The US Dollar’s Downfall, Flipping vs. BRRRING, & Cash Flow

David:
This is the BiggerPockets Podcast, episode 762. I don’t know that I’d say it’s apparent that the dollar will no longer be the world’s reserve currency, but it is moving in that direction and I’ve been talking about this for years. So we’ve known that inflation’s going to be a problem since before COVID, especially during COVID. We’ve known that we’ve printed so much of our money and America’s position within the global market has weakened to the point that other countries don’t feel like they have to keep the dollar as the reserve currency. If the world stops using the dollar as the reserve currency, there is a very high chance that money that is in other countries is going to flood back into our country.
What’s going on everyone? It is David Green, your host of the BiggerPockets Real Estate podcast here today with a Seeing Green episode where I do my best to bring the heat to teach you more about real estate, to answer your questions and to expand your knowledge base when it comes to real estate investing, and I think we hit it out of the park today.
Today’s show is fantastic. We talk about what to do when your STR or short term rental is no longer cash flowing and it’s time to move on to a new deal. We get into when you should use the BRRRR methods, specifically when you’re using HELOC money, as well as some other issues regarding HELOC money and the best use for it, how the dollar may impact real estate vesting in America, what’s likely to happen if the US dollar loses its position as the reserve currency of the country, which we’ve been talking about on the podcast for a while. All that and more on a fantastic show.
All right, before we get to our first question, today’s quick dip is find the expert and let them do the work for you. Learn to leverage your community. So many of you’re asking great questions and you’re coming here, but what I then do is want to connect you with the expert that can answer it even better.
We at BiggerPockets, have a lot of ways that we can help you with that you can listen to our regular podcast where we bring in experts in different fields, from bookkeeping to construction to appraisals to subject to financing, everything that you could ever want. Contact those people. You could also use the agent finder under the tools on the biggerpocketss.com website to connect with a lender, with an agent, with a multifamily specialist, whatever you’re looking for. You could check out biggerpockets.com/bootcamps to take a course from a person who will teach you on a specific strategy or you could reach out to me and I’ll put you in touch with my team, my people and the people that I use. But whoever it is, however you’re doing this, make sure you’re talking to the expert and not trying to figure this out yourselves. I wouldn’t recommend anybody represent themselves in court. And in the same way, I wouldn’t recommend that anybody try to learn the jobs of other people involved in the real estate transaction. Focus on what you do best and let them do what they do best.
All right, let’s get to our first question. I’m excited.

Josh:
Hey David, my name’s Josh. I’ve done about a half dozen deals now in the Grand Rapids and Lansing area of Michigan. So I’m getting my feet wet and doing okay. And my question revolves around, I’m doing my first BRRRR and it’s actually working out pretty good. I purchased property for 42,000. I’ve got 55 into the rehab, all said and done, closing costs and everything. And I just had a desktop appraisal done because it’s not quite finished yet. I had a desktop appraisal done and it came back at 140, so I should be able to refi at 75{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} LTV and take all my money out, which is great.
The issue is that typically when I evaluate properties, whether or not I want to buy them, I look at my cash on cash for the first 12 months, but then after that point, I transition to evaluating properties based on return on equity once they’re in my portfolio. This property, because of interest rates is only going to cash flow about $150 a month, which is fine because I’m leaving nothing behind. So it’s an infinite cash on cash even though it’s a little lower monthly cash flow than I would like typically, but it’s a play and that’ll grow.
But the issue now is that I’ve got $40,000 in equity and I’m only making $150 in cash flow a month. That’s a really low return on equity on day one. So from a ongoing evaluation standpoint, it looks like I should sell the property and flip it instead of keeping it as a BRRRR. So my question is with interest rates where they are, is it ever the right choice to BRRRR or flip? Or I guess if you’re looking at return on equity, is it ever the right choice to BRRRR instead of flipping, or should I just be flipping? Or how do you look to evaluate? Because my return on equity’s going to be really low, but I do want the long-term benefits of another long-term rental in my portfolio. So I’m just a little curious about how you would evaluate these and what your advice would be for a BRRRR property with a low return on equity because it’s a BRRRR property. So thanks a lot, appreciate the podcast

David:
Josh, my man, such a good question and such a good position to find yourself in. This is just going to highlight so many good teaching points. You just won on The Price Is Right, and you have to choose between a Ferrari or Lamborghini. That’s the situation that you’re in. You’ve got 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of your initial capital back out of the bur, but you’re recognizing with the equity that’s left in the deal after the refinance, the $150 a month is not an incredibly high cash flow.
Let’s go your two options. You could sell it and get the equity back out of the deal, put it into something else, or you could hold it. Benefits of holding well, you don’t need to get money out of that deal because you’ve already got your initial money out so you still can buy more real estate. This isn’t stopping you from buying more real estate. Holding this property over the long term will lead to appreciation and likely rent increases. How to capitalize on that? Is it in an area that rents are likely to keep going up every single year and the property’s likely to appreciate every year? If it’s not in one of those areas, if it’s in a stale market that just doesn’t grow, rents don’t increase, we might lean a little bit more towards selling and getting the equity out and putting it into something else. If it’s an area where growth, I’d lean more towards holding.
