0:00

This. Is the Big Pockets Pride can

0:02

show Nine O or Nine what's going on

0:04

Everyone This is David Greene your host of

0:06

the Bigger Pockets Podcast. Today we have episode

0:09

nine forty nine and if you don't know

0:11

what a pallet Jerome is, go check out

0:13

Google because you're in one right now. We've

0:15

got a great show for you. On seeing

0:18

Green episode we get in solicitor questions from

0:20

you are base are going to be talking

0:22

about what you could do to build wealth

0:24

the real state with Rob adding his little

0:27

spice into the seasoning. Rob: how are you

0:29

today? Oh. You know, sounded like a gremlin

0:31

because I lose my voice so easily after

0:33

I go to conferences. But I'm hanging in

0:35

here man and I'm excited to answer some

0:38

questions. Yeah. We get some really good

0:40

one. So today show we get into a

0:42

lot different things including how to allocate capital

0:44

when you've got a bunch of properties, but

0:47

they're not performing super well, what asset classes

0:49

you can consider moving into if the one

0:51

that you're in right now is struggling, how

0:53

capital gains work and how you can used

0:55

a cash out refinance to sort of get

0:58

money out of properties tax free and we

1:00

start to show off with a great question

1:02

about if somebody should buy a property that

1:04

they know is not going to cash flow

1:07

when they first by it. All

1:09

that it more into days seeing green.

1:11

And most importantly, if you want a

1:13

chance to ask your question, please head

1:15

on over to Bigger Pockets.coms As David

1:17

the link is into description down below. Pass

1:19

this, send us your questions, and let's

1:22

jump back in. Hi David

1:24

I'm Tony. I'm from San Jose, California.

1:26

My. Wife and I have an opportunity

1:28

to buy her grandmother's house of Market

1:31

for about eight sixty and it's worth

1:33

about a million fifty. It does need

1:35

about a hundred and ninety. you earn

1:37

repairs. Or. Looking at possibly

1:40

making it a long term investment

1:42

due to the equity. And.

1:44

Appreciation value that it has has gained

1:47

in the last couple years. On

1:50

for Joey! The rents are going

1:52

for. What? The mortgage will be

1:54

I would be upside down about sixty

1:56

hundred dollars. A month. But.

1:59

Long term. What? It be

2:01

a good investment for us. To

2:03

maybe take the hit now without

2:06

cash flow and potentially have a

2:08

good investment later. We.

2:10

Would have to make it our primary home

2:13

so. We. Will offset some rent

2:15

but it's not gonna be a

2:17

fool. Mortgage payment. What? Do

2:19

you think David? Thank you. Lose.

2:22

Tony Man, I love questions like

2:24

this. We're going to get into

2:26

some good real estate investing conversation

2:29

right now. This is the age

2:31

old question of which has caused

2:33

me to be labeled a heretic

2:35

and blasts femur of real state.

2:37

Sound advice Roberts my thank you

2:39

for always sticking by me and

2:42

even as people have criticized me

2:44

for saying there is more than

2:46

just cash flow when it comes

2:48

to vessel real The and questions

2:50

like this highlight the. Age old

2:53

question: sit vs jed i

2:55

work vs. Else and cash

2:57

flow vs. equity. So let's break this down.

3:00

Tony's get opportunity to by his grandmother property

3:02

in San Jose which is a high appreciation

3:04

market in the Silicon Valley area of California.

3:06

Where are the tech companies are if you

3:09

have an phone is probably it's made down

3:11

there he to buy it for significantly under

3:13

market value which I call buying equities. we're

3:15

gonna be in for eight sixty it's worth

3:18

about a million fifty needs a hundred and

3:20

ninety thousand dollars worth of work When I

3:22

am assuming if you spend the money to

3:25

fix it up that will also increased. Air

3:27

B by at least that same amount otherwise when

3:29

it makes sense to do the work Now really.

3:32

The. Problem. Is. It's.

3:34

Awkward. a cast for he's going to

3:36

be bleeding six hundred to eight hundred

3:38

dollars a month when he first buys

3:41

this. Property. So I've

3:43

got a way of looking at deals

3:45

like this. We're going to get into

3:47

that the sex of here of order

3:49

to be time into someone's had ever

3:51

do something like this. A few other

3:53

details to include: If he buys it

3:55

from her according to tell for his

3:58

prop nineteen, he won't have the value,

4:00

their properties property taxes readjusted, he'll be

4:02

able the take over whatever the property

4:04

taxes are currently I have it's grand

4:06

mother or grandfather or father mother to.

4:09

Sit around you get say now you say

4:11

you could say if he, if it's grandmother

4:13

it in, that's probably exactly where that phrase

4:15

came from, physical activity or ahead. Still, he'll

4:17

get to keep those old property taxes or

4:19

but he'll be bleeding. Six hundred, A hundred

4:21

or so much I rob. Let's start with

4:23

you. Is this a hard know. Well.

4:27

I have questions I have questions about

4:30

their so let me ask this clarifying

4:32

question. He mentioned that he may move

4:34

into it as a primary residence. And.

4:37

So if he moves into the into as

4:39

a primary residence. Do. We know

4:41

how much his monthly. Around

4:43

his monthly rents arab. His monthly

4:45

situation would change. he did say the about that

4:47

he just mention he'll be bleeding six hundred eight

4:49

hundred a month. So let's take this question from

4:51

the perspective of it would be a rental because

4:53

that's how most of our listeners and be semi.

