Real State

How to Turn Equity into Cash Flow and Getting Around 20% Down

You’ve got home equity, but maybe not cash flow. If you want to realize financial freedom, you’ll need consistent, passive monthly income. But with cash flow harder to find than ever before, how can you get it when real estate prices and interest rates remain high? Should you give up on cash flow entirely and only bank on appreciation? Maybe not. Using the strategy David outlines today, you can convert your equity into cash flow, but you’ll need to follow the right steps.

Welcome back to another Seeing Greene episode, where David, and some expert guests, answer your questions surrounding anything and everything related to real estate investing. Joining us on today’s show are Dave Meyer, J Scott, and Pat Hiban, all BiggerPockets authors and real estate masters in their own rights. They tag-team questions ranging from how to get around the twenty percent down payment requirement, how to calculate the time value of money on an investment, how HELOCs (home equity lines of credit) work, whether investing in hurricane-heavy Florida makes sense, and more!

Don’t forget to head over to the BiggerPockets Bookstore to get massive discounts on some of the best real estate investing books in the world! Still itching to ask David a question? Submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets Podcast, show 693 buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought up the low market value, you then added equity too through some form of rehab. You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex. What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast. And I just realized I’m getting much better at these numbers that we flash up every time we do this that used to be a pretty hard part of the show.
But with everything else, the more you practice it, the better you become. And I want to help you guys practice getting better at building wealth through real estate because it’s freaking and fun. Today’s episode is Seeing Greene episode where you get to look at real estate through my eyes, but not just mine because I brought in some help, several other different BiggerPockets personalities and authors are here to help answer questions from the people like you that are listening, give their advice on how to build wealth. And I chime in with that. So what can you expect from today’s show? Well, an amazing topic was the time value of money that Dave Meyers gets into. And I throw my two cents onto how a dollar invested today is worth significantly more than that same dollar invested 10, 15, 20 years from now.
You definitely are going to enjoy that. We clarify what a HELOC is, how to use it when it’s good, and what’s actually happening as far as the type of loan that you’re getting. We talk about buying for equity and then converting that money into cash flow as opposed to buying for cash and then trying to store up all the wealth that comes from that is actually much easier to create equity and then turn it into cash flow than to just start off trying to get cash flow, which is a thing that many experienced investors figure out later in their career. And I’d like to introduce you to that earlier in the career. All that and more. We also have a live guess with the unique situation and you’re really going to enjoy hearing the problems that they’re having and the advice that they are giving.
Today’s quick tip, the sale is almost over BiggerPockets Cyber Monday Sale is November 28th and everything is up to 60% off. This includes the not yet released book, the Real Estate Rookie: 90 Days to Your First Investment, which is available for pre-order until tomorrow. Please note the author name codes that you are hearing on this and other episodes will work for every other time of the year, but they don’t work during this sale because the discounts are way bigger than 10%. And if you’d like to get your hands on a copy of the Real Estate Rookie: 90 Days to Your First Investment, which is a book that has not yet been released written by Ashley Kehr, you can also pre-order that by going to biggerpockets.com/store.
All right. We’re going to get to our first caller, but before we do, I’d like to ask, if you’re listening to this on YouTube, please open the comment section and have your thumbs and fingers ready to type something out for me. Let me know what you’re thinking. If you were to want another book from me or another, couple books, tell me what you would want them to be written about. What would you want the title to be? What would you want the topic to be? What do you want to hear more of from me? And I’ll work on writing a book on those topics. All right. Let’s get to our first caller. Okay, I have no idea what we’re going to be talking about. So do you have your question lined up or do you…

Erin:
Yeah, so I had sent, so basically a year ago I bought a triplex in Savannah in Georgia, and I had been listening to the podcast for a couple of years. And originally, I was planning on buying in Florida and then the pandemic happened, and all the prices went crazy with everyone moving to Florida, buying everything up. A girlfriend of mine was buying in Savannah, and she said, here meet my realtor. And she was awesome. So I started looking at places. I checked out three or four and we settled on this triplex. So I closed on that last year.
So it’ll be a year in December, which is amazing. It’s got long-term tenants, its cash flowing for me nicely. But being a foreigner, I had to put down 25%, which was $110,000 plus closing costs. So it’s a fairly decent chunk of money and I think as a foreigner, from what I’m understanding from the lenders that I’ve been speaking to since then, speaking to a couple at the moment, trying to see what the different requirements are going to be, everyone’s more or less still going to want 20 to 25 to 30% from me.
And I’m wondering if there’s ever going to be any circumstances where that’s not going to be the case. At some point in time in my journey, if I buy a few more properties and I prove myself with my longevity and paying everything in the correct manner, that they’ll say, okay, well you are proven and we’re going to expect less of a deposit for you. Or if there’s any other foreign friendly lenders out there that I’d be able to get in touch with that wouldn’t require so much. I have plenty of reserves in Australia. I do meet all the requirements. The mortgage that I got is here in the US through my own industry, through the marine accountants. They hooked me up with someone here, so that was all great. I’m just wondering what to do next as well. Do I keep saving until I can put down another $110,000 and then go with your sort of stacking method and do another triplex or a quad or a couple of duplexes or something like that?
Because I want to keep building, my primary goal is to create as much cash flow for myself because I eventually want to be able to supplement my income. I want to be able to step back from working as much as I do. I work 16-hour days for months at a time, sometimes long periods away from my family. I want more family time, I want more time for myself to have a personal life and I’m just trying to figure out what my next best move is. And I’m trying to figure it out by myself, and I so appreciate your time. I didn’t expect to hear back from BiggerPockets. This was special.

David:
Well, I’m glad to hear that and this is a very cool story. It sounds like your biggest challenge is how do I continue buying real estate without having to put a $100,000 down every time? Is that the gist of what your problem is right now?

