Seeing Greene: Should I Start Flipping Houses in My Market?

David Greene:
This is the BiggerPockets Podcast show, 9 93. What’s going on everyone? Welcome to the BiggerPockets podcast. I am your host, David Green. Here today with my co-host spazzing out on YouTube. Rob Abola. How’s it going, Rob?

Rob:
Oh, it is warm outside. A tree fell in front of my house. We’re dealing with wreckage here in Houston, Texas, but I’ve got a lot to be thankful for because we’ve got AC and it’s okay.

David Greene:
We got no food, we got no booze, and our pet’s heads are falling off. But in today’s episode of Seeing Green, we’re going to be answering your questions, not bringing you our problems. We actually have a really fun show today with lots of laughs and lots of information being shared. We cover if flipping works in expensive markets like mine in the Bay Area from a caller who lives in the same city where I’m recording this podcast right now. How to decide the responsibilities in a partnership on how to structure a house hack whether someone should get into commercial real estate, stay in residential real estate or blend the two. And if you’ve never heard of a cashflow casserole, you want to make sure you listen all the way to the end because you’re going to be fascinated by the strategy as well as common colloquialisms that are often messed up in the world of finance and real estate.

David Greene:
You’re going to laugh, you’re going to cry, you’re going to learn. Welcome Toine Green. Alright, our first question today comes from David Moranis in Brentwood. Ooh, is this to say Brentwood that I am recording in right now or is this Southern California Brentwood where Rob and all his posh friends used to play croquet and practice their putting. We’ll never know. Alright, a little background on David before we get into his question. He currently owns a short-term rental in Davenport, Florida and a long-term rental in New Braunfels, Texas, as well as a primary residence in Brentwood, still undetermined, which Brentwood as an accredit investor. He also is in three syndications, San Jose, Texas, and Florida. Would like to continue investing in Texas and Florida and maybe Tennessee, which are three states that I recommended five years ago everybody invested in. If you listened to my advice, you probably did good with the goal of increasing his cashflow. Appreciation from his other investments has been great so far. No experience in flipping but has done do it yourself projects on previous primary residences. He works in project management for his W2 and has experience working with contractors hopes to leverage his mechanical engineering background and experience to build a small flipping business. Alright, let’s get to David’s question.

David Maranhas :
Hey David, this is David from your hometown of Brentwood. My question is about flipping the Bay Area or maybe Sacramento as a means of supplementing my W2 income profits. We put into down payments for buy and holds outside of state. Since I am terrified of being a landlord here in California, I had been thinking of an STR or small multifamily in Orlando and I am pre-approved through the one brokerage for a conventional loan, but I’ve been struggling to find deals, so I’d like to get a flipping side hustle, going to increase my cash reserves. I am a super commuter, so would really only be able to physically visit sites on weekends a majority of the time. So what do you think is flipping in the Bay Area working during these times? Thank you Sir BP podcast and your books have helped educate me over the past few years, but I need to get my butt in motion and grow my portfolio so I can retire ASAP and give back to others. Thanks for your help. Appreciate you. Bye.

David Greene:
All right, David, you know how to get on scene green. Well done. You’ve answered the question. You are in my hometown of Brentwood crazy that you live here. You got my book in the background, which looks like it was strategically moved to show long distance real estate investing in the center shot of the camera. You got some of Brandon’s books there. I see look like they’re kind of playing second fiddle to mine, which was also a great way to cater to my ego. It felt like looking at an audition for a role in a movie that was so good. All right, what advice do we have for David here who wants to get out of the rat race and start giving back?

Rob:
Okay, so the question is, is Bay area flipping working these days? I think that is always the question. You are the NorCal guy that specializes in hella real estate, as you all say. I think this is the same question that’s asked every year in San Francisco.

David Greene:
Yes, everyone does ask this question is impossible to invest in Northern California real estate and every year it just gets better and better and harder and harder. That’s what’s going to be tough about flipping out here. If you’re trying to flip locally, David, you’re just going under costs crazy competition. You’ve got legit full-time flippers that make an entire business out of this that spend massive amounts of money mailing people because the majority of homeowners out here know what their house is worth. You’re not going to bump into the kind of people who just want to get the things sold easy. They’ve been hearing everyone talk about how expensive real estate is. So if you’re going to flip, I would not look away from doing it here. If you come across an opportunity, absolutely take it, but you’re probably going to have to put the majority of your efforts in an out of state market somewhere different to get a machine going.

