Early Retirement, Private Lending, & The $10,000 “Guru” Trap

David:
This is the BiggerPockets Podcast, show 825.

David:
I think we all need to get rid of this virus that’s gotten into our minds that money should be passive, that we should just exist and we did hard work in the past and now money just flows to us and it just comes. That is not how it works. You don’t get really fit and then never work out again and just stay fit forever. You’re always working out. However, the work it took to get in shape is much harder than the work it takes to stay in shape. And business is the same way. You’ll work very hard to get in good business shape and then it’s just about maintaining it and it’s not that difficult.

David:
What’s going on everyone? It’s David Greene. Your host of the BiggerPockets Real Estate Podcast. The biggest, the best, and the baddest real estate podcast in the world. Every week, bringing you up-to-date content stories from other investors or episodes like today, which if you can tell because you’re watching on YouTube from the green light behind me is a Seeing Greene. Or if you just read the title to today’s show, congratulations for being smart.

David:
In these episodes, if you’ve never heard one, we take questions directly from you, our listeners, and I answer them, giving you the Greene perspective on what I think people should do, what should be considered, or what options they may have. My sincere hope is that my nearly 15 years of experience investing in real estate could benefit you, following behind me on the same journey.

David:
Today’s episode is awesome, high energy and a lot of fun. We get into, if someone can use a down payment that came from another property and if that’s a smart idea. Advice for a late starter and someone looking to diversify their W-2 who has an illness. When it makes sense to scale a property management company? Who that is good for and what should be expected and if to invest in RE or lend privately?

David:
All that and more on today’s show. And remember, if you want a chance to ask a question on Seeing Greene, I’d sure love to see it. Head over to biggerpockets.com/david and you can submit your question there and hopefully have it answered on one of these shows. And lastly, please take a minute to like, share and subscribe to this channel, if you found value in today’s show, if it was entertained, if I made you smile, just send this to someone else that you love, because I want to make them smile too.

David:
And one of our questions today made reference to my Batman voice. Awesome. Glad to hear that there’s still people out there that love it, which brings us to today’s quick tip. Batman here says, “Go order David’s new book, Pillars of Wealth: How to Make, Save and Invest Your Money to Achieve Financial Freedom.” It’s available at biggerpockets.com/pillars.

David:
And most importantly, this book is a no-nonsense straight shooting blueprint to becoming a millionaire that anyone, and yes, I mean anyone can follow. It’s the secret sauce that most people don’t get told. That includes a three pillar approach to building wealth, being good at saving money, and yes, that is a skill. Being good at making money, that’s an even better skill and then investing the difference. If you’re somebody who is tired of failing and wants financial freedom, I highly suggest that you join the movement that so many other people already have. Go to biggerpockets.com/pillars and pre-order the book.

David:
And I almost forgot to mention, there are some pre-order bonuses you can get if you go buy this now. That’s right. If you get the book now, you’re going to get my Wealth Building Cake Recipe, a workbook to get yourself started and in the right direction, access to a coaching call, and one of you lucky pre-order specialists will get a private call with me, which will give me the ability to look into your personal financial situation and give you custom-built advice for where I think you should start, where your skills are and what path you should be following.

David:
I love helping other people succeed in life, and because money is such an important part of life, it’s one of the big things we have to talk about. In today’s show, I get to share some of that insight, but if you want my advice put directly towards you, go pre-order Pillars and get your chance for a private coaching call with yours truly.

David:
All right, let’s get to today’s show. Our first question comes from Chris Connell.

Chris:
Hey David. My name is Chris Connell. I’ve been investing in Winston-Salem, North Carolina for the last three years. Thank you, and Rob and the rest of your squad. You guys have done such incredible job.

Chris:
All right, here’s my current situation. I own three MTRs, one is paid off, two cash flow at about 1300 a month with mortgages, and my wife and I would like to add to the collection. So I might add, I’m an actor and cash flow ebbs and flows. I’d rather not put 20% down on a conventional loan, so we have the idea, maybe she could bring 50% of the cash from an account she has and I could put 50% from a cash-out refi on that paid off property, we’d buy our next property in cash.

Chris:
Is this a good idea? Does it make sense? Is it absolutely insane? I’m sure you have some great thoughts about it. I love your input and direction. Thank you guys so much.

David:
Thank you Chris for the question. All right, so here’s something that you got me thinking about when you said it. You were considering doing a cash-out refinance on a paid off property to buy your next property with half of the money from your cash-out refinance and half of it coming from your wife. I believe you were saying, if I got this right.

David:
It sounds like what you’re thinking is if you pay cash for the new property, you won’t have a loan and you’ll have more cash flow. The problem is you still got a loan, you just got a loan on a property you already had, not the new one. It might be tricking your mind into thinking that you’re getting cash flow, you’re really not getting, because even though the new property will cash flow more without a note, the previous one will cash flow less, right?

David:
So are you robbing Peter to pay Paul here and not considering that? Because you’re going to be losing cash flow on a property you already have. Another thing is that a cash-out refinance will usually have a higher interest rate than a rate and term refinance, and I’m wondering if you might get a better rate on a new purchase than you would on a cash-out refinance.