Erin:
Yeah, because I like small multifamily that makes sense for me. So do I do keep doing that saving so much or… I listen to an episode today and he’s talking about creative financing, so I need to maybe learn more about that.

David:
Well, everybody talks about creative financing. It’s always like, “Oh, you don’t have money, go do this.” In practice, it’s much more difficult than how it sounds when you hear someone talking about it. Let me ask you before we get too deep into this, what are you doing for work?

Erin:
I work as a stewardess. I’m the chief stewardess on a private motor yacht that’s based here in the US, and I’ve been traveling a lot this past year. We’ve just gotten back from Alaska. I’ve been at sea since August. It’s October now. So I’ve been working in and out on this vessel for the past six years and I’m just trying to figure out how to supplement my income or how to increase my income with rental properties so then I can keep putting down more money and eventually be able to step away from this and have a life again.

David:
Okay, so here is my personal take on the situation you’re in. This is probably the biggest hurdle for the average stereotypical American investor. It’s the down payment. You got to figure out a way to make more money or put less money down. At a certain point you will start to see this, your properties will be producing more equity, which becomes the down payment for future properties. It’s very slow going at first and then you hit a rhythm where you don’t have to worry about capital because it’s coming from stuff you bought eight, nine years ago. It takes a long time to get to that point. So at that stage in your investing journey is kind of where we’re starting right now. The short answer is there’s not going to be a lender who lets you put down less than 20% just because you have a good track record.
In fact, 20% is like the least you could probably ever expect to pay. My company had a period of time where we were getting 15% down for investment property. It’s kind of nice. It doesn’t last forever. It comes and it goes 20% usually your minimum and 25 to 30 becomes what they actually want. So the question is how do we get to the point where that isn’t a problem? Because you’re not going to do better than that and in other countries it’s actually worse.
One solution is if you become a good enough investor, you can borrow money from other individuals. That’s a form of creative finance. We would call that private money lending where you go to someone else, another person you work with who’s got 75,000 sitting in the bank and is doing nothing for them and you say, I’ll pay 8% on that money. And you take it and that becomes the lion’s share of your down payment. Once you have a track record and you feel very comfortable with the specific market, that’s one option you can use. Another one is going to be called house hacking. You familiar with that phrase?

Erin:
I think I’ve been listening to all of the strategies, and I think that would work I suppose except for I live on board this yacht and I don’t pay any rent. It covers all my expenses. I suppose I could set it up, so it was going to be my house and I was living in it, but I’m still living on the boat. But then renting out the other spaces.

David:
That’s exactly how we would do it. So I’d have you reach out to us, we would figure out which area. Where are you currently making home? Do you have a city?

Erin:
I spend quite a lot of time in Florida because we are loosely based here. I’m in Fort Lauderdale at the moment, but Savannah-

David:
That’s where I’ve been buying real estate. That’s funny.

Erin:
Nice. Well, I’m just getting ready for the boat show. So it’s going to be a busy week. But I bought in Savannah, Georgia and I love Savannah for lots of reasons for, like short-term rentals for medium term rentals, traveling professionals, film and TV crew, yacht crew. I think it’s a great market for that. So I’m wondering if I should be trying to get into short-term rentals and single family or something and then perhaps just generating cash flow like that to make myself my money for my next deposits.

David:
Well, the reason I ask is because the city that you make, your hometown will dictate where you’re allowed to buy with a primary residence loan. The reason we want to get you a primary residence loan is you can put three and a half percent down, 5% down. You have options that are not this 20%, a $100,000 you’re struggling with. If you could get by putting $20,000 down, you could buy a lot more real estate. You could start to build that equity that you could then tap into later to put towards these bigger deals you’re used to. So let’s say for instance that you bought something in Fort Lauderdale. There’s a lot of travel that’s going there. That’s why I’ve been investing there. We get you a loan as a primary residence loan, you buy a property, you rent it on Airbnb when you’re on the boat, you manage it remotely or you find another person that will manage it and then when you’re going to be staying in town, you just don’t book it.
You live in the house, then you’re leaving again. You put it right out there. I think this is a fantastic way of balancing… It has to be my primary residence, but I also want to make income off of it because nobody’s like someone like you, you’re not home very often. So why have it sitting there vacant? You rent it out. Now obviously there’s things you’d have to do, you’d keep a separate owner’s closet with separate linens and stuff so that you’ve got your own things there. There’s also properties you could buy where what I do in Fort Lauderdale is I buy a really nice property that has a garage because as you know, not every property out there has a garage. I will convert the garage into a separate, like a one bedroom or a studio apartment. You could stay in that, and you could rent out the main house.
They would never know that’s your primary residence. You wouldn’t have to share space with any of those people. It’s not that expensive compared to putting a 100,000 down on something. That’s a strategy I would recommend you look into. And the last one would just be the BRRRR strategy. That’s one of the ways that you don’t have to keep dumping a $100,000 into deal after deal. If you can go find a fixer upper in Fort Lauderdale, convert the garage, make it worth more, maybe you got it at a really good price because right now you’re seeing that the prices are coming down in a lot of areas. Like I was at an Imperial Point, that neighborhood a couple, couple weeks ago, looking at properties out there. You do that, you make it worth more, you refinance it into a primary residence loan, you get a big chunk of your capital back.
You’ve got a place you can rent as a short-term rental, and you can live in the studio by combining all of these methods together. You can make this work. You’ve got the primary residence loan, you’ve got the BRRRR method, you’ve got converting the garage to make it worth more. And now you don’t have to share space with somebody else. If there are people that you trust, other stewardesses that you work with, maybe that they’re on a separate, maybe they miss this trip, they’re stay at home. You can rent it out to them while you’re, you’re out there. And then this is nice to repeat because you can do it every year.
I think this is just my opinion here. Erin, this is the future of investing for that amount of demand we have in the real estate market in the United States and the lack of supply. People have to get used to the fact that they’re going to need to buy a house as a primary residence and make it work as an investment property. Gone are the days that just go buy a triplex and never have to think about it. They’re so expensive, there’s so much competition for them. You have to be able to think creatively. So what are you thinking after hearing that?

