Investing Later in Life? You’re Still in Luck!

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Think it’s too late to retire with real estate? Maybe you’re in your forties, fifties, or sixties and have decided that now is the time to put passive income first. With retirement coming up in a couple of decades (or even years), what can you do to build the nest egg that’ll allow you to enjoy your time away from work? Is it even possible to retire with rentals if you didn’t start in your twenties or thirties? For those tired of the traditional route to retirement, stick around!

You’ve hit the jackpot on this Seeing Greene show; it’s episode number 777! But, unlike a casino, everything here is free, and we’re NOT asking you to gamble away your life savings. Instead, David will touch on some of the most crucial questions about real estate investing. From building your retirement with rentals to investing in “cheap” out-of-state markets, buying mobile homes as vacation rentals, and why you CAN’T control cash flow, but you can control something MUCH more important.

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets podcast show, lucky number 777. You don’t have to buy more real estate. You have to continually be active in adding value to the real estate you have, and when you’ve got to the point that you’ve increased the value as much as you can by doing the rehabs after you’ve already bought it at a great price, sell it or keep it as a rental. Move on to the next one and continue adding value to every single piece of property that you buy. That will turn into the retirement you want.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with a Seeing Greene episode. In today’s show, I take questions from you, our listener base, and I answer them for everybody to hear. And you have struck the jackpot with episode 777 because this is a very fun and informative show. Today we get into several questions, including how to know if your property will work better as a long-term rental or a short-term rental, the spectrum of cashflow and equity and what that means, if the 4% rule of financial independence still works today and what may be changing about it, as well as what you can do if you get started investing later in life and you feel like you’re behind. All that and more on another awesome episode just for you.
Before we get to our first question, today’s quick tip is very simple. Check out real estate meetups in your area. Many of you are in certain markets in the country that we don’t talk about all the time on the show. In fact, I bet you the 80/20 rule applies. We talk about 20% of the markets 80% of the time, but what does that mean for the other 80% of the people that live somewhere else? Well, you still need to get information about your market and opportunities you have available, and there’s no better place to do that than a good, old-fashioned real estate meetup where you can meet other investors and hear what they’re doing that’s working, what challenges they’re having, and how they are overcoming them. If there isn’t one in your area, good news, you get to be the one that starts it, and you get to build the throne upon which you will sit as the real estate king or queen of choice. All right, let’s get to our first question.

Sam:
Hi, David. Thanks for answering my question. My name’s Sam Greer from Provo, Utah, a recent college graduate. My wife and I bring in about 180K a year. We have no debt, wanting to get into real estate, want a three bedroom as we both work from home and have a one-year-old. Rent here is about 2,200 for a three bed. A mortgage with a 5% down payment would be about 2,800. We’re wondering if we should continue renting, buying real estate outside of Utah as it’s much cheaper, buy here, try to house hack, although if you do a duplex, it’s about 2,800 accounting for the rent on the other side. Things are expensive around here. We’re wondering what we should do if it’s best to try to find a deal here or go out outside of Utah in a cheaper market. Any advice would be greatly appreciated. Thanks.

David:
Hey there. Thank you, Sam. So let’s start off with this. Real estate being cheaper somewhere else does not necessarily mean better somewhere else. There’s a reason that real estate is expensive in Provo, and that’s because you’re getting growth. So I want you to look at the way that real estate makes money. It really makes money in 10 different ways that I’ve identified, but there’s two main sources, which is cashflow and equity. Usually, a market that is stronger in cashflow will be weaker in equity and vice versa. So that doesn’t mean it’s a cashflow market or an equity market, although most of the time it would lean in one direction or the other. That means there is a spectrum, and on one end of the spectrum you’ll have equity. The other end, you’ll have cashflow. And you got to figure out where you’re comfortable fitting in there.
The Provo market is growing because population is growing. People are moving there, and people are moving there from California and other states that have money, which means rents are going to continue to increase. Values of real estate are going to continue to increase. That is a healthy robust market that you’re likely to do well in, but as you’re seeing, that means it’s not affordable. Now, here’s where I want you to change your perspective, and I want you to start Seeing Greene. It is not affordable right now, but it’s going to become even more expensive in the future. Now, I’m saying this because if you don’t buy in these high-growth markets, your rent continues to go up and up and up. So you mentioned that you can rent for 2,200 but own for 2,800. Right off the bat, that makes it seem like renting is cheaper.
It’s always like that in the beginning. Remember the story of the tortoise and the hare, where the hare came out the gates and was really fast, and the tortoise was really slow? The hare always looks like they’re winning the race in the beginning. That’s what it’s like when you think about renting and instead of owning. But over time, rents continue to go up. Your mortgage will be locked in place at 2,800. You actually even have some potential upside that rates could go back down and that 2,800 could become even less on a refi. So you might get some help on both sides, both from rents going up and from the mortgage coming down if you buy. So if you’re taking the long-term approach, buying is going to be better, and this is before we even get into the equity. We’re not even talking about the house gaining value and the loan being paid off. We’re only talking about the cost of living, which means buying is better.
