and there’s not much I can say about it. Let me tie that into real estate investing. Let’s say that you’re in a choke hold in your career. You want to be an investor, but you don’t have 20% saved up. Now, to save that 20% could happen, but it might take you five or six years depending on the market you’re in.

David:
You don’t have that much time because you’d be choked out before you’re able to save up the money. You only have what, seven to eight seconds when somebody throws a move on that before you’re going to lose consciousness. What you need to look for is an escape. A clever way to get out of your position without having to wait five years. For someone in that position, I would say house hack is going to be your escape from that real estate triangle. On one end you’re being crunched by high values that you can’t save, that you can’t just buy any house for, and on the other end, you’re being crunched by a down payment that you can’t make. Your escape right down the middle, is going to be house hacking. Go in there with an FHA loan, a VA loan, or even a conventional loan at three to 5% down.

David:
My team does those all the time, and buy a property that you are then going to rent out part of to other people. Now, almost every time we do this, the rent that you’re paying right now is more than the mortgage you’d have left over after you collect rent from other people. So that’s a big win for you right off the bat. You got yourself into the market without waiting five years for home prices to continue increasing, so that’s a win for you right there. You got into understanding real estate investing and the fundamentals involved with very low risk because you didn’t buy a pure investment property, you actually bought a property you’re going to live in that functions as an investment property, and you reduce the amount of capital you put into the deal altogether to lower your risk. House hacking would be a great way to escape a real estate triangle like that.

David:
Now, what I would like to ask is every one of you has a different position that’s different. I want to buy, but my spouse doesn’t want to buy. What would another one be? I want to buy, but the area that I live is too expensive. Whatever it may be, you’re in some form of a choke hold. There’s principles that work in jujitsu, I just haven’t learned this one yet, just like there are principles that work in real estate investing that will get you out of that choke hold. Never, ever, ever give up, and don’t assume that you need to tap until you’ve looked at every single opportunity. All right. I hope you guys have been enjoying this episode. I have a lot of fun making these. I hope you have a lot of fun listening to them. If you are listening on YouTube, please leave me something in the comments that lets me know what you like or what you’d like to see more of.

David:
I want to hear your feedback on these. Also, please take a very fast minute to like, and subscribe to this video as well. Share it with somebody that you think would get a kick out of some of these answers. They might be a jujitsu practitioner, they might be a real estate investor, they might be interested in building wealth, or they might just like looking at ugly people with huge beards in Hawaii. But there’s somebody out there that will like this as much as you do. You want to build that community around yourself so that you’re not the only person who has this fascination with this weird thing called real estate investing that we all love.

David:
I’d also like to know what’s resonating with you. What stuff have you heard that you thought, boom, that’s what I needed to hear. That helps us pick better questions, and it helps me learn how to answer these questions better for you. If you guys can take a quick minute to leave your feedback in the comments below and on the BiggerPockets forums, you can just tell BiggerPockets what you like about this podcast. I would really appreciate it. Let’s get back to more submitted questions. The next question comes from vantage surfboards. If I built a small cabin on my property for a short-term rental, are there tax benefits? Could I have the same tax benefits that I would get from buying a REI property? Okay, good question there vantage. Before I answer it, let’s break this down a little bit. I’m sure there are some tax benefits, but I don’t know all of them.

David:
I’m not a CPA. What I would like to do is answer this question with how I would look at it if I was in your position and I was going to buy this and then I would go run it by my CPA to see what they say. That’s what I encourage all of you guys to do as well. If you’d like, reach out to me, I’ll connect you with my CPA. There’s plenty of CPAs that are on BiggerPockets that would love to help you with this question. But don’t be the person who tries to pretend like they’re a lawyer and move forward with legal answers that you got yourself. I think there is a phrase where you salute, or use in law enforcement. The man who represents himself in court has a fool for a client or something like that. I’ve always tried to avoid in my own real estate investing business, doing other people’s jobs.