4:56

Okay, so generally I'm very

4:58

anti cash. Well, As

5:00

I met a very i'm very anti

5:02

anti costs well meaning I don't really

5:04

like inheriting properties that are gonna lose

5:07

me money every single month. but I

5:09

would say considering this isn't like the

5:11

one. Most. Prime market in existence

5:13

With the San Jose. In terms of

5:15

appreciation, this is a very rare scenario

5:18

in which I'm like, okay, I do

5:20

actually think there's an appreciation play there,

5:22

because historically San Jose has paid us

5:24

really, really really big for anyone that

5:26

inherited or ever got property at any

5:28

point in the past. So I think

5:30

as long as he feels like he

5:32

can afford it, On a Bleeding

5:35

Kind of gives the impression that maybe

5:37

can't afford it and so that six

5:39

or eight hundred dollars is gonna be

5:41

detrimental to his financial situation. Absolutely that

5:43

I would probably just sell it, Take

5:45

the money and go. But if it's

5:47

the expense that he's willing to put

5:49

up with for two, three, four, five

5:51

years than exactly up for consideration. a

5:53

hottie. Look at it. I. Have a

5:55

framework that I look at these deals through involving

5:58

ten way to make money and real state. Are

6:00

we learned about buying equity? That's one

6:02

of them. He's by of but load

6:04

of equity here so that's a really

6:06

good deal. I don't love buying a

6:08

property that's going to bleed money if

6:11

it's always gonna bleed money so I

6:13

wouldn't wanna do this in. Like you

6:15

know, the mid West, seventy thousand dollar

6:17

house rents are not going up. That's

6:19

a different story, but I talk about

6:21

something market appreciation cashflow, which is buying

6:23

into a market where rents are likely

6:25

to continue appreciating every year more than

6:28

the national average, as well as market

6:30

appreciation equities. Which is by it's a

6:32

market where the value of the property

6:34

is likely to continue increasing over the

6:36

years at more than the national average.

6:38

San Jose is very strong about the

6:40

those so. Barring. Any unforeseen

6:42

circumstances, those rents are going to be gone

6:44

up a lot and after a couple years

6:47

he's not can be bleeding money and after

6:49

a couple more excuse me making money and

6:51

after a lot more he's you making a

6:53

lot of money and have a lot of

6:55

aqui. So this is really a question of

6:57

delayed gratification vs. immediate gratification. He's gonna feel

6:59

some pain in the media this because he's

7:02

gonna be not covering the mortgage, but he's

7:04

probably going to make an insane amount of

7:06

money over the long term. So. Now

7:08

we move into how do you do this

7:10

wisely if you're going to do it while

7:12

there's a couple wastes. Ah, we Tegra portfolio

7:14

architecture. Do. You have other properties in

7:16

your portfolio that are cash flowing solid. maybe

7:19

something you bought years ago that also benefited

7:21

from market a preseason cashflow step provide Castle

7:23

that would cover the money that you're losing

7:25

on this one. Now you're balancing your portfolio

7:27

of take his of Castle away from these

7:30

houses to get a long term equity play

7:32

with this one. So I'm getting all the

7:34

benefits of long term equity without the risk

7:36

of losing their property for closure because I'm

7:39

pulling cash on from somewhere else. Do you

7:41

have a great job either? Beneath him, you

7:43

means. More. You've got cast accompanied

7:45

from work even if it's are coming in

7:47

from your portfolio in which case this becomes

7:49

less risky to someone who is living beneath

7:51

their means versus someone who's living paycheck to

7:54

paycheck and as these details that stop you

7:56

from in able to just tell people always

7:58

by cashflow were always by equities. You

8:00

have to look at your specific scenario and

8:02

my advice is to construct your life in

8:04

a way that you can buy amazing deals

8:07

like this when the he's being offered without

8:09

having to turn them down because you're in

8:11

a financially strong position. Yeah, Okay, so something

8:13

else to consider here is that he said

8:16

that he's losing six a hundred dollars every

8:18

single month. I

8:20

mean I'd imagine that is probably not exactly

8:22

losing that because of that pay down to

8:24

do we think that he's buying us like

8:26

what the brand new thirty year mortgage or

8:28

do we think is kind of walking into.

8:31

An hour like a subject to or something like

8:33

that. Now I think he's probably gonna be getting

8:35

a a do mortgage for the way described it.

8:38

Okay, So you'll have a

8:40

little bit of that pay down, but probably not.

8:42

And the amount of time the or if I

8:44

won't be that significant here in that first five

8:46

years, I like where you went out because that's

8:48

another one of the ten his loan paid out.

8:50

If he could take over a mortgage that's already

8:52

fifteen years in a being paid off, he's paying

8:55

off significant principal every single month. Which makes even

8:57

though he might be losing six, eight hundred hours

8:59

month and cashflows, the Prince or Reduction can be

9:01

two or three thousand dollars a month. Which means

9:03

he's actually gaining wealth. The up and then. the

9:05

other thing to keep in mind is that he

9:07

does have the equity. So while he's. Quote Unquote

9:09

Bleeding: Six to eight hundred dollars.

9:12

When. You think about what you're actually losing over

9:14

the course of let's say, three years serve

9:16

at six hundred bucks, times twelve? What is

9:18

that? David, You know, Six. Hundred times.

9:20

Twelve. Yeah that. Would be thirty

9:22

six hundred times to area of gets

9:24

scissors Seventy two hundred dollars a year

9:27

and that's only two hundred times it's

9:29

a three. He's gonna lose about twenty

9:31

two thousand dollars in the next three

9:33

years. Quote: Unquote that that's what is

9:35

gonna bleed. However, he is walking into

9:37

multiple six figures of equity says he

9:39

does kind of like that over arching

9:41

math. He's actually not losing any money

9:43

at all. Not at all. You. Know

9:45

he isn't. As if you're that way every

9:47

month. and maybe technically from his bank account

9:49

standpoint he is but from the net worth side

9:52

of his entire life he that actually losing

9:54

any money he's walking into. pretty good situation of

9:56

that something he feels like he can weather

9:58

for a few years. and as. Definitely that

10:00

a deadly a deal and take I'm

10:02

gonna. seems like if you can hold

10:04

onto it until he's maybe even it

10:07

in a stronger financial situation eventual the.

