Dave:
What’s the point of your first real estate deal? Some investors would say you saved the down payment, you did the homework, now shoot your shot, maximize returns and start the wealth building snowball. The flip side though is that you don’t know what you don’t know on your first deal. So you could play it safe, just get on base and then push the envelope after you’ve gained experience. One of these approaches does build wealth faster on a spreadsheet, but not always in real life. What’s up everyone? I’m Dave Meyer here with Henry Washington. And today we’re dipping into the BiggerPockets forums to answer your questions. Henry, how you doing, man?

Henry:
I’m doing great, man. I love answering forum questions because they’re other people’s problems that I get to help with versus dealing with my own.

Dave:
So much easier to give advice when it’s not your problem. I totally agree with that. Well, we got some great questions today. We’re covering a lot like the house hacking math most people get wrong. The moment it’s time to 1031 out of a property and when to cut your losses on an entire market. But Henry, you got our first question queued up. What do we got?

Henry:
Our first question comes from a BiggerPockets forum user named Justin, and he asks, “I live in California and I’ve been looking at multifamily units in Ohio, Michigan, and Wisconsin for my first investment. I will have approximately $100,000 within a few months. Would it be better to buy multiple multifamily units that are between 120,000 and 150,000 and put as little down as possible? Or should I buy multifamily or single family homes, but put 20% down?”

Dave:
Okay. Well, first up, Justin, love the strategy here. If you live in California and it’s expensive, invest in the Midwest. It’s a great way to do it. Ohio, Wisconsin, Michigan, all have great places to invest. I do it. I live in the Pacific Northwest, expensive here, hard to find cash flow. So I love the approach here. So then he’s asking, “Do you buy multiple units and put less down or buy fewer units, but put 20% down?” Justin, I got some hard news for you. You got to put 25% down, just so you know if you’re getting an investor loan out of state. Maybe if you’re getting a DSCR loan, you might be able to put down less, but at least in my experience, I put 25% down. What about you?

Henry:
Yeah, I’ve seen some 20%. I’ve seen some 25%. It just depends. I like the thought process here. My default answer is you’ve got to lean back on your goals. So if I have smaller goals, then I’m willing to put more down to get the cash flow upfront. If I’m trying to grow and scale quickly, then putting less cash in allows you to scale more quickly. But I don’t know if that’s the best move in this market unless you’ve got a good level of comfortability and a good team in place to execute that because saying you want to buy two or three multifamilies and actually executing them so that they produce the return that you hope they would in this market, it could be challenging. So I think there’s some other information you need in between there. What are your goals? Have you done deals in this area before?
Do you have a team in place? Because if you’re going to go and buy two or three multifamily deals in a year’s time span, there’s a lot that can go on in there that you’ve got to be responsible for in order for you to get that return.

Dave:
The title of this post that you read was First Investment. So the answer is he has not done these kinds of deals before. So I like this question because I feel like so many times when we get these, we have to answer them by saying, “Oh, it depends. If

Henry:
You

Dave:
Could do this, this one is easy for me. Buy one better condition multifamily property. Put 25% down. It’s your first deal. Your number one goal in your first deal is do not lose. Just don’t lose your shirt. And the best way to lose your shirt is to buy what he’s listing as multifamilies for 120, 150 grand a unit. That’s a cheap property for a reason. There is going to be problems. You don’t know how to manage it. You’re across the country. You’re going to invest out of state. I genuinely like the approach. Buy something easy for yourself, learn what you like, build your team, gain some confidence. And then maybe in the future you can buy cheaper properties. Maybe you just keep doing that, but you don’t need to take that swing on the first one.

Henry:
Yes. Cheaper properties can be more of a headache, but also just the benefit of being able to build a team you can depend on around that first deal. So if you buy something better quality in a decent neighborhood, but build that Rolodex of contractors, your investor-friendly agents and lenders, and after you’ve done a deal and you have some of those things in place, it’ll be a whole lot easier to execute a larger project. But starting off, you could be in a world of hurt if you buy, because if you hit the combo and buy not a great deal and a ton of disrepair and you don’t have a team in place, I mean you can lose money fast.