David:
We’d be happy to look into that for you. If you want to send me a DM, I’ll connect you, but whoever you’re using that is a thing you should think about is, “Am I going to get a better rate on a cash-out refi or on a purchase?” Because if you get a better rate on a purchase, I don’t think you should do a cash-out refinance. You should go buy the next property getting a loan on it.

David:
Now that does sort of beg the question of, “Well, how do you come up with the money for it?” Which might be why you’re thinking that you’re going to do the cash-out refinance in the first place. I’m just… In today’s market, okay, this isn’t a hard-and-fast rule. Generally speaking, I’m not a huge fan of putting debt on existing properties to buy new properties. I’m not against it. It could work, especially if you’re in the medium-term rental game, short-term rental game where you typically can get more revenue, sometimes you can make those work.

David:
What I don’t like about it, is it’s hard enough to find cash flow in properties as is, now you’re taking on extra debt and trying to find a cash flow in property has cash flow even more. It becomes harder and harder to do. The strategy that I’m seeing this working in today’s market is taking a delayed gratification approach.

David:
You’re buying real estate in good locations, expecting it to make money later. But you’re looking to make money right now. You’re looking to sort of offset the income that comes from acting. I just want to make sure you’re making smart decisions buying real estate, and you’re not buying stuff that’s not intelligent because you feel like you need cash flow. I’ve said it before, I’ll say it again, real estate’s really not a great way to generate extra income. It does that. It can work for that. It’s not what it’s intended to do.

David:
A Lamborghini can tow a boat if you set it upright. It can do it, but it’s not intended to do that, and there will be a negative impact on the performance of that vehicle if you do it for too long. Cash flow is intended to come from commercial real estate, which is very risky right now, because we don’t know where rates are going. And from work, from starting a business, from having a job. My philosophy, what I’m telling people is if you need cash flow, you need to start a business or you need to take another job or you need to learn a skill in addition to your acting.

David:
And if you want to build long-term wealth, you need to buy real estate. I think things work better that way. I think real estate inherently has an architecture that benefits long-term ownership. The principal portion of your payments goes up with every payment over time, making long-term ownership beneficial. Inflation makes dollars worth less, which makes values go up, making long-term ownership beneficial.

David:
Rents tend to go up while your mortgage expenses will stay roughly the same, which makes long-term ownership beneficial. It’s a great retirement plan. It’s not a great right now, plan. And that’s why I’m usually telling people the opposite of all the other influencers that say, “Take my course, quit your job and live off the cash flow.” I don’t see anyone making it happen and I see a lot of heartache coming from the people that tried to force that.

David:
So I’ll sum this up by saying I like what you’re thinking. If you want to buy more real estate for future gains, for your future retirement, for delayed gratification, go through with what you’re doing. If you’re looking to just offset the ups and downs of the acting business, this would be a poor strategy to use. I don’t think that buying real estate for the cash flow it generates in year one is a super simple bet. Right now, you’re also exposing yourself to risk, just in the same way that it makes income, real estate can lose income.

David:
The traveling professionals may stop going, your market could get saturated, there could be a lot of other people that do the same thing, and now you’re losing money every month, which makes your problem of inconsistent income amplified. That’s even worse. So I’d rather see that you took a different approach of making money within real estate.

David:
If you love it, getting a job within the real estate industry or some other type of business opportunity to supplement your acting other than real estate, but keep buying the real estate, just don’t buy it because you need to supplement your income today. Also, killer hair, bro.

David:
All right, let’s check out a clip from Greg Miller in Rochester, New York.

Greg:
I’ve been an avid listener since way back in the Josh and Brandon days, but I have a bit of a unique situation. I have a W-2 job and I own three homes. I live in one of those homes. I rent out the other two as short-term rentals.

Greg:
One of those two is a duplex, so that’s a total of three short-term rentals and last year I grossed about $150,000. I’m 53 years old, but a few years ago I was diagnosed with multiple sclerosis and then last year they tell me I had a stroke.

Greg:
Even though I like my W-2 job, I’m in a situation where I want to leave it behind so I have time to enjoy my life. Because of my health conditions, I obviously want to do that sooner rather than later. And earlier this year, I inherited close to $900,000.

Greg:
I would like your advice on how I can use those funds in today’s market to generate immediate cash flow and also to provide an nest egg for my family. Thank you so much and keep up on the Batman voice.

David:
Gregory Miller, thank you for your question and congratulations on being featured on the BiggerPockets Podcast, episode 825. Glad to see a longtime listener finally getting to make their way into the show. I got a good question here.

David:
There’s an advantage that you have to getting a late start if you’ve got capital saved up, right? Everyone’s jealous of the 22-year-old that figures out about real estate investing gets an early start. Yeah, it’s great for them. However, they usually have no money.

David:
When you’re 53 getting started, you’ve got almost a million dollars to put into play. You got some pretty cool options that I’d like to get into as far as building up that nest egg that you’re talking about, and thank you for indulging the glory of the Batman. Many people don’t know that Wayne Enterprise has actually had significant real estate holdings and that’s how I got to where I am today.