10:09

Maybe. You can do a value add and

10:11

he can put one hundred and eighty thousand dollars

10:13

into this properties that so much he says it

10:16

needs and repairs and if he does that then

10:18

can a increase the equity firm three hundred k

10:20

two for five or six hundred thousand dollars and

10:22

that's that's where the wealth through the says compounding.

10:25

Well. Said Rob. You're actually speaking right

10:27

out of the framework of my last

10:29

book. Pillars of Wealth People can picked

10:31

up a bigger parks.com/pillars where I talk

10:34

about how we typically only looked at

10:36

energy and are paid to camp or

10:38

in our wallet. But there's actually energy

10:40

and your stock portfolio. And there's energy

10:42

in your real estate with called equity.

10:44

And like you said, when you look

10:46

at it from the big picture you

10:48

like I'm going to be losing twenty

10:51

one thousand dollars over three years to

10:53

game two hundred fifty thousand dollars or

10:55

so like data. Incredibly. Good return and that's

10:57

not even considering the fact that rents are

10:59

going to be going up over time and

11:01

real set of us. Thing is this is

11:03

what is really like to do it. It

11:05

is more complicated than purely a cast i

11:08

cast analysis. although that's very important, it's a

11:10

fundamental understanding. It's that the only thing that

11:12

we get our maybe like point basket by

11:14

gotta build a dribble the ball. But it's

11:16

not all about dribbling. There's other things you

11:18

have to take into account to be good

11:20

at basketball. same thing for real see investing

11:22

so I will handle drop. I really like

11:24

your perspective there. Yeah. Well did good for

11:27

you. Tony has like a great great house.

11:29

Keep us updated. come back with another question

11:31

when you have an update. Yeah Tony and

11:33

if you're looking for some good Mexican, I

11:35

recommend La Victoria in San Jose. Make sure

11:37

you get that orange sauce. Far right Everybody

11:40

telling of After this quick break we're going

11:42

to be talking about portfolio architecture as I

11:44

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11:46

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15:08

about how to handle my portfolio and a capital

15:10

gains question after that are on. Our first question

15:12

comes from a moron who writes in the real

15:14

estate rookie facebook group. I. Am

15:16

a first time property manager for a

15:19

long term duplex the first for Tim

15:21

has been living in the house for

15:23

twenty years without a me lease. As

15:26

a former owner of the house was her sister

15:28

and her rent is only six hundred dollars which

15:30

is basically free. The new owner my boss has

15:32

already told that hinted that there would be a

15:35

leasing coming and the rent increase. Once I arrived,

15:37

the market price for department and it's currency is

15:39

about nine hundred fifty. I'm looking for advice as

15:41

to how to best handle the rent increase. It

15:44

seems unfair to me to ask someone a p

15:46

three nars more without a lot of notice, but

15:48

it's also unfair to expect to pay so little

15:50

and I know she's expecting to pay more. How

15:53

would you go about a timeline in red

15:56

increases and creating the lease? Interesting? Yes, Isn't

15:58

it right up your alley as you probably

16:00

come across as a few times in your

16:02

career. Imagine her. oh got all the time.

16:05

Like one of the biggest mistake investors make

16:07

a speaking that they're helping somebody by keeping

16:09

the rent low and then later I they

16:11

need to increase it or that person. Maybe

16:14

the property falls into disrepair and they realize

16:16

I need to spend all this money to

16:18

fix the place up. but I'm not getting

16:21

ran after starts, more rent to make up

16:23

for this and the tenant is upset about

16:25

it. So Rob I know that you love

16:27

conflict and you have hurting people's feelings. How

16:30

would you go about handling this? ah with

16:32

a baseball bat in my head? Not, it's

16:34

just that. it's It's a tricky scenario right?

16:36

Yeah, I'm a soft a man, I'm not.

16:39

I'm not good for this is flagged for

16:41

the short term rental that I had to

16:43

deal to sever, but I'm typically it's It's

16:45

kind of lands as a one two punch

16:47

so I would have a conversation over the

16:49

phone. I would let them know that there's

16:52

gonna be an increase with sounds like Lauren

16:54

did. Not say hey just you know

16:56

you know that new new property manager, the new

16:58

boss, the management everyone a call it there and

17:00

place we will be increasing grants I'm not sure

17:02

what that is right now me to get two

17:05

nights at the end of the day me to

17:07

send you an email and then we can check

17:09

and afterwards that we the kind of understand and

17:11

you can sort of have time for them to

17:13

sort of processor. you can process it then send

17:15

it in writing formally that same day so that

17:18

you can kind of get all the numbers out

17:20

there that then digest it You can digest it.

17:22

I think what you don't want. In.

17:24

My opinion. You tell me if I'm wrong

17:26

here, but you don't want to be like

17:28

hey, I know you're and six hundred we're

17:31

going to actually increase it to nine hundred

17:33

and then it becomes an instant tense. Negotiations

17:35

were you someone's going to back down are

17:37

gonna and very poorly whereas I think if

17:40

you send it in an email it's in

17:42

writing, at least people can both like, like

17:44

process it on both ends and then you

17:46

can discuss it. With. A That. I.

17:49

Love it. That has nothing to do with the

17:51

fact that an email allows you to avoid the

17:53

discomfort of discover, say, spit At All right? No

17:55

doubt, because I think you can still have it.

