Common Real Estate Investing Questions with David Greene on the Bigger Pockets Real Estate Podcast

Check out the Episode Page and Show Notes

Key Takeaways

  • The benefit of a Home Equity Line of Credit (HELOC) is that the closing costs are very low
  • The downside of a HELOC is it’s not a fixed rate – it has a higher interest rate than a standard loan, and that rate can go up as interest rates go up
  • A cash-out refinance is more expensive in the beginning because of the closing costs, but the benefit is that you lock in the lower interest rate for a long period of time
  • Lowering your rent to get a tenant is better than having a vacant property
  • With inflation, five or six years of not increasing rent can put you so far behind, that you’re never going to catch up
  • Depreciation does not mean your house is worth less – it’s an accounting term used to define the fact that your property is slowly falling apart every year and you get to write off a percentage of your building every single year due to its falling apart
  • Your debt-to-income ratio is different and has way more implications and rules when you’re self-employed

Intro

David Greene (t: @DavidGreene24) is a former police officer with over nine years of experience investing in real estate that includes single-family, multifamily, and house flipping. A nationally recognized authority on real estate, David has been featured on CNN, Forbes, and HGTV.

Building Leverage with HELOCS

  •  A HELOC or home equity line of credit is secured by the equity in your property
  • If you have a lot of equity in a property, a bank will give you a loan based on that equity
  • Should you miss the payment, they’ll take the property away from you
  • The benefit of a HELOC is that the closing costs are very low
  • The way the HELOC works is the bank will take the value of your home, then subtract how much you owe on that home, and you’ll be left with your equity
  • The downside is it’s not a fixed rate – it has a higher interest rate than a standard loan, and that rate can go up as interest rates go up
  • If you’re looking to do a short-term loan, a HELOC is the best bet because the upfront costs are less
  • Another benefit of a HELOC is you’re only going to pay interest on the part that you borrowed when you pay it off

Cash-Out Refinances

  • A cash-out refinance is more of a permanent loan
  • You’re basically getting a loan on your property to replace the first loan that is on there, but the second loan you’re taking out is for a higher amount
  • There are some closing costs associated with doing a cash-out refinance so it’s more expensive at the beginning
  • The upside is that the longer that you have that loan, the less that cost matters because you’re locking in the lower interest rate for a long period of time
  • When you need to access that money to reinvest it permanently, the cash-out refinance is usually the better option
  • If you’re going to use that money for a temporary thing like a house flip, or putting money into somebody else’s deal, or rehabbing a house you already own, the HELOC is a better option

Setting the Optimal Rental Rates

  • If you rent a property out for too little, you’ll make less money
  • But if you take too long before you get a tenant, you’re losing the full amount of rent every month
  • The math typically supports lowering the rent and just getting somebody in there, and avoiding the vacancy – once the tenant is in, start increasing the rent every year to what you think it should be
  • Nobody likes the hassle or cost of moving
  • The way inflation is going, five or six years of not increasing rent can put you so far behind, you’re never going to catch up

Write-Offs and Tax Deductions that Real Estate Investors Can Use

  • The first general rule: if it’s an expense for the business or the property, you can usually write it off
  • The interest on your mortgage, property taxes, homeowners insurance – are all expenses against the income property
  • Any repairs that have to be made, as well as the labor that you pay somebody else to take care of that property, should be written off
  • Often you can write off business trips where you go to learn more about what your business


  Concept Of Depreciation

  • Appreciation means your house became worth more
  • Depreciation does not mean your house became worth less – it’s an accounting term that is used to define the fact that your property is slowly falling apart every year and you get to write off a percentage of your building every single year due to it falling apart
  • “When you hear about big time investors like the Robert Kiyosakis and the Donald Trumps that say, “I pay no taxes.” The reason that they don’t have to pay taxes is because they make sure that any income they made is less than the depreciation that they took on the property. It’s not a loophole. It’s not illegal. It’s not immoral. It is literally you being compensated for the fact that your property is falling apart every single year and it’s not going to last forever.” – David Greene

How Newly Proposed Capital Gains Taxes May Influence Seller Financing Opportunities

  • When you do seller financing, you pay capital gains on your cost of the house minus whatever expenses that you had
  • If you do seller financing and you sell the house for more and you keep the note; you don’t pay capital gains on that full amount
  • You only pay capital gains on the money you make from the note the buyer sent
  • Seller financing is an advantage because the seller hasn’t actually realized the gain because they didn’t get the money from the sale, they just got a note – they only pay that 50% on the interest that they’re collecting

How to Shift Your Mindset and Identity to Fit the Person You Want to Become

  • If you can shift your identity, it can have a direct correlation to the results and the success that you see on a daily basis
  • Typically, people don’t change until they hit rock bottom
  • Behaviors typically don’t change shift their identity until they have no other option
  • “Don’t wait to hit rock bottom? Start taking away the things that you’re comforting yourself with right now. And you know what they are. I know what the things are that I comfort myself with that I shouldn’t be. I just don’t address them. You guys know what it is also. Get real with yourself. And if for some reason you just can’t, go find another person that you trust and say, “What are the ways you think that I numb myself or I comfort myself when I really shouldn’t?” You’d be amazed at what you will realize you’re doing that you never consciously chose that is dictating the way that your life goes.” – David Greene

Finding Financing When You’re Self-Employed or Have Low Income

  • Your debt-to-income ratio is different and has way more implications and rules when you’re self-employed
  • Self-employed people tend to write off a variety of items so they don’t have to pay a lot of taxes – that’s good when it comes to taxes, but not when it comes to getting financing
  • “To me, owning real estate is a much better financial decision than just saving money on taxes. Just like hiring a great listing agent is a much better decision than just avoiding paying a commission. You’re going to lose so much money to save a little bit in commission. It doesn’t make sense.” – David Greene
  • If you want to get into real estate investing, quitting your job early is not the best advice – put your time in a more dollar-productive environment so you can make more money and buy more real estate
  • In the interim, work with another investor that has deals coming in where there are actually creative opportunities
BiggerPockets Real Estate Podcast :
Notes By EWerbitsky

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