How to Use Home Equity to Retire, Buy Rentals, or House Hack

David:
This is the BiggerPockets Podcast show 9 85. What’s going on everybody? Welcome to Seeing Green. I’m your host David Green, and if you are listening to this podcast, you are part of the growing and thriving BP community. This is the show where we get to connect with community members like you directly answering listener questions that everyone can learn from and I brought some help. Joining me today is the man, the myth, the legend. Rob Abso, how are you Rob

Rob:
Ajoy. I’m back in America. We’re in the same time zone once again and it is beautiful to not be doing this podcast at 11:00 PM

David:
That’s right, Rob does not have to be recording at midnight and we are both in our offices locked, loaded, and ready to bring you the best podcast out there on the interwebs. In today’s show, we get into contractor tips, how to trade equity for a house. Hack one of the best comments that we’ve ever had on this show, as well as what to do when the city threatens to tear your house down and you have only two days to solve that problem. All that and more in a stellar episode of Seeing Green.

Rob:
Now let’s hop in.

David:
Alright, our first question of the show comes from No name here. It’s a gentleman that looks like a mix of Antonio Banderas and Jason Momoa. Sir, welcome to Seeing Green. How can I help you today? Hey

Rob:
David, longtime listener, first time caller. So I’ve got a situation where I was supposed to close on a property today and make $105,000, but we found out that the city of Houston is going to demo my house and there’s nothing I can do to stop it. I was just wondering, based on your experience, what should I do? Thank you, big fan of all your books.

David:
Wow, okay. They’re demoing your house. Did they tell you why?

Rob:
Yes, they did. So basically I bought the house in 2023, but in 2017 it was condemned by the city and then it got recon condemned again in 2022 and in 2023 when I bought the house, I made all the necessary repairs that the city asked for, but I didn’t file for an extension to basically make the repairs and because of that they basically condemned it again and then they went on to basically find me $600 for long grass. I mailed a check to pay the fine, it got sent back to me and because the check was sent back to me, they said, oh, well the owner of this house is not here. It’s an abandoned home. Let’s send the wrecking ball to basically knock down the house.

David:
Wow. Well, this is a lot of condemnation going on. First off, Houston sounds very judgy and so I’m sorry that you’re having to deal with that. It sounds like the city believes that nothing is actually being done on this property. Have you been able to get through to them to show them that something is indeed being done?

Rob:
Yeah, so I went to the neighborhood city department today and I basically said, hold on, what’s going on? Why are you demoing my house today? I was supposed to close on this property and make $105,000 and they said, oh yeah, do you have any photos of the repairs that you made? And I was like, yes, I do. And I showed photos, timestamps, receipts, everything. And the guy, the head inspector looked through all the photos and said, oh yeah, it looks like you did make all the repairs. Okay, yeah, we’ll approve your permit. And so basically when it was all said and done, they gave me the extension, I’m good to go. I freaked out, I panicked For anyone listening at home, the charade is up, the person is me, Rob Abso, I was dealing with this over the last 24 hours.

David:
I thought you looked familiar.

Rob:
I called David in a huge panic and I was like, David, what do I do? And David said, take a deep breath. They probably can’t just demo your house without your permission. So I said, who not how? And I started making phone calls to people that had more answers and I went to the office today very calmly, and I went through the process and everything’s going to be okay, but I did lose out on the sale.

David:
Yeah, you’re losing the deal. That’s true. My backup advice to you was chain yourself to the doorframe and stand there live streaming this so that they can’t demo your house with you attached to it and everyone would see what the judgy city of Houston was up to. I’m glad it didn’t go to that. It’s not always a good day when you find yourself playing chicken with a wrecking ball. This diplomatic approach you took seems to have worked out much better.

Rob:
Yes. Well, I just was taking your advice and Henry Washington’s advice that, Hey, I’ve been holding onto this property for a long time. I didn’t want to lose money on it. Y’all were like, Hey, just lose the $5,000 on it and be done with it. And I was like, fine, I’m going to do it. So I decided, hey, I’m going to lose 5,000 on this property. I’ve been holding onto this property for a little less than a year now. I was so excited and in real estate, sometimes there’s good luck, sometimes there’s bad luck. This was a bit of bad luck for me, but I followed the process. I try to remain calm after I frantically called Henry Washington and Dave Green on FaceTime and good news is the house isn’t getting demoed. Bad news is I got to find a new buyer, but hey, that’s real estate baby.