Dave:
The longer I do real estate, the more I prioritize making it sustainable for myself. And I actually started writing my BP Con presentation the other day, so I won’t give it all away. You have to come to the event in Orlando, October 2nd through 4th to hear the whole thing. But a lot of what I am talking about, and I’ll just share with you a little bit, is in order to be good at real estate, you need to stay in the game and you just can’t take risks like this when you don’t have enough capital to weather it. You can take risks in real estate. There’s plenty of times to do that. First investment out of state, now time to take a big swing in my opinion. You go up there, you try and hit a single or a double, you learn, you get better and you find a way to get to the next one.
Get up again, get up to bat again. I just don’t see the reason to swing for the fences here.

Henry:
Start small, build your team, learn the market, because until you actually do a deal in that market, it’s all guesswork.

Dave:
Just think about limiting your risk. Learning is more important than maximizing your ROI on the first deal. All right. Great question, Justin. Appreciate it. Good luck to you. We have another question from Trent in St. Petersburg. We’re going to get to that right after this quick break. Stick with us. Welcome back to the BiggerPockets Podcast. Henry and I are here answering the questions of the BiggerPockets community. Our next question comes from Trent in St. Petersburg, Florida, who says, “Hi everyone. I want to move to Florida and house hack using an FHA loan with 3.5% down. The duplexes I’ve been looking at typically rent for around $1,200 per unit while the estimated mortgage payments, taxes, insurance would be about 2,200 per month. Am I looking in the wrong area or is this fairly normal in today’s market? Should I be factoring in future rent increases or is it better to base my numbers only on current rents?” Henry, what do you think?

Henry:
I think this sounds like a solid house hack.

Dave:
Yeah, I would buy this deal right now.

Henry:
$2,400 total coming in rent, but mortgage payment about $2,200 a month, which means you’re going to live in one of the units, so you’ll bring in 12. So you’re cutting your living expenses down and you’re going to be able to move out at some point. Now, depending on when you move out, you may be breaking even depending on rent raises and you may be cash flowing depending on how long you stay there, but that’s the beauty of a house hack. You can stay there longer if you’re not ready to move out or you’re not in the financial position to move out yet. But this was solid numbers.

Dave:
Yeah. St. Petersburg is a good market. I don’t know exactly where the neighborhood is, but that’s a good market in Florida. Florida isn’t a correction. So Trent, my advice would be to try and buy under market comps and make sure you’re getting a good deal here, but the cashflow numbers work on this. It’s easy to estimate this. Next week, we’re coming out with an episode of the podcast, so tune into this. It’s fun. I created a new rule of thumb to replace the 1% rule because rent to price does not work anymore. And we came up with rent to payment ratio. And I think this is a better predictor of cashflow right now for all the reasons you can hear about in next week’s episode. But if you compare the rents, which is 2,400 bucks a month to the payment of 2,200 bucks a month, that’s above 1%.
That is a good opportunity for cash flow. I like this deal because regardless of what you’re paying when you live there, you could move out and this will cash flow, especially because you’re putting 3.5% down and it will cash flow at that number. So if you move out and refinance it up to a 20%, your cash flow is going to be good.
I guess the only other thing I would ask here is, is there an HOA? Because I know in Florida sometimes there are HOAs that might be a monthly fee that you’re not factoring in here, but assuming there’s not an HOA, I think it’s looking pretty good. I would still look around and compare other duplexes to make sure I’m not missing out on an even better opportunity, but just comparing this to the national average, Trent, you’re looking pretty good.

Henry:
Yeah, I agree. And also we’re assuming some things. If this is turnkey, you can just buy it and you don’t have to do renovations to it and you can get these numbers, that’s great. But if you got to go and spend 50, $100,000 to get to these numbers, that lessens the profitability of the deal because you got to factor in the money you spend getting it up to speed. But this is solid deal, seems like a good market. And you said buy under market comps. I always want to buy under market comps whether I’m buying on the market or off the market just because –

Dave:
You should.

