Seeing Greene: Is Paying Off My Mortgage Early a Mistake? - Transcripts
This is the bigger podcast podcast. Show 6 21. Most of us have some goals that are similar, we want freedom, we want our time back. We don't wanna be stuck in a commute, that's pretty much an overall general consensus we can all agree with. But there's some people that really want to make a ton of money and they're limited in their ability to do so at their W. two job. There's other people that just want a little bit of money but they wanted to come easy. There's other people that know they have a creative itch that they want to scratch and real estate helps them do it. And then there's other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people. What's up everyone. This is David Greene, your host of the bigger pockets podcast coming at you today with a Seeing Green episode in today's show. We are going to take questions from different people that have submitted them and you're going to hear my perspective how I see it because I'm Mr Green, we have a lot of really good stuff for you, several different topics that I don't get asked very often and I thought was really cool that people ask questions.
So one of them had to do with is there a way around a debt service coverage ratio loner is that my only option when it comes to getting financing. If I don't have a W. Two job, we go into a very very sort of a deeper situation of when you should pay off your properties mortgages and when you should use financing or leverage. I think there's a lot to learn from understanding there's not one way to do it, but there is usually a right way for you to do it. And so I break down this particular situation and give advice that you might not be expecting me to give. And then I actually talked about why I decided to publish my books with bigger pockets, publishing all that and more at this seeing green episode. If you're looking to learn, if you've got questions that you want to ask, if you want to hear other people asking questions so that you don't have to be the one to ask it. This is the right place to be. And for today's quick speaking of bigger pockets publishing, my newest book just dropped today with them. It's called skill. So I, my last book that I wrote was called Soul. This was a book written for real estate agents to learn how to make money in the real estate agent game.
This book is about how to become a top producer and make really good money. So if there's a real estate agent in your life that you know that you love, that you appreciate that you're rooting for, go to bigger pockets dot com slash skill and get a copy of this book to give to them. It is a very difficult business to be in. Most people have no direction of what to do. And this book is written to give a very specific play by play for real estate agents to be good at their job. So if you're working with an agent that's good, but you want them to be great. If you have people in your life to sell homes and you think that they would be happier if they made more money, please go get them this book, give it to them, I would appreciate it. And so would they. Alright and a quick word from today's show sponsors in business competition is key to success. Every product you own, From the shoes on your feet to the phone in your hands, got their do cutthroat business decisions and wonders podcast business wars brings you stories about the most well known products and businesses in the world and how the decisions they make shape, what you buy. Hear about Haagen Dogs versus Ben and jerry's and how these two legendary american brands have spent decades conquering the global ice cream market tune in for the backstory, Behind the fight for your feet with Nike versus Adidas or the smartphone battle of the century and how the iphone beat Blackberry with over 50 seasons to choose from business wars is entertaining, fun eye opening and will help you understand a little bit more about the world around you. Listen to business wars on amazon music apple podcasts or wherever you get your podcasts.
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high blessing David. My name is Deborah, Fong my questions for you are okay. I'm a widow. I lost my husband couple of months ago and right now I'm not working. I quit my job as a teacher a year and a half ago to stay home taking care of him and after he's gone, he left me with his life insurance. So, um, I get the life insurance, I pay off the house I'm currently leaving. So I also purchased a property in colorado spring pay off And I still have $200,000 cash in my hand. Now I learned about this real estate investment, made me feel like paying off my mortgage wasn't a, the smartest move. Um However my, I'm thinking should I get a cash out refinance from the current two properties that I have already paid off to buy more properties And also I don't know should I pay them off or should I just, I mean for the new property, should I Just do a 25% down payment Um also for the 200,000 cash in hand. The same thing do I do I find property more properties just paid the initial initial down payment or just or should I just buy one property Within the $200,000 range, pay them off and and receive rent coming in as the positive cash flow. Currently I'm still taking care of three kids, Two are in college and one is staying home with me. He's um, he's, he'll be a sophomore in high school.