Something else to consider is that you’re probably going to get tax benefits if you own that home. So if you get a benefit of say, $300, $400 a month in taxes that you’re saving from being able to write off the mortgage interest deduction, that 2,800 now becomes 2,400 or 2,500, which is much closer to the 2,200 that you’d be spending in rent. So as you can see, it’s starting to make more sense to buy. Now, that’s before we even get into house hacking. Can you buy a four-bedroom house or a five-bedroom house and rent out two of the bedrooms to family, friends? Maybe your wife isn’t into that. She doesn’t want to share the living space. Can you buy a property that has the main house that you guys stay in and has an ADU, has a basement, has an attic, has a garage conversion, has something in the property where you can rent that out to somebody else?
So your $2,800 housing payment is offset by collecting 1,200 or 1,400 from a tenant, which is house hacking, making your effective rent much more like 1,600. Now, that is significantly cheaper than the 2,200 that you’d be spending on rent plus you get all the benefits of owning a home. Now, I’ll give you a little bonus thing here. For every house hacker out there that feels like you’re not a real investor, that’s garbage. Let me tell you why house hacking is awesome. Not only do you avoid rents going up on you every year, so that 2,200 that you’re talking about here, Sam, that’s going to become 2,300, then 2,450, then 2,600, and it’s going to go up over time, but you also get to charge your tenants more. So you’re winning on both sides. Rather than your rent going up by a $100 with every lease renewal at the end of the year, your tenant’s rent is going to go up by a $100 with the lease renewal at the end of the year, which means a savings of $200 a month to you every single year.
Over five years, that’s the equivalent of a $1,000 a month that you will have added to your net worth to your budget. Now, how much money do you have to invest to get a $1,000 return every single month at a 6% return, that is $200,000. So house hacking and waiting five years in this example is the equivalent of adding $200,000 of capital to go invest and get a return, right? It makes a lot of sense, so take the long-term approach. Talk to your wife, find out what she needs to be comfortable with this. Go over some different scenarios, whether it’s buying a duplex, or a triplex, or renting out a part of the home, or changing a part of the home so it could be rented out. Maybe you guys live in the ADU, and you rent out the main house for $2,000. And now with your payment of 2,800, you’re only coming out of pocket $800 a month.
You save that money, and you do it again next year. When you first start investing in real estate, it is a slow process that is okay. You’re building momentum just like that snowball that starts rolling down the hill, it doesn’t start big. But after five, 10, 15 years of this momentum of you consistently buying real estate in high-growth markets and keeping your expenses low, that snowball is huge, and you can take out big chunks of the snow that have accumulated that’s equity and invest it into new properties. Thank you very much for the question, Sam. I’m excited for you and your wife’s financial future. Get after it. All right. Our next question comes from Laura from Wisconsin.
“My husband and I began investing in real estate in 2018. I’m 57. He’s 58. We got a late start and are now trying to navigate our way through to get us to retirement in the most efficient way possible. We weren’t always financially savvy, nor did we think about retirement as we should have, which has led to us now trying to play catch-up. I began listening to podcasts and reading books to get educated and use that to take action. We invest in B-class neighborhoods in Southeastern Wisconsin. Our business plan has been to rehab these properties so that we don’t have to deal with capex or maintenance. My husband is a contractor. We purchased our first single-family fixer in 2018 and fully rehabbed it to about 90% brand new. We did a ‘burb but then sold it in 2021 to capitalize on the market being in our favor. We 1031-ed that into a four family, then sold our primary residence that my husband built last fall and used that money to buy a single-family residence from a wholesaler and are now doing a live-in flip.”
“This has allowed us to personally live mortgage free. We do have a mortgage on the duplex and the four family. I don’t have a specific question. Just what advice do you have for those of us investors who got a late start? There haven’t been a lot of podcasts related to this topic. Cashflow is important to us, but appreciation is nice too. We aren’t comfortable investing in markets that provide the most cashflow. We also want ease of management. We love a good property that we can take advantage of Jeff’s strengths and add value to. We don’t want a huge portfolio, but are hoping to have enough properties to make a difference in our ability to retire comfortably. I realize this is a broad question, but maybe it’s a topic you can tackle in the near future. Thanks for all you do for the real estate investing community.”
Well, thank you Laura and I got some good news for you. You and Jeff were actually in a pretty good state. What I can do here is I can provide you some perspective that you may not be getting now. Most people look at real estate investing from the training wheel perspective they get when they first get introduced to this. So when we at BiggerPockets were first teaching people how to invest in real estate, it was a very simple approach. “Here is how you determine the cash-on-cash return. Here is how you make sure that you’re going to make more money every month than it costs to own it because that’s how you avoid losing real estate.” Now, this was important because BiggerPockets came out of the foreclosure crisis where everybody was losing real estate. So Josh Dorkin started this company because he had lost some real estate and he wanted to help other people avoid that same mistake.
