Pay Off Properties or Buy More with Mortgages? (Rookie Reply)

Ashley:Today we’re tackling some of the biggest rookie debates out there. Do you follow Dave Ramsey and keep things debt free or do you scale with leverage like so many investors here on BiggerPockets?

Tony:And what about house hacking? Is it still worth it if you don’t want to rent by the room? Plus we’re talking about one of the toughest rookie hurdles. What’s harder when you’re just starting out? Is it finding good deals or getting your financing?

Ashley:This is the Real Estate rookie podcast. I’m Ashley Kehr.

Tony:And I’m Tony j Robinson. And with that, let’s go into today’s first question. So our first question today comes from Noah. And Noah says, what are your thoughts on Dave Ramsey? Would you rather have one property paid off that’s worth $500,000 or maybe having $600,000 in five leveraged properties? I think there’s something to be said about the stress of leverage. I used to want the latter, but now I’m not sure who is combining Ramsey with more of the BP style. Are you being more conservative in this economy? Good question. And I would think that a lot of the folks in the audience know Dave Ramsey really quickly for those maybe aren’t super familiar with what he teaches. Dave basically says that all debt is bad debt no matter what the circumstance, and you should never have debt. The only caveat to his role is that if you do want to buy real estate for your personal residence, you should only buy it on a 15 year fixed note and then pay it off as fast as you can. I don’t even know if he’s okay. I think he’s, even when it comes to investment properties only wants you to pay cash. Yeah, Dave, he’s got a pretty hard line in the sand about using debt under any circumstances. So Ash, I dunno, maybe I’ll let you lead with this and what are your initial thoughts?

Ashley:Yeah, I mean I was a Dave Ramsey fan. I read the, what is it like the Extreme Money makeover book, and I followed his debt snowball. I paid off, we had farm equipment debt, we had a home equity line of credit I paid off and my student loans. So we had those three things and I had my little spreadsheet and my snowball tracker. So I started with the highest interest rate and went down to the lowest interest rate until they were all paid off. A big fan of that. I would say as far as his investing advice, I would not agree with, and I don’t think there’s a wrong or a right because investing can be emotional. And if you’re not sleeping at night, even though you’re making a great return, that’s not exactly a healthy lifestyle to be living if you’re so worried because you’re over leverage.So in my portfolio I do have a mix. I do like to have a couple properties completely paid off or now that I’ve been investing for over 10 years, some of my properties are on 15 year nodes and the balances are really low. So I still have a mortgage, but I have a ton of equity that I could tap into. I think there’s a good mix of this and I think the best thing to actually do is to run the numbers and look, okay, if you had that $500,000 property and you held it for 10 years, what would be your cashflow? How much money would you make from cashflow over those 10 years and what would the property be worth in 10 years? Then I would take that. If you took that money and bought five properties, what would your monthly cashflow look like? What would the mortgages be paid down to in 10 years and what would your equity be in 10 years?And I would at least use the numbers as a starting point as to, okay, this is what the numbers look like and actually I’ll make more money at the end of 10 years and have more equity if I go and buy these five properties instead of this one property. Other things you have to take into consideration though are five properties. That’s more to manage more asset management, that’s more overhead. So you have five different insurance policies to track. You have five sets of properties access to pay though even though it may not seem like a big deal, think about how much time you have or what resources or property managers you’re going to use to actually manage these properties over the 10 years too.

Tony:Yeah, I totally agree with everything you said Ash. And I think there is something to be said about Ramsey’s device working really well in the personal finance space, but not maybe being the best in the investing space. Because I think about someone who only wants to pay cash for a rental property, and if that were the case, I never would’ve gotten started and I wouldn’t have a portfolio today if I was only waiting to pay cash on deals. At least in the market that I’m in, I live in an expensive market. So I think there is a way to maybe blend those two things. And I think what comes to mind for me is if you are concerned about leveraging, then maybe you set a rule where it’s like, Hey, I’m only going to put down at minimum 30% like every deal that I buy, I’m going to be at no more than 70% loan to value, which means you put down at least 30% on every deal, maybe it’s 40%, but I think there’s maybe a way where you can blend the benefits of leverage because leverage is one of the tools that makes real estate investing so attractive is that you get to control an asset that’s worth half a million dollars worth only 10, 20, 30% of the actual value of the asset.And I think you would be maybe reducing some of the benefits of real estate if you aren’t using leverage at all. So I think there’s a middle point here where it’s like, hey, what is the amount of leverage that I’m comfortable with? And it’s more of a sliding scale I think, than a black or white. Every property is at 99% or I’m at 0%. And there’s maybe something to be said there. I think the last thing that I’ll add is that it might also vary depending on where you are at in your life and what season you are in. And I think a lot of folks are familiar with investing in stocks and typically you’ll see younger folks maybe going after a more aggressive stock portfolio where they can maybe take some bigger swings and we have a few misses because they’ve got a longer time horizon until they actually those funds.And it could be the same if you are investing in real estate later in life, maybe you’ve got a good amount of capital and what’s more important to you than maximizing your return on that capital? It’s the preservation of that capital. And if that’s the case, then yeah, maybe buying more properties in cash or putting more properties on a 15 year note makes more sense if you’re closer to that timeframe in your life. So I think blending the two of those ideas together, but then also trying to understand, okay, where am I at in my investing journey and trying to put together the pieces in a way that makes sense for your specific situation.