Erin:
I mean I think that’s fantastic. I didn’t realize, I suppose that I would qualify for anything like that. Being a foreign, I thought that those sorts of loans just wouldn’t be available to me because so far all I’ve discussed I suppose is real estate investing properties for rentals. And these were the terms that I needed to meet, and I just assumed that that was going to be across the board always. But if I could qualify for something like that, that’s definitely a strategy that I would be so into doing. And I know that I could run an Airbnb. I mean I run a super yacht. So for me, I write checklists all day long. I have daily weekly task list. I manage a team of cleaners and guest interaction and high-end service. So that’s something for me, that’s my skillset, that’s where I live.

David:
And that’s why I asked about your job because literally the way that you invest should be a reflection of the skill you have. And most people’s skill set was developed at their job. So you just telling me what you did, answered so many questions that I would’ve had. It tells me that you’re organized. It tells me you’re not afraid of a challenge. It tells me you’re used to having to think ahead and anticipate what could go wrong. It tells me you’re not unfamiliar with a schedule. All of those things are like you said, exactly what it takes to manage a short-term rental.
To you this will be easy. To the person listening to this who’s never done a job like that, it would seem daunting to have to try to manage a short-term rental. And so the advice I’m giving you is going to be geared towards what I think you’d be good at. And in fact, I think that you might be someone who could manage properties for somebody else in the future. You may be managing my short-term rentals because I think you’re just going to be like, “Yeah, this is so easy.”

Erin:
I would love to mean eventually-

David:
Prepare to be in on a super yacht, right?

Erin:
I love it. It’s been such an incredible adventure. But event, I do want to step back from it at some point in time and beyond that life, what is there for me? And I feel like that is the natural transition for me into managing rental properties, having my own and I want to set myself up for the future so I can actually afford to travel I want to and not on someone else’s time. And I can go home and see my family more often than every two years or so.

David:
Yeah. So here’s what you got to keep in mind. That is a worthy goal. Don’t buy in any hype that it’s easy to get there. That if you just buy someone’s course in six months, your goal will be completed because that’s a worthy goal. It’s going to take a lot of effort, a lot of sweat equity, a lot of challenge, a lot of emotional sacrifice to get to that goal. But once you get past that first maybe six, seven, eight-year period of time where you’re grinding stuff just starts to fall in the place and becomes so easy. It’s not a linear progression, it’s an exponential. It will feel like you’re not getting anywhere. And then you hit this inflection point and it starts to take off. So I would recommend first off, reach out to us. We will figure out how you could get a primary residence loan as a foreign national, which lenders are offering that, what programs are available?
Then we’ll come up with a strategy like what we just said by a short-term rental that you can live in when you’re there. You’re not there very often, so you’re going to be renting it out, you’re going to be making some money from that and then scale that every year. Every year you get to buy another one of these primary residences. And then in addition to that, once you get pretty good at it, you can probably start borrowing money from other people who don’t know what to do with their money. They’re getting 2% interest on it, maybe they start lending it to you. You pay them 8%, 10%. Now you’ve got your down payments figured out and you can start to scale pretty good.

Erin:
That all sounds so good. I love it.

David:
All right, well thank you Erin. We appreciate you being here and bring in this question. We’ll make sure we stay in touch.

Erin:
Yeah, thank you so much for your time. It was an honor. Enjoy the rest of your day. Thank you, David.