Now let’s look at the benefits of selling that property. You would get a little bit more equity out of it likely if you sold because you’re going to be leaving, that’s something about BRRRR is you get all of your money out, but there is still value left in the deal. For the people who argue BRRRR is risky because it’s increasing leverage. It’s not. When you refinance it, say 75{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} loan of value or 80{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} loan of value, that is no different than if you put 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} or 25{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down on a house. Just because you get 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of your capital out does not mean you get 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of the equity out of the deal. You’re still leaving it in there. But if you sell, you’re also going to have closing costs, you’re going to have realtor commissions, you’re going to have expenses associated with it. So for more expensive properties, the portion of closing costs is a smaller proportion of the overall money you’re getting out. On inexpensive properties, your closing costs are a higher percentage of the money you’re getting out, so it usually makes more sense to try to avoid selling or even refinancing in some cases cheaper real estate, whereas more expensive real estate, you have the benefit of if you have to sell, you’re getting more money back than what you’re paying in the closing costs.
Another expense you’ll have if you choose to sell are capital gains. You’re probably going to have to do a 1031 if you want to roll over your gains so you don’t pay taxes because those can be significant on deals like this. Whereas if you hold it, you can avoid that. So once you’ve considered all of this information, you’re in a little bit of a better position to decide if keeping makes more sense than selling. If you sell, you’re going to have taxes. You’re also going to have closing costs, may not get as much of that equity back out of the deal as what you’re hoping to unless you do a 1031 exchange. And if you do a 1031 exchange, you got to have the next deal lined up. Those can be tricky.
Most of the time, Josh, you’re probably going to be better off holding it, keeping equity in the property, getting your infinite return, that 150 bucks a month and moving on to the next deal. The only time I would say you’re better off to sell and not keep, has nothing to do with the BRRRR just has to do with location. In the same sense that I would look at my portfolio and say, I’m going to keep the properties that are in good locations. I’m going to sell the properties that are in inferior locations. You’re in the same boat. I’d look at it the same way. Thanks for your question though, and great job.
All right. Our next question comes from Joe and Florida. “How are you evaluating your portfolio and future investing strategy now that is becoming more apparent that the dollar will no longer be the world’s reserve currency?” Oh boy, Joe, you’re asking the questions I love, but this scare me.
I don’t know that I’d say it’s apparent that the dollar will no longer be the world’s reserve currency, but it is moving in that direction and I’ve been talking about this for years. If you listen to this podcast, you hear the stuff that they’re going to talk about on the news before they start talking about it on the news, and that’s because most people don’t look at what’s going on under the hood of their car until the light comes on, the check engine light, the check oil light, whatever it is. We’re sharing with you guys from BiggerPockets what we see happening under the hood before the light comes on.
So we’ve known that inflation’s going to be a problem since before COVID, especially during COVID, we’ve known that we’ve printed so much of our money and America’s position within the global market has weakened to the point that other countries don’t feel like they have to keep the dollar as the reserve currency. I will come right out and say, I don’t know what’s going to happen, but I will share my opinion on what I’m planning on happening because you’re asking about my opinion and my portfolio.
If the world stops using the dollar as the reserve currency, there is a very high chance that money that is in other countries is going to flood back into our country. That means we will have even more inflation than what we have. Just because we’re feeling inflation, most people don’t pay attention to what’s going on until the symptoms come, but you can’t measure your sickness by the symptom. You have to know what’s going on inside your body. It’s pretty bad. We printed a lot of money so that we could avoid recessions in the past and there will be a price to pay for that and it will come from the weakening and potentially destruction of the US dollar.
Now there’s things that are working in our favor. Other countries have done the same thing. They’ve printed too much of their money, but we see what happened. Look at Venezuela, look at a lot of other countries that have had serious, serious problems with inflation, which creates affordability issues, which leads to poverty and at BiggerPockets is we’re trying to prevent poverty from happening. So the short answer is that’s why I say we need to buy real estate. That’s why I’m buying real estate. If we get massive inflation, the property I bought for $1 million will stop sounding like it’s that much money because everything’s going to cost $5 million at some point. The things that we think are expensive right now won’t be expensive, and I just guys just think about this.
At one point in our lives, my parents were paying rent that was like $250 a month, and that felt very expensive, but it was because at that time I could buy something of value with the quarter. We used to have, when I was a kid, coins actually were kind of important. I can’t remember the last time I needed a coin. Their just a pain in the butt. At some point we’re just going to get rid of coins. We hardly ever use them. Okay? At some point a million dollars sounded like a lot of money. It still sounds like a lot of money. It’s not nearly what it was. And there will come a point in history where we look at a million dollars and think why is millionaire a word? All of the book titles that have millionaire in them aren’t going to be very important. If any of you that are the younger listeners have wondered why we talk about six figure jobs, that’s a badge of honor. You’re confused by that. Well, when I was a kid’s six figure jobs meant you were really, it was like the equivalent of making $250,000 a year to be able to make a hundred thousand dollars.