David Greene:
I would recommend somewhere in the Midwest. I think more Californians are going to be moving there. I think more Americans are going to be moving there. As you see less and less affordability through rising energy costs, food costs, housing costs, everything. I think you’re going to get more and more people that move into some of those cheaper markets and because the margins are thinner, you don’t have as many of the big boys that are competing over there. You still got a decent chance to turn a profit. You just got to kind of do it at volume, which if you have a mechanical engineering background, you’re a systems guy that gives you an advantage when you’re trying to do it at volume. Rob, what do you think?

Rob:
I don’t know. Yes and no. I mean I would say that the Midwest could still be competitive because there are a lot of people that don’t have high budgets that all they can afford is that entry level flip where they make 10 to 20 5K. I think that the San Francisco area is also very competitive, but I also think it’s also weeds out a lot of people that try to get into it. So ultimately I think, I don’t know. I mean I don’t have the data to support if one is more competitive than the other. I would ultimately say that it comes down to how deep is he buying As our friend Henry Washington would say, how deep of a discount is he getting on that property? You said David yourself that it’s much harder to get these deeply discounted houses out there. The only thing that gives me hesitation is that if you’re flipping in the Bay Area, we’re talking about a very expensive first project, first flip, first brrrr, whatever it is.

Rob:
So to kind of get started in the flipping world in the Bay Area feels a bit risky if you don’t really have much of a foundation doing any flips at all. Many people have done it, many people have done it successfully for that reason. I think I would agree with maybe trying to start in a lower priced market, maybe some of the suburbs, maybe outside of sort of the prime area of the Bay Area or the Midwest, but I mean I just kind of think it’s how good of a deal did he get on the property? If he got a really good deal, then yes, a flip is going to work. My hesitation is it’s expensive, thus very risky for a first time flip.

David Greene:
I like the idea for you, David, of finding a wholesaler two, maybe three that is kind of newer in the business and doesn’t have a huge buyer list built out that is going to feed everything to you first. You’re going to have to get out there and network to find that person or a couple of them. But if you get someone who’s trying to break into the wholesaling model and they actually get a seller on the line who’s got something to sell, and they’ll come to you with it first and you can give an offer that they’ll take where they make some money and you feel pretty good about it and you’re not competing with nine other people and having to increase your bid to get this property that you don’t even know if you can flip or not, and they just feed you a steady stream of these projects and you can have two, three, maybe four going on at a time.

David Greene:
You’ve got a decent chunk of capital that you can use to fund these, especially if you don’t have to use hard money right away. I kind of like the idea of you cutting your chops there, figuring it out and putting a system together and hey, if you come across something in Northern California to flip, we’ve got some great bridge products that we can use. So you can put little money into the deal to be able to flip it, but don’t make it your bread and butter in a competitive market where you could lose everything on one deal and put yourself back. Diversify that. Try to get some base hits to mix in with those home runs.

Rob:
That’s how I feel too. I think it’s just kind of one of those where I’m like, well, he didn’t tell us how much capital he had, so my answer’s going to depend on, I mean, he’s a mechanical engineer, so he probably a six figure earner doing pretty well. It’s my guess, so assumption of course, but ultimately I think if he’s got a lot of capital, it’s one of those things where he can enter it and have some room for error. Maybe he can go over budget, maybe make a little less. If he’s coming in with 50 grand, then he should not be touching the Bay area. So I think my point of view is going to really depend on if you have a little bit of capital, don’t even touch it. I would not go the bridge loan route or the credit card route of just trying to get something done for your first deal.

Rob:
As much as I love take action spirit, I would say go into some of these lower price markets and try that. Especially because he said he has no flipping experience, but he’s done several DIY projects, which is sort of congruent to what he’s doing, but it’s still not flipping a house. But if he’s got a lot of capital, then I would say maybe find someone in the Bay area market, find a mentor, go to a meetup partner with someone who’s doing it, say, Hey, for this first one, what if I pitch in half the money and I shadow you? And that way he can actually transition into this. Not so he just said he can’t go every day. He’s a very long commuter, he could only go on weekends. So maybe what he offers this experienced flipper is, Hey, I’ve got capital, I’ll put capital into this. I can show up on weekends to walk the property and make sure that the progress is coming along and there could be a partnership that he strikes up. I think I’d feel more comfortable with him trying to do that versus trying to just jump right into potentially six figure or multi-six figure flip in the Bay area.

David Greene:
Yeah, same thing. I was thinking if you can start off a little bit more consistently and smaller, diversify your risk and mix in some of the bigger ones when you get some confidence going, I think that’s a good strategy.

Rob:
Yeah, yeah, yeah, I feel better about that.

