Seeing Greene: Refi vs. “Recast,” Tax-Free Equity, & When to Cut Your Losses

David:
This is the BiggerPockets podcast. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, the show where we arm you with the information that you need to start building long-term wealth through real estate. Today we’ve got a Seeing Green episode with you and I brought back up. I got Robbie Abba here joining me today. We’ve got an amazing show. We’re going to be covering several topics, including if you should invest extra capital in a house, hack or save the money to get additional properties, when to sell your primary residence, to take advantage of the tax exceptions for it and when to keep it. And we’re

Rob:
Also going to be talking Greek casting and how that could be a significant play for you if you have the option.

David:
That’s right. If you’ve ever wondered what happened to Judy and Family Matters, we’ve got the answers for you along with some real estate stuff today on Seeing Green Up. First we have Ronnie from Napa, my hood joining us live with his question about how to generate leads for his real estate business while working a full-time job. And as always, please remember we would love your comments. We want you to be featured on an episode of Seeing Green, so head over to bigger p.com/david and submit your questions there. Let’s jump into it with Ronnie. Alright, our next question comes from Ronnie Gallindo. Ronnie like me and one of the realtors on my team, Robert Reynolds, funny enough, is a real estate agent and a law enforcement officer. So Ronnie, thank you for your service. Tell us what’s on your mind.

Ronnie :
Yeah, thank you David and hey Rob, nice to meet you both.

Rob:
Nice to meet you.

Ronnie :
Just trying to kind of get ahead of the curve. I have dabbled a little bit in real estate and being a full-time W2 employee, it’s challenging to find a little extra living here in California even though we get paid decently. So got my license for real estate and trying to get deals, but my sphere of influence is small and so just looking to kind of get some advice on how you build up your real estate business and start selling houses so that you can buy some additional real estate for yourself on the side.

Rob:
Well Ronnie, you came to the right place. I don’t think there’s a better person to answer this than former police officer realtor himself. David Greene.

David:
Yes, yes, I am happy to help Ronnie. Alright, first off, let’s get into it. Do you own real estate yourself?

Ronnie :
I did had to sell it. I wasn’t making the numbers I needed it to and so I just have my primary right now.

David:
Alright. Are you house hacking?

Ronnie :
No, unfortunately I got a wife and two little ones and so basically all the rooms are full up.

David:
That’s one thing that would help if you could find a way to get a property that had more than one unit, that had something that could be rented out. It gives you something to talk about to your coworkers if you can’t, that’s still what I would do as I would still talk about house hacking. I’d be like, man, I have this other client make it up and we bought them a house and he lives in the master bedroom and rents out the other three bedrooms and he basically comes out of pocket $400 a month or $600 a month and has all of his roommates paying his mortgage off for him and like you guys, he’s a police officer so he’s never even home, doesn’t even bother him at all and he’s going to do this every year and he’s going to have five houses in five years and he’s not going to pay for any of ’em.

David:
I would tell stories like that to the other guys I was working with because telling people a strategy, this is the brrrr method, this is house hacking. It makes them think about it. Oh, that makes them say, Ronnie sounds smart. He knows good stuff, right? But telling them a story makes them think I could do that. I could rent out bedrooms. That doesn’t sound so hard. I could live in one unit and rent out the other too. I could live in a basement, shoot ’em already doing something like that. Now they start to get that feeling like they could and the natural next question would be, what do I have to do? Well, we’re going to get you pre-approved, going to run some numbers. I want to make sure you’re not paying too much for a house. Then I’m going to look for houses that would work for that.

David:
We’re going to make sure that it’s close enough to where you report to that your drive isn’t too long. This is what we’re going to do to look for tenants. You start painting a picture for people because the more clear they are on what it will look like when they’re done, the more likely they’re going to be to move forward. A lot of the time realtors make the mistake of just telling people what they should do but not explaining to them what it would look like when they do it. So that’s one thing. The other thing I would say is if you’re not working, you need to be hanging out with your wife at social events. You need to be meeting all of the other parent friends that you know the people at your church. You need to know all the people at your kid’s school.

David:
My buddy Kyle, he would just at an event for his kids, they go to an acting academy in the Sacramento area and he went to a Father-daughter dance and came home with four leads of two them that have houses to sell and two of them that want to buy. So every time he goes to a social event, it’s not time off. He’s actually making money when he is there. You got to be thinking that way when you’re a real estate agent, you’re not on the clock or off the clock, you are always on the clock, but you’re also really never on the clock getting to make money at social events, getting yourself in front of people is the most important thing.