17:57

I think you can still have it, but at

17:59

least gives them. They're opportunity

18:01

to come up with maybe not more

18:03

non emotional rebuttals that you're probably already

18:05

going to be prepared for. So it's

18:07

I'd drop the bomb and let everything

18:09

kind of settle before you actually have

18:12

a conversation. Yeah, Say. The

18:14

second and wanted to talk. I know it's a

18:16

lot that lets with this get into it and

18:18

then you can kind of explained in a bunch

18:20

arrive at Lauren. Here's what I'm going to break

18:22

down first: sophomore and and anyone listening who find

18:24

themselves in similar situations even if you're not a

18:27

real cities in check out my book at bigger

18:29

parts that com/skill There's something that I call. Baseline.

18:32

Adjustments and it has everything to do with

18:34

what we consider spare to v think about

18:36

what makes you happy and my it's when

18:38

you got something better than what you expected

18:40

or what you thought was fair. You go

18:43

to La Victoria Mexican restaurant stage order burrito

18:45

and they put in a little street taco

18:47

custom. Forty five cents per you're like that

18:49

is so cool. I was not expecting that.

18:51

but if you happen to go and buy

18:53

a burrito that you thought team but talk

18:56

ghosts and they only gave you one free

18:58

taco you feel like you just got ripped

19:00

off. Even an objectively that's not

19:02

the case. Expectations determine how happy where. if

19:04

you can exceed expectations, you will be happy

19:07

and if you fall short of them, the

19:09

person won't be. Rather than fighting with someone

19:11

over a free taco, it's so much easier

19:13

to just suggests expectations. Here's what that would

19:16

look like. I would go to the tenant

19:18

and I would say hey here is a

19:20

list of other units in similar condition or

19:22

in your area what they're renting for and

19:25

I would use the the best cases with

19:27

the highest rent so I probably be shown

19:29

she said it's or a nine fifty. S

19:31

I'd find the ones around nine seventy

19:33

five and I say this is what

19:35

current market rent is. However, you've been

19:38

a great senate. So. We're willing

19:40

to read to you for only nine hundred

19:42

dollars. You've set a baseline

19:44

at nine seventy five. As. You

19:46

said I will give it's you at nine hundred which looks

19:48

like a win for them. But.

19:51

The person who's receiving this is beating

19:53

six hundred is fair market rents. Maybe

19:55

they were expecting to go to six

19:57

fifty, so the nine hundred looks like

19:59

a big jump. The Basement a Six hundred.

20:01

You start by moving the Baseline up to

20:03

Nine Seventy Five. Then you give them your

20:05

number which is significantly less than the Baseline,

20:07

making it look like it's a better deal

20:09

for them. and it is still fifty dollars

20:11

less than a night of deceit she was

20:13

going to get. Now if the tenant says

20:15

I cannot afford it, it's not a matter

20:17

of them thinking that they were ripped off

20:19

because they seem fair market rented. it's them

20:21

have their own volition choosing. I don't wanna

20:23

pay that higher rate than I'm going to

20:25

move out on my own. Much.

20:27

Better than just saying hey here's what the rent

20:30

is. Still the ten it as to figure out

20:32

is nine hundred fairies Nine fifty fair Am I

20:34

being ripped off to ten? They even increase rent

20:36

by sixty percent at one times. All of that

20:38

makes them think they're the victim and they're being

20:40

ripped off vs if you start with setting the

20:42

baseline where you want to and adjust from their.

20:45

Diet. Lessons A decent get is better to

20:47

show properties that are more expensive. Like you

20:49

said, like a thousand bucks, nine seventy five

20:51

or decent. You would be better to show

20:53

what they could actually get for six hundred

20:55

dollars and say hey, by the way, six

20:58

hundred dollar apartments in this area? This is

21:00

what they look like. I need you both.

21:02

That's a great point. That's. A great

21:04

point. I mean you've sort of set the ceiling

21:06

and the floor by bring In and what

21:08

you did. I like that rob draft when a

21:10

little bit of that's orange sauce salsa on my

21:13

on my taco this this this this this

21:15

this Adam has in that there's the the benefit

21:17

of doing something like that would be that you're

21:19

kind of showing them not not. it's not necessary

21:21

like hey you've got nowhere to go but

21:23

like hey if you decide to not. Move.

21:26

Forward with us if you want to say the

21:28

same. budget. You can to be taking

21:30

a pretty drastic dip. In. Quality. And

21:32

so it's best to kind of like work

21:34

with us through this. That's exactly right you're

21:36

showing them. hates This is market rents and

21:38

so I'm giving you a discount and then

21:40

you're also say but if you don't want

21:42

that discounts Here's what you can expect to

21:44

be watching into you vow set to very

21:46

good baseline for that person to seats. The

21:48

obvious right choice is to pay that nine

21:50

hundred dollars and be grateful that is still

21:52

fifty to seventy five dollars under fair market

21:54

rent. Or it lord. So getting to the

21:56

chase I say you go right for fair

21:58

market right right away. Don't like the idea

22:01

of building up to what fair market rent

22:03

is and if she can't afford to pay

22:05

at them. Like Rob said, she just looks

22:07

at what apartments you can get for six

22:09

hundred dollars and I don't think you need

22:11

to feel bad about that because she was

22:13

getting a discount the entire time. Theoretically, she's

22:15

been saving three hundred dollars a month for

22:17

god knows how logs Optus read and so

22:19

that's a win for her seat. There's some

22:21

gratitude. This should be there if the person

22:23

understands with their market rent Actually, as I

22:25

think is a little tricky kind of thing

22:27

that we sorta glazed over. Maybe a such.