David:
Part of that would be getting legal advice. Let’s talk about what tax and benefits I am comfortable saying that I think you would get. The first would be that any income that, that property produces, should be shielded by depreciation. Now, depreciation is money that you get to write off of that building, based on the fact that it’s going to become worth less every year as it falls apart. Now, where I’m not clear is what would have to be done to take that additional unit that was built on your property, and have it have separate depreciation from the rest of the property. They might just take whatever you built and say, “Well, that’s worth 200,000 added onto the 500,000 of your existing home, and you have $700,000 of depreciation, but you’re not going to be able to use 700,000 because most of that is a primary residence.

David:
They’ll take a chunk of it and say, “This percentage of it belongs to that property.” You see how this starts to get complicated. This is definitely why you want to ask a CPA. Another possible benefit would be if you included the new value of this ADU, that you’ve add, into your main house and you’re not using it as a separate entity, you could probably take the total value of all of that together that you’ve now increased, and write that off of your mortgage interest deduction. In many cases, the IRS lets you take the interest on your mortgage and write that against your income, and if you refinance your property after adding this thing to it, because it had value, and you took out a bigger loan, you could be able to have a bigger write off when it comes to that mortgage interest.

David:
But again, there’s so many unique situations depending on how you want to claim that income versus not claiming it. This is something you should talk to a CPA about. I have found in my experience that the advice I get from CPAs, as well as the structure and the protection, saves me way more money than what I actually ever give them. It’s just like when you hire a real estate agent who’s good to sell your house. No one loves paying commission. Our team and me, we do so much more for our clients than the commission we’re getting. Literally, the full commission they’re paying ends up being less than the difference they got between us and another agent. That’s just because we’re really good at what we do. There’s many cases where like the money you put in a rehab is less than the overall value it brought to your house.

David:
These are wise investments. Hiring a good listing agent, hiring a good rehab person, and hiring good CPA. Don’t just look at spending money like you’re losing money. Look at it like you’re investing money. There’s more ways to invest money than just in a property. Sometimes you can invest in your teammates and your team members and get a better ROI than you would have otherwise. Next question comes from [inaudible 00:38:25]. When buying from a wholesaler, how do you send the initial check to secure the deal? Does it go to the title company? Also, what are some things to verify before sending that check other than the house itself? Okay, [inaudible 00:38:40], I see you here. I like this question. First off. If you’re going to buy a property from another person, you don’t ever want to give them the check. When real estate is being transacted and it’s passing hands, you want to use a title/escrow company.

David:
Oftentimes it’s the same company doing the title work and the escrow.n In those situations, we usually just call the title company, but in some areas the title and the escrow work are done by different businesses, in which case you would refer to them individually. The escrow company is the one that should be facilitating the transaction. We can call them title or escrow in this explanation. It’s basically synonymous. You always want to be giving them the check. They’re holding it as a neutral third party so that if you change the deal or you back out of it, you don’t want it. Your money’s not gone. They’re also the ones verifying that the person who owns the property has the right to be selling it to you. The person who says, “I’m selling you this house, give me a check.” You don’t even know if they own it.

David:
You don’t want to be the one to verify are they the person that owns it or do they just have the same name as the person that does, or you don’t even know to look for that. The escrow company, the title company, you’re doing all that work. Always, always, always give your money to them, and then understand the contract to know how much of that money you can get back if you can get that money back under what circumstances you can get that money back. That earnest money deposit section is something you have to understand if you’re doing a transaction without a real estate agent, which is what you are doing when you buy from a wholesaler. This is why it’s more risky. There’s no fiduciary watching over what you’re doing. Now, some things to verify before sending the check other than the house itself.

David:
I would verify what the contract says. Do you have a period of time that you can do inspections and you can back out if you don’t like what you see? I would, before you actually close on it, the title company needs to do a title search, and they need to figure out, do other people have a lien on this property? Meaning does the seller owe money to somebody else, that is secured by this property, and if you buy it, they aren’t being paid? That means you now take on that loan on yourself when you buy the property. That’s something you want to be careful of. That’s where the title and the escrow company do their jobs, and the title company finds out, “Oh, X amount of people are owed money on this house. What if there’s not even enough money changing hands to pay those people off?”