Ronnie :
Good advice.

David:
Rob, you want to weigh in on anything there?

Rob:
Ronnie, how many real estate meetups have you gone to in the past year

Ronnie :
Around here? I haven’t gone to any. I’ve been, I joined one in Sacramento. That’s the closest one I could find and I’ve actually been meaning to start one here in Napa because I’m in Napa, which is a small little market here that I don’t really have a R that I can attend, but been in talks with some of the other agents that are around me just haven’t done a meetup.

Rob:
There you go. I mean that to me is step one and I think there’s an actionable way to do that. You can go to different Facebook groups, different real estate Facebook groups in Northern California. You can go to the BiggerPockets forums, talk about who you are, what you’re looking to do, and look, you’re not going to start a meetup and have a hundred people show up on day one, but maybe on month three you might have 10, 15, 20 people and it snowballs from there. The reason I say this is that if you’re new into the real estate game in terms of being a realtor, getting someone to take a chance on you as a newbie realtor is always really hard. And this is why new realtors have such a hard time building up their roster in the first year because they don’t know how to market themselves and no one wants to take that chance.

Rob:
But you know who I will take a chance on is a guy that I meet at a real estate meetup that’s a new realtor that I like. Maybe we’re at a brewery together, maybe we’re at a Napa winery together and we’re having wine and I’m talking, oh, what do you do? Oh, I’m a police officer and I actually just started being a realtor, blah, blah, blah. And if I like you, that’s what this business is all about. It’s all about networking. It’s all about building rapport. So I think the most important skill a realtor can have is learning how to talk to people in as much quantity as possible their first year. How you’re going to build your book of business in year 1, 2, 3, in my opinion. And then it snowballs from there. Year two, year three, year four, you’re going to have so many clients from word of mouth. I think that’s the typical trajectory for a realtor. So that’s my advice for you is get started on that real estate meetup. The second one, this is just a bonus, I’m not going to charge you for this one, but you can always pull people over and say, Hey, I’m going to let you off with a warning, but you have to use me as a realtor next time you’re considering buying a house and then drop ’em your card and go back to your car.

David:
Sounds like a solid plan.

Rob:
It’s the greatest I’d be, so really I’m like, oh, I’m not getting a ticket. I’ll definitely use you as a realtor

David:
And we’re going to take a quick break, but right after that I’m going to share what I think is the real job of a real estate agent. So don’t miss it and welcome back. We’re here with Ronnie, a police officer in Napa. He’s looking for creative ways to grow his network and increase his business and Rob is going to help him with just that. Yeah, this is really good advice for real estate agents, not just a police officer, real estate agent. Okay, I’m at a real estate conference right now for Keller Williams and I’m teaching real estate agents what to do to make money, and this is something they all need to understand. Your job as a real estate agent is not to know what forms to fill out, what the laws are, what the fair housing process is like. Your job is to make everyone fall in love with real estate.

David:
You’ve got to be preaching it from the rooftops. They got to sense your passion, they got to know that you love it and then they have to feel safe. Just like your job as a police officer is to make people feel safe. I want you to think about your first day on the force. You’re with your field training officer and you get a pretty serious call that can be kind of scary and they look at you and they’re like, what do you think we should do? Think about how that would feel, man with a knife running around stabbing people and he’s like, oh man, this is rough. What do you want to do? How many agents talk to their clients like that? They show the house and they say, well, what do you think we should do? They get the inspection report and they say, what do you think we should do?

David:
They want their client to lead ’em through the process and it fills their client with terror and nobody can really articulate going on. So then the client never makes the decision what to do. Or you meet with them and say, I want to sell your house. Here’s what I think it’s worth. What do you want to do? You got to be telling them, here’s what comes next, here’s what we’re going to do. If you choose to work with me, this is what we’re going to do. If you’re going to have me be the one that trains you, officer Galindo, this is what you do when this happens. Now you’re going to go do it and I’m going to be right behind you to help you. That’s the attitude that we have to have as real estate agents and this is why so many agents are not good.

David:
This is why there’s such a bad reputation amongst the agent community, especially with investors that are not happy with the service they’re getting is because their agents want the clients to lead. So think about it’s your job to make everybody fall in love with real estate and then it is your job to lead them through the transaction and you got to know where they want to go to know where to lead ’em. You got to have clarity on what their goals are, what type of property they want, what strategies they have, and once you’ve given them that they’ll follow you. You’ll put people in contract and they will spread the word for you.

Ronnie :
That was great advice and I definitely, I know I need to start that rhe.