So yeah, that's my questions and thank you for your help. Hey
Debra, thank you for the question. First off condolences, I'm very sorry to hear about your husband and Please send those condolences to your kids as well. I lost my dad when I was 27 and my brothers were even younger than me and it's incredibly hard when that happens. Sometimes it feels like the entire cornerstone of your family falls apart. So you'll be in my prayers as far as the question from a practical perspective that you're asking here of, should you take out loans or should you own properties free and clear and if you're going to take out a loan, how much should you be taking out? I see all the options that you're presenting and I can tell from the way you're spitballing that you've got a lot of uncertainty and questions in your mind and I'm really glad you reached out. Let's talk about when you should take out loans and use what we call leverage and when you should pay a property off the majority of the time, the people that are listening to me are coming from a perspective of trying to grow an empire. Okay, so the advice that we give them is different than you, if you have a different goal than what they have and that's what we have to get into here. This is the way that I look at borrowing money to buy homes or using leverage. It will increase your ability to grow wealth, which is what I'm going to call offense, but it comes at the price of being more risky, which is what I would refer to as defense. So ideally we want to be able to have as much offense as possible with as much safety or defense as possible and that's what we're striving for. But the two are typically mutually exclusive.
You can't have both at the same time. So what somebody has to figure out is how much do I care about risk and how much do I care about growth? So for you Deborah anytime you take out a loan, you have to make the debt payment on it. And as a new investor, you could easily find yourself in a place where you pick the wrong tenant or you buy the wrong property and you're not able to generate rent from the person or you have to spend money to fix things up. And now you're in this situation where you don't have enough money to make the payment on the mortgage and you're also not making money from the property and you could lose the entire thing and that's what I don't want to see for somebody in your situation. Now, if you're not working and you don't plan to work, that does increase the risk of investing in real estate. And the reason it increases the risk is you don't have money coming in from a job in case you make a bad decision or something goes wrong with the property, you're sort of operating without a bulletproof vest. I would say one mistake, that bullet's gonna get right in there and it can really hurt you. That's what I don't want to see happen now if you're planning on getting a job and you are gonna work and you think you can generate decent money. That now opens up some doors to where financing could be a safe option for you because even if something goes wrong, you've got a cushion with money coming in from work. So the first question to ask yourself is, do you want to work, are you willing to work or is that not the case? There's so many scenarios that I can lay out for you.
But in general, if you're not going to work, I would probably advise you to not take out a loan. Okay, just buy whatever you're going to buy in cash and at least learn how to invest in real estate with as little risk as possible, you're still gonna have property taxes, you're still going to have homeowner's insurance, you're still gonna have different expenses like repairs and maintenance that are going to pop up, but you are having less of a debt service if you're not taking on a loan so that you can kind of learn the ropes, it's kind of like training wheels while learning to ride a bike. Now let's say you take to this like a fish in the water or at least you become competent at it. At that point, you're going to make better decisions on what you buy and how to manage it. And at that stage, I would say taking out a loan to buy property, you could make some sense because you're not learning at the same time that your risk is high, your risk is going to be much lower because you've already learned how to do the job and there's less surprises that are going to jump out for you and if you do that well, you may never have to get a job because you can make a career investing in real estate full time. All the money you make can come from the rent, but you're not going to do this by just snapping your fingers jumping into becoming an amazing investor. You're gonna have to start very small, Start slow start with low risk by in good areas, pay the house off, learn how to manage the tenants. I would recommend looking for what we call small, multi family, a duplex, a triplex, a four plex, something along those lines. If you can, with 100 $50,000 maybe you had more. I think you said you have 100 50 K. You're probably not going to get a bigger property like 10 units. It's gonna be very hard to make that work.
So get what you can get for the money, you pay cash for it, make sure you buy in the right area, get a property manager. That's really good. That can kind of teach you the ropes, Get that first property, see how that goes and then scale from there. Next question is from Yasser in Atlanta. I'm a 21 year old from Atlanta Georgia and was trying to see what you do if you were in my shoes. I've never bought any real estate. I got a good job paying well and I just didn't want to let that money sit in the bank. Should I start with the multi family unit? How much should I save for emergencies? Really good. Here Yasser. First off, this is a situation where you would really benefit from listening to the bigger pockets money show.
So they get into personal finance, how to live beneath your means, how to make more money, how to manage the money that you have at a more holistic level than just investing in real estate. So you should check that out and other people that are in your situation, especially younger people that haven't learned how to manage money yet can get a lot from listening to a show like that, let those seeds get planted and how to build and grow wealth at a very young age. Second off before you start worrying a ton about investing in real estate, I think your energy would be better put towards finding a career. Do you know what you want to do? Are you gonna work in the trades? Can you make good money learning a trade? Are you in college right now and you plan to get out of school and work a job? Do you know what you're going to do to make money? So making money at work is much less risk than just buying real estate and the best real estate investments typically happen when you're already making decent money at a job and you can afford to take on a mortgage. Now I'm gonna assume here that you have some money saved up, you're able to do this, you're ready to buy real estate. You're financially strong because that's the position that I advise most people to start from. If you're not at that position, get to that position first.