Ashley:We have to take a short break, but when we come back we’re going to discuss if this one strategy is still viable in today’s economy, we’ll be right back. Okay, so our next question is about house hacking. Hello everyone. I’m trying to understand if house hacking is still a viable option if you pursue any options beyond rent by the room. Does anyone have any examples where they were able to do a house hack without this method and where the average single family home price is around $400,000? I’m hoping to pursue a house hack in Raleigh, North Carolina or surrounding areas. The general trend that I have been seeing is that cashflow is going to be hard to generate in today’s market unless you are able to rent by the room. Unfortunately this is not an option for my spouse and I. Due to past experiences with roommates, my wife is open to a situation where we are able to create separate living spaces.Hence my question. Okay, so let’s kind of summarize this here. A rookie couple wants to house hack but without roommates. So they want separate doors, separate walls. They’re curious if this is still viable. So I guess we need to define what viable means. And he didn’t mention the word cashflow, so I want you to think of it this way. Is that when you buy your investment property, the goal yes, is to cashflow and put money into your pocket without having any expenses on your own. For house hacking, you are living in the property. So if I were to go out and buy an investment property, I’m still paying my cost of living to live in my property and then the tenants are covering the mortgage on the investment property. I purchased Tony, he has decided to go house hack. He is living in the property, he’s renting out one side and he’s living in the other side.So I have that cost of living now and he doesn’t because his tenant is paying his mortgage. So I think you have to not just look at what the cashflow is on a how tech, but look at how much money you’re saving by not living somewhere else, either renting or paying a mortgage. So as long as you are decreasing your living expenses or maybe you’re living or moving to a bigger property that you couldn’t afford without having someone supplemented income, maybe you just found out you’re having triplets and need a bigger house and renting out one side or the garage or basement or something like that can help offset that. So the goal of house hacking is really to offset your own cost of living. And if you can cashflow, that’s great, that’s awesome. That makes it so much more worth it. But don’t get strung up that it’s not a deal because think about how much you would be paying to live in a property that’s similar and it’s probably going to be a lot less with renting out another unit or having your roommate.

Tony:And I think we can even expand because it seems like this person’s thinking about house hacking only in the sense of buying a single family home and then renting out the spare bedrooms. And while that’s one version of house hacking, I think there are lots of other ways that you can go about house hacking. You can rent out the basement, like say you have an unfinished basement, maybe you buy a house, you finish out the basement, put a separate entrance. Now you can rent out the basement if you have an A DU in the back. We just did an episode, we just did an interview with Lake dha and she talked about building dadoos detached ADUs. So you could do that where you live in the front house and you rent out the back house. You could buy small multifamily, duplex, triplex, fourplex where you live in one unit and you’re renting out the other units. So I think one potential solution is just expanding your buy box to potentially identify other types of structures that would still allow you to house hack while keeping your space separate from where your tenants are.

Ashley:And along those lines is looking at what strategy to actually house hack because you could have somebody that’s in there all the time, but you could also do a short-term rental or a midterm rental where you’re choosing when you want to open up the bookings for someone to book. You have great flexibility as long as your regulation or your state allows for it, you can go ahead and kind of fit a strategy that will fit to your lifestyle. So for example, if there are times like Christmas when you just want the whole property to yourself or whatever it may be then, or you’re having family visiting and they can stay in that other unit, then maybe short-term rental or midterm rental or a combination of both in that other unit can make it more worthwhile.

Tony:Something else that I think we should highlight here, Ash, they said that rinsing by the room isn’t an option for my spouse and I due to past experiences with roommates. And obviously you are the resident expert at tenant screening here. I wonder Ash, if there’s a way that they can maybe adjust their tenant screening processes to alleviate those issues because it sounds like they said roommates, so I’m assuming they were maybe living with someone just in a traditional roommate setting. But if you’re doing house hacking, you’re actually that person’s landlord though we did have a bit of a horror story in a recent episode where someone had to evict someone who was renting a room from them in their house, but what would your recommendation be to them ally, in terms of screening this tenant to avoid any potential issues?