David:
So let’s talk about what you could do here, my man. First off, we want to see that $900,000 grow. We don’t want you to just take it and plant it somewhere and only think about the cash flow. I’d like for you to take that $900,000 and look at some BRRRR opportunities. What I’d like to see you do is to target properties with a lot of square footage that are not priced very high. Okay?

David:
If you could find a 22, 24, 2600 square foot home next to a lot of 1200 or 1300 square foot homes, you have a lot more room to work with. You could create different units in the same house. You could make that house worth more by fixing it up. You have different ways to what I call forced equity, which is just really value add opportunity, and the reason I like that is because you’re going to put some of that $900,000 into this deal, maybe paying cash for it, fronting the rehab costs on your own, and then you’re going to get a lot of it back out.

David:
So it’s not all going to stay in the property. You’re going to be able to get it out and put it into new properties because even though $900,000 is a lot of money, it goes faster than you think when you’re buying $500,000 homes. That’s one thing that I’d like for you to look into is value add on every single deal you get. I also don’t want you to turn away from flip opportunities.

David:
There’s ways that you can maybe buy a place for 300,000 that needs a ton of work, put a hundred thousand dollars into it, so you’re all in for 400, sell it for 500, sell it for 475. There’s going to be some pretty good opportunities if you’re in the right area to grow that 900,000 at the same time that you’re buying properties with it. Don’t just get a one track mind and say, “I’m going to buy a whole bunch of duplexes.” Make sure you’re looking at all the options that you have to use that to create some money.

David:
Lastly, if you really want to build generational wealth, I need you to be thinking about location. Avoid the risk to say, “Well, I can get 30 houses if I buy $30,000 houses.” No, no, no, no, no. You want to be buying in the better areas and you have the luxury of being able to put more money down if they don’t cash flow.

David:
So oftentimes when we say a property doesn’t cash flow, what we really mean is it doesn’t cash flow with 20% down, but if you put 40% down, 45% down, 50% down, a lot of them will cash flow pretty good. You’re going to get a smaller ROI on the cash flow. That’s true because you’ve got a higher down payment put in there, but you are going to get more money over the long-term in the appreciation and the rising rents.

David:
So though 53 may seem like a late start, it’s really not. Hopefully you’ve got a lot of years under your belt and you want to make wise decisions so that when your family does inherit this real estate, someday they’re inheriting real estate that they want, not real estate that they were forced to take over. You’ll also find that your headache factor goes way down when you’re buying in better areas because you have more selection of tenants to choose from and you have a higher quality of tenant that wants to live in your property.

David:
I hope that makes sense for you. I would recommend checking out my book Pillars of Wealth: How to Make, Save and Invest Your Money to Achieve Financial Freedom because it’s going to have some ideas in there for you to make that $900,000 stretch out.

David:
Let me know what you think after this video. Please submit another question at biggerpockets.com/david and let me know what you’re doing and what your plans are and feel free to reach out to me directly on whatever social media platform that you use if you want some more advice. But thanks man.

Maxx:
Hey David. My name is Maxx Jackson from Wilmington, North Carolina, and I must ask you a question about property management. I currently manage three short-term rentals while owning only one. I’m a realtor, so I do get leads from it, but it also is pretty time-consuming.

Maxx:
My question to you is what in your eyes is the best end goal for property management? Should I continue taking on properties that people want me to manage primarily because I’m a Superhost on Airbnb, until I can’t do it anymore? Do people ever scale their property management business and then sell them entirely, or should I just keep leveraging out as much as I can and grow as much as I can, until I do not have any more time? I have some of my own ideas, but I thought it wouldn’t hurt to ask the expert.

Maxx:
Keep up the good work. I listen every week. I appreciate you and next time you’re in Wilmington, North Carolina, stop by and we can play some pickleball at my newest property. Thanks, David.

David:
Maxx Jackson. Maxx Jackson. First of all, what a cool name. I’m not surprised to hear you’re successful with the Maxx Jackson and I did notice the, I mustache you a question. If you guys are not listening to this on YouTube, Maxx has a pretty prominent mustache, looks kind of like one of the bottom of a push broom that you might see at a warehouse. Definitely makes a statement with that. So go check us out on YouTube if you want to see Maxx’s good-looking face.

David:
All right, Maxx, what I love about this question is that it’s not purely real estate. This is a business question and real estate is a form of business and you’re thinking the right way. Let’s break down the reality of how business and real estate works that most people that don’t actually invest in it, at a significant level won’t tell you.

David:
Scaling is often explained as a concept, not as a practice. Scaling is hard. In fact, in my own personal life, I am going to be firing several property managers and hiring an in-house property manager that’s going to manage my whole portfolio for me because of scaling issues. I hire the company and I love the owner. Then the owner leverages out the work to one of their employees and now I’m getting a low talent, low level motivated employee that’s not doing a good job with my short-term rentals. And after months of having them do this, you finally start to see a pattern in the numbers and you realize the problem. “I’m not getting to work with the talent, I’m working with an employee who doesn’t have the right mindset.”