Rob:
Yeah, go do that, man. That’s the answer to your problems.

David:
Thanks man. Thanks for calling. We appreciate you.

Rob:
Thanks for coming on.

Ronnie :
Thank you.

David:
Alright, great job, Ronnie. That was so good that Rob and I had to take a quick minute jump on a plane and fly back to our studios where we could jump into recording this again after we debriefed on Ronnie’s situation. We love it when you guys send us information about what you got going on, what struggles you’re facing, and how we can help you. So please remember to continue to send us your questions and videos at biggerpockets.com/david. In this segment of the show, I like to get into what some of your comments were on previous YouTube videos, what some of the questions were from the BiggerPockets forums or what reviews were left for us. So please make sure that you like common and subscribed to this video and maybe you can be featured in this segment of a future episode of Seeing Green. Our first comment comes from YouTube and it’s from Narcissist.

David:
Kind of funny, someone admitting that they’re a narcissist. Hi David. I recently moved all of my properties from my name to individual LLCs. Unfortunately the county zone, as the properties change hands and they reappraise them, I lost the homestead exemption on my best cash flowing house, so I lost a lot of cash flow in the process. In the future, I will place properties into LLCs upon purchase, just a word for other investors. This is cool and it’s very narcisistic of Marxist to share this information with everybody else. You often hear people say, I’m going to move it into an LLC later as if there’s no consequences, but in this case there was. What do you think, Rob?

Rob:
Wow. Yeah, I have never considered that consequence. So it makes total sense because basically once the county notices a change, everybody’s just trying to make more money here, so county just wants to tax you. The one thing that seemed a little peculiar about what he said though is that he lost the homestead exemption on his best cash flowing house, which sounds a little fishy to me because you shouldn’t have a homestead exemption unless you’re living in it. Yeah,

David:
Yeah, that’s exactly right. And you can’t be living in it if an LLC owns it in many cases. So

Rob:
What? Hold on. Wait, is that true?

David:
Well, if you buy the house as your primary residence and you’re telling the letter I’m going to be living in it and then you transfer it into an LLC, you can’t get a primary residence loan in an LLC.

Rob:
Oh yeah,

David:
I see. So you got right off the bat that’s not the case. And then most of the time if you’re going to get a loan in an LLC, they’ll tell you you can’t use it as a primary residence. It has to be something that’s collecting income because they’re making a loan to a business, not a person. So it’s not like legally, I think that’s what you heard. There’s no police that are going to come and say you’re not here, but according to what you agreed to with your financing. Yeah,

Rob:
Yeah, no, I just was more saying like, yeah, yeah, that makes sense. Thanks for the clarification. So yeah, just make sure people, when you’re doing the homestead exemption, that is a tax break that you get when you live in that home because you’re marking it as your primary residence and you get a tax cut. So you don’t really want to do that when it’s an investment property because I would imagine that’s some version of mortgage fraud is my guess.

David:
That’s exactly right. And as technology increases, it becomes easier and easier for banks to find out that people are doing that. We see that with my loan company more and more frequently we get contacted about, Hey, one of those people you did a loan for, they were naughty, they said they were going to do this and they didn’t do it. Now you’re going to have to buy this loan back or they’re going to have to fix it. So keep an eye out everybody. Next comment comes from, oh boy, Masha Hiim, FDII 58 26. Rob, how do you feel? I did on that first take.

Rob:
I think it’s great. Honestly, I was impressed and I just can’t believe there was 5,825 other ma fundis.

David:
Yeah, that’s a funny point there, but you never know. There’s a lot of people in this world and apparently this is a popular name. Yeah, Masha Hiim, FDII 58 26 says, what is the issue with recast? I only hear about refis. Have you heard about this, Rob?

Rob:
I have not. This is a thing,

David:
It’s kind of a thing. It’s not really the same as a refi. A recast is when, let’s say that you’ve paid, I’m trying how to describe this. You get a loan for a property, you take out a certain amount of money, you have principal and interest that equals a payment on said loan. If you go in there and say, Hey, I want to put an extra 50 grand towards my loan balance and I want to pay off what I was paying principal and interest on, and at $50,000 less a hundred thousand dollars less, you can get them to basically restart the clock on your loan with principal and interest that are calculated on the new loan balance. So it’s less in a sense, it’s almost like buying cashflow. Maybe you could look at it like that. You go in there and you put money towards your loan balance and now your principal and interests are less than what they were. A refinance is like you literally get a whole new loan on the house and you use the money from that loan to pay off your own loan. People typically do that when they’re getting a lower rate, so that’s why their prices dropping, but you don’t have to bring cash into the deal. So a recast is not as good as a refi when you’re getting a lower rate.