But if you are there, you should house hack, you should look for small, multi family property that you can afford to live in the house and rent out the other units or maybe buy a house with a lot of bedrooms, live in one bedroom and rent out the other bedrooms When you're young. This strategy works the best. You're not gonna want to rent out bedrooms if you're married, if you have kids, it's a completely different scenario. So if you're still young and you're single, which I'm assuming you are, you actually didn't mention that buying a house and renting out the rooms is one of the best ways to learn the fundamentals of real estate investing, choosing tenants, having them sign leases, managing people while keeping your risk, relatively low bigger pockets. Has a book on house hacking written by craig, curl up. I would recommend that you check that one out, get some ideas of how to house hack as well as google the term house hack and learn some strategies that you can use where you can put a very low down payment, 3.5% get your first property and learn the fundamentals without taking too much risk.
Hi, David, my name is David. Also, first, I just want to say, thank you so much for all the content that you put out and all the insights that you provide. Um, you've taught me so much and you've really helped change, you know, my wife and I's life really. So just can't thank you enough. Thank you. Thank you so much. Um, just to give you a background, we own a number of short term rentals, we own a few long term rentals, but mainly short term rentals in. Tennessee, we've purchased them over the last few years. They do really well for us, cash flow wise. Um We recently purchased um expensive home here in Orange County in California. Um So we are actually pretty much using all of our W. Two, I work as a teacher, my wife works in retail and we're pretty much using all of our W.
Two income that's going to go directly to our mortgage. We earn a lot more money from our rentals but we've always thought about cash flow, cash flow, cash flow. Um You've kind of helped shift our mindset with looking more about appreciation just underlying the benefits, particularly the long term benefits of appreciation. So we've really shifted our thought about that but with this higher price property that we've just bought were starting to be in a little bit of two minds. Like do we need some more of that cash flow that may have not been as important previously. Um We uh kind of at a point where we've been able to refinance a lot of those properties so we have quite a lot of capital to be able to deploy that. We want to purchase more rental properties with um We are in two minds as to do we just keep going with the cash flow, just keep finding these vacation markets or do we diversify, potentially buy in more of your traditional markets that have the likelihood to appreciate population growth, job growth, all those kind of kind of things. Um, uh, you know, places like phoenix or Tampa or you know, Salt Lake City, those kind of places. Um, you know, so, so maybe just wanted to get your idea on, based on our situation, what you would advise. I know you've had some people on your, on your podcast before talking about renting by the room, just being creative like that were pretty on top of the short term rental things. So we feel really comfortable with Airbnb, so we're more than willing to do something like that, even in a more traditional market, provided the regulations lend itself to that. But yeah, I really want to shift away from the vacation rental markets that have been so good to us.
But then at the same time still want to be able to make a little bit of cash flow. So just wanted to get your idea on what you think. Maybe you could point us in the right direction. We're at a bit of a crossroads at the moment and then potentially if you, if you have some ideas on markets, I know I mentioned some of those growing markets that we all know about. But um, yeah, I just wanted to get your insights on, on, on this particular situation for us and any advice you might have. Thanks again for everything and I hope to hear from you soon. Thanks.
Hey, David, thank you for the question. All right, here's what I'm picking up from the way you went about that you and your wife are not sure what your goal is. You know, you want to make money in real estate, but you don't know how, you don't know what you want your life to look like. You're not sure what you value the most. And because of that, you're kind of bouncing around between all of these different options and you're not sure which direction to take. Let's break down in general, the different roads you've got, you've got the high cash flow road. This is where you're going to try to build up as much cash as you can every month, meaning the properties are going to generate rental income and your expenses are lower than that. So you get to keep that money. You kind of get the immediate payoff right off the bat of cash flow. In general. Castro comes at the expense of appreciation because you usually make more cash flow in markets where homes are lower price and therefore don't go up as much or you make more casual at the expense of more work, which would be the short term rental market where you've got to put in more work to get that cash flow. Then you've got the appreciation road.
This is gonna make you the most wealth in real estate, but it comes with the most delayed gratification as well as the highest risk because when you're playing the appreciation game, you're not getting as much cash flow or sometimes you don't get hardly any. And so you could lose the property more easily than if it was cash flowing very strong. And even when it does work out, you don't have access to that money. It sits in equity in the property until you access it via a cash out refinance or selling the property. So the appreciation road, as opposed to the cash flow road has less of an immediate payoff. It's more of a long term play. Then you've got the short term rental game, which kind of stepped into the industry that combines the two of them. You're now able to buy in high appreciating markets and generate more cash flow. But it comes at the expense of being more active and less passive. So here's your problem, David, you're not sure what you wanna do. It sounds like you don't want to have to work a lot and you want a lot of cash flow, but you also want a lot of appreciation. And that's why you're stuck.