David:
Now, Maxx, you’re doing well managing other people’s short-term rentals because your talent, you also realize you can’t scale because it’s hard, but the fact it’s hard is why they hired you. If it was easy, they wouldn’t give you the job. So lesson one, to learn from this, quit looking for easy everybody. If things were easy, it wouldn’t be given to you. They would be doing it themselves. We literally make money doing work in real estate because we’re doing something that’s hard. So you got to embrace the hard.

David:
Now, Maxx, I don’t think you have a problem with the hard. What you’re asking is because it’s hard, how am I going to scale this thing? And that’s where the challenge comes in.

David:
If you want to get good at scaling, the key is you have to build skills that are different than what got you good at where you are now. So I call this the three dimensions of leadership. The first dimension is learn. You’re doing that. You’re learning how to be a good short-term rental host and people like it so they’re hiring you and like you said, there’s some synergistic benefits, you’re getting leads, that’s good. But if you want to scale, the second dimension is leverage.

David:
By the way, this comes out of my book Scale, which you can find at biggerpockets.com/scale if you want to check that out.

David:
Leverage is building the skill of hiring other people to do the work. You have to hold people accountable. You have to be a good manager, you have to check in on what they’re doing. You have to have difficult conversations. Everything that you acquired in learning the skill yourself is largely useless to you when you’re trying to be good at leverage.

David:
It’s very different, and that’s why most people never grow a business because they get good at doing something and they don’t want to start over at zero and have to acquire the leverage skills. And it’s only after you’ve done both of those, you’ve learned and you’ve leveraged. Now you have to lead, which is starting over at zero all over again, developing a completely different skillset.

David:
Most people are just not willing to pay the price to scale. But Maxx, I’d like to see you do it. So here is what I want to warn you about. As you try to scale, you will have new challenges that will cause you to pull that mustache right off your face. It’ll drive you nuts. It’s okay, it gets better. You acquire the skills of leveraging other people and eventually leading them with time. But no, it’s not like, “Hey, if I could do it with two, I could do it with 20, I could do it with 200.” That’s not the case at all.

David:
Every time you stake the next step-up in business, you have new challenges that you have to take on. It’s constant personal growth all the time. I’d like to see you do it. You just need to understand that you’re going to be very busy, you’re going to be stressed and that’s the price that people pay to be wealthy.

David:
If you look at the top loan officer in the one brokerage, the last couple months, he’s literally made more money than the company has because he doesn’t have any overhead. The company has a ton of it, but he’s working 12-hour a day. We just interviewed him on Mortgage Mondays on YouTube if you guys want to go check that out.

David:
He gets up at six, he’s in the office by nine, after his workout and he works until nine o’clock at night or later. That’s what it takes to be a top producer. Now he’s crushing it, right? He’s going to have a six figure month here pretty soon, but he’s earning it. Just like you have to put in a lot of work to have a good body, you have to be very disciplined with your diet to have a good body. Wealth works the same way.

David:
Now, over time you will get better at it Maxx and it will not seem as hard in year 10 as it did in year one. But the point is it’s still going to be hard and that’s okay. We don’t have to run away from hard. We should actually run towards hard because that’s where the opportunity is.

David:
So to sum this up, yes, I do think that you should take on more short-term rentals. I think there is a really big opportunity in that space. If someone is good at being a host to make money in what I believe is going to be an economic recession, I think people should look forward to it. I think we all need to get rid of this virus that’s gotten into our minds that money should be passive, that we should just exist and we did hard work in the past and now money just flows to us and it just comes. That is not how it works.

David:
You don’t get really fit and then never work out again and just stay fit forever. You’re always working out. However, the work it took to get in shape is much harder than the work it takes to stay in shape. And business is the same way. You’ll work very hard to get in good business shape and then it’s just about maintaining it and it’s not that difficult. So as long as you’re ready for that journey Maxx and your mustache is locked in and ready to accompany you, I want to see you keep it going.

David:
All right, hope you guys have been enjoying the show so far. I love this stuff and you can expect to hear more about business in the future, because as real estate investing is getting tougher and tougher to do, because there’s more and more competition for these assets and cash flow is getting harder and harder to find. We can either sit around and cry about it and go watch Dancing with the Stars and numb ourselves with our pain and look for sympathy from everyone and just wallow in self-pity.

David:
Or we can pivot, we can look for different ways to make money. We can gain business practices and principles and experience and get out there and change careers and get into a job in the industry we love, which if you’re listening to this, it’s probably real estate.

David:
At this segment of the show, I like to get in comments left to previous shows on YouTube. I read you guys the comments that people have left. And remember, if you want to have your comment read on the show, I’d sure love to read it. Just head over to BiggerPockets YouTube, follow us over there and leave your comment.

David:
From episode 816, from yourpersonalagent7243. “Hey David, wondering when your house hack at 3.5% FHA, do you have to refi out of that to qualify for another FHA after a year?” Not a comment but a question, yet still a good question and the answer is yes, you do. You typically only get one FHA loan at a time. So you could either sell the house, pay off the loan and use an FHA loan to get your next one, or you can refinance and keep the house refinance into a conventional loan and then you have another FHA loan that you can use by your house.