Rob:
Got it. Okay. So I thought this was whenever in friend season one, Ross ex-wife Carol, whenever they recast her, but now I know that it’s actually I’m doing this right now on a new construction loan. Basically. This is actually really great because what they said is I did a one-time close, I got a 4.75% interest rate on this right before the big interest rate hike. Oh, I

David:
Remember you were mad about that rate and now you’re like, that’s so bad now.

Rob:
I was like, how dare them give me a better rate than the market? And then basically they said that I can, it’s a one-time close, so as soon as they nail that last nail in the house, it’s mine. But what I can do is come in with whatever size down payment that I want and they will amortize the balance and keep the same interest rate. And I was like, I wish that this was a thing across the board. Is this ever an option? Is this normal? Do you have to seek out special lenders because this is the greatest thing ever. It’s

David:
In your loan documents that you can or can’t do it. Most lenders will let you do it. Sometimes they have a window when you’re allowed to. They may not let you do it four years after you get the loan, but in almost scenario, within six months, maybe six to 12 months, you can come in and do exactly like you said.

Rob:
Interesting. Yeah. Okay. So that to me is a very powerful tool. So we’re going to be doing that hot take. We’re actually considering selling a couple of properties that I’ve purchased over the last seven years, taking all that equity and dumping it into this house and just trying to get my mortgage balance as close to zero as possible, something that is unheard of in the real estate world. But I like the idea of this so recasting, I’m all about it. So

David:
Rob is all about shrinking his portfolio. If you want to learn about scale, age, get my book scale and if you want to learn about shrinkage, follow rob built. Alright, next comment comes from Haans Arman to 71 51 BiggerPockets. Can you start saying FHA has PMI for life of loan? Unless you put down 10% PMI goes away after 11 years. Correct me if I’m wrong. Just would be helpful piece to add. Thanks. Alright, Hains Meto. Let’s see if we can bring some clarity to the FHA loan. A couple of common misnomers that maybe some of you listening could be ill-informed about FHA does not stand for first homeowner. That’s not with the F and the hr, it actually stands for Federal Housing Administration. It is a loan that was created for people that were going to have a harder time buying real estate. So if you didn’t have 5% to put down, they let you put 3.5% down.

David:
If you are credit scores were lower than what the conventional loans were requiring, you could go get an FHA loan with a less than ideal credit score. So oftentimes FHA loans will allow you to have a lower interest score to get the loan. Now this comes at a cost. PMI stands for private mortgage insurance and on a conventional loan, this is a amount of money you have to pay a lender to compensate them for the risk they’re taking. If you did not put 20% down, because if they have to foreclose and you put 5% down, you put 10% down, they have more risk, they may not get their money back, so they make you pay for that. Well, on a FHA loan there is mortgage insurance, but it’s actually called MIP. It’s the same thing. It’s just the name that the Federal Housing Administration uses for their PMI and it doesn’t go away for as long as you have an FHA loan, it always will have that MIP even when you pay it down to the 80% loan to value or 70% loan to value.

David:
Another thing that they won’t tell you, and I know this because I’m a mortgage broker and I often steer clients away from FAFJ loans and into conventional loans where you can put 5% down instead of three and a half, is that they collect that first year’s MIP upfront when you close, but they don’t get the cash from you because you don’t have the cash. That’s why you’re using an FHA loan. They tack it onto your loan balance. So you’re putting three and a 5% down, but then they take that year’s MIP say it’s like $10,000. They add it to what you borrowed from them. So even though it’s not cash and close, you’re still end up paying for it and most people using FHA loans have no idea this is happening. This does not mean FHA loans are bad, it just means that there are more costs associated with them that people don’t always know about. And in most cases, you’re better off to use a conventional loan, which you can get 5% down or 3% down assuming that your credit score is eligible. So thank you for allowing us to bring this up.

Rob:
I do have a flip side to this though. On the second home loan that I have, we actually just got the PMI removed because I believe on that specific loan it was once we had equity of 20% or more we could apply to get it removed. And so basically we called the mortgage company, they sent out an appraiser. I’m not sure if we paid for the appraisal, but my guess is yes, appraiser came out, appraised it for I think we have $300,000 of equity in that specific home. And yeah, they took it off. So now we save 200 bucks a month in PMI, which is a beautiful thing.