This is what inflation does. That process will be sped up if dollars come back into our country or if we can no longer just keep printing money. That’s a secondary issue. If the dollar’s not the world reserve currency, we can’t just keep making more and more of it and having other countries hold it. What would happen is we would have to actually create more products in America.
So not that Seeing Green is meant to be an economic show, but that does affect real estate. So if you think about generally speaking, we import goods from other countries. So other countries make cars, medicine, clothes, everything. I’m wearing a shirt right now that was made in America, but that’s very rare. Most of them don’t come from America. We import useful things from other country and what do we give them in exchange? Dollars. Now, dollar has value because it’s the world’s reserve currency, and so it’s considered the safest form of currency, but if that stops happening, they’re not going to want our dollars. They’re not going to send us their cars, their clothes, our medicine, the things that we need, our supplies, they’re not going to trade that for dollars. They’re going to insist on something better, more of those dollars which creates inflation or something of value in return.
If that happens, we’re going to have to make more stuff in America, which means it will be more expensive. We have labor laws here, we have regulations, we have working conditions that have to be met. We have people that expect a higher wage. I think everyone can agree with me that in general it’s been hard finding people in America to want to work. COVID showed what that was like. You’ve been to a restaurant, they all have signs that say, “We’re sorry for low staffing. We are trying to hire, if you know anyone who wants a job, have them apply.” We can’t hire anybody. It’s becoming very difficult to get American’s to work, which means if we have to produce our own goods, we’re going to have to pay a lot more for those than when we’re importing them from a country like China or India that has a labor force that is willing to work for less.
So what does this mean? It’s not good news. It means everything’s likely to get more expensive, and that’s why I’m encouraging people to buy real estate. Real estate will collect income that is in proportion to whatever happens with inflation, so rents can go up when inflation goes up, the value of the property will go up as inflation goes up. It’s another source of income when everything becomes less affordable. Don’t know. Don’t have no idea if that’s the way it’s actually going to play out. Nobody does, but that’s my take on it. That’s what my concern is and that’s why I’m out here sounding the alarm that if you can own a home instead of renting, you should.
All right, our next clip comes from Quadre in California.

Quadre:
Hello David, and thank you for taking my question. My main question was I recently received a $200,000 HELOC on a property that I currently rent out in Wildomar, California, and I was thinking about taking that money and trying to invest it in properties in the Midwest. My main question is pretty much a two-part question is how should I go about that? One, should I use the money to buy a property cash, or would it be better for me to purchase properties with a 25{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, 20, 25{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down payment and go about acquiring properties that way? Thank you.

David:
All right, Quadre, thank you for that. Congratulations on the HELOC. Let’s break down your options. If you go pay cash for a property with the HELOC, I just want to differentiate because your mind will play tricks on you. You’re not actually paying cash for a property. That property still has debt associated with it, although the lien is not on it. The lien is on the investment property that you took the HELOC out on.
Now, think about what rates are right now. Your HELOC rate could be 8, 9, 10, 11, 12{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} depending on the situation because it is investment property. That’s the equivalent of getting an adjustable rate mortgage on the new property at 10, 11, 12{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. I don’t know exactly where your rate is, and that means it can go up. Okay, so if you’re going to go buy that property, it’d probably be very hard to find one that cash flows with a mortgage at above 10, 11, 12{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. So don’t get caught thinking that you’re analyzing the second property as if it doesn’t have debt because they’re going to look like they cash flow, but they’re not actually going to cash flow if you add the debt, at least it’s a great deal. Okay? Everything I’m about to say, throw out the window if it’s a great deal. We’re assuming this is just a standard base hit deal We’re talking about.
If you go buy a property and you use the HELOC for 25{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of it, you end up paying the higher rate interest, say 10, 11, 12{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} for 25{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of the mortgage and get a lower interest rate, say something in the sixes or maybe low sevens for 75{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of it, which would make the property cheaper, but it will increase your risk. You’re now going to have a lot more financing on this property, okay?
I would need you to bring me a specific deal for me to be able to tell you if you should use the HELOC or the loan or a hybrid, and we don’t have that, so I can’t give you that specific advice, but I can give you general advice. In this market for most people in most cases, I like using HELOCs for short-term purposes, much more in the down payments on new property. I like flipping, starting a business, investing money in some way that’s going to get you a return. I like a wholesaler using a HELOC to spend money, 10 grand, 20 grand to send letters that’s going to turn into revenue when it comes back and they wholesale it much more than I like them using it to buy a cash flowing asset because those are very, very hard to acquire and find right now. So just something to keep in mind. And if you want me to give you more specific advice, just submit another question and be like, here’s the deal I’m looking at. Do I want to do it this way or that way? I’d be able to give you better advice with that information.