David:
A common misconception is that FHA loans are for first time home buyers. This entire concept of first time home buyer was really born out of the crash. The 2010 no one was buying real estate thing. It became a marketing concept for lenders to draw someone in who hadn’t been scarred and didn’t have PTSD from the crash.

David:
So they’re like, “Okay, we don’t want to get someone to come buy a house that already bought one because they’re scared. Let’s get a first time home buyer to come buy a house because they’re not going to have the same trauma and fear about doing it. Well, what incentives can we come up with for first time home buyers?” And then they took stuff they were already offering and sort of said, “Hey, this is a perk for a first time home buyer.” Maybe they had some new stuff, but in general it wasn’t all that great.

David:
People get that confused with primary residence, you can get a 5% down conventional loan on a primary residence. You can get an FHA loan on a primary residence, you can get a VA loan on a primary residence. It just means a house you live in. And you might have nine houses on one another primary residence, you might have 15 houses on one another primary residence. You can use these low down payment loans for those, but you can only have one FHA loan at a time.

David:
Now, the good news is yourpersonalagent7243, that if you don’t want to get rid of your low interest rate on your FHA loan, you can get a conventional loan at 5% down, which is only a little bit more than three and a half percent down. So reach out to us and I will put you in touch with my crew or find a loan officer using the BiggerPockets lender finder tool and they should be able to answer these questions and if they can’t, they’re not good. Run away.

David:
All right, from episode 816, we’ve sparked a chain of comments from everyone. So thank you for helping this person get the info that they need. From 50calpulse76. “On a house hack meaning buying is a primary home. Is there a timeframe that you have to live in it before you rent it out or can you buy a home with the intent there and then immediately change your mind and not live in it?”

David:
The first comment came from Richie1317 that said, “Dude, that’s fraud and no, you can’t just change your mind. The regs require you to live there for at least a year before you can get your next loan.” Then Rullau said, “No one ever cares or checks who lives there unless the payment is not coming.” Thrivinglife said, “At least two years. Then you can move out.”

David:
Lots of different feedback here. I will do what I can to try to set the record straight. Remember how I just said that there’s a misconception with first time home buyer with primary residents? They’re not the same thing. The same exists when it comes to when you can get a primary home loan after you’ve already got one.

David:
What we tell people is buy a house, live in it for a year, then buy a new one and rent out the first one. That doesn’t mean that’s the only way to do it. The reason that we give that advice is that you typically can’t get a primary residence loan until after a year from the last one you got. So if you buy a house as a primary residence, most lenders in most cases will not let you get another primary residence loan until you’ve waited 12 months. We get exceptions at the one brokerage all the time. There is ways around it, but it’s very difficult. Okay?

David:
Now, people confuse that with, you have to live in the home for a year. There aren’t regulations from lenders that say, if you buy a primary residence you have to live in it because they legally can’t do that. If you buy a house to live in and then you lose your job and you can’t make the payments, they couldn’t stop you from renting it out to somebody else as you move back in with mom because you can’t make the payments.

David:
If you buy a house and take a job and then get fired and you have to move back to take a job somewhere else, they can’t force you to live in a house and commute by plane to the new place. So there isn’t a rule that says at least in almost all the loans I see, conventional ones definitely, that says, “You can’t rent it out.”

David:
What they’re looking to avoid is you buying a house with a primary residence loan that you never intended to live in at all. Okay? It was clearly meant to be an investment property. You lied and said it was a primary residence. That would be considered fraud. If you move into it and then something happens that you don’t like. Okay? I’m not giving you guys specifics on case law because I haven’t seen this myself, but I’m explaining my understanding as it’s been told to me.

David:
Let’s say, you move into a property and the dog of the neighbor is barking nonstop and you can’t sleep at night and you talk to the neighbor about it and they’re like, “Yeah, go kick rocks. That’s my dog. He barks, not my problem. I don’t care. I can sleep through it.” You’re not getting any sleep at night. There’s nothing that I’m aware of that a lender could compel you to stay living in that house.

David:
Lots of things like this happened. You can’t anticipate all the problems that could come up. What would be mortgage fraud is if they could show you never intended to live in there at all. You didn’t make any effort, you didn’t move into the house. “You were defrauding us from the very beginning.” That is fraud. That should be avoided. Do not do that.

David:
But when it comes to, “How long do I have to live in the house before I move out?” There actually isn’t a law that I’m aware of and I don’t know of any case law where a judge has looked at this and said, “Six months, three months.” They don’t look at it from this hard-and-fast rule like our brains look at it from, they look at intent.

David:
So if your intention was to live in the house and something changed in your life, circumstances changed. There was something wrong with the property, you didn’t like it. You are allowed to move out of it and go live somewhere else. But no, you probably won’t get another loan to buy another primary residence until 12 months had passed since you bought the first one. That could be tricky. But really good conversation we had there. I’m glad I got to weigh in on that.

David:
Guys, we appreciate the feedback and mostly we appreciate the work that you’re all putting in to pursue your goals and your financial freedom.