David Greene:
Alright, thank you David. Great question. Let us know how it goes. We want to hear from you again. Alright, coming up we have a question about de-leveraging risk while also growing a portfolio and we have a live guest coming up that wants to see if staying the course in residential real estate or going bigger in commercial is the right call. So stick around. All right, well come back. We have a few more questions before our residential commercial eval. The next question comes from Brian Sparger.

Rob:
Ooh, funny side note about Brian. He wants his username to be pretentious platypus on BiggerPockets. If the admins will allow it, we’ll make the call. We’ll see what we can do for you, Brian.

David Greene:
All right. Brian says, I am 44 and stuck between the idea of de-risking by paying things off and trying to grow my portfolio with the market where it’s at. I’m also struggling with how best to grow if I go that route. I only do long-term rentals. I have a portfolio that combine stands at about 29% loan to value. All of my notes are 30 year fixed rates. I have one class, some class Bs and a Class C. All my properties are profitable except one of the Class Bs where it breaks even. But I like the area because it’s tied to government jobs and it’s stable and appreciating well. I expect it to retain steady growth. I also have a savings rate that allows me to put about 140,000 a year to towards this. Any advices. Welcome. Thank you. All right, Rob, so Brian here has $140,000 a year that he’s able to save. He’s got a portfolio of long-term rentals and he doesn’t know if he should go big and scale or if he should pay off some of his existing properties to get them to cashflow. What do you

Rob:
Think? I mean, if I’m reading this correctly, he says that his current portfolio as it stands as a 29.2% LTV, meaning he’s paid off 70% of the total mortgages of his portfolio. That’s pretty good. I mean, as much as I’d love the idea of paying off properties, I would say given his age, he’s 44, he’s kind of right in the mid stretch of this real estate thing. He’s got a lot of time to still build a portfolio, pay things off. I think that will come pretty quickly. At this point, he’s probably attacking principal pretty aggressively already as it stands because he only has a 29.2% LTV. So I would say with that in mind, I think I’m okay with him just buying more properties and stacking equity, leaving his equity that’s in there, not touching it. He’s got some good low interest rates, maybe collect a couple more properties for a few more years and then we can work on attacking that principle.

David Greene:
Well, he owes about a million dollars in debt, so it would take him probably seven and a half or so years. Yeah, maybe, yeah, six or seven years to pay this thing off. But of all that debt, only 230,000 of it is at 6.75%. The rest of it is very low, 3.25 and lower. So he’s not going to save himself a ton of interest by paying those off. The only one I would even consider paying off is that 6.75%, which he could do in about two years.

Rob:
But that one’s cashflow positive. He said that the 180 7 K one, that’s the only one that’s breakeven, I guess.

David Greene:
Yeah, they’re all cashflow positive except for the one.

Rob:
Yeah. Yeah. So I would say let those cook and maybe just buy another properties using the same strategy that he used to get to this meaning maybe he puts down a little bit more so that he can actually cashflow and then once interest rates come down in a few years or whatever, refi, get his high interest rates from today down and then have this really LTV light portfolio. I like that. I think he’s in a pretty good position.

David Greene:
Brian, you could put 50% down and buy properties for about 280 $300,000 with this $140,000 that you’re able to save and buy one a year like that for the next 5, 6, 7, 8 years and just wait and see. Like Rob said, what rates do, if rates go down, you refinance the stuff you bought until lower rates. If they don’t go down, you still have money that you can put down, which allows you to buy cashflowing real estate that other people can’t. There’s going to be less competition. You’re in a very, very solid position here. Just keep making progress. Just don’t stop. Just keep hitting these base hits over the next 10 years and you’re going to be in a great position.

Rob:
He is in that dream scenario, man. I mean, I guess the dream scenario is to have everything paid off, but at 44 to have 70% of your portfolio paid off, that’s insane. So I would say keep scaling accordingly. Don’t go crazy, slow and steady. Use your savings wisely and enjoy your 29.2% LTV. I think it’s such a beautiful thing.

David Greene:
Alright, our next question comes from Harrison in Milwaukee. Hi David and Rob. My dad and I are thinking about going in on a duplex in Milwaukee together. We contribute equally for the down payment and own the property. 50 50. He’s currently house hacking his duplex and I would be house hacking this duplex, but we would own it together. I don’t know how to structure this partnership fairly. How do most partnerships split the responsibilities and the costs? Also, do you have any recommendations for how to purchase the property? We want to put as little down as possible. Thank you both for your wisdom and your time, Harrison. Alright. When it comes to the financing for this bad boy, Harrison, if you’re trying to put as little money down as possible, you’re going to want to use a conventional loan. You can do FHA for three and a half percent down or you could do a conventional loan for 3% down in most cases.