Ashley:Well, especially when it’s your primary residence, you have more leeway if you’re living in the property as to can actually rent from you so you have more discretion. So for example, you could say only girls ages 20 to 30. That may be appropriate because they’re around your age and you want someone your age living there. And with, if I was renting out an investment property, I could not put any of that into the listing as to this is who exactly the demographic of the person that I want to live with me. So you do have a lot more leeway into choosing who you want to live with you. And it could be honestly that you don’t feel good vibe or that you’re not going to get along with the person, whatever. There’s a lot more excuses that you can use to not accept the person to move into your room in your house.So I think that’s a big factor into play is that you can have more discretion as to who you choose to actually be your roommate. You could also do the short-term rental strategy for rent by the room too. So maybe if you’re gone for a weekend or something like that, you could rent out your room or you could be there. We don’t have a lot of rent by the room, short-term rental listings near me at least, but I’ve seen them all over the place and other cities available. So then that also depends how comfortable you are because that’s also complete strangers coming in and staying with you. So that might actually be worse for you than actually going through the screening criteria, but doing a really thorough screening of them. So I use, there’s Turbo tenant, there’s Rent ready, all these different property management softwares that will actually do the tenant screening for you, a background check, actually the credit screening, you can check for any criminal activity, any past evictions, things like that. But also you should be doing social media scrubbing through social media, looking at their Facebook profile, do they have a picture where they’re showing their house like, oh, just hanging at home today and it’s literally just a trashed apartment with garbage and pizza boxes and stuff all over. Kind of give you an idea of how they would treat your home. So definitely go to social media.

Tony:Ash, have you seen tenants with posting those kind of pictures where they’re in their units of trash all over the place? No.

Ashley:No, but my sister, her tenant actually, she found her tenant’s TikTok and they live upstairs, downstairs. My sister just moved out actually, she just bought a new house, but she found her TikTok and she found some, let’s see, what’s some para police violations doing in her apartment and provocative posting that was happening in the apartment, whatever, but nothing illegal, nothing bad or whatever. Then the apartment wasn’t trashed at all, but it was just funny.

Tony:I think that, and to your point, you can probably head off a lot of issues with the right screening upfront and if you are not in a rush to find someone and you really take your time to go through those motions. I know I can think of one couple in my life, one of our partners, he and his wife house hacked their primary residence I think for the majority of their time owning it until they had, I think two kids, they have three now. I think their first two kids, they were still renting out rooms in their primary residence to help offset that cost. So it’s something that’s worked well for many people. So you got a few options here. Raleigh’s a big market. It’s a big city. I’m sure there’s a lot of demand for room rentals. Just got to figure out the right way to execute on it.

Ashley:Alright, before we jump into the next question about the hardest parts of getting started the deal versus the financing, let’s take a quick break to hear from our show sponsors. Okay, this question comes from Brandon and this is from the BiggerPockets form. When you first got started in real estate investing, what did you find more challenging? Was it locating good deals or securing the financing? I’d love to hear the different perspectives. This is actually a great question that I don’t think I’ve ever been asked what was more difficult of these two things, but if I look at it, I would say that what comes first, the chicken or the egg can also go along with this. What did you get first, the deal or the financing and did the good deal be the thing that secured the financing or was it you that secured the financing then found a good deal because you had the financing in place? I guess for my first deal, I had the money partner first. I can’t remember. I know we talked about it, but I don’t think he exactly said, oh, I have this X amount of money, go find a deal. I think it was more we were talking about it, he was interested and then I found the deal and then he said, yes, I want to partner on this deal. Pretty sure that’s how it went. What about your first deal? What came first? The chicken or the egg?