Henry:
I just always want to get a deal.

Dave:
Especially in Florida right now, you have negotiating leverage. Go get yourself a deal. Obviously do the full analysis. Henry and I are using really high level numbers here. Go run it through the BiggerPockets Calculator, go biggerpockets.com/calculator, do the analysis, figure out if it’s actually going to cash flow, but I think your prospects are strong. Now there was another question in here, Henry, where Trent asked, “Should I factor in future rent increases or is it better to base my numbers only on current rents?” You and I actually talked about this recently, but I think where we both came out to in this market right now is unless you’re going to do renovation to push up rents and do something you control, I personally wouldn’t. What do you think?

Henry:
This is the market to be extremely conservative. So run it based on what you know now. Florida, like you said, is in a correction. A lot of people weren’t expecting that. So if they didn’t factor those things into their numbers when they bought those deals, they’re hurting right now. So don’t overestimate what you think rents are going to go up to. Underwrite it where it is today. And if it’s working right now, I feel a lot better about doing that deal than if it doesn’t work great now, but it works great in three years if rent goes up. I don’t like that. I don’t like that thought process. All right, let’s move on to our third question, and it comes from a BiggerPockets member named Angela. And she asks, “If I’m going to sell a flip for $500,000 and make 80,000 to $100,000 profit, is it worth putting the money into a 1031 exchange?
I don’t want to buy another property of that value. I would like to buy two to three long-term rentals next.”

Dave:
All right. Well, Angela, I guess I’m the bearer of bad news today with people, but I got to tell you, Angela, I don’t think you can do a 1031 on a flip. I am almost sure. I’m not a tax advisor, but I do think it is sort of carved out that properties that are sold and used as 1031 have to be held as an investment, not for immediate resale. Flips are classified differently as a dealer property. The only way to flip and get that kind of tax advantage is to do a live-in flip, which is even better than a 1031 because you get the tax-free gains, but you don’t even need to immediately put it into a property and go through the whole rig and role of a 1031. So Angela, I’m sorry to burst your bubble, but you do ask a good question around reinvesting and using a 1031 and whether it’s worthwhile.
I’m going to say hard yes on this on a 1031. I have used it many times and I love it. It’s stressful as all hell, but it is worth it. For anyone who doesn’t know, the 1031 is basically when you sell an investment property, you can take all of the profit that you make and reinvest it into another property without the intermediary step of paying taxes. For example, if you went out and sold stock, you would have to pay tax on it and then you could go buy more stock, but at 80% of what your profit was because you just paid 20% in capital gains tax. One of the magical things about real estate is that you could just take a hundred percent of your profit, reinvest it into a new property, and it’s incredible because that compounds over time. You can just keep trading up and buying more and more and more.
You can die without ever paying that tax and give your heirs a beneficial real estate situation. There’s all sorts of benefits to it. The stressful part of it is that you have to identify the property you’re going to buy within 45 days and close on it within 180.
The closing on it, in my opinion, is really not a big deal, but you have to find properties, which can be a little stressful, especially in a market like now where deal flow is a little bit harder to come by. That said, why not try it in my opinion? Because the worst case scenario is you don’t find a good property in 45 days and then you just pay the tax, which is what you would’ve done anyway. You do have some fees to pay a 1031 intermediary, that might cost a thousand, $2,000, but I would risk the $1,000, $2,000 in fees for the potential benefit of that all day. Personally, I don’t know what you think.

Henry:
I think that that’s the approach. I think, and I have seen what happens with investors is they want a 1031 and they’re so scared of paying the tax that they buy a bad deal because they need the 1031. But remember, you’ve got to buy something of like value or higher. And so they’re paying more for a bad deal and they end up bleeding out more money because of that bad deal than they would have if they just paid the taxes. So make sure you don’t just do it because you have to 1031. It’s got to be a deal that pencils and makes sense and you got to be willing to say, “Nope, I’m not going to buy that. I’d rather just eat the taxes than risk it on a deal that I’m not so sure about.”