David:
All right, lemme give you a little bit of advice. Have you put this thing on the MLS yet? Yes. Okay. That will help. I don’t think there’s a whole lot of houses listed at a hundred thousand dollars in the Houston MLS, so you will get interest, you will have an investor that will find it. I wouldn’t expect it to be sold in three days if it was a primary residence, it was priced really

Rob:
Low. It’s been on the market for like six months.

David:
Is it that long before you found this buyer for it?

Rob:
Well, we get a bunch of offers in the 50, 60, 70, 80, $90,000 range. So whenever someone’s kind of close in that a hundred thousand dollars range, we say, Hey, the least we can do is this amount and we kind of negotiate from there. So yeah, we get offers all the time, but yeah, this was the only one where I was going to come out unscathed for the most part.

David:
Well, if you want to go in on it together partner and make it the green pickle, let me know. That might be a good backup

Rob:
Plan. Thank you. Thank you sir.

David:
Hey, don’t forget Rob, and I want to hear from you on a future Seeing Green episode, so simply head over to bigger p.com/david and submit your question. We’ll do our best to help figure that out. All right. Our next question comes from Bob who has questions about strategies to tap into equity when nearing the end of an investing journey? Quick question. This may be a standard strategy, but what is your best plan when you start thinking about retirement and you own real estate, you don’t want to eat the equity. I know this, you know this, we all know it. So what’s the answer to getting access to our equity? For those of us who have some but don’t really want to continue acquiring properties, I want to slow my life down a bit and enjoy the fruits of my labors. I had cancer a few years ago and I acknowledged my time to enjoy life is finite.
It occurred to me that I should just cash out, refinance my properties that are fully stabilized, that have significant equity, but that also can support the new debt incurred. For example, if you own a property with $400,000 in equity and you can still easily cashflow with a $300,000 cash out, what’s the downside to doing this? You just got to handed $300,000 tax free. If you have multiple properties where you can do this, you can finance a very nice lifestyle and still retain the underlying assets. Just curious group thoughts on this, Rob, it looks like Bob here is looking for a little reassurance that cashing out a property and living on that tax free money is a good idea. What are your thoughts?

Rob:
I don’t like, I think that if you’re going to cash out this gift, this savings account that you’ve built up and you’ve sacrificed so much to build, you should use that to get a return on equity, which would mean take that equity, go and invest it in more real estate that’s going to cashflow you more than the current situation that you’re in. That to me is really the only acceptable time to cash out. I like the idea, it’s like tax free. They could live for 300 k, but I mean I guess it’s a philosophical thing. I am not going to poo poo it. I’m not going to yuck their yum, but I really only think that the only acceptable time to cash out is A develop the empire or B, you’re truly retiring, which at that point maybe I’d consider more selling it and just being done with all of it. But what do you

David:
Think? I’m going to take the opposite approach here. I think Bob was mentioning he doesn’t want to have more work. He wants to wind down, so he doesn’t want to reinvest the money, he doesn’t want to see another renovation, he doesn’t want to analyze another deal and go digging for deals. So as far as taking equity out of a property, it does not get spoken about very often on podcasts, and that’s because most people listening to a podcast like this, and of course we’re speaking to our listeners here, they look at real estate as a way to grow, but he’s at the end of his journey. He doesn’t want to grow. He actually wants less work, less headache and a easier life. I get that in Pillars of Wealth, I talk about what I call the fifteen, fifteen fifteen strategy and basically it’s a very simple way where you buy a house once every 15 years and you put it on a 15 year note and you may not cashflow as much or at all in the beginning, but you start paying off huge chunks of principle right off the bat and at the end of 15 years, the house is paid off.
You then refinance it live on the money that you pulled out of it tax free, and then the second year, the second house that you bought is now paid off. So if you can sacrifice 15 years of hard work building a portfolio, you would be able to cash out, refinance a new house every single year and live on that money tax free, which could be a hundred, 200, 300, $400,000 depending on how expensive a real estate you bought. I think Bob’s in a similar situation here where if he doesn’t think he has a terribly long time to live, he thinks he has enough equity that will last him for the rest of his years. Taking out a loan, not paying capital gains taxes, not having to reinvest that money into new properties is actually a viable strategy. It’s similar to having a 401k that you’re cashing out your stocks and you’re getting less dividends from those stocks and less growth from those stocks, but you’re getting to spend the money. He’s just doing the same thing with real estate. He’s going to get less cashflow because he’s going to take on more debt, he’s going to have less growth, not buying more real estate where he is going to get more appreciation, but he’s going to gain the use of the money and an easier life, which for many people is the reason that they started this journey.