All right. In this segment of the show, we talk about YouTube comments from previous shows. I love getting into this because they get to hear directly from you the audience. First off, if you’d like to be featured on the show, head to biggerpockets.com/david, submit your question just like our other awesome guests have done. And if you don’t want to do that, head over to YouTube and leave us a comment on today’s show and I just might read it on a future episode. Want to increase the likelihood that your comment or question will get featured on Seeing Green? Make it good, make it funny, make it engaging, make it interesting. We look for the best ones to put on the show.
These comments come from episode 750. The first is from Zach Pate. “Building the foundation is so crucial, something I tried to put a lot of emphasis on prior to jumping into real estate. By skipping this, it’s like trying to build a house on sand. It will never hold up.” Wow, you just went full-blown Confucius on us right there, Zach. That’s powerful.
And I’m going to step into the role of broccoli. Okay? Seeing Green. I’m going to give you your green. No one likes it. No one likes vegetables. I don’t like them either. In fact, you didn’t ask, but I’ll tell you a little thing about me. When I do eat vegetables, I almost have to combine it with some kind of meat. I had asparagus today. I just don’t like vegetables, so what I did was I mixed it with the protein that I was eating. Little quick tip about David Green there, vegetables are not my favorite, but if I eat them with something I do like I can stomach them.
So I’m trying to take that principle of how I eat vegetables and feed it to you guys in the podcast that I do. I’m trying to give you what you need to hear, but mix it in with something that you want to hear to make it a little more palatable. When it comes to building wealth, when it comes to becoming a millionaire, when it comes to whatever your goals are, it’s not going to be what you see on people’s social media reels. They’re going to take the full dinner and they’re going to highlight the ice cream sundae and show you that to get you to come to the restaurant. They’re not going to show you that in order to get the sundae, you actually have to eat a lot of vegetables first, but wealthy people know this.
The people that are making really, really, really good money in real estate are not living passive lives. They are working a lot, a lot. And sometimes it’s okay to say, I don’t want that much money because I don’t want that much work or risk associated with it. The foundation is everything. You’re going to a build a foundation by having the right habits. The book I’m working on for BiggerPockets right now is called Pillars of Wealth. I’ll give you guys a URL for that. When we have a pre-order for it and it basically breaks this down. You have to be good at saving money and budgeting, you have to be good at making money, I call that offense, and then you have to be good at investing. You need to be good at all three. If you don’t have all three, you don’t have a foundation and you’re going to build something very quickly that’s going to collapse when the market changes, so thank you for that, Zach.
Our next comment comes from Lillian Luna Garcia. “Hi David. I have a question. I have listened to the BiggerPockets episodes for over a year, and I’ve recently got my first deal. I closed at the end of January. I wanted a fourplex but was not penciling in, so I got a duplex in Riverside, California County.” Hopefully you use one of our agents. I’d love that. “I’m house sacking and I’m remodeling the first unit to rent it out. The back house has a large garage and I want to make it into ADU of one bedroom, one bath, move into that, then fix the other unit to make it a two bedroom, one bath. However, I have to use my credit card to pay for my investment. Do you have a better strategy I can be using to speed up my project? I’m currently doing one unit at a time, paying off my credit card than doing the next unit. My goal is to make my duplex into the fourplex I originally wanted. Any advice helps. Thank you.”
All right, Lillian. First off, if you had used a David Green team agent, tell your agent that you want to talk to me about this and because you used us, I will answer this for you directly, but for everybody else to hear the advice that I would give you, I’m hoping you don’t have to use a credit card. I’m not thrilled with that option unless it’s your last, last, last resort or if you make really good money and have a really safe job, maybe you can take that risk. One thing you could do is finish the first part of it using private money, okay? So find a person out there who’s getting no return on their money, offer them a 6{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} return, a 7{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} return, and make interest only payments to them for a couple of years and use their money to do these remodels. Okay? That’s the first thing you could do.
Then when the remodel is done, you could refinance it, get your money back out, pay off that note, or just keep paying the 6{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} or 8{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} interest. Whatever you negotiated, that would be much cheaper than a credit card, would be the first thing I’d look for. Make sure you give yourself longer than a year. You’re going to want a couple of years in case something happens. Other than that, Lillian, you’re thinking the right way. You couldn’t find the fourplex, so you bought the duplex and you made it into a fourplex. This is not just looking for a great deal, this is making a great deal.