Dave:
I totally agree. It doesn’t give you that much cushion. You’re saving some equity, but I wouldn’t justify buying a bad deal because I had 1031 money. What I have done in the past is bought a deal at a lower LTV to make it cashflow, where I’ll put money into a deal that might not cash flow at 20%. I’ll put 30% into it because I like the asset, not because I’m like, “Oh, I just need to put my money elsewhere.” But I’m like, “Okay, I can make this cashflow by just putting 30% down or 35% down, and it’s a really good asset that’s safe and is going to do well for me.” I have done that successfully multiple times, and I like that. I like that approach. I think I’m probably going to do another one this year and I might do another one next year I’ve been thinking about.
And based on what you just said, I’m starting to think maybe what I should do, and maybe this is good advice for people, is come up with my criteria of what I will buy before I sell the house because it does get tempting. You’re like, “You don’t want to pay the tax. I could look at a thin deal.” Maybe set your buy box and criteria
Before you sell and then just have a easy go, no go on these kinds of decisions because it can be stressful.

Henry:
Yeah. I think you got to just come to terms with the idea that you may have to pay taxes. You just need to be okay with that and then go shopping.

Dave:
Hot take. People are going to disagree with me on this. People spend way too much time thinking about how to optimize their taxes and not enough amount of time about just like.

Henry:
Man, I get so annoyed when people. All the time. If I tell somebody, oh, I just flipped this and we made that, or I had a student flip this and they made that and everybody, what about the taxes? You got to pay the. Yeah, it’s called a capital gain. A gain means I made money. Making money is awesome.

Dave:
Unbelievable.

Henry:
That’s what I want to do.

Dave:
I remember I was talking to someone, wealthy, successful person who was complaining to me that he had to write a seven-figure check to the IRS, so over a million dollars. And I was like, “Cool. Give me all your income for the year and I’ll write that check. No problem. No problem.” I think real estate investors also get very spoiled because we have the best tax. It’s the best tax advantages of any asset class. Just the fact that you can make all this money and only pay 20% tax at worst, that’s still pretty good. Now, I still try and optimize for my taxes too, of course.

Henry:
As you should. But

Dave:
Don’t make a bad business. That’s the difference. Don’t make a bad business decision because it has a good tax outcome. That is dumb. If you could get both, great, but do not make a bad business decision to get a good tax outcome.

Henry:
I’ve literally heard people say, “Yeah, you made $100,000, but you had to pay $40,000 in taxes.”

Dave:
Still 60 grand more than you.

Henry:
Yeah, I want that problem. Yeah.

Dave:
Great problem

Henry:
With that. So you’re saying you wouldn’t have done the deal, so you wouldn’t have to pay 40 grand in taxes and put 60 in your pocket out of here. Capital gains taxes are a tax on a gain. A gain is what you’re trying to shoot for. Look for ways to offset your taxes as you should, but don’t be scared of them. It takes some planning. Yes. Is it annoying? Yes. Especially annoying if you blow all your profits before you cut that tax check, but conceptually, it’s a good thing.

Dave:
Yeah. There was one other thing I wanted to mention here because she did ask, she said, “I would like to buy two to three long-term rentals.” That’s an underrated part of a 1031 is you can split it into multiple

Henry:
Properties.

Dave:
It’s a really good option. And you can actually, what I’ve done in the past, I think this is a really good way to do it, is you have to identify your properties and you could do up to four. It’s either three or four depending on certain criteria and price points, but you can identify three or four.
Identify at the maximum that you can, and that gives you 180 days to close. So that gives you time to work with multiple sellers. Maybe you don’t buy all three of them, maybe you buy two of them, maybe you buy one of them, maybe you buy none of them, but I really recommend thinking about it that way and trying to spread into multiple properties. If you can, that’s a great way to level up, and it gives you more optionality and more leverage when you go negotiate with sellers during your closing process. So I like that approach, Angela. All right, that’s our third question, but we have one more for you that I think we might disagree on, but I’m curious to hear your opinion on this. We’ll get to that right after this quick break. Stick with us.
Welcome back to the BiggerPockets Podcast. Henry and I are here answering your questions, questions of the BiggerPockets community. We got a good one for our last question of the day. This question comes from Tammy in Fontana, California, posted on the BiggerPockets Forum. She says, “I have a rental in Kansas City that’s gone into serious disrepair. I’d like to sell because it’s my only property in this market. One option is to take a cash offer that will almost certainly be breakeven. The other option is to make some repairs for around 45K that would likely yield 20 to 30K after the sale. What are your thoughts?” I know my answer. What’s yours?