At that time, it was just if you knew how to run numbers and you bought a property that made money not lose it, it was that simple. You were going to do well. And if you bought anything in 2011, ’12, ’13, 10 years later, you’ve done very well. So you understand what I’m talking about. Fast-forward to 2023, it is a fast-moving, complicated, highly-stressful, pressure cooker of a market, and we need a more nuanced approach to real estate investing that’s simple. Just calculating for cash-on-cash return and that’s all-you-got-to-do approach, it’s not cutting it anymore. So let’s break out of the training wheel approach of just buy a single-family house, get some cashflow, do that again, hit control C and then control V 20 times, you’ll have 20 houses, you can retire.
Real estate actually makes you money in more than one way. I’ve broken this into 10 different ways, and a couple of them are buying equity which means getting a deal below market value, paying less for a property than what it’s worth, forcing equity which is just adding value to the property, natural equity which would be the fact that prices of real estate tend to increase over time because of inflation, and then market appreciation equity which is investing in markets that are more likely to appreciate at a greater rate than the areas that are around them. Again, it’s not guaranteed, but it’s reasonable to expect. If you buy in a high-growth market with limited supply, it’s going to appreciate more than if you buy in a low-growth market with plenty of land and tons of homes everywhere, so they can’t go up in value. Now you’re already doing the first thing I would’ve told you, which is take advantage of your competitive advantage.
In Long-Distance Real Estate Investing, the first book I wrote for BP, I talk about this. Buy in markets where you have a competitive advantage. Where do you know a wholesaler that can get you deals? Where do you know a bank that will fund them? Where do you know a contractor who’s really good and reasonably priced? That’s the market you want to take advantage of. Now, you happen to sleep in the same bed as an awesome contractor, which is great. He’s always going to take your jobs first, and he’s going to communicate with you quickly. That’s the problem all the rest of us are having, but your husband does this for a living. You’re taking advantage of that. You’re also buying equity. You mentioned that you sold the house that you lived in, and you made the sacrifice, which was sacrificing your comfortability of loving that home that your husband built from the ground up with his own hands to get a good deal from a wholesaler and start over.
Now, when you bought that single-family residence from the wholesaler, you bought equity because you paid less than it was worth, and now you’re forcing equity by having Jeff work on it. That’s exactly what you should be doing. I understand you’re playing catch-up. That doesn’t mean you need to take more risk. That doesn’t mean you need to hope deals work out and just like buy a whole bunch of property. It means that you need to be more diligent about getting more out of every deal that you buy, which you’re already doing. You’re not paying fair market value for properties, and you’re not buying turnkey things. That’s a mistake a lot of investors make is they want convenience. They go buy a turnkey property, or they go to a market, like you said, where it appears that you’re going to get a lot of cashflow but you get no growth. And they end up either losing money or breaking even over a 10 to 15-year period.
You have already sacrificed comfortability in the name of progress, and I love that you’re making the right financial decisions. Hopefully you guys are also living underneath a budget, so keep doing that. I like the idea of you guys doing the live and flip. Buy a house that’s ugly, torn up, but in a great market. I call that market appreciation equity, it’s B-class areas, A-class areas. Just like you said, those are going to appreciate at a higher rate than C and D-class areas. Fix up the house. After two years, you’ll avoid capital gains taxes. You can sell it, and you can buy another one and repeat that process, or you can keep it as a rental, and you can put 5% down on the next house. You aren’t going to need a ton of capital. Because your husband does this work, you have an advantage over other people. Because your husband does this work, he has contacts in the industry.
Maybe he’s too old or his body can’t keep up with the demands of it, he can oversee the work that someone else is doing. Maybe he even mentors some younger kid that wants to come in and learn construction, and your husband can use his brain instead of his body to bring value into forcing equity. That’s another thing you should think about. As you do this, the equity that you’re growing with every deal should continue to increase. At certain points, rip off a chunk of that. Go buy yourself another four family. Go buy yourself another triplex. You’re already doing the right things. So to sum this up, you don’t have to buy more real estate. You have to continually be active in adding value to the real estate you have.
And when you’ve got to the point that you’ve increased the value as much as you can by doing the rehabs after you’ve already bought it at a great price, sell it or keep it as a rental. Move on to the next one and continue adding value to every single piece of property that you buy that will turn into the retirement you want. Thank you very much, Laura. Love hearing this story and glad that we have BiggerPockets are able to help you out with that retirement.

Vince:
Hey, David, thanks for taking my question. This is Vince Herrera from Las Cruces, New Mexico. I’m in the middle of closing on this property that I’m in right now. It’s my parents’, I made a deal with them to pay off the remainder of what they owe. And they sign it over to me, and I’m the owner free and clear. So right now, it’s really good. It’s only 30,000. So I looked up just really quick numbers on Rentometer and the areas around it, and it looks like I could probably rent, this mobile home for around a $1,000 a month. It’s a four bedroom, two bath. It’s in really good shape. It was recently remodeled. So I’m wondering, after I do this, should I try to use it as a short-term rental or long-term?