David:
All right. On this segment of this show, we review comments left by people who have commented on the BiggerPockets YouTube channel from previous shows. Our first comment comes from Randy Robinson Knight. I absolutely love this market. I have agents sending invites for brunch, champagne, and gift card offers. That is hilarious. It’s absolutely true. When the market gets tough, you start seeing agents and loan officers spoiling you a little bit. Take advantage of that. Our next comment comes from DDREI mentor. When I’m finding in Chicago is a lot of agents are removing listings and re-listing somehow removing the old price. You can’t easily see how long it’s been on the market, and you can’t see how much they lowered the price. I just keep seeing new listings of stuff I saw in May, and it will say that’s been on the market for two days with a listing history that has all blank prices.
All right, so DDREI mentor. Here’s what’s going on with that. When a listing agent puts a house in the MLS, there is a timer that starts that we call days on market. Houses have the most leverage possible when they first go on the market and then every day that they sit there that don’t get a buyer, they slowly lose leverage. It’s very rare you will ever find a house that’s been on the market a 100 days that’s going to get an over asking price offer. But it’s very likely if someone writes an offer two days in that they’re going to get an over asking price offer. So agents have figured out some kind of sneaky ways they can make it look like this house hasn’t been on the market for a long time and it’s not stale product. Like every good homicide detective knows your chances of solving a murder significantly decrease after the first 48 hours.
So real estate agents have just learned, let’s keep restarting a new 48 hours by taking it completely off the market, waiting a predetermined period of time and putting it back on the market. They’re making it look like it’s a new listing and that will help their clients in several ways. For one, it gets rid of that timer that was counting, making it look like it’s a house that nobody wants for. Two, it hits all the buyer’s email lists again as a new listing. So once you’ve seen all the new listings, the MLS stops sending you the stuff you’ve already seen by taking it off and putting it back on. It gets in everybody’s inbox again as a new property. And it also allows a listing agent to say, oh no, no, no, that offer’s not nearly good enough. We’ve only been on the market five days.
You’re going to have to do better. Here’s my advice to you. Who cares what the cumulative days on market or the days on market says or what the listing agent says? Write the offer. You’re willing to pay for the house, follow up with the agents to see if they’re willing to take it and continue that follow up eventually when no one’s buying this house, the sellers are going to take the offer that they don’t like because it’s not about the offer that they want. It’s about the best offer they can get. And every one of them eventually gets to the point where they realize this is the best offer I’m going to get, so I might as well take it. You want to be the first person in line when that happens.
All right, next comment comes from New Way Home. Excellent chat guys. I can almost imagine home buyers dancing and excitement with watching this keep up the good work. Well, I hope so, because home buyers for a very long time have not been able to dance about anything. They basically just had to take a deal that they didn’t like and pay way more than they wanted to and sort of put their tail between their legs when they got the keys to their new home, and they couldn’t be excited and just eat it. Well, that’s how it started. At least until three or four years later when they have over a $100,000 in equity in that property that they didn’t do anything to earn other than just wait. It’s one of the ways that the market cycle works. When you’re very rough to get the deal you like, you usually end up really liking that deal three, four, five years later when you love the deal you got right away, you probably aren’t going to have the same upsides so that yes, buyers right now are dancing in excitement.
It doesn’t mean that they’re going to be just as happy in five years if the market continues to stay where it’s at. There’s no right or wrong way to do real estate. There’s just the way that it’s working based on supply and demand and we hear a BiggerPockets want to give you the information to play the game based of what the defense has given you. Our last comment comes from Charles Granger. This video seems dishonest and geared towards bulls. I don’t think they’re appropriately displaying risk to investors. Additionally, you comment about your deals to display authenticity slash authority, but you have a different means of acquisition than the traditional investor. All right. Charles let’s start with different means of acquisition. I’m still using money just like everybody else is, so that’s not any different. I’m not buying properties, I’m not like finding properties off market.
I think that there’s some people that are doing that and they’re like, I just got this million-dollar house for $500,000 because they spent two years and a bunch of money sending out letters to find the deal of century. I’m not doing that. Almost everything that I buy comes right off the MLS just like anyone else. If what you meant that I have different means of acquisition is that I have more money than other investors, that could be true. I mean I definitely have don’t have more money than all of them. I have more money than what you’re calling a traditional investor. If you’re assuming it’s a person who’s just getting started. But I don’t think that’s a traditional investor that’s a newbie trying to crack into the game.
Most of the money that I have comes from properties I bought previously that I refinanced or pulled equity out of to buy the next round, which meant I bought and waited, which nobody wants to do or from businesses I started where I helped other people build wealth through real estate representing them as a real estate agent or a loan officer, which other people don’t want to do.
So rather than being mad about it, why don’t you just take my advice and do the same thing for yourself. Start a business in real estate or buy some real estate and wait and then pull that money out to buy more properties. Regarding the part where you’re saying you don’t think that I’m appropriately displaying risk to investors. I don’t know how to, because there’s two kinds of risk. There’s the risk of buying a property and then losing it because you couldn’t make the payment or there’s the risk of not doing anything and missing out on all the money you could have made. I want to just bring up a point that nobody really likes to talk about, but it’s very important. Let’s go back in time to 2014. Everyone’s telling you that the market is too hot. Now let’s even go forward. Let’s go 2016. The market’s even hotter and everyone’s saying don’t buy.
There’s no way that this can continue. The prices have to come back down. We just had a crash. Another one is coming, and you don’t buy a house. The money you lost from not buying in 2016 to 2022 is so much more than the money that you could have lost if you bought and then the market went down some. One of the cool things about real estate is that even if the market does go down, we still continue to collect rent, so we don’t lose the property. So there’s risk on both sides. We just only tend to focus on the part of risk that would lose something we already have. I’ll give you a little example of this. Let’s say I said to you, there’s an opportunity for you to make $200. It’s just about guaranteed. You got to drive four hours in that direction, pick up your $200 and then drive back home.
And it might be a little bit difficult. They’re going to ask you to do some pushups when you get there, but other than that, the money’s yours. And then I said, on a scale of one to 10, how urgent are you looking for that opportunity to go get that $200? Would you be like, whatever it takes, man, I’m going to fight through a hungry cage of tigers to get to my car so I can go get that money. Probably not. Most people would consider it, but they wouldn’t jump at the chance. Now in this same example say hey, there’s somebody in your office right now stealing $20 out of your wallet. You’d probably do anything in the world to get there and fight like hell to keep that $20 from being stolen from you. Why do we put so much effort into saving $20 but not into gaining $200?
I don’t know myself, it’s a thing of human nature. I don’t work any different than that, but I do want to call attention to it because oftentimes when we talk about risk, we’re only talking about what could go wrong. We’re not talking about missing out on what could go right. Think about this advice and anything else in life. Don’t go talk to that girl, man. She might not like you. It might hurt really bad. There’s risk involved in putting yourself out there. Don’t go tell her how you feel. Well yeah, there’s some risk you could get rejected, but consider the risk of spending your whole life never being with someone that you really, really love and always wondering what that person did. Which of those things is riskier? The last part is when you’re saying it’s dishonest and geared towards bulls. No one knows if this is a bull or a bear market.
I’m very, very clear with explaining to you guys why I think what I do, not just what I think. Do I think the market’s going to continue to go down? Yes. Do I think it’s going to be long-term? No. Do I think it’s natural? No, I think it’s artificial. I think we’ve raised rates artificially to slow down the market. It has worked, it’s pushed prices down, but it hasn’t necessarily pushed affordability down because the Fed isn’t doing this for real estate investors or for real estate. They’re doing it for the economy as a whole. And lastly, I do believe very deeply that when rates come back down, the prices are going to shoot back up and I don’t want people to miss out on that. So I hope you guys don’t think that there’s anything dishonest about the information that we’re giving you here. I do tend to have a bullish outlook on real estate long-term because when I look back for 500 years, that’s all it’s been.
Is this been going up constantly when I see all the money that’s being printed, I think it’s going to continue even more. Only time will tell, but I will say this, in order to protect against your downside, I’ve said it a million times, I’ll say it again. Keep more money in reserves than you need. Do not quit your job right now. Continue to work and continue to save and by smart cash flowing deals. All right, we love it, and we appreciate the engagement, even the negativity. I love that stuff guys. If you have something negative to say, if you’re sitting there grumbling saying, David always says to buyer, David says not to buy these markets, but I like these markets. Whatever it is, it’s okay. I’m not mad. I want to hear what you have to say. It actually leads to a better discussion and more depth being shared as to the inner workings of what makes wealth being built. And I want more people to hear it.
So please get on YouTube right now and tell me what you like and what you don’t like. Tell me what you don’t agree with. Tell me what questions you have that are not getting answered and we will do our best to address those on a future Seeing Greene episode. All right, our next question comes from Dave Meyer answering Travis in South Carolina.