And our next comment comes from Casey Brightwell. “Awesome podcast. I’ve been listening now on and off for about a month. Great advice.” Thank you for that, Casey, and from EJC. “David, you speak often about the need to increase the velocity of money to build wealth. I’m starting to look at my 401(k) as stored energy that I’d like to put into motion to accelerate my wealth building journey.” Wow, this is a disciple of David right here. Way to go. I love the way you’re talking. “I took a loan out on my 401(k) when I bought my primary residence years ago, so an additional loan is not an option. I also looked into an in-service withdrawal, which I’ve heard some plans allow for an investor to roll into real estate. My retirement plan does not allow me to do this. I’m curious what your thoughts would be on taking a withdrawal that would result in penalties and an increased tax burden for the given year in which the withdrawal is taken. I’ve gotten hundreds of thousands of dollars locked into my 401(k) and that money doesn’t seem to be performing as well compared to my real estate portfolio. I’d like to continue to build my real estate empire and I almost think that the penalties will be a wash in the long run. What are your thoughts?” This is a super good question.
All right, so first off, if the penalties are evened out by the gains you make in real estate, yes, that can be something to be done, but there’s not a guarantee they will be, so we’re going to tread really lightly when it comes to doing anything that would incur penalties or a tax burden or in involve you risking retirement funds. Something that I was thinking when you were describing this is, are you able to take this retirement plan and roll it over into a self-directed IRA? We have a show coming up with an expert in this area, being lookout for Karin Hall and The Power of Investing in Realty and Alternative Assets With Your Retirement Account, should be episode 770.
That could change everything. If you could just take it from the form of energy it’s in, turn it into a self-directed IRA, which is a different storage of energy that has more flexibility for getting the energy in and out of it, otherwise the money in and out of it, that could answer your question there. If you can’t and you’re going to do it with penalties, only do it for a screaming deal. I’m going to say that again, only do it for a screaming deal. Do not do this for a base hit or a decent deal. When we say it’s okay to get base hits or we want to look for base hits, that’s assuming we have cash that we’re putting into them that is useless as far as increasing its value just sitting in the bank, losing money to inflation, you’re better off to put that into a deal. If you’re putting money into a deal that’s going to cost you money because you’re taking it out of your retirement account, it needs to be better than a single, right? Maybe it has to be a double, triple, double and a half, something like that.
All right, I hope you’re liking today’s show. If so, please go into YouTube and leave me a comment and tell me what you’ve liked about it, what you like about Seeing Green, what you think about my vegetable eating confession that I gave you guys and what you’d like to see more of on the show. Also, if you’re listening to this on Spotify, be look out for the polls. If you’re listening to the show, head over to Spotify and leave us a comment. We want to get better and stay relevant, so drop us a line and share your thoughts and fill out the polls that Spotify asks you about what you like about the show.
Our next question is a video question from Harold Blanco in Springfield, Massachusetts.

Harold:
Hey, David, how are you? My name is Harold Blanco. I’m calling from Springfield, Massachusetts, and I have a couple of questions about lending actually. The first one is the lending requirements, what are the lending requirements for a person that is a self-employed or has a owner of a small business? As you can see behind me, that’s Paula’s Barn Inc Child Care, my wife and I, we run a childcare business out of our house. And I’m looking into buy another house to house hack because this house is childcare. It’s a business more than anything else, but both my wife and I, we work here and this is our business, this how we get our income. And I would like to know what are the requirements, especially for this time that it’s so difficult when the interest rate so high and maybe banks are not lending as comfortable as they used to. Also, I have another question about lending. Does having an IRS debt or debt with an IRS have any influence on the getting a mortgage loan? Thank you and I hope you have a wonderful day.

David:
Thank you, Harold. This is a good question and it also is a good opportunity for me to make a teaching point. Questions on the specifics of a certain trade, like tax questions, mortgage questions, contract questions for real estate, sometimes even construction questions or bookkeeping questions. We do want you bringing those to me here, but I just want you to know I will never be able to give a solid of an answer as a good person in that trade. Now, part of the value I can bring you guys is if you reach out to me, I can connect you with the person who is going to be good. I can connect you with my CPA, I can connect you with my bookkeeper, I can connect you with a loan officer that I know is good at this. Because I can give an answer, but it will never be as good as the person who’s swinging a hammer every single day when you want to ask about floor choice, right? I sound like I know more about construction than someone who doesn’t get into it. I don’t know anything about construction compared to the people that are in it every day.
Very similar to jujitsu. You guys are waiting for a jujitsu analogy. Wait no longer. I am really, really, really good at jujitsu and fighting against people who don’t know and don’t know how to fight. The minute that I get against somebody who does train, I am terrible, okay? 15 year olds could whoop me. And there’s something to be learned about that in life. We’re often comparing the people that we look at to ourselves who know nothing and like, whoa, that person’s great. But in their world, are they great? Are they one of the better people at their academy? Are they one of the better people in their world?
So Harold, when it comes to self-employed lending, it is a completely different set of rules just like you mentioned, some income counts, some income doesn’t count. Some debt, like the stuff that goes to the government counts, sometimes it doesn’t. You’re going to have sometimes child support or alimony payments or back taxes. Most of the time our loan officers will check with the individual lender and say, in your loan program, can they use this income? How many years of income do you need to see from their childcare business before you feel good crediting them that income? And how much of it will you credit? How many years of taxes does this need to be claimed on? And the reason I can’t tell you right off the bat, this is the way it works, is every lender has different requirements.