Obviously, I know I would probably make more as short term, but I don’t know how successful mobile homes are for short term, and I just don’t know what factors I should be looking at to make that determination. If you could help me out with that, that’d be great. My overall goal is to house hack small multifamily properties to build up my portfolio. So when I have something done with this property, whether it be short-term or long-term rental, I’d like to get into a small multifamily duplex, triplex, fourplex and house hack that, and then just keep going hopefully. So appreciate you taking my question and hope you have a good day. Thanks.

David:
All right, Vincent, thank you very much for that. This is a good question. To go short term to go long term, that is the question. All right. Now, like I mentioned before, what I usually need to give a good answer on this is an apples-to-apples comparison. So a lot of what I’m doing in real estate when I’m looking at two options is trying to convert the information into something that’s apples to apples. So what I wanted was to know what would you make per month as a long term? What could you make per month as a short term? Then I would look to see, because it’s going to be significantly more work to manage the short-term rental, is the juice worth the squeeze? If it’s an extra two grand or three grand a month, you can make as a short term rental, I’d compare that to what you’re making at work.
And I’d try to figure out would that make sense for you to put the effort into it versus if it’s another $300 a month, and it’s going to be a lot of work? Maybe it doesn’t make sense. So I use the BiggerPockets Rental Estimator, which anybody can use if they go to biggerpockets.com and they go to Tools and then Rent Estimator. And I looked up four-bedroom, two-bathroom, mobile homes in Las Cruces, New Mexico, and I used the zip code 88001. I don’t know exactly what the address was, but that’s the one that I picked. And rents seemed like they were anywhere in between $1,100 and $1,700, right? So we’re going to use an average above that, $1,300 for this property as a long-term rental. The next thing I would need you to do is to ask around at property managers that do short-term rentals out there and find out how much demand you have for short-term rentals?
You’re going to want to talk to either another investor that does it or a property manager that manages short-term rentals to figure it out. My guess is the people that would be renting out a mobile home as a short-term rental would probably be either a traveling professional that needs a place to stay for a month or two or a person that wants a budget deal because otherwise they would just stay at a hotel. So at a $100 a night, you would basically need to rent that thing out for around an average of 13 times a month in order to get similar revenue to the long-term rental. Now, of course there’s cleaning fees and other fees associated with short-term rentals, but it’s about half the month it’s going to have to be rented for at a $100 a night. Compare that to hotels. Can people stay at a hotel for less than that or more?
If a hotel out there is $200 a night, maybe you could get 150 or 125. That’s the approach that you want to take. I can’t answer your question on which way you should go until I know how much demand there is and how many people are traveling to Las Cruces, but I have given you enough information that you could figure this out for yourself without a ton of work. Also, congratulations on using the resources you have available to you, which was your parents to get this property, pay off the note, and take it over free and clear. I would love to see what you would do with this. This could be a great building block, a foundational piece to get some of the fundamentals of real estate investing down that would then help you buying the next house, which is hopefully a regular, construction, single-family home that you can buy with 5% down.
Reach out to me if you’d like to go over some lending options and come up with a plan for how to do that, and hopefully we can get you on another episode of Seeing Greene to give progress on the next property that you buy. Now, Vincent, at some point you may want to finance that mobile home, and you’re going to find that financing is not the same for mobile homes as it is for regular construction. You’re not going to get the same Fannie Mae, Freddie Mac 30-year, fixed-rate products, and that throws a lot of people off. There are still financing options available to you though. You just got to know where to look. Check out BiggerPockets episode 771 where I interview Kristina Smallhorn, who is an expert on this, and we go over some financing options as well as other things you should know if you’re going to be buying mobile homes or pre-fabricated properties.
All right, this point of the show, I like to go over comments from previous episodes that people left on YouTube. I find it as funny, I find it is insightful, and I find it as challenging, and sometimes people say mean stuff, but that’s okay. I’m a big boy, I can take it, but I like to share it with all of you because it’s fun to hear what other people are saying about the BiggerPockets podcast. Make sure that you like, comment, and subscribe to this YouTube channel, but most importantly, leave me a comment on today’s show to let me know what you think. Today’s comments come from episode 759. Let’s see what we got. From PierreEpage, “You should make turning on the green light part of the show, and then it will be harder to forget, almost like a quick tip being said in a certain way so consistently.”