Rob:
Yeah, it is the point. What Bob is suggesting, and it’s Bob, maybe at one point he was Rob and now he’s an older wiser guy and I’m just a young in here. I personally would feel guilty because I’m sacrificing so much so that I can build wealth for my family. So the concept of taking out equity to go live on a beach or something, that’s probably not what Bob’s going to do, but whatever. I guess I just naturally feel guilty because that’s just so anti the purpose of real estate when you’re first getting started. But if I guess I could see it, like I said, I’m just too young to have that perspective. Truthfully, if I’m being honest, I can’t relate with it because that’s just not something I would do, but I understand he’s just trying to cash in on all of his hard work over the years. So I think you gave a pretty good presentation there. Maybe I should should take a page out of your book.

David:
I want to just take a minute in front of all of the seeing green audience to say how mature of you to recognize your own bias and you’re like, David, it’s just not how I think. And so my advice was colored by that, but it might make sense for Bob over here.

Rob:
Yeah, yeah, I get it. Well done. Alright, thank you.

David:
You’re grown up in front of my eyes here.

Rob:
We grow up so fast, don’t we?

David:
Yeah. Now I will say there is some risk in this because you’re taking on additional debt. So I’m giving this advice under the assumption that Bob has so much equity and so much cashflow that cash out refinancing whatever he’s going to take out is not putting him in a financially dangerous position. If your cashflow was really thin, and this is going to make it even thinner, I don’t like it, but if Bob can pull out $300,000 or $400,000 and he maybe only needs 50 or 60 to live, he’s basically bought himself a couple years of living on the money that came out and he doesn’t have capital gains taxes, he hasn’t lost the asset, so he’s still getting future growth. This is really what a lot of people are working towards being able to do. I think the tricky part is knowing when you make the jump, right? Because at the point that you pull money out of your property and you don’t buy more property, you’re sort of putting yourself in a dangerous position where there’s no more growth and the worst thing would be if you ran out of equity to cash out refinance and you didn’t have a way to replenish it. Does that make sense?

Rob:
It does, it does. Well, how about this to round this question out, if you’re watching on YouTube, drop us a comment. Are you team Rob or are you team Bob from a point of view standpoint? I’m curious where people land.

David:
Are you team, Rob, are you team Bob, are you real estate snob and where do you fall in the real estate mob? Let us know in the comments on YouTube what you would do if you were Bob.

Rob:
Very good, impressed, honestly.

David:
Alright, coming up. We’re going into our first ad break, but stick around because we’re going to be talking about if someone should sell their current home to scale into small multifamily and what to do after you get a heloc. We’ll be right back. All right, welcome back up. Next we have a question about selling two properties to trade for a smaller multifamily property. Amber in California says, Hey David, I love the show. It’s my go-to podcast and I appreciate all you do. My question is regarding selling to scale up. I have two single family rentals in Riverside with about 400,000 plus in equity in each and good cashflow. I’m looking to purchase a two to four unit house hack near Orange County to be closer to my husband’s job due to the higher interest rates and still inflated home prices. We are being pushed out of the market.
When does it make sense to sell one of my current homes to scale up? Thank you for the help. Oh, Rob, this is the best part about seeing green in an incredibly challenging real estate market where everything used to be pushing us forward and now it feels like everything is pushing back. This is a legit question, right? I’ve got a lot of equity and a lot of cashflow. I want to move that equity from one asset to another, but my rate might be two or three times as higher and the prices haven’t come down. So what are your thoughts on moving equity when you’re going the opposite direction with interest rates?

Rob:
Yeah, this is an interesting one because I always say that equity is a gift and I think I don’t like to move equity around as much as other people, but I think it’s a totally viable solution. Obviously what I like about this is that not only is she open to selling one of her properties or she has 400 K in it, she’s wanting to sell one of her properties that has 400 K in it to buy another property that she can house hack in. So I think it’s really great maybe if that allows her to upsize and have a better home for herself and on top of that have anywhere from one to three additional units on the property, even if that property requires a little bit more leverage and she can more equity over time in a more expensive property and if the return is pretty similar or kind of in that same area, then I’m totally fine for it because as you’ve mathed out before, the return on investment on a house hack is great whenever, if you can subsidize your mortgage pretty substantially.

David:
Okay, so your advice is that if you’re going from a smaller asset into a larger asset, larger one, you like it if it’s going to continue to grow.