Tony:My first deal, the financing came first and that was what pulled me into that market. But I don’t know if that’s the standard. I think the answer to this, and no one wants to hear this, but I think the answer is that it depends, and I think it depends on a few factors. I think there are maybe market or call them external factors and then there are the personal or maybe internal factors on the market side. Sometimes finding good deals is easier than other times. In 21, 22 when interest rates were super low, especially if you’re flipping homes, it was so easy to find good deals because the market was just on the skyrocket going up. So even if you bought it face value, you were still probably going to get some equity in the next six to 12 months because the market was just moving up like crazy.So finding good deals wasn’t really hard today where you’ve still got a lot of sellers who are stuck on those prices of a few years ago and you’ve got a limited buyer pool. Finding good deals is a lot harder today than it was three years ago. So I think part of it is market dependent. Same thing for financing. You didn’t have to search super hard for good lending when rates were 2.6%. It’s like you could go anywhere and almost get a really good deal, whereas now rates are elevated. You’ve got to maybe do a little bit more homework on what financing option makes the most sense for me. So I do think part of it’s market dependent. And then on the internal side, the personal side, I think part of it is personality based maybe. And for some people finding good deals is going to be easier than others.We have our friend Nate Robbins, and we’ve brought him on the podcast. He’s been a guest. And for him finding good deals isn’t all that hard. He’s a super personable guy. He likes to chop it up with people. He’ll hop out the car while he is driving and go knock on someone’s door and try and buy their house from ’em. It’s a Tuesday afternoon. Whereas for some people that’s super hard for them. They don’t enjoy that. So I think part of it is a little bit personal as well. I think to Brandon’s question, what’s harder I think is almost the wrong question and I’m glad you asked it, but I think it’s the wrong question. It’s like it doesn’t matter what’s harder, because the truth is you’ve got to do both. You’ve got to tackle both of those things if you want to get your first deal done.So I think the bigger question is where should you maybe leverage the expertise of someone else to help you do that? Right? And if it’s deal finding where you think you might need some help, well then go find a really good agent, go find a really good wholesaler, build those relationships. If you think it’ll be lending where maybe you’ll struggle a little bit more, go find a broker who can shop multiple lending institutions to help you find the deal. So I don’t think it’s so much what’s harder? It’s just like, okay, which one do you need help with first?

Ashley:Yeah, I couldn’t have said that better. Even though one could be harder, you still have to do both of them. And I think right now it’s easier to get the financing. I think right now in today’s market that it is not too difficult to secure financing because I think you’re able to get more creative with options. So right now, properties are sitting on market longer. They’re not selling for what they were in 20 21, 20 22. And I think there’s more flexibility to be able to get seller financing, which I think is just going to be such a huge advantage. That was really, really hard to do for several years because interest rates were so low that no seller could even match that lower rate. And why would you do that when you could just go to the bank and get the really, really low interest rate anyways?So I think getting creative in different options will make financing a little bit easier. But I do also think that deal finding will become easier too because the properties are sitting on market longer. I think there’s also a lot of mom and pop landlords that are getting ready to retire to be done. I just got emailed by one the other day. He has five properties he wants to sell, sell them over several years and wants to line up some kind of creative finance deal where some of it’s seller finance. So I think you also have that shift too of not only for rentals, but also small businesses too, where that wealth creation is going to be shifting, which would make it easier to find deals by targeting those mom and pop landlords that are getting ready to retire or sell out their properties.

Tony:And again, I think that goes back to where we’re at in the market and that’ll dictate what’s harder given where we’re at. At least for me, I like in the markets that I’m looking at, even like in OKC, we’re trying to find our first flip. We’re still seeing not only on the selling side, because I think the sellers are still kind of stuck on prices that aren’t super realistic today, but there’s even buyers out there where I’m like, how are you going to make money at this price that you’re locking this deal up at? And we had Henry Washington and Dominique Gunderson in the podcast a few episodes ago, and they mentioned the same thing in their markets that for the volume of offers that they’re putting out, they’re getting far less yeses. And it’s because people are buying at numbers that just simply don’t make sense if you’re looking to be an investor. So I think as the market may be stabilized a little bit, hopefully sellers start to come to their senses. But at least for me, I think it has been a little bit tough still to find those good deals. How is it in Buffalo right now? Ash?

Ashley:It’s a type of house that is selling so quickly and it is a house that maybe grandma is selling a house that hasn’t had a lot of changes or models to it, but was very well taken care of as good bones. And yes, it needs to be completely updated, but it’s still in such great condition. You don’t have to update anything right away. And that is the type of house I’m seeing that is going so quickly. It’s a great starter home or it’s also a great retirement home to downsize in. So in my market that’s what I’m seeing is moving so quickly where you’re seeing things set a little bit longer are the fixer uppers, which is great for investors. And then also just the higher end homes. We don’t have a ton of, in my direct area that I check all the time, which isn’t around the city of Buffalo, more rural, we don’t have a ton of houses that are flipped.For me to actually gauge that as a reference of how investors are doing that way, there is one house that was flipped that’s been sitting on market for I think over 30 days now. It is beautiful. It’s done very, very well, but it’s just, it’s sitting there. Well, thank you guys so much for joining us today for the Real Estate Rookie, rookie Ripple Eye episode. I’m Ashley. He’s Tony. And we’ll see you guys on the next episode. Don’t forget to subscribe to at realestate Ricky on YouTube and follow us on Instagram at BiggerPockets Ricky. We’ll see you guys next time.