Pierre, that is a great idea. This is why I like you guys leaving comments. I could not do this show without you. It could be that, like (singing). [inaudible 00:21:58] is that, isn’t that Sting or something that sings that? Is it Roxanne? (singing) Yeah. We could even make that the theme show for the Seeing Greenes, but we just have green instead of red. Maybe I should do that. When I start the show, I’ve got the regular blue podcast light behind me, and then we know it’s time to get serious because I flick it to green like Sylvester Stallone in that movie, Over the Top, where he turns his hat backwards. And it’s like flipping a light switch, and I go into Seeing Greene mode. Might have to consider that, Pierre. Thank you very much for that comment. In fact, if I can remember your name, I might even give you a shout-out when I do that for the first time.
Next comment comes from Patrick James 1159. Before I read this, I just want to ask everyone because I do Instagram Lives on my Instagram page, @DavidGreene24, and you try to read the person’s name that has the comment. And it’s always Matt_Jones_thereal.76325, and I wonder is there that many Matt Joneses that they need this many? Patrick James, are there 1,159 of you, and that’s how far you had to go? But as I read this, I realize the hypocrisy of what I’m saying because I’m DavidGreene24, and there probably were 23 before me, but I picked a number. However, my number was my basketball number in high school. I don’t know what number 1159 could be. It’s not a birthday. I’m curious, Patrick, if you hear this, leave us a YouTube comment on today’s show, so we know why you chose to throw such a big number at the end of your name.
All right, Patrick says, “I wish the best for everyone, but I’m leery of inflation and higher and higher rates. Two things that I can’t control, a grizzly burr.” Ooh, I see what you’re saying there like grizzly bear, but using burr, and you’re saying bear because it’s a bear market which has you nervous, which is why you said you’re leery of inflation at higher rates. Okay, you probably meant this as a joke, but I’m going to run with this in a serious way. It’s a problem, my brother. This is literally why I think the market is so hard, and I won’t take the whole episode to explain it, but if you’re struggling finding deals that make sense compared to what you’re used to seeing, you are not alone. We have created so much inflation that you cannot beat it by investing your money in traditional and investment vehicles, bonds, CDs, checking accounts, ETFs, even most mutual funds. Unless you’re an incredibly talented stock picker, you’re not beating inflation right now, and depending how inflation’s measured, that’s different, right?
The CPI think came in at 4.9, but if you look at how much currency has been created, there’s people that think inflation is closer to 30% to 50% a year. You’re not getting a 30% to 50% return on any of these options I mentioned. Where can you get it? With real estate, and that doesn’t mean a cash-on-cash return, I’m saying more like an internal rate of return. If you look at buying equity, forcing equity, market appreciation equity, natural equity, natural cashflow, forcing cashflow, buying cashflow, all the ways that I look at how real estate can make money when I’m Seeing Greene, you can start to hit those numbers over a 10-year period of time. And that’s why everyone is trying to buy real estate right now, even with rates that are high, even with cashflow that’s compressed. It’s hard, but it’s still the cleanest shirt in the dirty laundry, and everyone’s fighting for it.
So I hear you, Patrick. It’s rough. Patrick then says, “There be a grizzly burr in them woods.” This is a very corny Seeing Greene fan, and I love it. Thank you. Guys, who can out corn Patrick? I want to know in the comments. From Justin Vesting, “Hi, David. I just want to touch on something that I’ve noticed. You guys never interview or speak on the Northeast market, New England specifically, the toughest market in the US and where I’m located. I live in Rhode Island. Please do a show regarding the Northeast market, and if you could, Rhode Island would be fantastic. Hope you can make it as I would love to hear some insight in my market. Thank you.” All right, Justin, as I read this, I realize I forget that Rhode Island is a state in our country. I’m probably not the only one. There’s other states like Vermont and Maine that I can very easily forget exist. New England you hear about, but with Tom Brady gone, you hear about it much less.
So you’re right. We don’t do a whole lot of Northeast talk. We don’t have guests on that have done really well in those markets. Maybe we need to get someone to reach out to BiggerPockets.com/David and let me know if you’re a Northeast investor, so we can get you on the podcast because it’s tough. And I can see how you live there, and you’re trying to figure out what can be done to make money in those markets, and you’re not getting any information. So first off, thank you for listening even though you’re in a forgotten part of the country that I don’t know exists. This is like when you go through your closet, you find that shirt that you forget you had. You’re like, “Oh yeah, I haven’t worn this thing in three years. I remember I used to like this sweatshirt.’ But it’s like it’s brand new. You just reminded me we have 50 states and not just 47.
But on a serious note, yeah, we do need to get some people in to talk about that. I believe that we had someone from Bangor, Maine, it was like the first BiggerPockets episode I ever co-hosted with Brandon. We interviewed somebody from that market, and it was very rare. So if you’re a Northeast investor, let us know in the comments. And if you’ve got a decent portfolio, include your email, and our production team will reach out to you and interview you to be on the show. All right, a call to action before we move on to the next question. Get involved with your local real estate investor association or meetups. This is your best way to connect with investors in your market and get real-time info about what is working. If you’re investing in New England, please apply to be on the show at BiggerPockets.com/guest.