David:
That’s a great example. That was a conventional loan that was not an FHA loan that you did that on. Yeah, so that’s exactly how it should work is you pay PMI until you hit usually 80% loan to value, 78% loan to value. And then if you get an appraisal, which you probably did pay for, but it’s like 400, 500 bucks and yeah, now you don’t have PMI anymore and that’s how it should work. That’s the life cycle of how PI should be. And in a market where prices are appreciated as much as they have been, some people it was like two or three years and it was gone. But if you get the FHA loan, it doesn’t go away. So never say we did nothing for you here at Seeing Green. Thanks everybody. We love the engagement, we love the questions. Thank you. Please leave us a comment as you’re listening to this like and share and subscribe to the channel. Alright, our last piece of this segment is a review from Apple Podcast from Greg Verge, say, brought to you by Rob Abba Solo.

Rob:
Okay, so he says great all around knowledge as the title five stars. And he says, I’ve been listening for about six months and I love the show from Success Stories to educational podcast. Every episode has been something you can take away to build and grow your real estate portfolio. Isn’t that just heartwarming? That makes this day for me, David.

David:
Yeah, nice job rhyming there. Build grow real estate portfolio rap and Rob rap built.

Rob:
I just looked at it. He said your real estate, I added portfolio maybe because I just felt like we

David:
Needed I know you did. That’s what I was saying.

Rob:
Yeah, we needed the closure.

David:
Or maybe you just like Eminem, you think in rhymes. Very nicely done. Let us know in the comments. What do you think about Rob’s rap skills? He drops hammers, he drops knowledge, and now he’s dropping bars. Alright, let’s take a question about investing extra capital into your house hack right after this quick break. Welcome back. Thanks for being here. We missed Jeff, Rob and I, were just sitting here shedding tears and we’re happy because you’re finally back. Let’s get into if you should invest extra capital into a house hack or use that to buy new properties and scale your portfolio. I think I know what Rob’s going to say, but let’s see if I’m right. The question comes from Connor Castillo in Georgia.

Connor:
Hey guys, this is Connor Castillo from Atlanta, Georgia. I live here with my wife and four kids. We have a two-part question for you. One is about our two rental properties. One is low interest rate and cash flow is just over a thousand dollars. The other has a high interest rate, but also cash flows for just over a thousand dollars. We’re thinking about taking the three to $400,000 of equity out and putting a cash offer on a house so that we could cash flow closer to that $4,000 range, not have to worry about a mortgage. And then our other question is we have this tiny house in our backyard as electricity. We flipped the inside, obviously need some pressure washing, but we were wondering if maybe it’d be a good house hack to bring out water here, put it in a kitchen, put it in a bathroom, spending about 40 to $60,000 to get it to where somebody could potentially rent it out as a short term or long-term rental and help us with our overall mortgage payment of $3,200. We think we could get anywhere from two to $2,500 a month in this good neighborhood. Thanks. Bye. Alright,

David:
Rob, what are you thinking?

Rob:
Okay, we know what I’m going to say here. Listen, he’s already got a structure in his backyard. He needs to bring out the water, which that part is easy. I think it’s the sewage and then making sure that there’s a proper slope and making sure that the sewage water can leave the tiny house and go to the street. There’s some permitting there. You have to go to the environmental health services department and the Building and safety department. By no means is this an easy project, but I think it’s a really obtainable one. And I think that when you’re getting started in the world of real estate, it’s pretty important. It doesn’t seem like he’s got a ton of experience in the world of real estate. And so because of that, he isn’t privy enough to understand that this is a bad idea, but I think he should do it. I think he should do it. I think he should learn the skills involved with project managing. I think he should do some of the work himself. And if he invests 40 to $60,000, let’s just go in the middle there, $50,000 so that he can make between two to $2,500 a month. That’s a grand slam of an investment. He’s looking at a 40 or 50% return to get there.

David:
Yeah, I think there were two parts to the question. Should I refinance existing real estate to buy new real estate with cash? And then I’ve got this structure in my property that I could turn into a tiny house, 40 to $60,000 to make that a rental property was the second part. Answer to part two, like you said, Rob is absolutely to be able to get a return of 2000 to 2,500 a month on a 40 to $60,000 investment is crazy good

Rob:
Queasy. Yeah.

David:
Yeah, we’re talking like 60 70% there. So that’s definitely, that should happen. And that’s one of the things I look for in houses I want to buy is do they have a structure like that that I can convert pretty easily? That’s how I make brrrs work in 2024 is I’m buying properties that I can add square footage to that way. Now the other part is a little bit trickier. Should I cash out refinance a property to buy another property in cash? To my mind, it’s almost a confusing way to look at this question because even though you’re buying something with cash, so you’re saying I won’t have a mortgage on it, you’re taking out another mortgage on another property

Rob:
That will be higher.