David Greene:
That’s usually the better option. All you need to do for that is consult with a loan officer. You need to tell a loan officer, ideally a mortgage broker, Hey, here’s the situation I’m in, how do we have to structure this? And they’re going to tell you one of you has to be untitled. The other one can be added later. One of you has to be on title. The other one can’t be added later. Both of you’re going to have to be on the loan. They will check with the underwriters and find out how the loan needs to be structured and the title for the property can be taken as far as the plan for owning the duplex, which I think was probably the gist of your question. Rob, do you have any ideas on how they can structure a partnership where they both own a property but one of them is living in it?

Rob:
Yeah, this one is pretty nuanced. I think if they’re going to own it 50 50, then the cleanest way would be for Harrison to kind of pay the entity of Harrison and Harrison and his dad’s entity, we’ll call it Sun and Co LLC, pay Sun and Co LLC rent to get to live in the property. That feels like it would be the cleanest.

David Greene:
So we like the idea of buying an investment property that’s not a primary residence and owning an entity and then paying rent to the entity. That’d be the cleanest way. What you just said, Rob, I think they might run into a problem if they have to get a primary residence loan. You can no longer purchase it in the name of an entity to be a primary residence. So in order to try to maintain the spirit of what you’re saying and also holding legal compliance, what I’m thinking, and I’ve never had to answer this before, is that rather than owning it in an entity, they own it in the name of whoever has to buy it based on what the loan officer tells them the rules are, but they open a bank account, they each contribute an equal amount to that bank account, say $10,000 each. So they start with $20,000 in that account. Then the mortgage comes out of that account as well as all the expenses for the property and the rent goes into that account that Harrison’s going to pay and that the tenant of the other unit is going to pay. So they’re each going to pay market rent to this account?

Rob:
Correct. Got it.

David Greene:
Now Harrison’s contribution to the account, half of that will be his. So if the property cash flows positively, Harrison will still be getting half of that positive cash flow out of the account, but he will be paying money into it as a tenant. So he’s sort of in a way that account functions like the entity that you were saying and Harrison is paying money into it as a tenant the way that you were saying. Does that make sense?

Rob:
It does, yeah. Yeah, so basically just it’s more of a personal bank account versus like a business bank account and they’re putting all their expenses in it and then taking profits 50 50 and basically Harrison is just a tenant sort of this

David Greene:
House. That’s it. He’s a tenant in that sense, even though he’s on title as owning it, he pays his rent into this shared account they have of which Harrison owns half of it. The other tenant’s full rent goes into that same account. When there’s expenses for the property, they come out of that account. If the property sells, they split the money that’s in the account. They also split the equity that comes their way from escrow after it closes. So Harrison becomes part tenant and part owner. Well, it’s scary. We’ve never had to work this out, right?

Rob:
Yeah, he is living as his primary. He’s living in it as a primary, as a tenant. So I don’t talk to your loan officer. How about that?

David Greene:
Another way could be Harrison buys it completely himself, gets some type of, see I want to say gets a gift letter from his dad, but now I don’t know if he can do that if his dad’s also going to own part of the property. So you could say we’re like, I’m going to give away 50% of the equity in the property to the person who gave me 50% of the down payment, but then I myself will be responsible for all of the repairs and I will be responsible for all of the expenses. That’s another way that this could be structured where Harrison buys it and he’s on title, but he gives his dad half of the equity in exchange for half of the down payment. All that has to be disclosed to the lender to make sure that they set that up legally and then when they sell the property, dad gets half of the profit. But Harrison was responsible for all of the expenses during the time that he lived in it.

Rob:
Yeah, I guess I think the only weird part is when they go to sell it, Harrison wouldn’t have to pay capital gains because he lived in it for two out of the five years, but then his dad would have to pay capital gains. He didn’t live in it

David Greene:
Most likely.

Rob:
Yes. So it’s kind of this really weird trying to make an investment property work as a residential set up and vice versa and have your cake and eat it too. So I would just say be careful. Talk to your loan officer, see what they say. There’s absolutely a way to do it. I think David, the way you said it is what feels the most correct, but everyone’s got their own set of lending guidelines, so make sure you connect with the lender that understands real estate investing, house hacking, and can guide you more accurately.

David Greene:
Alright, getting into the next section. This is where Rob and I like to review YouTube comments from previous shows. Sometimes we get into BiggerPockets forum questions or even reviews from Spotify or Apple podcasts. Today’s YouTube comments come out of episode 9 85 where we had lots of great comments from some road islanders chiming in and people sharing their situations. You want to take the first one, Rob?