My advice is that you and your wife are going to have to sit down and ask yourself, what kind of lifestyle do we want to live if it's all about having more of your time back. Now, I would say you should chase after cash flowing properties that are stronger on that side, which are probably gonna be small, multi family or larger, multi family that you probably haven't considered, you can hire a property manager and manage it. It will put off more cash flow and you won't be as directly involved. If you say no, we're willing to work right now. Then the short term rental game is what you should keep doing and should just find different markets to get into. If you can't make it work. And the one you're at, the more short term rentals you get, the more income you can generate, the more money you have to pay someone else to manage it for you. And that's one way that you can get your time back. Another road that you could consider would be the appreciation game where you say, hey, we're willing to work really hard right now. We don't need as much time. But when our kids are older, that's when we want to know that we've got a lot of money set aside. So I can't answer your question unless you know what your goal is.
If you're really not liking short term rentals because that was my original thought when you were talking is, hey, you want appreciation and cash flow, that's the perfect mix. You gotta hire somebody else to manage these properties for. You know, I'm actually looking for something like that myself. I've got a couple of short term rentals now and I plan on getting more. I want to hire a person that will manage the logistics of it. So if you're listening and you want to make some extra money, get paid by the hour, message me. If you have experience with short term rentals, David, you could do the exact same thing I'm looking for. Someone that has done it before they can manage the cleaners, the supplies, the reviews, They don't have to worry about getting it booked, but they do have to make sure it's ready for the next guest that wants to stay in it. If I can do this. So can you, that's what I think that you should be looking for. But before you get too deep into that, you got to talk to your wife and figure out what you want your life to look like. Then submit another question, letting me know.
And I'll give you some more specific advice about different strategies or roads that you could take to get where you want. Hey, we've had some great questions so far. I love being able to do these episodes. So I need more of your questions to keep doing it. Please go to bigger pockets dot com slash David and submit your question there for everyone that has already submitted. Thank you very much. If you're listening to this on youtube, please hit that subscribe button. So you get notified when additional episodes come out as well as like this and share it with anyone. You know who's also a real estate geek at this segment of the show. We like to read some of the comments from previously shows we've done and give some airtime to people that were on Youtube and participating in the conversation there. Our first comment comes from Daphne Hill. Love these shows David, you are a natural teacher and never make guests feel like they're questions are dumb or have been answered hundreds of times before.
Thank you, thank you for that. Daphne, I appreciate that. Made me feel good. Next comment comes from Lauren David. I would appreciate some bookkeeping recommendations. Should each property have a separate bank account or use one account for all properties set, everything to auto pay etcetera. In my personal situation, I have no partners closing on my first short term rental in april and looking to get my second short term rental after. Thanks. Well, Lauren, I will try to answer this, but I will say, I don't know that my way is necessarily the best way and I know that right off the bat, how I typically work bookkeeping is that I have all of my single family properties managed in one account. So I have a bookkeeper that goes over all the property management statements, puts them into a spreadsheet. I can see what every property makes or loses and all of the expenses are on auto pay coming out of that account as well as all the income goes into it. I have a separate account for short term rentals and the reason I created a separate account is I wanted to keep more reserves in that account than in the other ones because I feel like the income from short term rentals is less reliable.
So therefore I offset that risk by putting more reserves in that account. Then I have a different account set up for my $15 or $16 million dollar property that I bought because it's huge and it needs a ton of money In reserves. And I don't want that money to be mingled with the other money because I need to have extra money in there for that really big property where the mortgage is $80,000 every single month. Then I've got a different account set up for my real estate sales, a different account set up for money that comes from the one brokerage and and so on and so forth. I run a private mastermind where I teach people how to build wealth and how to be entrepreneurs. And so like that has its own bank account. So I like to keep mine basically by income stream is how I set up my bookkeeping. And I have different accounts for the different sources of income. Now there are some sources of income that kind of all fit together like all of the single family rentals or book royalties that I would receive. Okay, there's times where or maybe speaking fees, I can put all those into the same account, but I typically put all the money into the same account when there's not expenses associated with it. So for example, I don't have expenses associated with book royalties from books that I've written. There's nothing that I'm paying for that.