Rob:
Yeah, and she’s also house hacking in this asset as well.

David:
I like the house hack definitely. I wouldn’t recommend doing this at all if it wasn’t house hacking. I don’t know that I like going from a cheaper asset to a more expensive one. I liked that a lot more when rates were going down. So when you had a house at a six point a half percent interest rate and you were going to exchange it into a bigger, better house that was taken on more debt, but you were going down to a three point a half percent interest rate, it really tipped the scales in your favor to take on the additional risk to get the additional reward, and that’s one of the reasons real estate was so popular for so long is you could make these big gambles but you could mitigate your risk on the gamble because you were getting a better rate, you were getting more inflation, you were getting the odds of rent going up and the odds of the asset itself appreciating everything was going in your favor.
So I do like the idea of trading one asset for another asset, especially if you’re going to a better location. The area that I might advise differently than you Rob would be, I don’t know the person’s financial situation if they’re rolling in the dough, obviously this isn’t as important, but I’m almost happier to see someone sell a $600,000 home at a 3% interest rate to get into a $400,000 home at a 7.5% interest rate. I feel like if you’re taking on less debt when you make the move, your payment isn’t going to jump up as much, but you’ve still moved the exact same amount of equity from one asset to another. Sure.

Rob:
I think you and I are more similar than you think.

David:
Please elaborate.

Rob:
Well, because she said she’s putting down 400 K and then she’s looking to purchase a two to four unit, so I assumed that she’s going to take that entire 400 k plus equity, dump it into the unit to try to get it as close as possible to whatever her living situation is now, and then also have this subsidized mortgage in those other units. So I mean it is hard to know without all the information in front of us, but yeah, I feel like that’s kind of what she’s getting at

David:
Because there’s so much equity. So I guess if you’re moving the equity from one asset to another, ideally you always want to be going into the same or a better location that’s going to lead to more growth. Even if the house itself isn’t more expensive. Theoretically the house in a certain area will appreciate at a similar rate, so an $800,000 house will go up more than a $400,000 house, but they’re probably both going to go up around the same for or 5%, if that makes sense. So you can move your equity from one asset to another, but if you take on less debt, that helps combat the higher interest rate and it keeps your expenses from getting disproportionately high, which is where the risk comes from.

Rob:
There you have it. I think we’re saying the same thing, just looking at it slightly different again, need a little bit more info, but surface level I think I like it to move a bunch of equity into a house hack and then not pay a mortgage is what I’m hoping she’s going for.

David:
Yeah. Now Rob and I are both somewhat familiar with Southern California. I think Rob, you’re probably even more familiar than me. I live in California, I live in Northern California, but I do know that moving equity from Riverside, which is a so-so area into Orange County, which is a grade A area, is a very smart move, especially with the economy of California somewhat in flux. When you see that things are possibly going down or getting rough in a state or a location, the best school districts, the best areas will hold their value more. So moving that equity into Orange County is almost guaranteed to be a smart move because it’s going to hold its value and appreciate more there than it would have in Riverside.

Rob:
Totally. You’re never going to go wrong in investing in Orange County in my opinion. I think over time you’re going to see some pretty massive appreciation. Pretty nothing is guaranteed, but over the course of a long-term investment, that’s a huge hitter.

David:
That’s right. There’s only one county better than Orange County and that’s a green county, which is where you are right now, seeing green. Alright, moving on to our next question from Claude. Claude asks, what are my goals is to grow my portfolio to 30 units. I currently have two properties with four units total. I’m getting a heloc. What do I do now? I understand that this money has borrowed money, so I don’t want to have it locked in a deal for a long time and pay the interest payments. What’s the best way to utilize this HELOC to grow my real estate portfolio and mitigate the risks of borrowing a large sum and not pay it back Or worse consequences. I figure a fix and flip project, cash out, refinance, pay off the heloc and then repeat like the burr strategy. How else have you all used HELOC loans and what are the risks that I may not be seeing or aware of? Full transparency, and then I do not know the best path forward. I also understand that there is no blanket answer to this question. I’m more looking for perspective. Well, Claude, you came to the right place because this is perspective central.

Rob:
This is perspective.

David:
Oh, that’s even better.

Rob:
That’s pretty good perspective. Isn’t that your seventh book that you’re writing with BiggerPockets? Give

David:
Yourself a pat on the back. It’ll be my 17th book actually.

Rob:
17th book? Yeah.