Rob:
Sure. Okay. So SLE says, what I like about you guys and your show is that every time I watch it, I feel smarter and wiser. Thanks for making me better. I have not started my real estate as an investor, but praying that 2025 will be the year just lining up all my ducks in the middle of the road while traffic is moving as the ducks get ready to jump in the water full of crocodiles in Florida. Laughy cry face emoji. Hold on. Is it ducks in a road? It’s not that right.

David Greene:
Ducks in a row. Okay,

Rob:
Good. I was like uhoh, I’ve been saying it wrong my whole life and then he created a whole analogy out of it. So maybe we just rebranded to ducks in a road.

David Greene:
I do find it hilarious that there are things people could go their whole life thinking or what people say and then you’re like 34 years old before you find out that isn’t what people actually meant. You have a really funny one of these and we talked about this in Cabo Robb.

Rob:
I think so. So brass tax is not TAX, it’s not like a tax on brass. It’s like T-A-C-K-S getting down to brass tacks. That’s one of them. What is that obvious to you?

David Greene:
How old were you when you realized that it wasn’t a tax on your brass

Rob:
This morning? I was like looking. I see. I’m like what is this brass ax? Why do I always have to

David Greene:
That’s good. That’s really good. I remember there was an age where I learned that it wasn’t French benefits, it was fringe benefits.

Rob:
Okay, that’s a good

David Greene:
One. I don’t know how it was always pronounced like French benefits.

Rob:
It’s for all intense and purposes, not all intensive purposes. That’s a pretty good one. Good. Come on. I’m not alone here. I’m not alone. Hey, for all intensive purposes, that purpose is very intense.

David Greene:
Yep. It makes intense sex. All right. Thank you very much for sharing this.

Rob:
We appreciate you.

David Greene:
All right, coming up we have a live guest who’s going to be joining us with a question about staying the course in small multifamily for a million dollar purchase price or going bigger in commercial real estate and what the best route to take is. So stay tuned as we get into the real estate weeds on this one and welcome back Mark. Welcome to the BiggerPockets podcast. Mark here was on episode 7 47 where he was on scene green and asked some questions about residential versus commercial real estate. Mark, I understand you’ve had a few changes in your situation and you want to get some updated advice. So first off, welcome to the show. Second, tell us what we can do to help what’s been changed.

Mark:
Thanks for having me. So what’s changed over the last about year, year and a half? So originally I asked the question, we only had about a hundred thousand in cash. Since then we’ve bumped up to about 300,000 just being able to say save low cost of living with the house hack and also a little bit of an inheritance and our equity has grown in our first two properties. We’re sitting at about 500,000 in equity right now between two duplexes as well. So looking to see, our plan was to use the cash that we’ve accumulated to purchase a four unit property, which would be about a million dollars in my area, and then possibly using the equity down the road after that one is stabilized using some of the equity in one of the properties to purchase another four unit. And I actually just listened to, I believe it was episode 9 85 that just came out where you and Rob discussed exactly that as far as using how you guys feel as far as using HELOC from a rental, buying another property. So I actually, funny enough, I just kind of got your perspectives on that as well.

David Greene:
Okay, so first off, there’s some congratulations due here. You’ve increased your cash by how much? It’s

Rob:
A lot. 200

Mark:
K, 200 k. I can comfortably say that it’s mostly my wife and she makes a bit more than me and again, our expenses are just really, really low.

Rob:
That’s still awesome though. I mean that’s a

David Greene:
Lot. Yeah, that needs to be highlighted. There’s a benefit to keeping your expenses low. It’s not easy to do. It’s kind of like Rob’s haircut looking like it does every single day. He doesn’t just wake up like that. It takes some effort. Keeping your expenses low is not easy so congratulations there. Also staying on the path of wanting to buy more real estate, so making more money and saving more money, that is in my mind the best strategy to take. If you’re trying to build a portfolio, you’re investing money that you’ve made, you’re not trying to creatively come up with money you don’t have and shift equity around that just becomes more risky than real estate investing needs to be. It’s already a risky investing class. So several things you’ve done well there, mark. Congratulations. You have the goal I’m assuming here of scaling. That’s what we’re talking about today, right?

Mark:
Correct. But I think I’d like to keep it within the self-managing I kind of realm. I don’t really see myself as like a Brian Burke or one of these guys for thousands of units, just kind of keeping it within house. So scaling but nothing too crazy. I don’t feel that I need to go to a meetup and say I have hundreds of doors or anything like that.

Rob:
Sure, sure. I have a question. What does scaling mean to you? Obviously maybe that does mean more doors, but when you think of scaling for your ideal scenario, is scaling, meaning increasing your cashflow or increasing the size of your portfolio equity, what is it that you’re actually trying to attack right now?