Dave:
Hey, what’s going on everyone? My name’s Dave Meyer. I’m the host of the BiggerPockets Podcast on the market and I am the author of the new book Real Estate by the Numbers that teaches you to analyze deals like a pro. Today I’m going to be answering a question from Travis who invests in South Carolina and his question is about the time value of money. Travis writes, I am in the process of rehabbing a two bed, one bath home that I plan on renting out after this rehab. I’ll be totally out of funds making me unable to purchase another property that could come across my radar, thus losing money, which is why I bring up the time value of money. So my question is, should I free up funds now in case some great opportunity presents itself in the future? I generally don’t know that I want to do a cash out refinance because of rates going up.
And what if the deal never comes? It took me nine months of searching, waiting to get hold of this property and it’s hard to justify doing a refinance when there’s no guarantee I will find a property to invest in anytime soon. But at the same time, the house I’m rehabbing now has a 6.5% interest rate. So I suppose it’s definitely a possibility of burring this one and getting my cash out and keeping a relatively similar interest rate. What do you recommend? So Travis is basically in a BRRRR right now and is facing two options. He can either take the equity that he has generated by improving the property and leave it in the current deal, earning him some cash flow, or he can take the option of doing a refinance where he takes the money out and then hopefully invest in another deal. But as Travis says, he doesn’t know if he’s going to be able to invest in a good deal right away.
And he asks about the time value of money and how you analyze this question through the lens of the time value of money. And if you’ve never heard of this concept, it’s a little bit complicated, but the easiest way to think of the time value of money is that money that you generate now or that you have now is worth more than money that you have in the future because you can reinvest it. So as investors, we shouldn’t just be thinking about how much money can we generate by a deal. You want to think about how much money can you generate as quickly as possible. You want to get those returns and pull them up as close to now as you can so that you can reinvest them at a high rate of return. And so with this question, you basically have to determine which option between keeping your money in the deal or refinancing is going to generate you more cash faster.
And there are metrics that take the time value of money into account. You can do a discounted cash flow analysis, you can do a net present value or IRR, which is a very popular metric for real estate investors. And you can measure which one of these options is going to earn you the better return with the time value of money factored in. But just as with the math aside, just logically, what I would recommend doing here, Travis, is you should go out and see what kind of deals you can get right now. I’m sure you have a real estate agent, contact them and go run the numbers on five or 10 deals and figure out if you were to even before, don’t do the refinance, but just pretend that you’re doing the refinance and go run the numbers on five to 10 deals and see if that option would earn you a better return than keeping your money in the deal.
Because I generally don’t recommend pulling money out, especially at a higher interest rate to just sit on it because you don’t know if you’re going to get a deal. So the only reason I would refinance if I were in your position is if you knew that you were going to be able to reinvest that money at a higher rate of return than you’re earning with your current deal. Hopefully that helps Travis appreciate the question. Now I’ll throw it back to David.