David:
And really if you do a cash out refinance on your other property, your rate will be higher than if you got a new loan to buy this property. If it’s a primary residence, if they’re both rentals, then it’ll be a wash, but you’re not actually gaining anything here. You’re just taking on more debt on a different property. And that’s why you kind of have to look at portfolio architecture because when you look at every property like its own unique individual thing, this can be confusing. It feels safer to buy something with cash, but if you look at your portfolio as a whole, it’s not safer. You’re adding extra debt onto something else that would’ve been paid off. So am I missing something there you think, Rob, with that question?

Rob:
No, no, you’re not. Yeah, it honestly, I get this dilemma. I think so many people are in this dilemma right now in 2024. They’ve got six figures of equity, but they’ve got this 2.75% interest rate and they’re like, should I get out of this and use it to expand? I find that I don’t want to be as aggressive like this in 2024. I think it’s a gift to have a 2.5, 2.75% interest rate. Now, with all that said, if he can take 300 K, I’d imagine he can get like 75% of that. So let’s say $250,000. If he can take that $250,000 and invest it into another property, whether it’s buying cash or leveraging it and it can get him a greater return than what he’s getting right now, then I guess the answer is yes. But I would also raise the question of how much work will it take to do that and how much more is that return?

Rob:
Because let’s say that he’s getting a 20% return right now and it’s arbitrary of course, but let’s say he’s getting a 20% return and he’s like, all right, I’m going to do it. I’m going to refi or sell this property, take my equity, go and buy this house, do this, do that, and then he’s going to make a 25% return. Yes, he’s making 5% more, but I don’t think it was worth the hustle and bustle. So I’m kind of in the mindset of I don’t think there’s anything wrong with coasting right now on a 2.75% interest rate. Am I crazy? I feel like it is so counterintuitive to the real estate community. I

David:
Don’t know that I would care what the interest rate was as much as I would think you’re losing your cashflow when you go from a 2.75 to seven and a half or whatever it’s going to be, and now you have to have a significant delta to make up on the next property in a market where it’s very hard to find cashflow. So I think the low hanging fruit here is convert that property in your backyard and don’t let the equity burn a hole in your pocket. It’s okay to be sitting on equity. You don’t have to deploy all your capital. The

Rob:
Only other thing, the only thing I’m going to ask is does he need to use that $300,000 of equity or part of it to do his tiny house house hack conversion that will cost him 40 to $60,000.

David:
So Connor, if you don’t have the 40 to 60 grand in the bank and you have to get that from the equity in the property, don’t do a cash out refinance and lose that good rate. Do a HELOC on your investment property, which they have products for those now we do ’em all the time. Use the 60 grand from your HELOC to make that into a cashflow property. Take the cashflow from the property and put it back towards paying the HELOC down. And when you’ve paid it all back, it’s basically like you got a free property

Rob:
And you could do that sounds like in two, maybe three years. So if you can give up a little bit of instant gratification, be diligent about paying that down. And then you got some pretty good cashflow, my friend. Yep,

David:
And you did it smartly, Connor. Best of luck to you. Next question here comes from Todd Lawrence in Jackson, Wyoming. My question is, what factors do you consider when taking a homeowner’s tax exclusion if you’ve leveraged a performer primary residence to fund the purchase of a new primary? I bought a duplex in house act using the equity and the duplex to put a down payment on my new primary. The duplex is currently cashflowing and appreciating should I still take advantage of the tax exclusion and realize the gains tax free. The market here is very tight and there are not many alternatives apart from investing outside of the Jackson area. I have about 500,000 in equity.

Rob:
Okay. So I think what he’s asking is should he sell the property now and take advantage of the $250,000 tax exclusion where he won’t have to pay capital gains on it, or should he keep it and forego that Because I think you are in that window like two out of the last five years if you lived in it. I think if he has plans on using this money personally, then whether it’s for real estate or whatever, then I guess I would say sell it if you know, want to use it to do more real estate so that you can avoid the capital gains question in the future. But if you like this house and you don’t really have a plan of action and you don’t plan on buying more real estate, then I don’t know my answer might change there. So I mean it’s a little situational. What do you think?