Now, a good mortgage broker’s job is to go do what you are asking for you. You tell them, here’s what I got. They take what you got, and they go look for the person that will accept it. We call this 1099 approvals or self-employed. They’re definitely trickier. They take more time. This is why, especially if you’re self-employed, you don’t want to wait till you get a deal on contract and then run to a lender and be like, “Can you get me a loan?” You don’t understand what you’re asking for. It’s very difficult. W2 loans tend to be much easier to give. So reach out to me directly, I’ll put you in touch with one of the one brokerage guys. They can answer these questions and for everybody else who’s thinking the same thing, it feels safe to get the information. How does this work? But the answers change. Just like if you learn construction codes, those codes change, the rules change, the way that things are done often change. You actually have to have a contractor that’s aware of what the shifting regulations are.
So a little quick tip for everybody that’s listening here, send me your questions, but know that it’s better to be directed to the expert in this field that can tell you like a CPA that knows a tax code that’s changing. Then make decisions based off information you heard on a podcast two years ago, things like bonus depreciation changes with what can be taken, things like the full-time real estate professional status change. You might have been listening to a podcast from a year ago and we said, if you’re W2, you can’t take bonus depreciation against other forms of income, but now there’s the short term rental loophole they call it, that you could use. So you always want to talk to the person directly. Just let us at BiggerPockets, put you in touch with who those people are. Thank you, Harold and fingers crossed for you and your wife’s business man. I love, love, love small business owners. Way to go.
All right. Now, I was going to move on from this question, but I actually took a minute to talk to my partner in the One Brokerage, the company broker Christian Bachelder, and got his take on this as if we had contacted him ourselves, and I will tell you guys what Christian said. “First and foremost, it’s important to understand there are multiple ways to qualify.” I mentioned that to you guys as well. “If this is specifically referring to conforming guidelines, which I’m assuming it is, which means if this is for a Fannie Mae, Freddie Mac, conventional type of loan, any self-employed, our business income typically needs to be seasoned for two years on tax return for conforming loans. That’s a general rule.” Which is why you hear people say you need to show two years of income, two years of income. You hear that a lot. That’s because that’s one of the conforming loan rules.
“We take the average of the net income, not the gross, and add back depreciation, then divide that number by 12 to get monthly income.” Many of you, your heads are already, I don’t understand all that. He’s using a bunch of big words, which is why I tell you to contact a mortgage broker and let us figure it out for you. “That’s what we use to calculate a debt to income ratio, which is what we use to get the pre-approval. If the borrower has been in the business for more than five years, it’s possible to qualify with only one year of tax returns instead of averaging out the two years.” So if you have five years of experience in the industry, sometimes you can use last year’s income, not two years of income.
“There’s also non-conforming products that you can qualify based on deposits in your bank account. These are called bank statement financing,” I’ve used these loans myself because it’s a pain in the butt to show them all my different income streams and sources and have it all verified, “That are very forgiving to self-employed borrowers who do not report their taxes perfectly. Second, and regarding IRS having the debt you have influence your debt’s income, it does. The monthly payments, if you’re on an assignment plan that has more than 10 months remaining will be added to your debt’s income ratio just as any other liability would be.” So we would factor that into it for you, give you a pre-approval based on that.
Now, had you contacted us, what we would’ve probably said is, or you can skip all of that, not worry about qualifying off of your income at all, use a debt service coverage ratio loan that we can qualify you based off the income the property makes and you can skip all your debt to the IRS and all of the income and all of the taxes and all the things, Harold, that I think you don’t want coming up, which supports the fact that I’m saying you should contact the person directly and let them solve your problem for you. That’s what a good person does, is they solve your problem for you.
All right. Our next question comes from Jesse Dylan in Central Massachusetts. “Hi David. I’m about to sell one of my properties for the first time. I’ve owned it for less than a year, but isn’t performing nearly as well as I expected it to despite tons of analysis and pivoting.” Can’t say that I’ve never been there. “It’s a single family house that I bought as a short-term rental, and it doesn’t work as a long-term rental or a medium term rental rookie mistake.” Yeah, but way to go take an ownership of that, Jesse.
“It’s far from breaking even. Otherwise, I just write it out as it’s in a fine high cost, high appreciation state. Not a good feeling to have made a bad investment, but I’ll at least be breaking even and I learned a lot.” Good attitude about this so far. “I should walk away with 95K, but would have to buy something for 525K plus to do a 1031 exchange. Finding good deal that’ll work with less than 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down on a time crunch seems impossible right now, especially because I’d want to get into a two or three family close by, so I couldn’t use a vacation home loan again. I’m considering not doing the 1031, using the money how I want. Then figuring out how to offset the $14,000 tax burden. I could add another unit to another property and cash out refi when rates are lower, buy another two or three family with 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down around 400 K nearby, invest passively in someone else’s deal, buy a camper to medium term rental on my house hack property. The options are overwhelming. If cash flow is my primary goal. What are your thoughts?”