Mark:
So I think scaling to me because finding a hard number. I know a lot of these people, they know their expenses, they know exactly how much you’re spending per year. Our situation will change over the next couple of years with kids. We’re going to finally stop house hacking after five years, so I know that’ll be a fluid number. Scaling to me means the properties are self-sufficient so that they are able to basically, I don’t need to take any of my money and put it into it. I have enough, let’s say I have enough properties that if four of ’em are doing well and one has a large X expense that year, I can just kind of move money around. It pays for itself. That’s one part of scaling. The other part of scaling to me is I’m going to be retiring at 55 from a government job and keeping me busy enough to stay busy while I’ll be retired.

Mark:
I won’t be working a government job anymore, but then I’ll still be involved in the day-to-day. I could step away for a week or two to travel, but it does keep me somewhat busy kind of either managing the managers or just doing things here or there. I know that’s not a specific answer, but just kind of keeping me busy enough to keep me stimulated but not so busy that I’m drowning in it and it’s I’ve just bought myself another job where I’m working 40, 50 hours a week on my portfolio. That’s what scaling means to me.

Rob:
Got it. So if I’m hearing it correctly, you’re looking to balance out your portfolio architecture, meaning you want a little bit of diversity and income so that whenever, when one property is not doing so hot, another property is picking up the slack and you always have that flexibility. That’s one. Two is you are willing to invest in something that might take a little bit more work and that would be worth the extra cash flow for you, but you don’t want so much work that it feels like you left retirement to go work another crazy, crazy job.

Mark:
Correct. And the other thing too is that I don’t need the money obviously like we talked about my expenses, I don’t need the money. So if I do buy a property and it’s not cashflowing day one, year one, year two, that’s totally fine. That’s what we bought. We purchased a three unit about four months ago. Now that I’m currently sitting in as a house hack and it’s probably not going to cashflow depending on when we move out. It might not cashflow for that first year, but it eventually will because it’s in a class A area which is totally fine with us and we’re fine with putting in a little bit of sweat equity because we know we’re playing the long game. We know after 5, 10, 15 years which we plan on holding that everything rent will appreciate the aerial appreciate.

Rob:
Nice. And so the question for today is with all these things in mind, what can you do? What are some ideas of how you could utilize 300 K to increase cashflow, increase maybe some equity and what’s that next move with that amount of money?

Mark:
Correct. And also I know last time when David answered the question, the main question was stay in residential or go commercial and it’s kind of a revisiting that question. I’m right on the cusp with our down payment and our cash size. It would be right around the four unit. However, it seems like when you buy more units like a bigger building, you usually get a better price per door. You could buy around here a duplex for anywhere from 600 to 800,000 or you could buy a four unit for around a million dollars. So obviously that’s less per door. Would it make sense for us to just wait a little bit and then scale up because about five units are going for about anywhere from 1.2 to 1.5 depending on the exact location. Should we just wait and kind of scale up a little bit more to a five unit again bridging the gap between residential, commercial or kind of stay right in that sweet spot, the four unit?

Rob:
Yeah. Yeah. Okay. So David, I’m going to turn this over to you really fast. I know you’ve owned commercial property in the past. I don’t know if you still do. What do you think, what is that appropriate moment for an investor from your experience of maybe parlaying or foraying if you will, into the commercial space?

David Greene:
It’s a different way to manage it and the financing is very different. You rarely ever find investors that do both commercial and residential. Super rare and it’s like two different sports. So I want to ask you Mark, what are the elements of real estate investing that you don’t like and you want to avoid?

Mark:
Some things I don’t like that I don’t do now really, I don’t like dealing with leasing up properties units. I don’t really enjoy finding deals. It’s so hard to find deals in my area that I just, Jonathan Green is one of the guys in my area and he has his thoughts on wholesalers, which I a hundred percent agree. There’s not really deals out there for wholesalers. It’s a lot of who and on market stuff. Those are I guess the things that I don’t really enjoy doing. I do doing some of the day to day in bits and pieces like working on properties. I don’t mind kind of self-managing, but I would say really the only thing I think I just do not are just leasing up and I think that’s pretty much about it.

David Greene:
Alright, so you don’t like looking for the deals, which I’m assuming means you don’t spinning your wheels and not making any traction. There’s not a lot of deals out there to look at. So you don’t like wasting time, you don’t like leasing up, meaning finding a tenant for the property, is that right?

Mark:
Correct. I’ve hired that out to my mentor and my realtor as well.

David Greene:
Okay, so what are the elements you do?