David:
I wanted to reveal a recent review that came in on the Apple Podcast app. “I love listening to the show, but, I regularly listen to your show. But my biggest problem is that there are so many real estate investment gurus that I don’t know who’s real and who’s fake. And I suffer from buyer’s remorse after spending $10,000 plus on, quote, unquote, “training.” Everyone agrees that we should start with training, but no one breaks down what is actually real training and not just flashy noise, bragging and motivational stuff.” This comes from Deborah via the Apple Podcast reviews.

David:
This is an amazing review, but you gave us 3-stars. I’m not the one that took your $10,000. Why are you punishing me with a 3-star review, Deborah? I think you’re mad at the industry. You’re not mad at BiggerPockets. You got to fix this. You didn’t say why I only got 3-stars. I’m pouring out my blood, sweat and tears for you Deborah, and it’s free. If anything, we should be getting six stars out of five because we’re giving you free content, not taking your $10,000. Oh, this is so sad. Hurt people, hurt people, right? That’s exactly what just happened to me.

David:
All right, on this topic of the $10,000 scam, first off, no one talks about it. I call it course shame. When someone spends a bunch of money and gets ripped off, they don’t want to go tell everybody that they know that they got ripped off, so they just silently suffer. They keep it inside. The glassy look in their eye and their lack of eye contact is they stare at their shoes at a real estate meetup, awkwardly swirling their watered down drink is how you know that someone is taken advantage of by a course, but if you don’t look for the subtleties, you will miss it.

David:
Here’s my 2 cents on the whole thing. Whenever somebody sells me on an idea and the way they’re selling it doesn’t line up with other things I’ve seen in life, I know I’m being deceived. When I’m watching a commercial for a truck and I’m seeing the thing bouncing all over these rocks and I’m seeing a really hot girl in the passenger seat staring at the guy driving at it lovingly with desire in her eyes, because he’s so cool that he has this truck and I hear this music playing and I see this dream being painted. I ask myself, “Have I ever seen this in real life? Have I ever seen a woman that fell in love with an average looking dude because he had a cool truck?” No I haven’t. I’m being sold a bill of goods.

David:
Look at influencers that are doing the same thing. Are they saying, “I will teach you how to make,” Insert ridiculous sum of money here, “for only” Slightly smaller sum of money to take their course, “and it will be easy and you can do it and you’ll make 10 extra money back.” Do you see that happen at other times in life? Have you ever signed up for a gym and said, “I want to get in really good shape.” And they said, “Oh, this is the gym to go to when you walk in the doors, it’s like magic. A six-pack just happens to come and you don’t have to do anything.” It’s not how it works.

David:
Have you ever had a situation where you paid a bunch of money to have someone fall in love with you and they just stayed in love with you forever? Nope, probably not. That’s something to look out for with these courses. There’s always going to be people that are going to be telling you they can help you and selling you and why you should go with them. They’re rarely ever going to be honest with you.

David:
This podcast is for people that want the honest truth, that want it straight from the horse’s mouth, that want someone to tell them what they need to hear, not what they want to hear. And the majority of you guys love that. So Deborah, I’m so sorry that happened, but don’t blame us. Don’t punish BiggerPockets. We are here for you for free and everybody else that’s listening, please continue to listen to our podcast.

David:
Spend 15, 20 bucks on a book. Don’t go spend $10,000 on a course unless you have a preexisting relationship with the person that’s teaching it. You know them and you trust their word and their integrity. I’ll give one last piece of advice to Deborah and everyone listening here.

David:
I have the one brokerage, we do financing for real estate all across the country. When people say, “Why should I do the one brokerage?” My answer is usually, “Why don’t you talk to one of our other clients and find out what loan officer they had and ask what their experience is like?” Because of course if you ask me, I’m going to say, “You should use us.” Every influencer out there is going to say, “Yes, you should take my course.”

David:
So ask the people that have taken the course. Go to someone that has used the service and say, “What did you get? What did you not get? Would you do it again?” I think that’s smart. So before anybody signs up for a course that costs money, it would be wise to ask other members of the group, “What is your experience and what can I expect?” And all of us in the real estate investing community can kind of look out for each other and help steer us towards the right people and away from the wrong people.

Rob:
David, my name’s Rob Browning. I’m from Escondido, California and my question today is, when is a good time for somebody entering in their later stages of their career to get into the real estate market, based off of current conditions in the marketplace? And I can tell you a little bit about what I’m looking for that might be helpful.

Rob:
I’m looking to build cash flow up over the next five or 10 to 15 years and I’m looking to become a full-time investor in real estate in the next three to five years, which would allow me to leave my current position.

Rob:
I do have money right now to invest. I’m okay withholding that and waiting for a better opportunity while I build up more cash. But again, I would like to get going as well. So that’s my question and look forward to your answer. Thanks, bye.

David:
Thanks Rob. The good news is I love your question. The bad news is these are hard to answer. I feel like I’m always the bearer of bad news in the real estate world, but it doesn’t have to be that way. Here’s what I mean. This phrase full-time real estate investor became popularized over the last 10 years, okay? So think about 2010 to right around 2020, 2021. There were deals to be had definitely at the latter end of that they were tougher, but like 2010 to 2015, there were deals everywhere, and by deals I mean cash flowing real estate.