David:
Now, you’d be taken over that lien, and you want to make sure that, that doesn’t happen. Another thing would be, does this person have the sole exclusive right to sell this house? What if they’re one owner, but they have two others like family members that don’t even know that they’re trying to sell it. That could get you in some hot water. Those are things that I would definitely look at if I was going to be buying a house directly from a wholesaler, and I’ll just give you this exclaimer. If this is one of your first deals, you might not want to be buying it from a wholesaler. Not that there’s anything wrong with this person, but there could be. You just don’t have enough experience to know if this is being done on the up and up, or if this contract is written in a way that leaves you very vulnerable and then not very vulnerable.

David:
Just think about that. If you were the person writing up the contract and you’re going to sell a property to somebody else, would you write it up in a way that benefited them, or in a way that benefited yourself? You might be an honorable person and write up a great contract. You might be a not so honorable person and write up one that can screw the other person. We don’t know, and not every rule can be applied to every person. This is why most deals are done through agents because there’s a listing agent who’s a professional, who’s representing the seller, and there’s a buyer’s agent who’s professionals who’s representing the buyer, and hopefully both of those professionals are making sure that both of those clients are protected. You don’t have that one buying with a wholesaler. All you have is that title and escrow companies to make sure you stay in very close contact with them.

David:
All right, next question comes from Grace. B. How do you do partnerships? Number one, mortgage on one person and then a property agreement, two, put more than one name on a loan, three, put all names on the title and one on the mortgage. Four, put the mortgage name on an LLC. Grace, I can tell you spent some time thinking about this. That’s a lot of different options. When you ask, how do I do partnerships? I don’t do them very often, and or ever, unless it’s a huge deal and it’s more of a syndication. This is why. There’s so many different ways to do it. I don’t like to get caught up in the minutia of trying to figure out who’s going to do what. But let’s try to swim our way through these questions that you’re asking and see if we can help you come up with something.

David:
When you’re doing a partnership, there are two main pieces to consider. I just look at them as the positive and the negative. The positive piece is the property itself. Ownership of the property. That is in this case being considered a good thing. Now, it might not be considered a good thing if the property ends up being bad, but most properties are better to own than not to own, so we’re going to call that good. The bad piece or the other piece is going to be considered the debt. This is the money you have to pay in order to have this. This is the price you pay to get the thing you want, and that’s how life works. There’s always a good and a bad. You can’t avoid both. In this question, we’re trying to figure out how much does each person get of the good, and how much does each person have to carry of the bad?

David:
If you put someone on title to the home, they’re getting a stake of the good, and if you put them being responsible for paying back the loan, they’re getting a chunk of the bad, and that’s balanced. I think that’s where you should always start. Both people own the property, both people are responsible for the loan. Now, you start getting into circumstances where one person doesn’t want to be on the bad, or they want more of the good, they want 75% of the good and you only get 25%, and they still want to be 50/50 on the loan, or they don’t want to be on the loan. That’s where this stuff gets complicated. I would say, if they’re not going to be on the loan, they are not responsible for paying it back, they have to make the argument to me that they’re bringing more value for whatever reason, than I’m taking on by taking on the whole loan.

David:
Maybe they’re bringing a deal that you otherwise wouldn’t get. Maybe their debt to income ratio won’t support them being on the loan, so they can’t be on the loan, and the only way to make this work is for them to not be on the loan. That way, in that case, I might want to limit how much equity they get in the deal because they’re not onboard with the loan. When you put more than one person on the mortgage, what you have to understand is it affects both of your debt to income ratio is 100%. If the mortgage is $5,000 a month, both of you are now carrying that debt. It’s not like they split it 2,500 on each of you. If I go co-sign with someone or I go on a loan, and that loans for 5,000, that’s counting against my debt to income ratio, exactly as much as it’s counting against theirs too.