Mark:
So I guess as weird as it sounds, I actually don’t mind dealing with tenants. I know most people don’t and I can understand why I like being somewhat in the minutiae a little bit. I like kind of dealing with the, I don’t mind doing the bookkeeping at some point I would like to hire that off, but for now I don’t mind it. I like analyzing deals. I love looking on for right now just Redfin, Zillow and running numbers while I’m on the couch and going to look at properties. I enjoy that and I enjoy not necessarily rehabbing because I have a contractor who I’m actually friends with, so that really helps. But I enjoy dealing with him and some of the projects when we do have to take on renovations and things like that. Not being a GC as much as just kind of above the GC and just kind of directing him.

David Greene:
You like the vision, you like to look at it, you like just try to figure out how it’s going to work out and you like to manage it once it’s been purchased but you don’t like anything that doesn’t make progress. I can tell that’s a big theme in this talk today is I want to feel like I am moving forward. What can I do with commercial real estate? The majority of the effort to do that well is in the analyzation upfront. Looking at would it work and having the cash to pull off the plan once you buy it. I believe in our first segment we did with you, I talked about commercial real estates like a battleship and residential real estates like a jet ski. Once you buy that commercial property, it is very hard to change Course it takes a long time. Your leases go for a long time.

David Greene:
When you lose a tenant it is very expensive to get another tenant in there. Usually you have to spend a lot of money to improve the space for the next tenant to want to use it. The remodeling isn’t something that you’re going to have much to do with. It’s usually the tenant that’s going to be overseeing their own remodeling. A lot of the stuff you like about real estate is what I’m getting at. You’re not going to be doing, you’re going to be constantly looking at deals all the time and analyzing that, but not just how do the numbers look. It’s going to be how do I analyze the tenant themselves as opposed to the property. When you’re analyzing residential real estate, once you know what’s in a good neighborhood, there’s not a whole lot that goes into it other than having a screening process for a residential tenant.

David Greene:
You might pick a tenant for your commercial property, fill it up with six different tenants and four of those businesses go out of business and now you’ve got four vacancies that might take a year and a half before you find another tenant to put in them. It’s very, very different than residential real estate. It doesn’t mean it’s worse. It’s a completely different skillset. You also might have a tenant that stays in there for 15 years and you don’t have to worry about anything and you just keep getting rent bumps and when it’s triple net, they’re paying the property taxes, they’re paying the insurance, they’re paying for the improvements. It’s wonderful, but it’s definitely, in my experience, more high risk and more high reward. It’s very different than residential real estate, which you could just scale bit by bit.

Rob:
You’re looking to make progress in whatever it is you’re doing and I worry that possibly stepping into commercial real estate will feel much like the opposite. Oftentimes as you learn this new niche of real estate, it’s going to be frustrating, it’ll be hard work, all that good stuff and it may be a while before you see that progress in that vision come to fruition. So for that reason, I think I would probably push you a little bit towards staying in what you know, which is on the residential side.

Mark:
Would it make sense to start looking at instead of staying at the four unit multifamily, look at the five to 5, 6, 7 multifamily properties as well

David Greene:
More so than the triple net. It would make sense. What I like about it is you have something to chew on. You’re going to have like 8, 9, 10 units of different tenants. They’re going to be leaving. You’re going to have to conduct turns, make sure that everything gets done. It seems like you enjoy that part and that is what it takes to be successful as a mom and pop operator is you got to pay attention to the details. I think it’s one of the reasons Rob does really, really good with his business is he’s in those details all the time. Where it’s going to be tough for you is the uncertainty that comes with the financing. A lot of people bought good assets that were cashflowing well that when interest rates went up and their note came due, all of a sudden this cashflowing asset at the new interest rate does not cashflow and you no choice.

David Greene:
You have to either refinance it or sell it and if you’re going to try to sell it, the next person buying it is paying way less for it because they’re buying it at that new rate and now you’re the distressed seller that we are always targeting and you did nothing wrong to end up in that position, just you didn’t have a chair in front of you when the music stopped. That’s what makes me nervous about somebody in your position, mark, who’s trying to grow bigger. Those assets are really designed for someone that’s already grown big that can put 50% down on that thing or 40% down. So if interest rates move in an unfavorable way, they refinance and have less cashflow, but it’s not that they can’t refinance. You’re still at the point where you’re trying to turn a chunk of change into a much bigger chunk of change.

David Greene:
So the advice that I would be giving you is probably along the lines of go into cheaper properties and see what you can do with the brrr method. You’re going to be very active, you’re going to be overseeing rehabs, you’re going to be using your vision, you’re going to be trying to look at properties that need a lot of work, that have some equity in them that you can go in, turn around, fix up slowly, build equity, and then maybe once you get 8, 9, 10 of these single family properties or small multifamily properties with equity added and refinanced 10 31 into some of these commercial assets that you’re talking about, rather than taking your cash and putting it right into commercial, I’d rather see you take your cash, put it into residential, grow your equity like you have on the ones you have. At the point you think that, Hey, I’m ready to move away from managing 10 of these properties, sell 10 and buy one 10 unit apartment complex. You’re talking about what are your thoughts?