David:
Do you want to illustrate it? I need to write a book that says written by David Green Illustrated. Hey Rob,

Rob:
I’m I’ll do the forward. It’ll be four words.

David:
That’s very good. Look, the rap is strong in today’s episode. That’s right. Go back and listen to that one again if you guys didn’t catch it. All right, Rob, you and I have talked quite a bit about ways to use HELOCs and this mainly comes up because for years when rates were low and real estate was appreciating, it was a semis safe strategy to pull money out of a property via heloc, put that money into new real estate because the cost of borrowing the money was low and the odds of the house appreciating that you bought with it was high, meaning all wins were in your favor. It’s not like that now. Real estate is not appreciating at the same level or at all in many markets and it’s more expensive to borrow the money. So it’s not a slam dunk that you just pull equity out of a house through a HELOC and you use it to go buy the next house. You have to think about it a little bit more. So what are some of the ways that you like seeing investors using HELOCs responsibly?

Rob:
I think that I’m more on board with sort of the velocity of money and kind of moving money quickly around. I think that’s the purpose of a heloc. For example, that house that I referenced at the beginning of this, my plan for that was basically to use my HELOC to pay for the renovation until I was advised against that. So now I’m actually using my HELOC for a motel renovation in New York motel that I’ve been working on for a little while now because I know that there is a quicker exit on that. So for me, I like having the mobility of a HELOC that I can kind of use however I want to. I probably am not the kind of guy that wants to trap a HELOC for a 30 year loan just because the interest rate is better than that of a bank, but some people do. I’m more of a, how can I quickly use a HELOC to kind of scoop up a few projects and move it around quickly.

David:
Okay. Give me a little bit more specifics there. What would that look like? If you could paint a picture for me,

Rob:
So just like this, a fix and flip project or let’s say that you have a property that could be a burr. Maybe you take the hard money out on the actual purchase price of the burr itself, but you have the heloc that is a significantly lower interest rate in theory to go out and make the renovations, to actually get you through the cash out refi of that property where you can get all that money back or if you want to build, we all always talk about ADUs. If you have a heloc, that’s enough money for you to go out and build an A DU to increase the value of your property. That’s going to take you about a year or so. But then in theory, if you do increase the value of your property, you can go cash out, pay back your HELOC and have gotten basically a free a DU out of

David:
It. That’s great. The pattern here is we’re looking for ways to use HELOC money that are short term pretty much when somebody uses the HELOC as the down payment for a new rental property, unless it’s a bur strategy, there’s no way to get that money back out of the property to pay down that heloc, and so you end up with two loans. You have an 80% loan in most cases, which is your first position mortgage. Then you have the heloc, which is 20% of the purchase price. It’s already hard to find cashflow. Now we’ve got to find cashflow with two mortgages. Very difficult to do, very hard. I like it more. Rob likes it more For short-term projects, I’d rather see that you pull the money out, use it to flip a house, maybe two or three houses take the money from those flips. That becomes the down payment for future purchases.
It’s not as easy, it’s not as fast, but it’s safer. This is assuming you know how to flip something else that Rob and I have talked about. If you’re a short-term rental operator, take money from a HELOC and put it into improving a property you already have not necessarily acquiring a new property. So you build an A DU on a property that improves the property. It also could what I call forced cashflow. As long as the cashflow that you forced is more than the debt service on the heloc. You won with cashflow and you won with equity and you made your property better. This creative type of thinking is needed if you’re going to use a HELOC in today’s market responsibly. You could also consider pulling out the money and lending it to another investor if you trust them to do good work or you could put it into a project that somebody else is doing as long as the return is higher than the money you’re getting. I don’t love that and I don’t talk about it as much because let’s say you’re getting a 16% return, but you’re paying 11% on your heloc. You’re basically risking losing it all to make a 5% return, right? The minute that you’re taking on debt in order to put into somebody else’s deal, but you’re still keeping the risk, your upside goes down and your downside stays the same. So Claude, to sum this up here,

Rob:
No, your upside goes down and your upside goes down. Wait, your upside goes down and your downside goes up. There you go.

David:
Your downside, does it go up or does it say the same? You could still lose the capital. That’s what

Rob:
I was getting at. That’s what I’m saying. Your downside like the risk goes up.