David:
Well, he mentioned the market here is very tight and there’s not much to buy outside of the Jackson area. That makes me think if he sells it and he gets that equity, he doesn’t have anywhere else to put it. And he’s sort of acknowledging that. I think that Todd’s dilemma here is he wants to take advantage of the tax exclusion, but he doesn’t know where to put the money if he does. So Todd, let’s reframe this for you a little bit before we even talk about the tax exclusion. Do you want to sell this first house that you’ve already pulled equity out of to buy your next house So you don’t need it to buy another property because you already bought a duplex with money that you got from this first one. So is there debt on this first house that’s drowning you that you’re like, man, I want to get out from underneath it because once I refinanced it and I bought the new property, it’s hurting and I want to get rid of it. If that’s the case, yeah, sell it. Get out from underneath it, wait to buy another primary when you see one. But if there’s no current pain, that first house is causing you and you believe it will continue to appreciate and you believe that rents will continue to go up. The house is in good shape. It doesn’t have any big capital expenditures coming up that you’re trying to avoid. I don’t think there’s any pressing need to sell it because there’s not much else to buy according to what you’re saying.

Rob:
So let me ask you this. Let me pose a question because this, I think I could go both ways on as well. Why not? If he’s in this conundrum and he’s on a timeline, why not sell the house right now? Take his equity however much that is and then just dump it into the primary residence that he currently has and just stack his equity into that one house. Maybe even recast it.

David:
He could, but then he’s going to be in the same problem as he is now where he says, I got this equity, should I capture it tax free? And then what do I do? So if he moves the equity out of the first house and puts it into the second one, he goes from having two loans he’s paying down to one loan he owes much less on, he may gain some cashflow doing that, but he loses future upside with rent increases and appreciation.

Rob:
Yeah. Yeah. I don’t disagree with that, but I think it’s more just about buying him time. It sounds like he really wants this 250 K capital gains free, which I understand. I’m actually in a very similar position with my Los Angeles house where I’m like, if I sold it right now, I wouldn’t have to pay any capital gains taxes, but in about six months I’m going to have to. And so there is something to be said about he tosses it in this and now kind of that clock restarts, he’s going to have to live in it for two years and now if he’s married, he has half a million dollars that he can claim tax free if he were to sell this primary. So I think it’s more about, I guess what I’m getting at. It’s more about how pressed he is. Does he want to make a decision right now that’s what you were alluding to, or does he just want to let it ride? And if so, I would say maybe just dump it into the current primary. But again, that probably goes against most real estate investing philosophies.

David:
I’m going to say this. If you think that Jackson Wyoming is a crazy good market that’s appreciating very fast, keep it. If it’s stalled, if it’s not crazy good, I would lean towards sell it and buy something in a market that you think is stronger than Jackson, Wyoming. Go to where the population’s increasing. Go to the southeast, go to the places that you see everybody moving into, put that $500,000 of equity into an asset where rents are going to go up. Maybe you do a short-term rental so you get more cashflow where values are going to go up and let it grow faster than it would have in Jackson.

Rob:
Can I toss out one more idea? I don’t want to derail this too much. Going back to the idea from the last person that we just answered, what if you took the capital gains on this and he bought an investment property cash so that if he ever wanted to sell that property, he could at least 10 30 wanted into more real estate. How do we feel about that?

David:
That would work because he’s got the exclusion of the primary residence. And normally that wouldn’t work because if he sold it and he 10 31 into another property, he would have to keep debt. That’s what I was originally thinking. He wouldn’t be able to own it. But because he’s got this exclusion, he can sell it, take the cash, he can buy something without a mortgage in cash and then he has flexibility. He can refinance it later. He could put a HELOC on it later, he could sell it later and buy something else without having to take on debt or it will cashflow in the meantime. So that’s not a bad plan at all, actually. It’d probably be your best bet to improve your cashflow while keeping your options open for the future.

Rob:
Yeah, this is what I love about real estate because initially I was like, oh, it’s dumped to buy a house cash. But that actually makes a lot of sense for this specific situation. And real estate’s all about getting creative and getting creative in tight timelines is probably the most important skill you can learn in real estate.

David:
Alright, our next question comes from Josh Pratt who has his first investment property in Huntsville, Alabama. Have you had a rehab budget increase unexpectedly on a project and have you ever had to cut your losses on a property due to unforeseen expenses coming up during the rehab? How did you decide that it was better to take a loss and sell a property rather than continue putting more money into a bad deal? Just wanted to hear about some experiences you may have had that were similar to mine with unexpected costs arising. It’s a pretty cool question here.