So I'm okay to stick all that into an account because there's nothing coming out. There's no risk associated with that. That's just kind of the way that I set it up. If I have an income stream that has some risk associated with it, I put it in a separate account where I can keep more reserves in that specific account. And then I have a spreadsheet that my bookkeeper has to take all of these different income streams and all of these different businesses and take my net profit from every profit and loss and put it in the column for that income stream. Then I look at that every single month and I see, hey, which properties are doing well, which asset classes doing well? Where am I losing money? Where am I making money? And I kind of put my time and energy towards the stuff that I think is making more money now. I'm in the process of switching bookkeepers right now and it's taken them a long time to get up to speed. So it's probably been three or four months now. I've been flying blind where I haven't been able to see yet how much of these businesses are making and I hate this feeling it's just the worst every time you have to switch over.
But it was necessary because I'm working at a faster speed now than the person that I had, he could keep up with. So I don't know that I answered your question, but hopefully by giving you a little bit of insight into me and my life and how I'm structured that right answers will make themselves known for you. Our next question comes from William Con love the show. Just giving a comment to support you guys, thank you for that. William appreciate it. Next comment comes from cd main, wow. Finally the audio isn't screaming for help. Hey, we're slowly getting better shout out to the production team at the bigger podcast podcast for making me sound like a normal human being. I tend to move around a lot when I talk, I get too close to the mic, I get further away from the mic, I don't know why I do that, but I just I'm a person that can't sit still. Do you guys have that problem? Do you ever get a phone call and you start talking on the phone and you get up and start walking around that is me every single time. I constantly walk around the parking lot of the area where my offices are because I can't sit still and talk on the phone if that's you, if you do the same thing.
Tell me in the comments something I'm not the only crazy person that has this compulsion to move around and walk when I'm on the phone and then also let bigger pockets know that you love the production team, that they're doing a great job, that my audio sounds good and that they got me looking fresh. Last comment comes from random on my mind. Wow. That house hacking topic was fantastic. I didn't think about the math behind house hacking. I'm going to look into that. Well, that's what I'm here for it to open your eyes as to new strategies that you might not have understood because I've helped so many clients with house hacking and I've done it myself that I have some unique insight into that, that not everybody has. So if you live in California and you want a house hack, reach out, let me know. I'd love to be able to help you do that. Same thing goes if you have a house you want to sell or if you need a loan, I would love to work with you and what I love even more is if more of you leave comments like this letting us know what you like about the show. So please tell us what hit, tell us what you like, Tell us what made you think, tell us what worked and then even say, hey, if I don't like this part of the show, that's okay, let us know that too. So if you're not following on youtube, make sure you do so and leave me a comment.
Alright, before we move on to the next portion of our show, let's take a quick break to hear from today's show sponsors. The biggest barrier to entry for real estate investing is the sheer difficulty of it all. But what if you could use a real estate investing platform, complete with an app and website to invest in high end real estate, like apartment buildings, single family rentals and industrial complexes. Well, with fun dries, you can fund rise is designed to help add stability and performance to your investment portfolio. It's how professional investors have been strengthening their portfolios for years To start tell fun dries your investing goals, whether that's extra income or long term growth and they'll put your money into the real estate deals that are right for you now. You can live anywhere in America and own properties in Austin Dallas Orlando and other hot real estate markets. It's no wonder over 170,000 investors are using fund rise to diversify their portfolios without compromise. Start investing in less than five minutes with as little as $10 Sign up for free today by going to fundraise dot com slash bigger pockets. That's F U N. D R I S E dot com slash bigger pockets. Hi David from Melbourne Australia. I'm jenny.
I'm a professor and a real estate investor with properties in Atlanta Los Angeles and Melbourne, I'm wondering if bigger pockets publishing would be interested in a book I'm writing called investing in real estate like a professor. The book is aligned with the goals of bigger pockets to help people make good decisions about getting started and building a sustainable portfolio in real estate. Professors have a particular way of looking at the world, which I think a lot of investors and would be investors will relate to our perspective, weaves through the lessons of history, the dilemmas of the human condition and applies these big ideas to our own lives. I started writing it with other professors in mind as my audience, but I think now that the book would also appeal to a general audience, like bigger pockets where learning is centered in the process of investing. One thing that professors do in our jobs is published. So I have some existing relationships with book publishers, but I've read all of your books which are published by bigger pockets. My questions are why did you decide to publish your books with bigger pockets instead of a traditional publisher and how would I contact bigger pockets publishing to find out if they have an interest in my book. Thanks a lot. David. Alright, thank you jenny man, this is a very unique question that I haven't been asked before in a public forum. So first off, my producer of the show reached out to you to put you in touch with the bigger pockets publishing team. So hopefully that goes well as far as the next two questions, what do I think about approaching book writing, I think what I'm getting at is you're asking, what do you think about approaching writing a book from the perspective of an individual person written for their specific scenario and then why did I choose bigger pockets publishing?