David:
I love that you thought about that for 14 seconds before you interjected it into this conversation. Genius. It’s a littles genius wheel on Rob’s laptop was spinning.
So short answer there, Claude Burett. Yes. Or flip it, yes, but don’t stick it somewhere that you can’t get it back out. Especially if rates go up again, those HELOCs can become a trap. I have a buddy Justin, who was advised by a loan officer that wasn’t one of us to take out a HELOC on his primary. He did it. He spent the money on a short-term, rental rates went up significantly and his payment tripled and he’s just like, he’s stuck working overtime every single month just to stay even and every time he has to drive to work and get up early, he’s cussing out his loan officer friend in his mind because he got screwed on this and it wasn’t told to him that, hey, rates do go up on these HELOCs and they can be significant.

Rob:
I got one more use case that I’ve, I’ve used at HELOC for one of the first times I ever used a heloc. I built a property out in Joshua Tree, used a HELOC for the majority of it and then it appraised for much higher. I did a 75% cash out on it, paid back the HELOC entirely, got a free house, not free. I still have to pay the mortgage. People in the comments always comment. They’re like, it’s not free, but I got the house basically I got all the money that I paid for the house paid back to me and now I just pay a $900 mortgage on it and cashflow every single month. It’s awesome. So it doesn’t matter if I cashflow a hundred or a thousand dollars a month, I don’t care because it’s an infinite return for me at this point. All because of a heloc.

David:
There you go. That’s how to use a heloc. Get in, get out. Don’t stick around. Alright. At this part of the show, we like to open this up and read comments from previous shows that you, the best audience in the entire world have left for Rob and I. We get these out of the YouTube comments. Occasionally we get ’em out of the BiggerPockets forums or sometimes we get ’em when someone leaves us a review. So if you’re listening to this, make sure you go leave us an honest review. Let us know what you think about the show and make sure you subscribe as well. Our first comment comes out of episode 9 72 in this show. We had a somewhat controversial discussion, Rob and I, and if you’ve been holding your breath, you can now let it out and breathe a sigh of relief. We have a verdict on the does Road Island have an accent debate, thanks to a life to summit. Rob, would you like the honors?

Rob:
Yes. He said one of my best bros is from Ri Rhode Island. Him and his entire family have one of the best and worst accents in the country. It’s like Boston met New York and made an idiot baby. Oh, I feel wrong reading that. This might

David:
Be the funniest comment we’ve ever read. Scene Green, we apologize if you’ve got kids in the room. We should have given you a warning. We use the I word there, but that is hilarious and made even better by Rob adding Boston in New York into the accents into this. I had no idea and frankly that’s because I don’t know anyone from Rhode Island. I forget Rhode Island is in fact one of our states. So if you’re listening to this in Rhode Island, I blame you for the fact that we forgot it was a state. We need more of your comments on YouTube so we can remember that you exist.

Rob:
Oh, can I add, can I add something? I’ve got a list of notable and famous people from Rhode Island. You ready? Cormick McCarthy, HP Lovecraft, Damien Shaza, George, Michael Cohen, Mary, I don’t know any of these people. Do you? That’s what makes exist so funny. Debra messing Harry Anderson. Oh, I

David:
Know her. Yeah, she was on the show. Is that with Ray Romano, right?

Rob:
No, Harry Anderson is a man. Everybody

David:
Loves Raymond. No. Debra Messing.

Rob:
Oh yes. Oh, Viola Davis. We got one. We got a live one. Who’s

David:
Viola Davis?

Rob:
Oh my God. Let’s move on.

David:
Alright, somebody out there. Rhode Island needs you to become famous, successful and powerful so we can improve this list.

Rob:
Oh, Polly D.

David:
Who’s Polly D? Is that a celebrity?

Rob:
He’s from Jersey Shore, which is funny.

David:
I was an MTV person or something.

Rob:
Yeah. Alright, carry on.

David:
Right after this quick break, we have a question about inheriting property and some advice from longtime contractors for investors. You definitely don’t want to miss that. How often do you hear a contractor telling an investor how they could be better? We’ll be right back after this quick break and while we’re away, make sure that you follow this show wherever you get your podcasts. All right. Getting right into it. Our next question comes from Dennis Gaman. Not a question but more advice and Dennis asks us to comment on what we think of it. I’m a real estate investor with five properties worth about $4 million that are all paid for. I have a mix of residential, commercial and storage space. I also own a remodeling contracting business, so you are a busy bee. Mr. Dennis, I frequently listen to and enjoy the BiggerPockets Real Estate podcast. I just finished listening to show 9 78 how to build your real estate investing team, agents, contractors, and lenders. Second pop quiz. Rob, what book did I write that talks about how to build your team bur

Rob:
The Bur bible. The bur book.