David:
It was like a person who wanted to catch fish and there were so much fish, you just threw your lure in the water enough times, you were going to get a fish on the line. You’re going to reel it in. The people’s ability to be successful catching these fish and landing these deals was inhibited by the time that they spent at their job and you could literally make more money, as in acquire more wealth. I look at money like energy, right? So if you look at the energy that you could make at your W-2 job versus the energy that you could make accumulating real estate at good prices at cash flow, that was going to grow in value, it was clearly a better move to be a full-time investor.

David:
If you had the skill to catch the fish, if you had a lapse funnel, leads, analyze, pursue success. If you knew how to purchase these properties, if you had the financing to do it. If all those things were in place, you had the lure, you had the fishing pole, you had the skill as an angler, being a full-time investor made a lot of sense for a lot of people.

David:
Here’s the challenge. We don’t have a lot of fish to catch like we did. That doesn’t mean that there’s no fish to catch. That doesn’t mean that fishing doesn’t matter. Please don’t assume the extremes of the argument I’m making. I’m not saying there’s tons of fish or there’s zero fish. There’s just less, which makes it harder to make sense to be a full-time investor. If what you mean is a full-time acquisition specialist, there are some people that do it, but typically they are a part of a big enterprise and they focus full-time on acquisition, while somebody else focuses full-time on management, while someone else focuses full-time on capital raising these syndications.

David:
Yes, they do full-time real estate investing, but they’re doing a piece of a puzzle which sort of puts you back into the employee category. You see where I’m going with this? Becoming a full-time investor is not leaving a job, it’s getting a new job and there are less deals to go after now than when we first started to use that phrase.

David:
So the question Rob that I think you need to ask yourself is, “Will I build more energy at the job I have now or will I acquire more energy if I go to become a full-time acquisition specialist with real estate?” And maybe you make less energy doing real estate full-time but you enjoy it more. That’s something to factor into the equation as well.

David:
If we’re speaking practically, what I see people making work right now, is becoming a full-time short-term rental manager, okay? If that’s what you mean by full-time real estate or full-time investor, I don’t think it’s fair to say a full-time investor because even though you do own the property, you’re functioning in the role a property manager and you are absolutely trading one job for another one.

David:
I’d rather have you look at, “Okay, I could pay someone X amount of money to manage the properties and I could do this much acquisitions with my free time. Am I making more money and having a better life keeping the job or am I willing to make less money but I get to work with in real estate that I love?” And get very specific on what it means. Not trying to discourage you.

David:
You might live in a part of the country or in an area where there’s deals everywhere and you can still make it work. I don’t know the names of those places right now, but I’m sure there’s areas in the south and the Midwest where other investors just haven’t found yet. And there’s people out there that are crushing it and there’s tons of fish to catch and they are full-time investors. They’re probably not talking about it because they don’t want the competition from all of us that are like, “Where’s the deal? Where’s the cash flow?” I just want to make sure I clarify for everyone that’s heard this phrase full-time real estate investor, that they understand what that means.

David:
That really meant full-time acquisition specialists, and if there’s not a lot of deals to acquisition, it doesn’t make logical sense for you to quit your job to jump into that. So Rob, let me know how it goes. Let me know what questions you have after hearing this. Don’t get discouraged. Just ask yourself the question, “What role do I want to play in real estate and would I rather trade my full-time job for that?”

David:
And our last question comes from Chris Feno who says, “I have around 600,000 in equity. What’s more effective in the long run? To buy investment properties using a HELOC or use that HELOC to fund local investors projects for returns over and over?” All right, Chris, it looks like what you’re asking here is, “Should I take out my equity and use it to own real estate or should I fund other investors flips so to speak, or maybe they’re BRRRRs and earn a return on my capital?” So let’s kind of look at your two different options.

David:
If you go the route of being a hard moneylender or a private moneylender, that’s what it sounds like you’re asking here. First off, you’re going to be taxed on those gains and it’s going to be most likely short-terms capital gain taxes. I’m not a CPA, I don’t know for sure. That’s what my gut would be telling me.

David:
If there’s a way that you get away from the capital gains, you’d still be taxed at a income level and the more money you make, the higher taxes are. When you earn equity in real estate, it’s not taxed until it is sold. So even when you pull it out on a cash-out refinance, that energy still isn’t taxed. It’s a more tax efficient way of building wealth, not the case when you’re going to be making money by lending it to other people.

David:
Number two, there is risk associated in lending that money. We just never hear about it because one, no one wants to share their losses, and two, we’ve had one of the best markets for real estate investing in the history of the world in the last 10 years. So not many people were losing money because it was tough. The person that borrows your money to flip a house could do everything wrong, and the market was so strong that it would overcome. They would sell the property, even if they sell at a break even or a small loss, they still had plenty of money to pay you back. But what happens when the losses get to be big? It becomes harder and harder and harder to make the flip work, so that you could get your cash back and a lot of that equity is going to start to go down.

David:
Number three, if you take the equity out of the houses and you use it to give to the people that are going to be flipping or BRRRR-ing you’re also paying interest on that. Okay? So if you’re lending it to them at 15% or 12%, but you’re paying eight or 9% on the HELOC, it starts to look like a much less desirable proposal for you.