Henry:
Okay. So with the information that I have, and I’m considering the market that we’re currently in, I am probably not going to risk the 45 grand to make 20 or 30. I’m probably going to sell it and be done and take the cash offer and it’s a breakeven. I’m assuming that’s a true breakeven, meaning if you’ve made money to this point via cash flow, you get to keep all that. That’s awesome. You don’t have to give it back. You just don’t get a check at the end of the day. You get to walk away and be done and go invest in another market where you maybe have other properties. My concern with spending the 45,000 is that there’s no guarantee that it’s actually going to yield you 20 to 30,000. You could spend 45,000 and you could totally break even on that 45,000. You’ll get more money, but you’ll probably only get 45,000 more with days on market, depending on the condition of the property, where it’s located.
There’s so many factors that are going to go into, is that actually going to make you money? Just based on this limited information, I’m probably going to take the breakeven and move on.

Dave:
Take the cash, Tammy. Just take that cash. This is a no-brainer for me. I’m with you on everything here. First and foremost, I think, sorry that you’re in a bad situation, in serious disrepair, you can get out of a bad situation at breakeven. We call that a win.

Henry:
That’s a win. You call that a

Dave:
Win, right? Obviously you shouldn’t be doing this a lot, but these things happen, right?

Henry:
Yep.

Dave:
You get out of a situation you don’t want to be in, you get to walk away, you call that a win. Personally, I say, “Hey, I got out of it. I learned something and I’m going to spend the next three months instead of managing a renovation in a market I don’t even want to be in and a property I don’t like. I’m going to figure out what my next move is and what a better use of my time and capital is going to be in my next investment.”

Henry:
And

Dave:
I actually just made this decision. I was talking before about getting out of a market. I had this exact decision. Numbers are kind of close actually about whether I wanted to do a renovation or not, and I put it on the market and I got exactly what I wanted. I think I did a little better than breakeven because I bought it well. And so the equity I walked into more than covered my transaction costs, which is exactly what I needed to break even. And I made really good cash flow on that property for several years. So all in all, still did well. I don’t need to spend the next several months worrying about this. I think this one’s an easy one.

Henry:
Trust me, Tammy, when you get to the closing table at that cash offer and you break even and that property is gone, it’s going to feel like you made a bunch of money. It’s going to

Dave:
Feel like you won the lottery.

Henry:
You’re going to feel so good.

Dave:
It’s so true. You probably will feel better than if you even walk away with 25 grand and your hair will be less gray and you’ll be pretty happy about it.

Henry:
Get out, get out, get out clean. That’s good.

Dave:
Yep. All right. Well, this was fun. I love answering these questions. By the way, if you want your question answered, go on the BiggerPockets forum and ask the hundreds of thousands, millions of members there who are helping each other succeed in real estate investing by just asking questions and sharing knowledge. This type of community is what makes successful real estate investors, and it’s completely free at biggerpockets.com. So go check that out, and then Henry and I might pick your question to answer on the next time we do a forum Q&A question. All right, Henry, we’re out of here. Thanks for being. He’s dancing. He’s ready to go. You look as happy as you would if you just sold a bad property.

Henry:
So people just sold a bad deal. Just sold a bad deal and broke even. Look, every time I’ve been in this situation, because I’ve been in it more than once where I had to get rid of something and I didn’t make any money, it felt awesome.

Dave:
I love it. That’s great. All right. Well, this was a fun episode. Thank you all so much for watching this episode of the BiggerPockets Podcast. He’s Henry. I’m Dave. We’ll see you next time.