Rob:
Hold on one little thing. I think the 5, 6, 7, 8 doors, it’s not like once you get past four doors, it’s all of a sudden like, oh, oh my gosh, it’s way harder. I think you’re ready for that. I think that’s honestly a pretty similar decision. If you had said, Hey, I want to buy a 30 unit building, then I’d be like, okay, that’s different than a four unit 5, 6, 7, 8. I mean it’s more work for sure because it’s more doors. I just don’t think it’s anything that’s like a night and day difference personally, but that’s just my thought

David Greene:
There. Alright, so let’s see if we can sum some of this up. Mark, you’ve got quite a bit of cash, you’ve saved up. You want to scale. I think the best way to do it is to convert that cash into equity in different properties, which you’re going to do by buying them below market rate, adding value to them, and then hopefully you get a little bit of market appreciation equity too, where the wins carry it further. I would say do that until you run out of opportunities or you run out of time slash energy when you’re just like, oh, it hit me in northern Florida when I hit around 50 properties or so. I was like, I just hate this whole portfolio. It was not that bad, but it wasn’t that great. It was just constantly this thing broke, this tenant’s upset, this issue happened, this person got a bullet lodged in their garage door and they’re mad at their landlord for it or whatever, and I just realized, okay, let’s sell these 10 31 into something that’s going to be less work and then start over building a portfolio the same way again.

David Greene:
That’s the advice that I’m going to give to you. I think you’re going to like doing that because it’s going to give you stuff to look at. It’s not going to be a waste of your energy when you’re looking at the cheaper properties that are lower price point that need a lot of work that other investors maybe don’t want to take on. You’re going to have to find another market probably somewhere in the south, somewhere in the Midwest, just somewhere where housing overall is cheaper and there’s less competition from other real estate investors and most importantly, your dollar will go further. You’ve got quite a bit of money saved up if you’re trying to invest in somewhere in Ohio, somewhere in Alabama. Some of those investors, they don’t have as much money as you do to take on some of these projects so you can take something on that. They can’t and you’re also not going to need to hold it forever. They’re going to be looking at this stuff like, I’m going to hold this thing for 50 years, so it better be a great deal. You could be a little pickier, you’re probably going to exit, sell it to someone else that wants a turnkey investment. Then 10 31 that money into some of the stuff we’re talking about today, the more expensive properties and the better areas that you’re used to rob.

Rob:
Yep. Solid plan. I like it, I endorse it. I co-sign it

David Greene:
Even. You’re not going to tell ’em to do short-term rentals. This is your chance. You’re the short-term rental guy, right? Everyone in the comments is going to say, Rob, all you ever do is tell people to buy a short-term rental. I

Rob:
Do think for what it’s worth, if you were going to buy a five to eight unit building, I think the dream scenario is if you bought an eight unit building, you rent four of those out long-term, two of them out midterm, two of them out short term and have a super diversified eight unit building that kind of cranks out cash in different varieties and different returns and that to me is the juiciest way to do a small time multifamily.

David Greene:
Rob, I think that is great advice. In fact, I’m going to write another book and I’m going to call it Cashflow Casserole based on your idea of six regular, two midterm and two short term.

Rob:
Nice. I like it. I’ll write the forward. It’ll be forward.

David Greene:
Let us know in the comments. Do you think that this new book that Rob’s forward forward is going to be called The Cashflow? Cashflow or the Cashflow Quesadilla? I just may take it serious. Alright folks, that’s our show for today. We’ve covered quite a few topics, which is awesome, including does flipping in the Bay Area still work with all the high competition? How to decide if the responsibilities of a partnership are being split up fairly, the brass tacks that few investors talk about and how to avoid those ducks in a road, in your own portfolio. All that and more plus a live call on today’s Seeing Green. Did you love it? Did you find Rob to be hilarious? Did you find me to be tolerable? Let us know in the comment on YouTube your favorite part of today’s show as well as what you would like us to cover. Rob, anything you want to say before we get out of here?

Rob:
Listen for all intensive purposes, I just wanted to say this was a really fun episode. We got into some good philosophy and hey, maybe I’m changing the way I think I always do every single time I share the mic with you, man. So appreciate you having me on.

David Greene:
Awesome. I’ll let you get out of here. This is David Green for Rob. Putting the brass and brass tacks, Abba Solo signing off.