David:
That’s why people don’t like to always be on the loan. As far as putting the mortgage name on an LLC, here’s where that can get tricky. For one, most people buy loans as residential properties, using Fannie Mae, Freddie Mac loans. Those are loans made to persons, not to entities. You can’t get the loan that most people would consider the best if you’re buying an LLC. Putting a property in LLC, doesn’t always mean you can’t get a loan or you can’t get a good loan. It just makes it a lot harder. You’re not going to get the standard loans that most people are used to hearing about when they want to buy real estate or that they hear that other people got. The other thing is that you are now owners in a company, like co-owners of an LLC that owns that property and you can buy more properties and put them in the LLC, but you can’t look at it like we are co-owners of this property.

David:
You are co-owners of this entity that owns that property, and that’s a big piece that you need to understand, because depending on how many more properties you put into that LLC, things can get tricky as far as what job duties are going to be split up amongst who and how is the financing going to work. If an LLC is the best bet for you, go for it. If you’re just going to buy one house, I would probably just say, this is David Green speaking. This is not me giving legal advice, and this is not the bigger pocket stance. I don’t know if there even is one on that. It probably doesn’t make sense to go through all the headache of putting an LLC together to buy one house with.

David:
You should probably just buy the house, share the equity however you decide to do it. Try to keep both people on the loan, so they both have something at stake. See how that goes, and if you really like working with this person, consider maybe then starting a business entity that you can put more property in. All right. A few more video questions. Let’s take a look.

Nathan Star:
Hi, my name’s Nathan Star. I live in Ashland, Oregon. I have yet to do my first deal, but I’ve just started listening to the podcast and I’m really interested in real estate investing. I’ve got a couple of questions. One, I’m wondering how, you’ve talked about getting a loan to an LLC is difficult since the LLC doesn’t have the income. I’m wondering if there’s a way to, I like the structure of an LLC and I’m looking to form a partnership. Is there a way to get a loan to the individuals, but still own the property by the LLC? Or maybe to put it in another way, can the bank offering a loan to the individuals have a lien on the property, even though the property is owned by the LLC, or is there some other way that you might suggest you could structure that, or solve that problem?

Nathan Star:
Second question is, how I’m interested in investing with other people’s money and wondering how do you figure out how to structure a deal like that? How do you figure out what’s a fair deal for investors, or what would be attractive to investors, but still offer me as the primary, I guess, primary investor with a big enough state to be worth pursuing? If you could answer one or both of those questions, so it would be great. Thank you.

David:
All right, Nathan, great questions there. Let’s break this down a little bit. The first one had to do with you like the structure of an LLC, but that makes lending difficult. Now, I’m going to answer this question to the best of my knowledge, according to how I understand things, but there are several layers of complexity when we get into what a lender can do, what your CPA can do, what exposure you have in an LLC, and there’s a chance that I might have a misunderstanding of all these different pieces and how they fit together. The first question is, can I get a loan in my name, but hold the property in my LLC? What my understanding is, is yes. I believe this because I believe my company has done this for people before, where we are giving the properties held in an LLC, but you Nathan are on the hook for making the payment.

David:
This works if you also own that LLC. Just as a side note, LLCs are not this bulletproof entity that would keep you from ever having to pay if you do something wrong, they don’t really work that way. It is understood that this is a person who owns this business. The first part of your question is, yes, I do believe that we can do that for you, so I do believe that it can be done. Now, you said, are there other things that can be done along these lines? That’s really where I want to dig in for the listeners. If the reason that you don’t want to own the property in your name, is you are concerned about liability, there are some options that don’t involve you putting it in the name of an LLC. The most obvious would be an umbrella policy.

David:
You go get a hyped up insurance policy that covers you for all the things that you’re afraid could happen, if the property was in an LLC, you think that that’s going to protect you. I almost think the insurance policy is better protection than just saying, “Well, it’s an LLC. So they can’t pierce the veil of that and come after me.” In many cases they can. I would probably lean myself towards getting an insurance policy that covered me overthinking, putting it in an entity with some loophole that somehow protects me if I do something wrong, because in many cases, I don’t think that it will. There’s also another option that in many cases you can take out the loan in your name and transfer the property to an LLC afterwards, in which case we’ve accomplished the very first thing that we said in the beginning, which is, can I have the loan in my name, but own the property in the LLC.