And the answer to both of them is, oddly enough, the same answer. So, I think when you're learning how to invest in real estate, you shouldn't just be learning about, well, how do I do it? Because there's a million ways to do it, it's more what is my goal and how do I make this work for what I want? And that's the thing is every person is different. Most of us have some goals that are similar, We want freedom, we want our time back, we don't want to be stuck in a commute, that's pretty much an overall general consensus we can all agree with. But there's some people that really want to make a ton of money and they're limited in their ability to do so at their W2 job, there's other people that just want a little bit of money, but they wanted to come easy. There's other people that know they have a creative itch that they want to scratch and real estate helps them do it and then there's other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people. So when you're writing a book, it is best to be asking yourself, well, who's my audience that I'm writing this book too, and I'm writing it from to a perspective that they would understand, and I think that that's what you're getting about when you're talking about writing it from a professor's perspective. Well, the reason that I published my stuff through bigger pockets is the majority of people that follow me, trust me, listen to me, respect me. There are people that are in the bigger pockets community. So rather than writing a very niche topic where I said, okay, I'm gonna write about, like, say how to be a real estate investor as a first responder, because I had a career in law enforcement, I was able to ride on a broader topic like long distance real estate investing or the burr method, but give it to a more specific audience that already was looking at real estate from the same perspective of me, and that's why bigger pockets publishing made the most sense. The people that were already following me were bigger pockets people.
The people who read my books typically aren't finding about me for the first time, just from the book, they're finding about the book from this podcast from the youtube channel, from social media, from my involvement with bigger pockets in general, and that means that they're more likely to get something from the book because as I hear people say, I hear your voice in my head when I'm reading it or they've heard me answer questions like this before. So they know my background or my philosophies when it comes to different real estate investing strategies. So that's why I went with bigger pockets publishing. I also just really like this company. They have a good heart. They mean, well, they're trying to help people empower themselves. They're not looking at giving people a hand out there, looking at giving people a hand up all things that I really can get behind and like, so it's also fun frankly to make money for the company that I love working for. So thank you for asking that question and I wish you the best of luck on your own book writing endeavors. All right. The next question comes from jones in my hood, the bay area California. Hey David, my question is about a heloc for rental properties. Heloc stands for home Equity line of credit.
I recently bought a single family in Oakland Montclair Hills, which I closed on earlier this year, even before closing, I gained over 200,000 and equity in the property. I bought the house for a million. The property is currently rented on a one year lease agreement I was looking to tap into this equity via he locked to go my real estate portfolio. I also have a good amount of equity and one of my rental properties in Cincinnati, my loan balance is 85,000 and I estimate property values is around 180. I've been researching a bit and I found it difficult getting a heloc on a rental property. Why is this the case? And is there a way around it? I don't want to do a cash out refinance because I have a pretty good rate on these properties and I haven't found a property which I would like to buy yet. I don't want to have cash sitting in the bank either. So my preference is for the heloc. Well, first off, congratulations on that property that you're able to buy. I work in that area and Montclair Hills is a great area.
The fact that you got something for a million means like you did really good. That's a pretty low price for that that area. Second off, let's talk about why a heloc is hard to get on an investment property. So what the hell is, is it's really a second position mortgage on a home. So the lenders only going to give a second position mortgage if there's enough equity to support paying off the first mortgage and then paying them off if something happens and the house goes into foreclosure, most Helocs will basically take the value of the home subtract what you owe on that home and let you borrow up to 80% of the difference. So you might, if you only have 20% of the in the, in the property, you might be able to get a ton out of a heloc on that home. Now as to your question of why are they hard to get on investment property? The reason is because to a lender's perspective, an investor is more likely to let the house go to foreclosure than a person who lives there. So if someone lives in the property, it's their home, it's perceived as being more secure because people would let all their properties go except for the one they live and that would go last. So the risk profile to a lender is higher. If it's an investment property. Now there are still some banks that do it, but you're generally looking for credit unions in the area of where the home is.