We also have an episode with Pamela Bardy coming up, so keep an eye out for 785, and she is from Boston, and you’ll love it. So if you’re in a market like the Northeast and you’re not getting as much information as you’d like, it’s more important that you make it to meetups and learn from other investors what they have going on. All right, we love and we appreciate your engagement, so please keep it up. Also, if you’re listening on a podcast app, please take a second to leave us an honest review. We love these and they’re super, super important if we want to remain the biggest, the baddest and the best real estate podcast in the world.
A recent five-star review from Apple Podcast from Legendary. “Finally took a second to write a review. Listened to you since the beginning, kept me going when I wanted to throw in the towel in my own real estate biz. Keep up the great work.” And that is from Jake RE in Minnesota. Thank you very much, Jake, for taking a second to leave us that review and especially for being so kind. So glad you’ve been here from the beginning. Love that we’re still bringing you value, and thank you for supporting us. All right, our next question comes from Tomi Odukoya.

Tomi:
Hey, David. My name is Tomi Odukoya. I’m an investor in San Antonio, Texas. Behind me is my vision. I have a question. I’m also a Navy veteran. I love your idea and thank you so much for pushing house hacking. I’m currently in my primary residence. I used my VA loan. I’m getting ready to close on a new bill duplex using my VA loan again. Current house, my primary has interest rate at 3.25%. I’m wondering when I close on the duplex and move into it, my current primary, should I transfer the deed to my LLC, or how should I take care of that, so I can rent out the current primary and also not have to worry about the liability, but hold onto the mortgage at 3.25%?

David:
Thanks. All right, Tomi, first off, thanks for your service, man. Really appreciate that you’re in the military, and love that you’re listening to the show. If we have other military members that are BiggerPockets fans, send me a DM on Instagram, @DavidGreene24 and let me know you’re either a first responder or military. Would love to get to know you guys better, and gals by the way. Okay, let’s break down your question. The good news is I think you’re probably overthinking it because you have the right idea, and I can see that you’re trying to keep your low interest rate. But you’re wanting to move out and get another house, which frankly, if I could just tell anybody what they should do with real estate, I’d be telling them to do what you are doing. Don’t overthink it. House hack one house every single year in the best neighborhood you can possibly get in with the most opportunities to generate revenue, whether that’s the most bedrooms possible or the most units possible, whatever it is. Just keep it simple. Put 5% down every single year. So you’re already on the right path.
Now, regarding your concern, if you’re saying that you may want to move the title into a new vehicle through a deed, so like starting an LLC to take a house that was once your primary residence and take it out of your name for liability reasons, I’m not a lawyer. I can’t give you legal advice. I can tell you if I was in your situation, I wouldn’t be worried about that. And I’m saying this from the perspective that LLCs are not airtight guarantees, much like your bulletproof vest which you’re going to wear if you’re in a position where you need to. It’s better than not having it, but it is far from a guarantee, right? The bulletproof vest doesn’t stop everything that comes your way, and you know that.
LLCs are like that. People tend to look at them like these airtight guaranteed vehicles that you’re protected in case you get sued and they’re not. They can actually have what’s called the corporate veil pierced. If a judge looks at your LLC and says, “That’s not a business. That was just his house. It’s still him that owns it. He doesn’t have a legit real estate business. He just took his house and stuck it in this LLC.” If you’re found negligent or at fault, they will still let that defendant come after you and take what they’re owed in the judgment. One thing people don’t realize is that your regular homeowner’s insurance will cover you in case you’re sued up to a certain amount. I would just talk to the insurance company, and I would make sure that you’re covered for an amount that is in proportion to what a judge might award somebody if you end up getting sued.
That’s one of the reasons I’m starting an insurance company is to help investors in situations like this as well as to ensure my property. So reach out to me if you would like us to give you a quote there. But the properties that I bought in my name, I didn’t move all of them into an LLC. The first properties I bought, they’re still in my name, and they’re just protected by insurance. So I think a lot of people assume LLCs are safer than they are. Doesn’t mean they’re not safe, doesn’t mean they’re not important. They have their role. But oftentimes the people that I know that are putting their properties into legal entities, it’s not always for protection. It’s more so for tax purposes. And the last piece that I’ll say is this becomes more important to put them in legal entities like LLCs when there’s a lot of equity, or you have a high net worth.
If you’re in the military, you’re grinding away, you’re getting your second property, you’re probably not in a huge risk of being sued. When you get a $1 million of equity in a property or within an LLC, now, there is incentive for someone to go after you and try to sue. But until you get a bigger net worth, it’s not as important. Because if you only have $50,000, $60,000, $70,000 of equity in a property, after legal fees, it doesn’t make sense for a tenant to try to sue you for something unless you really, really screw up because there’s not a whole lot for them to get. So don’t overthink it. I think you’re doing great. Make sure that you’re well insured. Buy the next property. After you’ve got several of these things, we can revisit if you want to move their title into LLCs.