David:
So most hard moneylenders, at least the good ones, really anyone that’s in the lending business focuses on yield spread and margin. What they say is, “All right, X amount of these deals are going to go bad, X amount are going to go good in order to make enough money to cover my losses, I have to charge 15%, 12%, two points.” Whatever, and out of that profit, they’re going to have to pay for the losses. So if you’re paying your hard money 15%, that doesn’t mean they’re earning 15%. After all the people that don’t pay them back or the money they lose, maybe they’re earning 8% or 9%. I don’t know the exact numbers, but I hope you get the point.

David:
If you’re already paying 8% on the HELOC and your true spread, it ends up being 10%, if you’re able to get 50% on your loan, you’re taking all this risk for a potential 2% spread. That doesn’t sound as good as what you’re probably thinking in your mind when you’re thinking about what I call the gross.

David:
In my book Pillars of Wealth, I talk about spending from gross. It’s this mindset virus that we acquire, when we say, “Hey, I make $90,000 a year. I can afford a thousand dollars a year car payment.” “Hey, I make 90 grand a year. I can afford that $3,500 vacation.” When you’re trying to make a decision on spending and you’re thinking about the gross money you earn, the amount you’re spending seems like a very insignificant portion.

David:
But if out of that 90,000 you get taxed 25,000, so you’re only keeping, I believe that’d be 65,000, and out of that 65, you’re only saving $15,000 a year. That thousand dollars car payment is $1,000 a month out of $15,000 a year, that’s 12 grand. That’s almost the whole thing. All of a sudden, that looks like a really foolish decision to make. It depends on if you’re looking at the net or the gross. I think when it comes to this opportunity to do private money lending, you’re looking at the gross, not the net. I don’t think the net will be as attractive as you’re thinking. And lastly, there’s some extra risk here.

David:
If you lose your money that you pulled out of the properties to flippers, because the market goes against you or you make bad choices or you make some beginner mistakes that everyone makes, but that ended up being all your capital, you’re putting the properties themselves that you put leverage on at risk. What happens if they need some repairs? What happens if the tenant stops paying the rent? You might end up losing the properties and the money that you pulled out of them going into a new business that you’re not familiar with.

David:
So those are the risks and the upside doesn’t seem as big. When you look at pulling out the money that you have in the properties to buy new real estate, the risks are going to be if the new real estate you buy doesn’t cash flow. If you end up losing money on those new properties, that’s not good, but that’s about the only risk I can see. The upside would be a lot of inflation and a lot of gaining equity through rising home values. The rents, if you buy in a good area, should be going up every year, which means eventually every year that you keep the property, it gets sweeter and sweeter and sweeter.

David:
You can also take the equity out of the property, say $600,000 and add leverage by borrowing money from the bank. So the $600,000 of your down payment would be the equivalent of buying $3 million worth of real estate. So if you’re doing good at investing and you’re buying in the right areas and the properties are supporting their debt service, you could take 600,000 and turn it into $3 million of real estate, which after 30 years has been paid down and now you have $3 million of real estate plus whatever it’s appreciated by. It’s tough for me to see you hitting those same returns, becoming a private moneylender.

David:
The last thing that I’ll put in here is that private money lending sounds simple and it can be simple, but that doesn’t mean it’s easy. There is a skill to analyzing who you should lend your money to and at what rates, and then take it over the projects that they screw up. And it’s not a skill that you probably have right now. You have to build it, and if you’re going to lose money in building the skill, it might not be worth doing.

David:
So those are the ways that I would analyze your two decisions there. I know that there is no easy options anymore because the market’s so tough. There used to just be like, no-brainer. “Go do this.” That’s not the market we’re in anymore. We had it good for a long time. Hopefully all of you listeners took action at the time just like Chris did. That’s why he’s in the position where he has $600,000 of equity, and if you didn’t take action during that time, that’s okay. Don’t sit around and cry about it. You can still take action today. It’s just tougher than it was before, but it might be even tougher than this in the future, we may look back at these times and say, “Hey, there was a lot of opportunities. We should have taken advantage of it.”

David:
All right, that was our show for today. Just to recap what we went over, we talked about a lot of things including how another property should be bought when you don’t have the 20% saved up, is it makes sense to take from one property and use the equity to buy another? What to do when getting a late start in real estate? What strategies to use to really grow that nest egg to hand it off to the next generation? If we should scale a property management business or not, because frankly, it’s a lot of work and to own RE or two lend privately. That was our last question there, and we got to look at the two different options.

David:
I hope that our advice today gave you a clear picture of what the next best step for you is, and even more importantly, help build your confidence when it comes to moving forward in your own real estate business and portfolio.

David:
Thanks everybody for checking out another Seeing Greene episode. Love having you here and love doing these. Remember, if you would like to be featured on the show or you’d just like to support us, head over to biggerpockets.com/david and submit your question there so that I can answer it.

David:
I’m David Greene. You can find me @davidgreene24 on social media. So please go follow me on Instagram, friend me on Facebook, follow me on Twitter, and check out my website, davidgreene24.com. If you’ve got a second, check out another BiggerPockets video and if you don’t, we’ll see you next week. Thanks everybody.