22:30

As big of a deal as I'm thinking, but I

22:32

feel like it is. She said that this ten it

22:34

doesn't have a lease and has been in this property

22:36

for like twenty years yet. So.

22:39

They're. Tenant am sure if they were like have

22:41

me to start paying. It wouldn't be that

22:43

easy to just get them out of there. So there's

22:45

something to be said about. How can you

22:47

diplomatically approach this in a way that gonna

22:50

basically not make them. Squat.

22:52

Right was a gifted. Treat them like a new

22:54

tenant tennis person. Afford the rent to do. They

22:56

make enough money to pay that rent right? Like

22:59

you said, the screen them if you want to

23:01

take them on as the ten a movie for

23:03

the same way you would if it was any

23:05

other tenet. You're not going to treat him any

23:07

differently than your next tenets of their debt to

23:09

income ratio. Can't afford that rats you're going to

23:11

have come up with a plan for how they

23:13

could move out, get somewhere else before you put

23:16

a least together. But Lord also did ask about

23:18

how could I put a lease together cause is

23:20

person hasn't paid one at all. Star

23:22

within a stop certificate where the tenants basic

23:24

gonna say hey, here's what I've been paying

23:26

for rent and here's what is the part.

23:28

but as minds and here's what belongs to

23:30

the owner As far as appliances or other

23:32

things like that once you've got that in

23:34

place, you can construct a new lease, but

23:36

again scream this tenant the same way you

23:38

would a new tenant that you'd be putting

23:40

in their use the same standards for everyone.

23:42

Make sure your body by Fair Housing was

23:44

You don't want to get yourself into a

23:46

situation where you're expecting more from this person

23:48

that he would from a different senate. But

23:50

I mean are they. Buying this house and

23:53

they get to. Keep. The

23:55

tenant are not keep the tenant. Yeah. They don't

23:57

have a lease than like they don't have a right to be

23:59

there. Yeah, I guess I feel

24:01

like that depends on the state. There could

24:03

be some. Like there could be some laws

24:06

that don't apply to contract law. There could

24:08

be like some specific protections which more. He

24:10

didn't mention which state there is in her

24:12

how that would go. So I usually talk

24:14

to property managers to get a background that

24:17

we're having to assume that there's.additional protections outside

24:19

of what would fall under standard contract Law

24:21

Professor and if you want to know more

24:23

about ways to use will be called a

24:25

binder strategy. We talked to old the and

24:28

big Neely great had a hair and that

24:30

that's head over to bigger part. It's Episode

24:32

Four Forty Eight or the Bigger Pockets Ricky

24:34

Podcast Episode Three Sixty Nine to learn how

24:36

the and handle situations just like this or

24:38

I think Swastika with us we're going to

24:41

get into some Capital Gains questions and just

24:43

a moment. But first let's give it some

24:45

of your comments. And

24:47

remember as always, make sure to like

24:49

Common and subscribe to our channel. Let

24:51

us know in the comments what to

24:54

think about today's show if you've ever

24:56

been saliva Tortilla in San Jose and

24:58

liked their food and if you want

25:00

to be featured on an episode of

25:02

Seen Greens had to bigger part.com/david or

25:04

at our first comment comes from episode

25:06

nine Forty one where hearty Key Eight

25:09

said I love your shows. It's hard

25:11

to know what to do in the

25:13

current rules in environments and I always

25:15

appreciate your wisdom and guidance Clearly Hardy.

25:17

Was referring to Rob on this one. You

25:20

hardy! I appreciate that. Next.

25:22

We get Cb one eight nine I feel

25:24

like a sound like a Dj and ninety

25:26

seven point nine of get my conference voice.

25:29

Great. Cadets. I really enjoyed the

25:31

comedic portions of the show. Good

25:33

balance of education and light comedy.

25:35

I about died and haven quoted

25:37

Eight Mile Lassie Cry Emerge He.

25:40

I've never heard of person say out

25:42

loud lap and Grandma's is Spezza is

25:44

Alec When Siri read your text back

25:46

to us loving dry emotive suspects I

25:49

wonder what Apple maims the A modes

25:51

he psychopaths we're going to call this

25:53

when the gas Queen were to tell

25:55

this when dancing Valerie like who who

25:57

has that job? Someone has it with

25:59

his interest. Like a modi namer.

26:01

If anyone worse at Apple A knows

26:03

how this happens, we want to know.

26:05

Right up Next we have Mid So

26:07

blodget Two Three Not quick Question: do

26:10

you pay capital gains on your net

26:12

profit or the sales price of an

26:14

investment properties? And second, if the answer

26:16

is net, why don't you cash out

26:18

refinance Prior to Sail saying specific requests

26:20

in our producer Eric Crests to hear

26:22

what you think. Rob: Okay, so you're

26:24

going to pay capital gains on your

26:26

net profit Now on the sales price

26:29

and the reason that you don't want

26:31

to be a cash outlay five prior

26:33

to the sale. Because it's not about.

26:36

The kiss out about being in debt. It's

26:38

about the cost basis of the property. meaning

26:40

like what is your actual cost to get

26:42

into that property, What is the process? What

26:44

is a profit on it Regardless and as

26:46

he took out like cash out and you

26:48

took our deck then a lot of people

26:50

say worthy of debt you don't pay taxes

26:52

on dead Another take Lipkis hockey's main thing

26:54

he always kind of emphasize that point but

26:56

cost basis as thing to keep in mind

26:58

whenever you're selling a property very gray. I

27:00

actually had a client who ran into the

27:02

same exact probably trying to sell her property

27:04

in Oakland and she done a cash. Out

27:06

Refinance First Mitchell, you're mixing up the

27:08

net profit with the equity in the

27:10

properties. They are off to the same

27:13

thing, so that's a normal thing to

27:15

get wrong. but they're not the same.