Rob:
Yeah. Okay. I’m in this exact scenario right now. I may have mentioned it on the show, but I’ve got a house that was supposed to be a whole tale, which is basically a very quick a micro flip if you will. And I bought it for 75,000. I was supposed to put in 20 5K and make like $20,000 somewhere in there. And long story short, that’s not the case. So it’s actually going to be more like a $5,000 loss if I were to sell it based on the offers I’ve been coming in. So my other option is instead of taking a $5,000 loss, I could invest $60,000 into the same property and make 20, but it would take me six months to do it. And I’ve never money on a deal before, not like this. And so I keep wanting to go that route. But pretty much every successful real estate investor talk to a lot of the BiggerPockets hosts, a lot of them are all like, yeah, just take the $5,000 lost man. Just get the a hundred thousand dollars that you invested, put that back in your bank account and move on. So yeah, I guess I might cut my losses, but gosh, I’m so stubborn.

David:
That’s the reason we don’t is because the ego does not like to say that I lost really hardly any real estate will ever lose money if you wait long enough, worst still ever. If you wait 20 years, you’re going to get your money back, right? When we’re talking about taking a loss on a property, if you can move yourself away from thinking of it as money and move yourself into thinking of it as time makes the decision a lot easier. Does Rob want to wait X amount of time, six months to be able to not lose 5,000? How much can Rob make every month for the next six months if he doesn’t have to have this thing hanging over his head significantly more than the five grand? So it’s an obvious answer. Now, somebody else in this situation, like we have in our background notes here that he said, I think the deal is still going to work for me.

David:
It’s just going to increase the payback period and slow me down on getting the next property. That’s the real question here. The deal will make sense if you wait long enough, it’s going to appreciate you’re going to get your money back out of it. It’ll be good. Do you want to wait a couple years to be able to say you didn’t lose money, or do you want to get out of the deal and get into the next one and hopefully make money there? Part of that answer is, well, what opportunities is the market offering you in today’s market? I don’t see tons of deals everywhere where if you get out of this deal and you get your capital back, you could go make money on another one really easy. You may be waiting a long time to find another deal you can make money on. You may not find another deal to make money on. You may run into another problem with a similar house because everybody’s looking at these properties and they’re picked over pretty good. So in this case, I’d probably be inclined to just stick it out, take it as a learning lesson. This is part of the tuition you pay to get into real estate university. Have a great story and do better on the next one.

Rob:
Oh fine. I’ll take the $5,000 loss. Golly. Yeah, the whole time. I’m just like, why have I been doing this? And here’s the dumbest part, and I’m going to admit this on national tv, AKA the BiggerPockets podcast. Yeah. I’ve been putting this decision off for two months, so I could have had a hundred thousand dollars back in my pocket two months ago. And I keep thinking I have contractors lined up. We’ve been doing things. I’ll just say, I could have been a little bit faster to make moves here, but I just am so caught up on not losing on a deal. Whereas now I’ve realized that I’ve already lost because of the amount of time lost. So thanks for the advice. I’m going to sell it. I’m going to sell it, and I’ll take the $5,000 loss and I’ll take the a hundred K that I have and figure out how to make more than $5,000 that I lost.

David:
Yeah, growing up right before our eyes on the BiggerPockets podcast, it could be worse, my man. It could be much worse.

Rob:
Yeah. I guess

David:
You bought a bad deal and you lost No. The people are going to hear this. Rob, I love your humility. Yeah, you had a deal go bad, which happens, and the consequences, you lost five grand. That’s almost doesn’t even count. I know. Could be so much worse. The only person that didn’t lose was the wholesaler, but that’s fine. That’s often the way it goes. In Josh’s case, the only person that didn’t lose is the contractor. They made more money on this deal because there was a kitchen issue and a bathroom issue that he didn’t see going into it. So the contractor’s going to do great. The wholesaler’s going to do great. So what’s the lesson here? If you’re somebody who’s trying to make money in real estate, stop trying to do it without work. Consider getting into the trades of real estate. I like people that say, I’m handy.

David:
I’m going to get my contractor’s license. I’m going to get into doing remodels. I like people that say, I have a good business mind. I’m going to get into generating leads for other people. I’m going to be a real estate agent. I’m going to be a loan officer. I’m going to be a property manager. If you got skills, put them to you serving real estate investors and you can decrease some of your risks that way. All right. Thank you so much everybody for joining us today. We love you and we will see you on the next episode. Just like Dr. Dre, this is David Greene for Rob. Willing to get double guac on his burrito, but can’t stand the thought of losing $5,000 solo. Signing out.