That's where I have found, luck is going to credit unions to get Helocs on investment property. Now, I also understand you don't want to have cash sitting in the bank. So the Heloc seems like your best bet I will give you this piece of advice. Interest rates are going up and Helocs typically are adjustable rate mortgages. Everyone I've ever seen has been adjustable rate. If you take out a heloc and you use the money just know the payment can keep going higher as interest rates keep going higher and if you're running your numbers based off of whatever the payment is when you first take out the money, you could find yourself surprised when the payment goes up later. Hey, David mason here from Austin texas, wanted to say thank you for everything you guys have bigger pockets do. And for this show that you all provide to, to like minded investors. I've been listening for about nine months that have been such a huge fan. It's changed a lot of things for me. So, so thank you for that. And um, I've gotten to the point where I've got to now submit my own question because it's been so valuable.
Um, a little bit of background about me and my situation, I'm 24 sold my tiny home in january for a good profit and was able to kind of use that to start a short term rental here in Austin texas with my girlfriend. And the good problem to have is that it's done so well that we are just so hungry to do it again. Um, and rinse and repeat So to say We had quite the time getting the conventional loan just because I am 1099 and uh, you know, banks love W2 income and were able to get it done of course, but for that reason debt service coverage ratio or dsc, our loans are very attractive to me now. The problem with resources and with those now is that of course a lot of them are requiring 15 and usually 20% down. So my main question is is there a way to creatively finance say half of the down payment or the range that we're kind of looking in is you know, nicer homes to instead of hitting a so called triple or going for a triple, trying to hit a home run with the next one. Um And those kind of range of homes, 20% would be out of our resources as of right now and I don't want to just wait and save for that long. So I want to know if if there was a way or creative financing via hard money loan or Um obviously cash out refinances an option but we're within that six-month period where it's Gotta wait again. But if there was an option to creatively finance say 10% of the 20% of down payment or equity kind of in the deal. Um if if lenders or someone out there did that or if you knew of any kind of creative ideas um obviously there's friends and family but I didn't know if there were other options or anything but but yeah, I appreciate again, what you guys do and and in all input would be greatly appreciated. Thanks. Alright, mason, you are in a position that many people are in, where it's not enough just to be financing 80% of the value of the property, you're hoping to finance 90 95% of it may be 100% of which means you don't have a big down payment. Now the easiest way to solve this problem is to get a primary residence where you can put 5% down or 3.5% down on an F.
H. A loan, you don't have to borrow the money. But if you're looking to buy a pure investment property, you do run into this problem. And here's why it's designed that way in general, only people that already have a good amount of money are the ones that are buying investment properties. They're literally investing the down payment that they already have Into a property, which is where they set it at 20%. But you're looking at investment property from a different perspective, you're not wanting to invest money, you already have your, wanting to grow well through an asset and you're wanting to borrow other people's money, you've got a couple options. So from the lending perspective you can look into an 80 10 10 loan, that's a loan where you borrow 80% of the property's value on your first position loan, Then you get a heloc or a second position loan for 10% of the remaining balance and then you put the other 10% down yourself. So if you find a mortgage broker that you feel comfortable with, you can ask them if they have access to 80, 1010 loans, you can always reach out to us at the one brokerage and we can look into that for you as well. You also have the option of borrowing money from someone else. So if you're gonna be putting 20% down on a property, what if you put down 10% and you borrow the money from somebody else to put down the other 10% and you split ownership 50, 50 that's another option. If you don't have a ton of cash, You're right to look into the debt service coverage ratio loans because you're working as a 1099. But those are typically going to be 20% down loans.
So there was a time where we were able to get them for our clients at 15% because we did a lot of volume. Those have gone away right now. They may be coming back later. So when you're someone that does a lot of business with us, you've done more loans, you've sent us referrals like now we sometimes have access to getting you those better loan programs if the lender is willing to give them out because we do a lot of business with them. But you can't count on that, that's what I'm getting at. Those are often times like a special circumstance. So your best bet might be to make other people money through what you're doing, give them a chunk of the equity in exchange, Maybe they put all of the down payment in and they get 60% of the equity and you get 40% of the equity and the cash flow for finding the deal and managing the whole thing. But you're gonna have to come up with something like that where you find other people that have money and you give them something to make it worth their while if you don't have that cash. And then just remember as you get older, as you do better at work, as you start making more money, you will become less and less dependent on other people until you can buy real estate with your own money. Alright, Our last question comes from john paul kessinger in Mount Hope west Virginia. Hey, David, I'm a paid firefighter in a small town. Getting paid via 1099 for my department.