Another reason that I’m not leaning towards it is when you do that, most times, you trigger a due on sale clause in your agreement with the lender that they have the right to come and say, “Now, we want you to pay our mortgage back in full.” They don’t always do that, but they can. And here’s my fear that isn’t talked about very often. When rates were at 5% and they went down to 3%, for a lender to trigger the due on sale clause and make you pay the whole mortgage off, they would lose the 5% interest that they’re getting from you, and they would have to lend the money out to a new person at 3%, which is inefficient. So of course, they don’t do that. But what have rates been doing? They’ve been rising.
So now I’m warning people, if you’re getting fancy with this type of thing, if you’re assuming somebody else’s mortgage and the lender finds out about it, or if you’re doing this where you’re moving the title from one thing into the next and hoping they don’t find out if your mortgage is at 3% or three to quarter, whatever it was you said it was at, and rates go to 7%, 8%, 9%, 10%, now the lender can triple their money by calling your note due and lending that money to someone else at 9% or 10% instead of you at 3%. You might actually see banks going through their portfolio of loans and saying, “I’m calling this one, I’m calling this one, I’m calling this one.” That would make sense to me.
So now with rates going up instead of down is not the time to try to move things out of your name and into a legal entity if there’s a due on sale clause. Hope that my perspective makes sense there. Again, I’m not a lawyer, but that’s the Greene perspective that I’m seeing. You guys have been asking great questions today. Our next question comes from Jeff Shay in California, where I live. Side note for all of you that don’t live in California, first off, no one calls it Cali in California. I don’t know where that started, but everyone outside of California refers to as Cali, but none of us call it that. It would be like calling Texas, Texi or Arizona, Ari. I don’t know where that started. It’s just a lot of syllables maybe, but you are guaranteeing that people will know you’re not from California if you say Cali.
And when someone says they’re from California, your next question should be, which part, Northern or Southern? Because they’re basically two different states. They have hardly anything to do with each other. So I’m not sure where Jeff is from in California, but if it’s in Northern California, it might be near me. Jeff says, “I’m 31, and my wife is 33. We’ve been investing in real estate. Our properties are more appreciation heavy, and eventually the plan is to sell off to purchase more cashflow-heavy properties or dividend stocks to maximize passive income. How do we begin to calculate when we can start doing this? Does the 4% rule still work in today’s financial landscape? Thank you very much.”
Jeff. I love this question. You’re doing it the right way. Let me give some background into why I think you’re taking the right approach here. So in general, real estate makes money in several ways, but the two main focuses are cashflow and equity, and it tends to operate on a spectrum. So it’s not like it’s cashflow or equity. It’s a lot of cashflow and less equity or a lot of equity and less cashflow, but there is some markets that fit right in the middle. Dave Meyer refers to these as hybrid markets. If you would like to know more about that, check out the bigger news shows that I do with James here on the BiggerPockets podcast network.
But the point is you have less control over cashflow. This is one of the ways I teach wealth building for real estate. Of course, we all want cashflow, and for you, Jeff, you’re trying to maximize how much cashflow that you’re going to get in retirement because that’s when it matters. When you’re not working anymore is where you need that cashflow. But I don’t control cashflow. The market controls that. I am at the mercy of what the market will allow me to charge for rent. That’s the only way I can increase cashflow is either raising rent or decreasing expenses, and it’s very hard to decrease expenses. You can only decrease them so much. Paying off the mortgage is one way, trying to keep vacancy low, trying to keep repairs low. But when things break in houses, your tenant controls that much more than you do.
So what I’m getting at is you have a lot less control over the outcome of cashflow. You have more control over the outcome of equity. You can buy properties below market value. You can buy them in areas they’re likely to appreciate. You can buy at times when the government is printing more money. You can force equity by adding square footage, fixing the properties up, doing something to increase the value. See what I’m getting at? Equity allows a lot more flexibility, but it’s not cashflow. So the advice I give is to focus on equity when you’re younger, grow it because you have more influence over that. And what I mean is you can add $50,000 of equity to a property much easier than you can save $50,000 of cashflow. I mean, think about how long it takes to save $50,000 of cashflow after unexpected expenses come up. That’s a long time.
During that period of time, you probably mill a lot more than $50,000 of equity. I mean, it might be 10 years before you get $50,000 of cashflow, but equity doesn’t help you when you want to retire. It’s a number on paper. It’s not cash in the bank. So the advice, just like Jeff is doing here, is to build your equity, grow it as much as you can. Then when you’re ready to retire, convert that into cashflow. Now, Jeff, you said, “Does the 4% work rule still work in today’s financial landscape?” I’m assuming what you’re meaning is you should invest your money to earn a 4% return because you’re going to live for a certain period of time, and that then your money should last you for how long you’re going to live. All right, so what is the 4% rule?