27:17

So let's say someone buys a property

27:19

for five hundred thousand dollars, sells it

27:21

for a million day. That's a five

27:23

hundred thousand dollar profit assuming there weren't

27:26

realtor expenses and closing costs because you

27:28

could write as off his was improvements

27:30

that you made. Okay, but if you

27:32

paid the property down to four hundred

27:34

thousand before you. Did it. You'd actually

27:37

have six hundred thousand dollars in equities, but

27:39

you only have a five hundred thousand dollar

27:41

game. They. Just look at what

27:43

you bought the asset for and what

27:45

you saw the asset for. The cash

27:47

flows that it made have already been

27:49

taxed. The loan pay down is not

27:51

included in the game here. They're just

27:53

looking at the sale price and the

27:55

price that you paid for. It's that

27:57

Cas or Refinance confuses things. Be.

28:00

If he, if you took out a loan

28:02

and now you owe a hundred thousand dollars

28:04

on the property as you sell it for

28:06

a million, what missiles think it is As

28:08

you're only going to get tax on two

28:10

hundred thousand, but you won't, you'll get tax

28:12

on the full five hundred thousand. And the

28:14

government say, well, you already got that money

28:17

out of the property, right? You don't get

28:19

to avoid paying taxes. I. Okay

28:21

let me just clarify that you're right I

28:23

was wrong. I said it's net but did

28:25

eventually correct myself and says more on cost

28:27

basis and we got there in the and

28:29

we know he met met after all of

28:32

the expenses that those are included in your

28:34

net Yak a job Rob think oh thank

28:36

guilt part of next we're going to be

28:38

talking about how to get up to ten

28:40

commensurately finance homes and what to do with

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the situation involving portfolio architecture and asset management.

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What what to do with a portfolio

34:36

at another question from seeing Green repeat

34:38

guess Tommy about steps to take to

34:40

get Ten Finance Properties. Hey. David My

34:43

name is brought home from Grammer,

34:45

Texas and my question is would

34:47

rather have my car portfolio. A

34:49

curly and sixteen long term rentals

34:52

across Texas and Louisiana with eleven

34:54

of them being classy properties was

34:56

taxes on paper. The castle looks

34:58

amazing. I rarely has a project

35:00

in numbers. I have enough

35:02

to nutty to sell the See properties for

35:04

a substantial profit and I'm sitting vos on

35:06

what to do. I. Have private

35:08

money loans totaling around one hundred thousand

35:11

dollars and percent interest for the next

35:13

four years. So my two part question

35:15

is do I keep these properties now

35:17

The most have been renovated and use

35:19

the cash flow to pay back brother

35:21

money loans or do I so and

35:23

pay these loans back with profits and

35:25

use the remainder to buy and the

35:27

class A or B properties and the

35:30

Dallas Fort Worth area. A third option

35:32

is to are cheap the lawns and

35:34

roll them to our class property with

35:36

little to no cash flow but substantial

35:38

appreciation. With a plan to cash out

35:40

refined four years sober debts. Thank you Will

35:42

think he brags. Get yourself in a pretty

35:45

good scenario here. You gotta lot of equity,

35:47

you've gotta lotta cash flow, and you've got

35:49

plans to grow your portfolio in the future.

35:51

So Robert was jumping out of you and

35:54

you realist? Okay, so I guess you've I

35:56

thought he gonna answered it pretty pretty beautifully

35:58

himself when he is getting. The options.

36:00

but he said that he's buying and

36:02

see. Class. Properties. He's

36:05

rarely hitting the projections, but it doesn't like

36:07

maybe his cash flowing. Ah, maybe there's a

36:09

lot of expenses that come along with these

36:11

houses that are unexpected and that's why that

36:14

eating is cast was And then he said

36:16

well I could sell them at a substantial

36:18

profit and then get into more A or

36:20

B class properties. I think that fry what

36:23

he should do because he may get into

36:25

less properties but given that he is kind

36:27

of interested in the whole hi appreciation thing

36:29

I think easy to see more appreciation and

36:31

the A to be class properties neighborhoods. And

36:34

lastly, he also. Mentioned that he has a lot of

36:36

private money. Debt. At

36:38

ten percent. And. You know, each

36:40

year he seems like he's baby in the mid.

36:43

Middle. Flashback side of his like

36:45

investing career at want to be

36:47

too presumptuous here. But. I

36:49

feel like at this point. The. Fastest

36:51

in get out of some as high interest

36:54

debt, the better and the concert kind of.

36:56

And around rounding third base.

36:59

On. His investment structure of did you play

37:01

baseball I quote unquote played football in the

37:03

ninth grade. apparently you are sports center before

37:05

recorded today so well done that was the

37:08

man a sore for gateway them when they

37:10

enter be really they're like so much you

37:12

love sports as a glove. I'm can only

37:14

add me that like this guy lied didn't

37:16

you come up with famous for Professional app

37:18

is like Peyton Manning like nicknames ah I

37:21

mean he's yeah occasionally that was party your

37:23

job. what was his name to share for

37:25

the marshal or something like that. yeah the

37:27

sheriff adding come up with that's a. Mile

37:29

said But I I came up with

37:31

the cartographer. For. Who. For. Peyton

37:34

Manning because he makes maps, is a

37:36

map maker, routes and are now. It

37:38

it really work, didn't get picked, you

37:40

found your place hosting a bigger part

37:42

spot. guess was and I guess though

37:44

say that are are when dinner is

37:46

loss or it's getting to Brad here.