David:
Man, that was some good stuff. I want to make sure we don’t gloss over. This idea of time value of money is very important. There was a lot of big words that were used there. Dave Meyer is obviously a data guy, so I want to make sure that people who are not data people don’t just have their eyes gloss over and say, I’m going to wait for something to be said that makes more sense to me. Here’s another way of looking at time value of money. We’ve all heard the story of would you rather be given a million dollars or a penny every day that doubles. So you get one penny the next day it’s two pennies and it’s four cents, then eight, then 16, then 32 and it goes on and on and on. And basically, right around the time you hit like day 30, it’s a whole bunch more money than a million dollars.
That is a story to illustrate the power of compound interest. When you invest money, and it compounds, and you reinvest the money that was added and that gets invested even more comes back and it grows at an exponential rate. Albert Einstein was once quoted as calling compound interest the eighth wonder of the world. To be fair, I think Albert Einstein is credited for saying a bunch of things that who knows if he ever said, but it’s still true that it’s a pretty impressive thing. If you want to understand the time value of money, here’s a good way to look at it. If I was to give you a penny on day one, would that be worth significantly more than a penny on day 27 of this 30-day compounding slide, right? Obviously, the penny is worth a lot more the further back you go and that’s what the time value of money is really trying to demonstrate.
If you invest your money at 15 years old, 20 years old, and it keeps doubling, that’s massively more powerful than doing the same thing at 80 years old because you’re going to die before the money has time to keep growing. And that’s all that the time value of money is really getting at. So from a overall perspective, that’s what I want you to take out of this video. Now, from a tactical perspective with the person saying, “Hey, I don’t buy deals very often. I really, really, really look for the perfect deal. It took me nine years to find the house I have.” If I do a cash out refi, the downside is I lose my good rate, so the property becomes more expensive. The upside is I have more money to invest, but the upside isn’t worth anything to me or it’s not worth much because it takes me nine years to buy a property.
So I see that the dilemma that this person’s in, here’s the advice that I would give. Put a HELOC on the property that has the equity but don’t pull the money out. Okay? Start looking for properties. Hopefully it doesn’t take you nine years to find the next one. Maybe you’re more comfortable. So it only takes four and a half this time find the property and then buy it with the money from the HELOC. Put that as your down payment to buy this new property. Now, you’ve got two properties, okay? Once you’ve got the second property bought, now refinance the first property that has the HELOC on it to pay off the HELOC. So do your cash out refi, pay off the HELOC and your original note, get the money back that compensates you for the money that you took out on the HELOC that you put into the next house.
This way the money doesn’t sit in the bank doing nothing for you while you’re spending nine years looking for your next house. You have access to it but you’re not paying for it because you don’t pay money on a HELOC until you pull the money out, which you won’t have to do till you find the next property. I hope that makes sense. That’s a way that you can avoid the situation that you’re in, where you don’t have to pick your poison. You’ve got an option that is not poisonous.
All right. I just was contacted by the producer of the podcast, Eric, here with a question that I want to include in the show. So Eric sort of jumped in. He is like, I don’t quite understand exactly how the HELOC works When you’re borrowing money off a property as a HELOC, I know you can get access to the equity, but how is that recorded?
So here’s the simplicity. A HELOC is really just a fancy word for a second position note. So you buy a property worth a million dollars and you put say $600,000 down. So you have a first position lien or a note in first position for $600,000, which means if there was a foreclosure, the first position person gets paid back first a HELOC, let’s say you took out another $200,000 on a HELOC. So you’ve got a first position for 600,000. A HELOC is just a second position note for $200,000. So you’ve got a total of $800,000 of debt against your million-dollar property. You’re still at an 80% loan to value when you go refinance and you say, “Hey, I want to do a cash out refinance.” And they say, “Great, we’ll let you take out 80% of the value of the home.” The money they give you on the refinance goes to pay off your first position note, which was in this case 600,000 at the lower rate and it pays off the HELOC, which was your second position note.
And now you just have one new first position note for $800,000 on your million-dollar property. And the $200,000 that you had taken out originally on that HELOC was the down payment for the second property that you went to go buy, which has now been paid off on your cash out refi. Thank you, Eric for asking for some question there and for helping me bring some clarity. Anytime we say HELOC, that’s just a fancy phrase. For a second position lien with an adjustable-rate mortgage by doing a cash out refinance, you’re turning first position, fixed rate, and a second position adjustable and replacing it with is one loan at a fixed rate that is no longer having the adjustable component. That’s the downside of a HELOC. Our next question comes from, Will and is answered by Pat and I will give my two cents on that.

Pat:
All right. Got a question here from a Will in California. How do I determine the correct amount of equity keyword equity here in this question? How do I determine the correct amount of equity needed to replace my W-2 income so that I can invest in real estate full-time? And how would I restructure my real estate portfolio to provide the cash flow I need in the most tax efficient man manner while preserving as much capital as possible to continue scaling up? And he goes on to say he’s got a duplex, one single family and one duplex both in Texas and he bought both of them with negative cash flow. Rents have increased since he’s bought them, but he’s barely getting any monthly income at this point. He says, I am getting a slight monthly positive on the single and the duplex is still a negative. So this is a great question and I’m seeing this more and more. It’s quite fascinating.
In the years past, people bought real estate based on cash flow and I don’t think that it’s smart to say that that has gone out of style. I think it’s interesting to see that some people stopped buying based on cash flow. I have never bought anything with negative cash flow or break even. I don’t understand the logic behind that, but I’m the one not answer asking the question, I’m answering it. So my answer is you need to get into things that cash flow. You’re in things that don’t cash flow, so get out of them. And here’s a rule for when you know should get out of an investment. If you could sell the property today and make more than seven times what your yearly cash flow is, you need to get out. So what that means is if your yearly cash flow is, let’s say it’s 500 a month and your yearly cash flow is $6,000, if you can sell the property and make more than $42,000, you need to get out because that’s around 10 or 11% return that you’re getting on equity.
And you need to be able to do better than that. When you’re buying these things new, you really should be shooting for 15% cash on cash. Worst case, 10% cash on cash. And what that means is if you’re spending, let’s say a $100,000 as a down payment on a property and you’re making $10,000 a year cash flow, that means you’re getting 10% cash on your cash that you put in. So you’re getting 10,000 out of a 100, you’re getting 10% cash on cash. That’s kind of like your bare minimum. Will, you’re way below bare minimum. You don’t even start above line. I think that you’re never going to be able to quit your job buying houses like this, never the next couple of years. Most likely they’re not going to give you any sort of appreciation like you’ve seen in the last five years.
Matter of fact, you might lose as the next year, two years, go on. If something’s worth 300 for you now, it could be worth 270 this time next year. I mean it’s possible. So you really got to look at this number, the seven X number and that’s going to be the case in both of these because you don’t make enough money on them. I would suggest you selling them and then getting into something that does cash flow. It might not be as close to your house as you want it to be. Might not be in as comfortable as a neighborhood as you want it to be. It might be uncomfortable for you. But first and foremost, most important thing, in my opinion in investing and trust, we have done this for over 30 years now. I have lots of investment is cash flow. That’s what you buy for first and foremost.