David:
Unfortunately that is incorrect. Would you like another guess?

Rob:
And we’ve got a winner.

David:
Luckily Rob phoned a friend and our producer was able to step in. This is evidence that Rob has only read one of my books and apparently doesn’t remember anything that was in it. David and Henry had a lot of great information to share in episode 9 78, part of which was how to find good contractors from my seat as a contractor in business for 34 years and having worked as a tradesman since 1975. Rob, I believe you’re only like 14 years old at that time. I would like to share a couple of my thoughts about contractors working for real estate investors. Number one, real estate investors can’t afford to hire top notch contractors when a real estate investor calls our remodeling company to do work for them, I have to tell them that I can’t even afford to have my trade employees work on my own real estate investments. They cost too much and they take too long. I hire other contractors to work on my own properties. Well, that’s a shock. I wasnt expecting to hear that. Yeah,

Rob:
I thought he would get it at cost here and it’s like a beautiful symbiotic relationship.

David:
Yeah. Number two, contractors work out great for a few properties, but then they stop getting back to me. This is because they haven’t been good business people. Most likely they know their trade well, but they weren’t making money doing it. They either went out of business or got wise and realized that if they want to stay in business, they need to start charging more. Construction. Contracting in most areas is very easy to start your own business, but the track record is that over 90% of contractors don’t make it. Past two years in business did not know that either. Interesting Of those who make it past the first two years, less than 10% make it past five years. This means that only 1% of contracting businesses ever make it past five years. And number three, contractors that become good business people will soon realize that they are worth more and deserve more money than real estate investors will pay them. Real estate investors must make their investments work financially and can’t afford to make decisions based on emotions wise. Contractors know that the place to make money is with homeowners who want to make their house work for their families or they want to catch up with the Joneses and they’re willing to pay the right contractor top dollar to make that happen. All right, Rob, we’ve been given three pieces of advice from a contractor who claims he’s also a real estate investor, so we’re getting kind of a balanced perspective. What are you feeling after hearing this?

Rob:
I wouldn’t say it’s advice. I think it’s more anecdotal perspective. I would say he seems a hair jaded, but I also, as much as I think that, I also think that he is kind of right for the most part, I would say a lot of contractors, I do catch them early on. I grow to love them because they’re affordable. I end up referring them out. They do a great job for other people. They get referred out and so after a few cycles of investments, they end up being a lot more expensive than where we started. So I definitely agree there. And then I would also say that yeah, contractors not good business people, but the ones that become good business people end up really marking up their services a lot. And so there are oftentimes where I do have to part ways with the contractor because they become too expensive. That’s just the name of the game for me though. I mean, have you been able to maintain the same contractor in your entire career in certain markets,

David:
Negative ghost rider, that has never happened. Usually they get to be well known in the industry. They have more business, so now they can be picky and they can choose the jobs with higher profit margins, which you have to expect out of capitalism. You and I would do the exact same thing for, you’re in that position. Sure.

Rob:
We all raise our prices.

David:
Yes. Or if they’re not getting more business, it usually means they’re not doing a great job or they’re operating. So the key is kind of like you’re looking to draft that really talented ball player before everybody else sees how good they are and get as much out of ’em as you can. And that is also what makes it difficult to get a referral of a contractor. Other investors don’t want to give up the most valuable part of their team to you because then you’re going to use them and you’re going to tell your friends about ’em and the next thing you know their phone is blowing up and they’re not working for you anymore, Rob, and they’re not working for me, so this is always a problem. I wish more people would listen to this and think, you know what? I’m going to start a construction business.
I’m going to become a contractor. I’m going to become handy because the industry clearly needs it and I can make an honest living being in high demand doing this job, and at the same time, I’m going to pick up some rental properties while I’m at it and I’m going to have my crew working on my deals. I’m going to have my crew doing my maintenance, and I’m going to have my crew doing other deals for other investors shotgunning out this approach. I don’t know why we don’t get more of that, right? Everybody wants to become the real estate agent or they want to become the white collar worker, but it’s the trades where I think most opportunity is because there’s less competition. Now, Rob, you are a bit handy yourself. When Brandon and I first interviewed you on the podcast, you were quite frankly, very bold and arrogant in your assessment that you know how to change the lock on a door. Do you remember this?