David:
You’d have to prove that you own that LLC, and then I suppose, depending on the lender, there could be some restrictions on that being done, but in many cases, I believe that people do that quite frequently, and that’s not a problem. The next part of your question is much more subjective. You’re talking about how do I structure a deal so that people want to be involved? The broader answer to that is just understanding there’s equity and there’s debt, and you could give people a piece of either one. Some investors just want a return on their money. Maybe we would call that debt, and in which case you have to figure out how much of a return they want. Other investors want a piece of the actual equity. They don’t want a guaranteed return, they want the higher upside of owning part of that property.

David:
In which case you have to figure out how much equity do they want. No matter which direction you take, the answer is going to be the same. You have to figure out what are people looking for now? Here’s what I’ve learned about human nature. Most human beings will take whatever they’re getting and compare it to whatever someone else has. This is that whole euphemism of like keeping up with the Jones’s or the Smiths. The people down the street that have something more. People gauge value based on how well they think they could have done compared to someone else, or in a different opportunity. What you have to do is just figure out what does that person believe they can get elsewhere and be better than that. Or even at minimum, the same as that.

David:
That’s where everyone’s different. Some people say, “I wouldn’t do a deal unless I got 75% equity.” Because in their past experience, they brought so much value that they deserve 75%. Other people might look at it and say, “Hey, as long as you can beat the return I’m getting at the bank of 2.2%, I’d be happy.” The first person needs 75% equity, the second person needs 2.5% debt. Obviously that 2.5% debt is better for you. What am I getting at? Rather than saying, what number do I have to give people and broadcasting it, get to know the individuals who are going to be investing with you. Find out what’s important to them. On the spectrum of safety versus return, where do they fit? Are they like, “No, I want safety more than I want return,” or are they in a position where they want to have more return, and they’re really wanting to pin the pedal down and see how much they can get. Ask them what they’re getting right now.

David:
They’re going to compare it to whatever they do. Are they in the stock market getting a 12% return? Do they do real estate deals with somebody else where they get 25%? You really got to figure out each individual to know what’s going to make it worth it to them. But the advantage you have is you walking into this with this knowledge I’m giving you, knowing that human beings compare what is being offered to them, to what they think other people are getting. This is how we get sold anything anywhere. Normally this pair of shoes cost $120, but right now you can get it for $70. The whole reason you buy that pair of shoes is because you think 70 is less than 120, but if somebody else was selling those same pair of shoes for 30 bucks, $70 would seem really expensive to you. It’s comparison. We call this price anchoring.

David:
If you can understand what price anchoring is, you can understand that people do this everywhere in their lives, and you can use it to your advantage when you’re structuring these deals. Thank you for asking that question and letting me share something that goes on at a deeper level when it comes to structuring deals.

Scott:
Hey David, big fan on the show. I own my first property in cash, and then I have a mortgage on my second property. In your opinion, should I take out a home equity line of credit on my first property to fund my third property? Or should I do a cash out refinance on my first property and then use that money to fund my next deal? Thank you so much.

David:
Hey, Scott, big fan of that tank top. This is a good question here. If I understand you right, you have two properties. The first you own free and clear, the second you have a mortgage on, and your question is for the third, I’m going to refinance the first. Do I want to refinance it as a HELOC or do I want to refinance it as a cash out refi. Quick clarity for those who don’t know the difference, a HELOC is a loan made against the equity in the property. It has less closing costs, but a higher rate, and the rate is adjustable than an average loan in most cases, and a cash out refinance is a loan where you’re taking more money out than you currently own, and when you owe it free and clear, any amount becomes a cash out refi, and it has higher closing costs, but usually a lower interest rate, and that rate is locked in.