David:
Well, that was a journey down at Intellectual Highway, wasn’t it? Lots of good stuff to chew on with that one. That might be one you want to go back and rewind and listen to again. So let’s see. Pat gave some really insightful information about metrics you can use when trying to hit cash flow. Hitting a 15% ROI is very difficult to do in a market like this. My guess is Pat’s got access to some business opportunities and some bigger apartment complexes that are getting him a 15% return based on the internal rate of return. That’s probably not cash flow right off the bat. Now I don’t want to take too much time to answer this question, but I kind of see what’s going on here. Pat’s looking at, hey, if I invest my money in an apartment or something like that, that we’re going to buy hold for five years and sell.
And he’s incorporating all the ways that money are made through that investment, which is what the IRR does, the cash flows, the loan pay down, the selling at the end, the revenue that’s generated from the capital raising, whatever that would be, 15% possible. But most of our listeners are sitting here as you’re hearing this, you’re like, you’re only looking at the cash-on-cash return in year one to determine your ROI. There’s almost nothing out there that’s hitting 15% cash on cash return year one. So don’t get confused by what’s being said here. If you said, “Hey, I’m going to buy a property that rents are going to go up every year, there’s a big value add component to it, I’m going to add equity to it’s going to go up in value and rents are going to go up and at the end of five years I’m going to sell it.”
And you looked at the entire money you made from every single component I mentioned, 15% totally doable. You could do better than that with single family residential property. Like I’m getting over a 100% returns on a lot of the stuff that I’m buying when you look at the internal rate of return. Okay, that being said, that wasn’t exactly the question that was being asked by the caller. The caller was saying, look, I’ve got a W-2 job that makes good money. I want to replace it with investment income. You’re on the right place so far. How much cash flow or what’s the best way to build up cash flow to replace my job? And I think the subtlety that might have been missed was the person asking the question here, Will. Will, understood that it’s very difficult to build cash flow.
It’s much easier to build equity. So I think what will was getting at is what can I buy that will build equity that can be converted into cash flow that can be used to replace my W-2 income. He’s sort of breaking this into a couple steps and I do like that approach. Now, Will mentioned that his properties are not cash flowing really solid. And Pat heard that, and he said that’s not good. You shouldn’t be buying stuff that doesn’t cash. What Will didn’t say is how much equity is in those properties. Pat’s advice might have been different if Will had said they’re only making a little bit of money every month, but I’ve got $200,000 in equity because I waited three years. Rents just haven’t kept up with the value increasing. You see how this changes the scenario that we’re looking at here. So, Will here’s my advice to you.
This is the same strategy that I use for investing myself. Of course, I want cash flow, but I get cash flow, not by focusing on cash flow. You go after equity. There’s several ways you can do it. One is you invest in the right area, which you’re probably onto investing in Texas. So keep doing that by an area that’s going to grow. Number two, buy something that you can add equity to. You can rehab it, you can add square footage, you can improve it cosmetically, you can turn it from a long term into a short-term rental. Anything that will make the property worth more. That’s step number two, three. It’s what I call buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought it below market value, you then added equity to through some form of rehab.
You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex, okay? That’s my advice for you for how to get from, I have a job and I want to replace my income. You’re not going to get it by buying $110,000 duplexes in the Midwest. You’ll be doing that for a 100 years before you get the income that you’re getting from your job. You do it by adding value and equity in properties that still at least break even like you’re doing. And then exchanging the equity for cash flow in the future. So you want to be having both things going on.
You’re doing a 1031 exchange from existing equity into a cash flowing asset like an apartment complex, a triple net complex, a big short-term rental that’s going to make you more cash. And at the same time, you’re buying new properties and you’re adding value to them. And if you do it the way that I’m describing, you will never run out of capital, which was one of the concerns that you expressed. So first off, thank you Will for asking a good question. And second off, thank you Pat for bringing up some really good information that will help everybody else. All right, we have time for one more question and this one comes from J Scott reading a question from Cheryl.

J:
Hey everybody, I am J Scott. I currently own about 50 single family houses all around the country, including in the sunshine state of Florida, which is good because today’s question comes from Cheryl who is asking about buying rental properties in Florida. Specifically, she wants to know about how rising insurance costs in the state along with things like hurricanes and the potential for global warming are likely to impact investors who are looking to buy and hold in various parts of the state. Now, she specifically mentions Tampa, which is on the East Coast, or I’m sorry, the West Coast of Florida and Orlando, which is in the center of the state. Now, why I don’t have a crystal ball to know exactly what might happen in the future, I do agree with her that rising insurance rates over the past few years is making it really difficult to find good cash flowing properties in many parts of the state.
And there’s certainly risk, both short term risk from other storms and long-term risk from things like global warming that Florida might become a really expensive and a really difficult place to invest at some point in the future. Now, that said, Florida also has a lot of things going for it. There’s large population growth coming into the state, which is likely to push rents higher over the next few years, and there’s a lot of building going on in many parts of the state, which means that a lot more housing supply could keep prices reasonable for the next few years. Not to mention that while hurricane damage is horrendous and really has impacted tens of thousands of families, honestly, it does provide some opportunities for investors, especially those investors who are willing and able to do renovations. Now, all in all as a Florida investor myself, my recommendations are the following.
First, ensure that your flood risk before buying any property in the state and make sure that the insurance costs still makes sense given that flood risk. Second, if you’re going to buy in Florida, I would suggest diversifying across different parts of the state so that you face less risk from any single storm or any single weather event. And third, I would highly consider looking at property in the middle of the state off the coasts, which will help reduce the likelihood of storms and reduce your insurance risk. All in all, I believe that there’s a lot of opportunity left in Florida, but I don’t recommend putting all your eggs in one Florida basket. Anyway, thanks so much, everybody. I’m going to hand it back to David now.