Rob:
Oh my goodness, yes. Yeah, and this was true and I had to step in because the maintenance people showed up at my apartment at 3:00 AM because there was a lockout and they came from a party. They were very drunk and they kept falling on the ground trying to drill a hole. So I had to step in and do the job myself. I

David:
Did, and I’m just kidding. He was not arrogant at all. Rob was an absolute pleasure, which led to him being my co-host on the show that, yeah, being handy is a superpower in today’s era where very few people are. If you agree with me or if you disagree, I want to know. Let us know in the comments on this show what you think about a career in the trades. I think this is pretty good stuff. Again, we cannot confirm if any of this is true, but I have no reason to think that it’s not. I believe that Dennis here is making some solid points. I don’t know what advice to give though about how to overcome this other than just expect that you’re always going to be having to cycle through contractors.

Rob:
Pretty much, yeah. It is part of the game and if you find a good one, take care of ’em. Pay ’em on time, don’t take advantage of ’em and get them excited about working with you and send them business like, Hey, I’m going to send you business, but remember to always take care of me. I do still have some of those contractors in my life, and yes, over time become more expensive, but I also believe that you get what you pay for and if you find a good one, you got to hold onto ’em.

David:
Final question from Oscar in sexist. Hello, David. Rob, I’d just like to formally apologize that none of our audience acknowledges you. I try to let you talk as much as possible. For whatever reason, they don’t ever remember your name. Hello, David. My brother and I recently inherited six lots from my grandfather. That just sounds like something that you’d expect from a grandfather, right? That they would own lots. Who else owns these lots in the world? Ever driven by an Arby’s and thought like who is eating at these places? How are they still in business? I never see anyone in the drive-through. It’s you got all these lots for real estate everywhere, and I’m pretty sure that they’re all owned by grandfathers across the country. One has a commercial building on it that is being rented. Well then it’s not just a lot, is it? Oscar?
Come on now. Yeah, it’s true. The properties are paid off. We have four lots right next to each other that the city has told us that we can build multifamily on. We currently don’t have any money saved, but we would like to optimize what was given to us as we are paying taxes on these properties. Either way, do you think leveraging the commercial building and land to develop is a good idea? If so, what would that look like? Thank you so much. All right. I’ll take first stab at this, then I’ll hand it to you. Rob. My loan company does have a product where you can borrow money to build and you can use the value of the land for your down payment, whether it’s all of your down payment or part of your down payment. It’s very cool. So the builder’s like, Hey, you have a $50,000 valued lot here.
We will let that be the $50,000 down payment of your property, so you would be able to build a $250,000 property here. And if the cost of building is two 50 to build multifamily, but the property is worth 700, 600, 500, when you’re done, you’re building a lot of equity. And I don’t disagree with this idea of building to rent in today’s market, if you know how the process goes. And that’s where it falls apart for a lot of people. Building, dealing with the city, dealing with inspectors, dealing with permits, dealing with this stuff. Some areas they’re great. They want people building in their cities, they want families to have a place to live. Others make your life absolute hell. What’s your thoughts on this idea of building on land that you already own?

Rob:
I think it’s great, especially like you said, you can use the land as collateral towards your down payment. So if you already have the land, I think you should use it. I would say if you’ve got six lots, maybe let’s not go all in on six lots and build something all at once. Scale accordingly. That’s always been my opinion. Take it day by day, try one or two, and if you really like the grind of building new construction and going through that process at that point, consider finishing it out in the second phase or maybe a third phase.

David:
Very well said. That might be the most concise thing you’ve ever said on seeing green. Do you have to go to the bathroom? Are you trying to rush out of here?

Rob:
No. I could give a longer answer, but I choose not to.

David:
Alright. In today’s show, we’ve covered quite a few topics, which is awesome, including how to save your property from a wrecking ball, what to do when a judgmental condemning city wants to condemn your property, contractor tips, tricks and advice trading, equity for a house hack, building to rent and more. And most importantly, we want to thank you all for listening to this. We know that you could be getting your real estate information everywhere, and we really appreciate that. This is where you go to get it. If you’d like to know more about Rob and I, you can get our information in the show note. So please do go look us up. We want to hear from you. Send us a message on social media, and if you have a question that wasn’t answered, you can submit it at biggerpockets.com/david, or you can head over to biggerpockets.com and you submit it in the forums, my advice, put it in the forums, and then also submit it at biggerpockets.com/david. So Rob and I can take our crack at answering your question. Keep an eye out for a future episode of Seeing Green, and we will see all you lovely people on the next one. This is David Green for Rob Forward ABBA signing off.

Rob:
Thank you for listening.