David:
Now, here’s a couple options you could have Scott, I’m going to lay out how I’d be looking at this and let you pick the one that you think makes the most sense. Because you said I’m buying a third rental property, I’m assuming that means you want it permanently. That means the HELOC is not the best option. HELOC’s are better for short-term stuff, because they cost less money to get, but they’re not as good long-term. I recommend using HELOCs for flips or rehabs or anything where you’re going to use the money, get a return, and then pay it off. If you’re keeping this as a rental, you won’t be paying it off. So the cash out refinance obviously becomes the better option in that scenario. Now, let’s get a little creative because there’s people here that love to just maximize return, and I can be one of those people sometimes too.

David:
If you go to a cash out refinance, you’re going to pull money out. You’re going to have the down payment for the third house, you’re still going to have to borrow the money for the third house on a loan. Before we even get into it, get pre-approved to make sure that you can afford a third home. When I say afford, I don’t mean you can pay it, I mean the bank will let you borrow the money based on your debt to income ratio, because you’re going to have a mortgage on the second rental property that you own, and now you’re going to have a mortgage on the first rental property that you own. We want to make sure that they’re generating enough income and you’re claiming on your taxes and you make enough money that your DTI can support this third house.

David:
It’d be terrible if you did a cash out refi, and then couldn’t even use the money.But here’s where you can get creative. If you go do a cash out refi and then go buy your third house, you’re going to be making a conventional offer. You’re making an offer to buy the third house, that’s contingent upon you getting a loan. Your market might be red hot, your market might not be. I don’t know exactly, but let’s assume it’s red hot. One thing you could do is get yourself a HELOC on your first property, and then make a cash offer on the third property with the money from the HELOC. That gives you an advantage when buying. Once it’s been bought, then do the cash out refinance on the house you just bought with the cash from the HELOC, your third one. Use the money you pulled out of that third house to pay off the HELOC that you took on the first one.

David:
You end up with the same results. You pulled money out of your first house to put into the third one, but because you did it with the HELOC as a middle step, you could buy the third house with cash. Hope that makes sense. I know that there’s a lot of moving pieces there, and I can probably explain it if you guys didn’t understand, ask that question again and I’ll make sure I get to it on the next episode, but you’re ending up at the same result. Just giving yourself a little benefit. It’s probably not worth all the headache of that, if you’re not at a hot market, and you can just go buy a house. But if you’re in a market where you’re competing with other people that are making cash offers, do the same thing. Take a HELOC on that first property, make a cash offer on the third one, buy it with the cash from the HELOC on the first house.

David:
Cash out, refinance the house you just bought, pay the HELOC money off with the money from the cash refi. You now end up with three properties that all have regular loans on them, but you got the benefit of using the HELOC to buy the third one. That’s the creative thinking I like from you BiggerPockets folks. All right guys, we’ve had another hard day’s work at the BiggerPockets office. I’m sure some of your minds are spinning with the stuff I said. Hopefully you’re feeling very positive about this. As you can see, a lot of the questions that are being asked, there’s not a right or wrong answer for. It’s really more tools, and we’re talking about how to apply each tool. I’d like to give you some encouragement. Don’t get down on yourself if you did some of the stuff we talked about today differently.

David:
You just didn’t know any better, or maybe you didn’t realize that was even a possibility, or maybe that possibility wasn’t open to you at the time you were making the decision. What’s important is that you own the real estate. You can always refine your process as you go. Don’t let it stop you from getting started because you think you don’t know everything. A lot of this stuff is really cool to know, but it doesn’t always make a huge impact on your investing. What does take a huge impact on your investing is you being committed and taking consistent action. I love it when you guys ask me these questions, please keep them coming. BiggerPockets.com/David. Please remember to come back below on YouTube so I can know what you guys are thinking.

David:
I’ve been referred in the comments to the Hennessy of real estate, all shot and no chaser. I thought that was one of the coolest things that I had seen. If you guys would like to see more Hennessy green, let me know, and we will keep making these for you. Then just please like, and subscribe. I also heard that you guys liked my new quick tip and I love that. That’s why I like you guys sharing stuff. Because I get to sound more like Batman and less like an opera singer. All right. Thanks for listening. This is David, trying to escape the Bermuda triangle green. Signing off.

Outro:
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