All right, let’s break this down into different components of your question. First off, if you’re selling it and and you’re going to have a gain after everything that’s going wrong, that’s pretty good, but I thought you said you’re breaking even. So I don’t know where the $14,000 tax burden comes from if you’re breaking even on this, you might not have a tax burden unless you 1031 into this deal from a previous deal. And when you say $14,000 burden, does that mean your gain is $14,000 because you’d only be paying a percentage of the gain, which would be insignificant, or does that mean your gain is like 80,000, 70,000 and so the percentage you have to pay is 14,000? I need a little clarity there. Because even paying 14,000 in taxes isn’t end of the world if you’re getting $95,000 back.
Another thing you could consider. When we had Tom Wheelwright on a previous Seeing Green episode who helped me out here, we talked about how you don’t always have to do a 1031 to shelter the gains. Sometimes you can take the gains on a 1031 buy real estate, do a cost segregation study, get bonus depreciation that you take up front, and that is enough to offset the gain that you made when you sold the property so you don’t owe taxes. So that’s another thing you could look into if you have a CPA you can talk to, if you don’t, let me know. I’ll connect you with one of my folks.
Now, if assuming we are past the tax issue and now we’re talking about what do I do with the money, you brought up a lot of good options, but here’s what I’m picking up from your question. There seems to be, and I’m totally reading into this because you just wrote it out on a document, but there seems to be a lot of urgency in what you’re saying here. You have all these different options. Do I want to invest passively in someone else’s deal? Buy another property and do a cash-out refi when rates are lower? Buy another multifamily property? Buy a camper to put in the back of a deal I already have to get a little bit more money coming in? I don’t think you need to be filling any urgency at all right now, Jesse. You’re good. You got into a deal. You realize it was harder than you thought. You bought it right, which is super important, so now you can get out with without a loss or with a very minimal loss, you got a good education. Don’t feel like you got to jump back into something and run full ahead of steam into this.
Now, if I break down why people do that, why I’ve done that, why this happens in life, it’s almost always because we are unhappy with our life right now. We don’t like our job, we don’t like our relationship status, we don’t like our car. We don’t like something about our lives and we think real estate is going to fix it, and so we get into this irrational exuberance, just I have to get in there and I have to go buy another property to make everything better. You don’t. Take stock of your life as a whole. If you’re not happy with certain parts of it, they might have nothing to do with real estate and fixing those problems will help you not make emotional decisions when it comes to real estate and instead you make financially sound decisions when it comes to real estate.
So with that $95,000, I would consider looking for a different house hack, a second one, okay? Can you buy another property in a better area, that’s a better property, that has more units, put 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down and take the house you’re living in right now and rent that out, would the numbers work there? That’d be the first option. I’d also keep some money in the bank. It’s not the end of the world to have some reserves when we don’t really know what’s going on with our economy, with our country, with where America sits as a whole with the next election that’s coming up. This is the most uncertainty I’ve ever seen in the market. I like the idea of sitting on some cash right now and waiting for a great, great deal.
All right. I hope that helps. If my answer has got you thinking of new things, Jesse, please submit another question. Let me follow up with this on a future episode. I’d love for us all to be tracking your journey. And if you want to know more about Jesse’s story and see the cool person behind the question on Seeing Green, please check out the Real Estate Rookie Show, episode 231, but don’t listen until you’re done with this one, okay? You’re in class right now and you’re not excused.
All right. Our next question comes from Derek in Knoxville, Tennessee, an exploding market. “Hi, David. I’m 24 years old.” That’s a good number right there. I like 24. “And I just moved to the West Knoxville area. I’m trying to invest in a house hack in West Knoxville, which is the nicest neighborhood, and I have a full-time job in marketing. I like it and it pays decent. I also picked up a part-time job on the weekends at an apartment complex as a leasing agent, but it doesn’t pay very well. What are some of their fields related to real estate that I can venture into without a high barrier to entry while still working my full-time marketing job?”
Okay, let’s see here. You got a thing for marketing, which is always confusing to me when people say that they work in marketing. I never know what marketing means. Does that mean that you make flyers? Does that mean that you come up with SEO? Side note for everybody who’s in marketing or everyone who says, I’m in marketing, make sure your next statement is telling everyone what that actually means. This is just one of my pet peeves because I can’t give you a great answer because I don’t know what skills you have, right? If you told me you were an electrician or that you were a bookkeeper, I’d have a very good understanding of what advice I could give you, but marketing is just so vague and means so many things.