According to Forbes, the 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio’s value, if you have 1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule. Now, I’m assuming what this means is if you can earn a 4% return on that money and only withdraw 4% of said money, you won’t run out of money in retirement. If that’s not exactly the 4% rule, I’m sure the FI people are going to be screaming. Let me know in the comments on YouTube. But it’s not super important if I have the rule down. What is important is that Jeff is asking, “How much money do I need before I can start withdrawing it, so I don’t run out of money in retirement? And at what point do I want to convert this equity into cashflow?”
So the good news is you’ve got the equity to convert, meaning you’ve run the race well. Good job, Jeff and your wife. You guys are 31 and 33, so it doesn’t need to happen anytime soon. Okay? Keep investing in these growth-heavy markets. Keep buying under market value and keep adding value to everything that you buy. I would wait until you no longer want to work or enjoy working. If you could find a job that you work until you’re 60 or 65 and you like it, it’ll be a lot less stressful to just keep working than it would be to try to retire at 50 and always wonder what’s going to happen. Now, here’s something that I think are headwinds that are working against you. Inflation is growing so incredibly fast. If I gave you a $1 million 30 years ago, you would feel a whole lot more secure than with a $1 million today.
What’s it going to be like 30 years from now when you’re in your early 60s? Is that million dollars going to be worth the equivalent of a $100,000 or $200,000 in today’s dollars? You wouldn’t feel very good retiring with a 100 grand. That might be what a $1 million is worth 30 years from now. It might be worse than that. I know this is hard to imagine, but if you went back 30 years and you looked at how much houses cost, you’d probably find that they were like $80,000, $90,000, a $100,000 in areas that they’re now $600,000, $700,000. They’ve gone up a lot, and we’ve printed more money recently than we have over the last 30 years. So I’m expecting inflation to be a beast. Now, this is good if you own assets. This is good if you have a lot of debt. This is very bad if you don’t want to work anymore.
In fact, when I first realized this, my plan of retiring at 35 and never working again evaporated because I realized the $7,000 of passive income that I had accumulated at that time was not going to be enough to sustain me for the rest of my life because of inflation. My rents were not growing at the same pace of the cost of living and all the things that I wanted to do. That’s when I realized, “I guess, I got to keep working, but I’d rather be a business owner than work at W-2. I got out of being a cop. I got into starting a real estate sales team, a mortgage company, buying more rental properties, doing consulting, the stuff that I do now, writing books.
Can you find something like that, Jeff, that you like doing, so you can keep working? Because my fear would be that the $40,000 that you might be living on right now, if you had a $1 million and you were using the 4% rule, would be the equivalent of $8,000 when you actually want to retire, not enough to live on in a year unless you move to a Third World country. So it’s a moving target is basically how I’m going to sum this up. By the time you retire, I don’t know if the 4% rule is going to work in today’s financial landscape, but I’m betting on, no. I’m betting on inflation being really, really bad and cashflow being hard to find for a significant period of time. So rather than investing to try to make money so I can retire, I’m investing to try to maintain the value of the money that I’ve already earned.
So if I earn a $100,000, I want to put that $100,000 in a vehicle like real estate where it is going to lose less, even if it doesn’t keep pace with inflation. If inflation is at 30% to 50%, I’m not bleeding as much as if I put it in a different investment vehicle. I realize that this is not a sexy concept, but it’s defense, and I think more people should be thinking defensively, including you and your wife. So keep doing what you’re doing, but we’re not going to make our decision on when you take out that equity and convert it into cashflow until much later in life, when you’re not able to work anymore. Now, what you still could do is you could take off some chunks. Let’s say you grow to $2 million of equity investing in California real estate, maybe you rip off 400,000, 500,000. Put that into a market that cash flows more heavily or an asset class that cash flows more heavily like a short term rental.
And then to get some cashflow coming in from that while you keep a 1.5 million in equity, let that snowball to another 2 million. At that point, rip off 500,000. Repeat the process. You could probably do three, four, five cycles of that before you retire if you do it every five or six years. All right, Jeff and Jeff’s wife, thank you so much for submitting this question. It was a great one to answer, and I got to highlight what I see going on with our economy and the future. And that is our show for today. I am so grateful that you all join me for another Seeing Greene episode. I love doing these, and I love your questions. If you’d like to be featured on the Seeing Greene Podcast, submit your questions at BiggerPockets.com/David because that’s my name, aptly titled, and hopefully we can get you on here too, especially if you can keep it under two minutes, one minute. Those are even the best.
And when we first started doing the show, we got a couple complaints that we had people submitting seven-minute questions, so we’ve done a much better job of getting those narrowed down. But we could not do the show without you, the listener base, so thank you very much for being here. If you would like to know more about me, you can find me online at DavidGreene24, or you could follow me on Instagram, Facebook, Twitter, whatever your fancy is at DavidGreene24. Send me a DM there, and we can get in touch. All right, if you’ve got a minute, check out another BiggerPockets video, and if not, I will see you next week. Thank you, guys, and I’ll see you then.

 

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