I'm looking at getting my first rental. I'm concerned that my 1099 may be an issue on getting a loan. I also have one mark on my credit from an unpaid medical bill from four years ago I paid it two years ago, but it's still showing up. I have enough cash for a 20% down payment. I'm worried about rising interest rates and whether this is a good time to start. Also, do you have any advice on what I should do to get pre approved for a loan or where? Well that's a silly question. There's mortgage brokers everywhere that you can talk to about getting pre approved if you'd like reach out to me and I'll get you in touch with my team that does my loans, happy to do that for you were the one brokerage because we're the one brokerage that can do it all now, as far as your question about is now a good time to invest. It depends on the market. So I will say right now, I don't really know much about west Virginia. I don't own any property there and I don't know anyone else that does either. So I can't tell you if it's a good time to invest in your market, but in the markets that I'm investing in, I think this is the best time to invest.
Now, let me tell you why. And the perspective I have and then you can decide for yourself if you agree. So I am investing in markets that I think are going to be very strong for the future. More people are moving there than normal. Okay, so there still is not enough supply to keep up with the demand that's going to push rents and it's going to put prices of those assets higher at the same time, rates have gone up, meaning a lot of people are scared. So there's less buyers competing with me for these homes than there was before. So I don't have to go in as fast or as aggressive as I was going in specifically because other people are getting out. So I have all of the long term upside with inflation that continues to spiral out of control with the near term upside of less competition? So I'm going at it hard, I'm looking to buy some really expensive properties very soon because these interest rate hikes have caused everybody to slow down now, depending on when you're listening to this, this advice might be of a different value, but the Fed has said they're going to continue to raise rates, which means when everyone who goes, oh no, interest rates went up, I don't want to buy real estate when they realize that they're going to keep going up. Today's rate that feels expensive will seem cheap and when the rates seem cheap, everyone's going to jump back in and you're going to get another flood of people that are all trying to buy real estate. So I actually think that this is kind of the best of both worlds. This is a unique opportunity.
This is the same thing I saw when I bought, when I bought my Maui condos, those have both gone up between three and $400,000 each in about a year since when I bought them because I recognized the same thing, the shelter in place happened. A lot of people thought, Oh don't buy real estate, there's a crash coming. I saw the window, I jumped in when everybody else wasn't jumping in and boom. I did really well on those. So that's my advice that I would give to you. Also if you're worried instead of putting 20% down on one house, what if you put 5% down on a house to live in and then next year did the same and the next year did the same and spread that money out over several properties and just house act. That would be the best way to reduce your risk if that's what you're looking to do And John as far as your 1099 income, if you have a stable work history where you've done it and you've claimed this on your taxes, which I'm sure you have, you can get approved to get alone with 1099 income. It just takes more time. It takes more effort for the processors to get all your information together to submit it to the underwriter. The underwriter has a lot more questions that they have to verify because you're probably making different amounts of money every month. If that's not the case, it's even easier. But don't let your 10 99 income deter.
You just need to find a mortgage broker and let them know your situation and they'll tell you what they can do for you. Your other option is a debt service coverage loan where they're going to use the income from the property instead of your own income Here's what I would say for someone in your position, I would advise you to get a 30-year fixed rate and not an adjustable rate mortgage. Even if the teaser rate is lower because unless you're in a position where you have over time that you can work or you can earn more income. You don't want to end up with the loan that's going up over time faster than you can make up the difference in money to get it paid. All right, that was our show for today. I want to give a big thank you to everybody that submitted a question and I want you to do the same. Please go to bigger podcast dot com slash David and submit your questions there so that I can answer your question and we can have more of these seeing green shows to learn from. If you enjoy this, please let me know in the comments And if you say something funny, insightful, clever, we will make sure that we read it on a future episode of this podcast so that other people can hear what you said and then let me know what you think of the show. If you want to hear more questions about a certain topic, let us know my production team will read those comments and they will find the stuff that you're looking for. Lastly, please subscribe to us on Youtube and share this with someone else that you think might benefit from hearing it. If you would like to get in touch with me or follow what I'm doing, you can find me on instagram, facebook linkedin, twitter, pretty much all of them at David Green 24 there's an E at the end of Green or you can find me on youtube at youtube dot com slash David Green Real Estate. Go give me a follow there.
Thank you. Everybody, if you've got some downtime, go check out the bigger pockets website. They have an amazing forum with tons of questions being asked, literally the best in the world. They also have a very, very strong blog section that I used to just read religiously when I was new learning how to invest in real estate. I read every single blog that ever came out and learned a ton from that bigger pockets has a lot to offer you more than just this Youtube channel or just this podcast. So go check it all out. Mhm