Let’s work under the assumption that Derek here is very good at getting eyeballs on whatever he’s responsible for. I’m guessing that’s why he’s working in the apartment complex as a leasing agent, because he’s good with people. He’s a very charismatic person, he’s friendly. He likes human beings. That’s also why he likes marketing. Look for people that need marketing, and that’s going to be a real estate wholesaler or a person who’s looking for creative financing or even a flipper. All of those people in real estate need marketing skills to find them off market opportunities. They can’t just go to the MLS and look for the deal, they have to go out into the world and get deals to find them. So if you have solid marketing skills and you want to work in real estate, that’d be a great opportunity is find a person who’s already flipping a lot of houses, a person who’s doing wholesaling deals because you’re going to learn from being around them, and you’re also going to actually have value that you can bring to their company by getting motivated sellers on the hook to hand it off to them.
Now, I want to ask you Seeing Green listeners, do you like the topic that we just covered? Are you interested in hearing more about real estate adjacent opportunities? Not a full-time investor, but not a different W2 job. Do you want to hear more about ways you can make money in real estate that don’t just involve owning the property? If so, leave me a comment on YouTube and we will work that into future Seeing Green episodes.
All right, we have time for one more question. This one comes from Anthony Wilson in the DC area.

Anthony:
Hey, David, Anthony here. Live in the DC area. I recently bought a quad-plex in the Detroit area, is my home area as an investment. I’m having a hard time renting out a few of the units because they’re two bedrooms, but the rooms are very small, so I’m wondering, should I take the wall down and make it a one bedroom that’ll be a decent size and maybe that’ll attract a better quality tenant, or should I keep fighting through with the two small rooms? One of them can probably just be a nursery or an office. I’d love to hear your feedback. Also, I’m looking to house hack for myself within the next year to get a place. Wasn’t sure about staying in the DC market, but I might be here for a while now, so I’m going to go ahead and do it. Love to hear your insight on both of these issues. Thanks.

David:
Wow, that’s a really good question, Anthony. We don’t get this very often. Should I convert my two small bedrooms into one big one? First question I would want to ask, where are you getting the intel the bedrooms are too small, so tenants don’t like it? Is that from a property manager? Is that your intuition or the tenant reps saying, I won’t rent your house because the units are too small?
Let’s assume that the intel is legit, that it’s coming directly from tenants. One thing I would consider before tearing down the wall is renting out as a medium-term rental or a short-term rental where people aren’t as likely to care about the bedroom being small because they don’t live there. They’re just needing it to sleep in basically. If you rent this out to traveling nurses or traveling professionals, they’re there to work. They’re there to work as much as they can, make as much money as they can. They just need a place to sleep, and this is better than a hotel room. Those people won’t care about a small bedroom. The person that cares about a small bedroom is going to be the family who is going to be using this for a living, and they have all their stuff that they want to put somewhere. Their kids need a place to play. So understanding your tenant base will really help make the decision on if you should tear down that wall or not.
Assuming that you can’t do the medium term rental or short-term rental and you you’re going to have to tear down that wall, I would still look for a way to use the space more creatively. If I was going to make one bigger bedroom, I would include a nook in there for an office space or a play area, something that was more than just a place to put a bed, right? Like the nursery that you mentioned. I like that.
Now regarding the second part of your question is house hacking in the DC area. I would recommend you to look into Section 8 Housing. Dr. Joe Osmo has been featured on the BiggerPockets Podcast several times. He’s also popular in the forums. He is known for doing very good with his Section 8 method because rents in DC for the Section 8 tenants are proportionally higher than what the cost of the home is or disproportionately higher. So you get a very solid price to rent ratio using that strategy in your area. So if I was going to house hack, I would look for a property that has as many bedrooms as I could possibly get that fit within the guidelines of the Section 8 program. I would live in one unit bedroom. I would rent out the others however you’re going to do it. After a year, I would now have a great Section 8 property that I could move out of that I only had to put 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} down or three and a half percent down to get.
You see where I’m getting at here? Don’t just look at the first year you own the property, buy it for the long term and take advantage of that. It’s the best advice I could give you in the DC area when it comes to house hacking. Sorry to hear about the problem of the bedroom being too small. I’d love to see you. Just to recap, try to rinse it out as a medium or a short-term rental before you tear the wall down and lose the bedroom.
All right, everybody. That is our show for today. This has been Seeing Green. I remember to turn the green light on. I wore a green colored shirt here or a green themed shirt. I talked about broccoli. I talked about vegetables, a lot of green, and hopefully I taught you all how to make a little bit more green through real estate.
If you’re listening to this on a podcast app, please take a second to give us a five star review, those help a ton. And if you want to know more about me, follow me, see what the heck I’m up to, you can check me out at davidgreen24.com or your favorite social media @davidgreen24. I recently posted a very short video on my Instagram that showed my legs, and I got quite a few DMs of people saying, I did not know you had legs, and I definitely didn’t know that they looked like that. So if you want to see what my legs look like or decide like, does David even wear pants because we’ve never seen anything from the waist down on any of these shows, you could do it on my social media.
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