David:
All right, thank you, Jay for that very insightful commentary. I’m going to second a lot of what you said and maybe just expand on some of your points a little bit. There’s pros and cons of investing everywhere, everywhere, and it… I get a little bit of a bee in my bonnet if you will, that people tend to ask questions that insinuate that they’re looking for an area to invest in that has all pros and no cons. It doesn’t exist. In fact, if you had the perfect area that had all pros and no, everyone else would be investing there, it’d be very hard to get a deal and that would become a con, right? So a lot of people look for areas with the lowest price point homes that they think are going to get them the highest cash on cash return and there’s no other investor competition.
They end up in areas that have no long-term growth and don’t build any kind of wealth. That’s what I’m trying to get at is you’re always balancing pros and cons. You don’t make wealth by trying to avoid cons. Now, let’s talk about some of the Florida pros and cons. J mentioned several of these things, the pros, massive population growth. Everyone’s moving there. I’ve said it before, if you just took like a table of the United States and you shifted it down into the right, that’s where all the population tends to be going towards right now and I think they will continue to for the future. Long-term population growth means you can expect increasing rents. You can expect a increasing tenant pool. You should have more people to choose from. When picking your tenants, you’ll have an overall better experience. Another pro is that businesses are moving into Florida.
I’m a Florida investor and this is one of the reasons that I’m putting money into that market is I’m watching a lot of businesses leaving New York and going into South Florida and that’s going to lead to increased rents in the future because people make more money and they have better jobs so they can pay more rent, they can pay more for a house, which both drives the price of my home and the rent that I can get for that home up. What else is good about Florida overall? It’s pretty good weather. You get a lot of rain and you do get hurricanes, but you don’t have the snow and the freezing cold issues like pipes bursting that can cause you some problems investing in real estate now, that’s why everyone wants to invest there. This is why so many people are talking about they like the pros, but you got to look at the cons too that Cheryl brought up and J highlighted.
Number one, insurance is ridiculous. It is insane. I’m getting hammered on insurance that is over three to four times as much as what my highest guess what it could be was the hurricanes have absolutely changed the way that homes are insured there. In fact, I have one house that I bought there during a 1031 exchange that blew me away. I didn’t even think this was possible. The lowest quote I could get on homeowner’s insurance for this property. Now it’s a big nice house, it’s near the beach, it’s over a million dollars. It’s 5,000, 6,000 square feet home. But still the premium to insure it as a short-term rental was $26,000 a year. That’s a down payment on a house in some places. So this insurance thing is legit. That’s a pretty big con. Another con, the actual hurricanes that cause these high insurance premiums are real and they do happen.
And that’s why J is saying consider investing in the middle of the state because you get less of that type of activity going on. Now, there’s a con to investing in the middle and you tend to make more money on the coastlines. That’s why we’re looking to want to buy there. We want to be near the beach. So you have to factor that into your choices. Another con for investing in Florida is that it’s very competitive in the best areas. There’s a lot of other people that are trying to buy now, let’s say for Orlando for instance, that is in the middle of the state. It’s going to be safer. Hurricanes don’t tend to hit that part as hard. You do have a good economy, but it’s very dependent on Disneyland. That’s why most people are buying short-term rentals or houses in Orlando. They don’t have a ton of industry outside of Disneyland.
And that makes me nervous. I’m not saying don’t do it, I’m probably overthinking it, okay. But part of my long-distance investing strategy is to not have too much of your assets in any area that’s dependent on one thing for its economic base. Most of the people that are living in Orlando are going to be like Disneyland employees. The people that are visiting it have something to do with Disneyland. Of course, there’s other businesses there, but Disneyland’s the biggest one. What happens if, God forbid there’s some scandal that comes out from Disney executives, knock on wood, right? And it gets canceled, it’s canceled Disney and nobody goes there because now it’s politically unpopular to go visit Disney World. I think I’ve been saying Disneyland, I meant Disney World. You see what I’m getting at? If that park shuts down or people stop visiting there, you now have an investment that no one is trying to use.
No one’s going to our Orlando to visit the swamp. They were going there to visit Disney World. So I get very nervous. I don’t think anyone saw Detroit collapsing the way that it did until it happened. So I’m not saying don’t invest in those areas. I’m saying be aware of the pros and the cons. I think a lot of good ones were highlighted in J’s response. I just want to bring a couple more, but the bigger point I want to make here is don’t get stuck only looking at cons. There always is going to be a con in any area. You’re going to just make sure that the pros outweigh them. All right. That is our show for today and I really hope you enjoyed it. We had another show where I brought in some backup to help answer questions because what’s important is that you guys get the knowledge and the experience that in our heads into yours.
If you’d like to buy one of the BiggerPockets books, simply head over to biggerpockets.com/store and use the discount code DAVID, and you can get 10% off any book that you’re buying there. I’ve got a couple in there to check out and new ones that should be coming. But more important than that, tell me what you think about the show. Go to YouTube and leave us a comment, subscribe to the page while you’re there, make sure you like the video, so the YouTube algorithm knows to keep showing you something along those lines. And if you want to follow me, you can do that @davidgreene24. I’m most active on Instagram, but you can follow me on Facebook, on LinkedIn, on TikTok, I think I’m officialdavidgreene and at YouTube I’m @davidgreene24. And I forgot to mention that tomorrow is Cyber Monday. So that 10% discount code that I worked will work at any time except for Cyber Monday because you’re going to get a bigger discount tomorrow up to 60% off on many BiggerPockets books.
Go check that out. If you’re listening to this after Cyber Monday, that 10% code will work. As I mentioned, follow me on social media, let me know what you thought of the shows and what I can do to help you build well through real estate. If you live near me in California, I definitely want to know about you because we put on meetups where we teach people about real estate investing and I’d like to invite you to them. Do me a favor, go leave a review, a five-star review on Apple Podcast, on Spotify and Stitcher, wherever you’re listening to this. And when you come to the meetup, show me the phone with your review because you deserve a high five. All right, everybody that wraps up our show for today. Please check out another BiggerPockets video, keep learning and keep making money through real estate.

 

 

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