37:49

First off, Brad highlights a very important

37:51

points. The properties that look great on

37:53

a spreadsheet asked in don't work out

37:55

that way in real life and this

37:57

happens more often than not in the

37:59

bad areas. Brad. The to these as

38:01

see areas it's so they they might be

38:03

more see my this type properties and out

38:05

of this is especially true in your properties

38:07

are lower priced and yeah to think about

38:10

the fact that things break in real estate

38:12

whether they're cheap or expensive but a new

38:14

roof, a new air conditioner, and new water

38:16

heater, or a small portion of the overall

38:18

value of the property and read when it's

38:21

expensive properties their a big portion of it

38:23

when it's a cheap property. and this is

38:25

one of the reasons that people think that

38:27

they're gonna go get cash flow and then.

38:30

They find out that it's more like

38:32

has no it doesn't actually come in.

38:34

So I'm inclined to think that Brad

38:36

should sell those properties and Ten Thirty

38:38

one them into some of the areas

38:40

where he's going to experience higher growth.

38:42

That's not only in equity, this is

38:44

also cash flow growth, right? So working

38:46

on a book right now the talks

38:48

about how you identify those areas at.

38:50

If I'm going to sum it up,

38:52

it's basically a function of tenets that

38:54

are willing and able to pay higher

38:56

prices. So if you buy in markets

38:58

where jobs with higher wages. Are being introduced

39:00

and there is constricted rental supplies. Reds have

39:03

nowhere to go but up and your tenants

39:05

can still afford to pay them, so identify

39:07

those markets and moving your portfolio. They're basically

39:09

guarantees that you're going to see increase Reds

39:11

every single year and with that, increase cash

39:13

flows. If he leaves a portfolio where it's

39:15

ass and there's no reason for rent to

39:17

go up, he's going to have the same

39:19

problems and ten years of his got right

39:21

now. What do you think? Rob? Yes, yep,

39:23

that's nonsense. That's exactly right. And what? What

39:25

are your thoughts on the I'm the High

39:27

Interest debt? He suggested Get out of every

39:30

cause. I'm cruising on that for now. I

39:32

was wondering why he's got. Ten percent

39:34

debt if he to just pass out,

39:36

refinance some of the houses at like

39:39

seven percent or eight percent and paid

39:41

off that way and maybe these not

39:43

showing income. So he's not able

39:45

to do that and with the proper isn't

39:47

cash flowing. I was wondering why he had

39:49

dead at ten percent when he could get

39:52

a mortgage that would be less than that's

39:54

Ah, my thoughts would probably be moved. The

39:56

properties into an area codes are not Kesling.

39:58

Anyway, meeting his expenses at this. That maintenance

40:00

and his cap acts and is vacancy are

40:02

probably too high. it's you move it into

40:04

an area where you have less of that

40:06

and even though your mortgage could be higher

40:08

it's I'd rather be paying money towards a

40:10

that I would be just thrown it away

40:12

to maintenance and vacancy it's and then you

40:15

start taking a cast on paint off the

40:17

debt. Maybe you take some of the properties

40:19

that you moved over. you do a cash

40:21

every fun it's bad and you that you

40:23

pay off half of that hundred grants and

40:25

any tackled the other half with the cash

40:27

flows from the proper easy but. Yeah.

40:29

I like that thing imo ll that more unsavory hear

40:32

of this. Consolidation. Visa

40:34

lot a long term properties and aren't really. Till

40:37

enough forum me it's like he's got some

40:39

cash flow. But yeah I'd say at three

40:41

hours and get into something that can add.

40:44

Treat you better over over the course of I

40:46

the next few years from an appreciation same point

40:49

mean it be wonderful if he could sell sixteen

40:51

properties and by to for plexus in a really

40:53

good area or too short term rentals in a

40:55

good area. and then he to manage those short

40:57

term rentals and get a lot more castle with

41:00

a lot less time and then use the money

41:02

from that, pay off the hundred thousand dollars and

41:04

find himself and to do as a class of

41:06

Brad let us know. Are you open to the

41:09

idea of a new asset class like short term

41:11

rentals? medium term rentals, small, multifamily worried in an

41:13

apartment complex, right? What? If you sold sixteen

41:15

single family homes, bought one, twenty four you

41:17

and apartment complex or something with the money

41:20

it's advantage that I bet you that would

41:22

be less of a headache that have and

41:24

sixteen individual homes but I river by single

41:26

family Poor fellow got to like city sixty

41:28

properties and you would think that it was

41:31

passive income as anything but It was ah

41:33

very frustrating pretty much every two to three

41:35

days it was another been as request come

41:37

in and another problem happening with the property

41:39

and other thing that I had to try

41:42

to figure out and I realize is very

41:44

inefficient set. To scale with that asset

41:46

class or as we often say on

41:48

the pod, the cheapest houses are the

41:50

most expenses. That's really good. Think.

41:52

You are next Video question comes

41:54

from our old pal Tell. Me: Hey

41:57

David! this is Tommy from San

41:59

Antonio. The. Following

42:01

the surface you lay them out. Love

42:03

how packing we close in a duplex.

42:05

So now I have two properties on

42:08

my be a low go forward. Trying

42:10

to stack up to ten I was

42:12

wondering can you give me three actionable

42:14

steps to make sure that I can

42:17

fill up using conventional loans multiple times

42:19

over and over? Ideally moving out every

42:21

year. It it just bringing the

42:23

most income that I can in each

42:26

year or with particular guidelines. Any suggestions

42:28

you have would be appreciated. Keep rocking

42:30

it I guess at that only saying

42:32

you're basically really thought about on the

42:34

shell ah how how sacking of the

42:36

ultimate catalyst for wealth and you are

42:38

often talk about how hey you can

42:40

buy a property for during a half

42:42

percent down and and you live in

42:44

it for a year and then after

42:46

that year game for three and a

42:48

half percent down again on another property

42:50

and move into that one. I. Think

42:52

he's looking for more like a bullet

42:54

in action plan on how some a

42:56

laxative that? Yeah And I'm going to

42:58

recommend a sneaky rental tactic to our

43:00

old buddy Tommy from San Antonio. The

43:02

sneaky rental tactic it's really amulet of

43:04

these strategies are really simple but we

43:06

give him cool names like bar and

43:08

How sacked. It basically just means buy

43:10

a house with a primary residence loan

43:13

which is incredibly powerful. He get a

43:15

slightly better to straight but you get

43:17

way lower of a down payment. I

43:19

mean if you distinct by the difference

43:21

between putting three percent down. And twenty

43:23

percent down. You. Can buy

43:25

almost seven the houses. With.

43:27

Three percent down than you could buy one.

43:30

With. Twenty percent. It's crazy It's you don't even

43:32

have to say that much money and opted if

43:34

your house hacking and saving on your mortgage that

43:36

is going to provide the three percent in savings

43:38

that you would need to buy the next house

43:41

a you house at one time, keep your mortgage

43:43

lower, that provide your down payment for the next

43:45

one and you just move every single year. That's

43:47

why people don't do it. They just don't want

43:49

the discomforts of having to move. Instead, they'd rather

43:52

have the discomfort of work at a job at

43:54

The Heat for forty or fifty years and going

43:56

into retirement broke. But if you can live like

43:58

no one else now, you. They have like

44:00

no one else later to corner old buddy

44:02

baby Ramsey. So that's what I say is

44:04

you buy the house, the primary residence loan,

44:06

eleven it for a year than you move

44:08

out by another one and make the one

44:10

that you bought into a rental just like

44:12

Tommy did with this duplex. And we've got

44:14

the sneaky rental strategy because you bought a

44:16

rental properties, but you did it completely legally

44:18

with a primary residence loan being sneaky. Yeah,

44:20

I mean in a think you know, I

44:22

wonder if there's anything to say about like

44:24

obviously three and a half percent. The reason

44:26

at this is such a good strategy is

44:28

because it really, you know. On most houses

44:31

that say there between two to four hundred thousand

44:33

bucks and been on the high end of that

44:35

when they do that matter with us. On.

44:37

The high end of that? It's like twelve

44:39

thousand bucks, right? So that means you have

44:41

to figure out how to save an excess

44:43

thousand dollars every single month. For. The

44:45

next year to save up enough money to

44:47

put down on the next property to figure

44:50

out. what kind of side hustle can you

44:52

extra shifts in York, An extra jobs or

44:54

something you can do? Can you sell your

44:56

time? Obviously if that the best approach and

44:58

you tried to scale, but considering you're closer

45:00

to the beginning of this, it may be

45:02

your only option. But what can you do

45:04

on an hourly basis? What can you build?

45:06

What can you sell? Can you consult to

45:08

make an extra thousand dollars every single month

45:10

that you actually have enough runway to buy

45:12

a new house every single year? A.

45:14

Lot of people know they should budget money but

45:16

they don't Where you know makes it easier to

45:18

budget money when you have a goal. And for

45:20

those of us a liberal said investing that next

45:22

houses a powerful motivator. So if you couldn't get

45:24

yourself the budget your money before now that you

45:26

know you want to get it's real set of

45:29

se a can make it easier for your build

45:31

better financial habits and ultimately I think you'll live

45:33

a better life when you're not using retail therapy

45:35

to solve your problems. Now that's one of the

45:37

reasons that I don't share the whole use other

45:39

people's money do something creative for every single time.

45:41

There's nothing wrong with doing those things, but don't

45:43

make up your bread. And butter still build your

45:45

entire foundation on. I just wanna go around

45:48

the go through. The Op's gone and once

45:50

you've got a good amount of equity in

45:52

your someone I grab a solo who knows

45:54

how to manage real states. You could use

45:56

some of these creative strategies to accelerate your

45:58

day, but not to get yourself started. So

46:00

tell me you're on the right path. My

46:02

man. like just buy a house every single

46:05

year and ask yourself whether you have to

46:07

do to buy it and what type of

46:09

property dd the by so they will cashflow

46:11

without a year at what? One final question

46:13

as we brought this up Daves So obviously

46:15

he's trying to acquire ten properties here. And.

46:18

If he's buying a property every single year

46:20

is that. Debt. Stacking.

46:22

Up against as Dt I is going to

46:24

actually be able to qualify for ten houses

46:26

and ten years of he's got you know

46:29

a lot of debt from all these houses

46:31

that is accruing. It is a good question

46:33

still be able to use the income that

46:35

he's getting from his renters and also the

46:37

debt that he staging on the problem is

46:39

that first year so when he's living in

46:41

the house he's not going to be able

46:43

to use any income that he's receiving the

46:45

help call if I for the next one

46:47

but once he moves out of it's if

46:50

the mortgage has two thousand dollars in is

46:52

collecting. Two thousand dollars from the

46:54

tenants. They basically offset themselves and

46:56

see your debt to income sees

46:58

relatively the same. And.

47:00

As Eminem said in the sequel to Eight

47:02

Mile Ugly was called Nine Mile House have

47:05

to how stats and avoid anything? that's House

47:07

whack are right about. That wraps up our

47:09

show for today. Tix is so much for

47:11

joining us and let us know when the

47:14

comments what you thought about today shown of

47:16

there's anything you think that we didn't cover

47:18

as well as what you think we see

47:20

covered future episodes and remembers. You can head

47:22

over to Bigger pipes.com/david and submit your question

47:25

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47:27

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47:33

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to do. You never know what type of

47:38

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47:42

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