Renting vs. buying a home, forty-year mortgages, HELOCs, and relationships vs. real estate. There’s something for everyone on this episode of Seeing Greene, as David tackles questions that go far beyond just basic investing. And as the housing market continues to get even more confusing, homebuyers, landlords, and sellers are stuck with some serious debates that only an expert agent, mortgage broker, and investor like David can answer!
When choosing to rent vs. buy a home, David uses some geographic-specific data to decide which markets make more sense to own. Then, we have a question on how an interest-only mortgage works, and whether not paying into principal is a waste of time or a better option for cash-flow-strapped landlords. If you’re thinking of buying a property in all cash, David has some advice as to why now may not be the time to use loan-free dollars to get a better deal. Finally, David takes a more personal question from a listener, asking when to put real estate over relationships and why dating feels like a “waste of time” when trying to build wealth.
Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!
This is the BiggerPockets Podcast Show 702.
I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans, and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with a special edition Seeing Greene episode. What makes it special you ask? Well, because it’s a Seeing Greene episode.
In these shows, if you haven’t listened to one before, we take questions from you, our audience, asking specific things about situations they’re in or general questions about the market and what’s going on. And I do my best to give them the most sound advice possible based off of my experience with the portfolio of properties that I own myself. These are some of our most popular episodes, so I really hope that you like this one.
You’ll notice that the light is green right now, letting you know it’s a Seeing Greene episode, but I forgot and it was blue when I was actually recording the content. So don’t be surprised if you’re watching this on YouTube when the light turns to green to blue. That’s just me making a mistake, but instead of doing the whole thing again, I left it in there so you could see that me just like you is not perfect and I make mistakes also.
Today’s episode is awesome and we get into some very cool stuff, including if somebody should buy a house when renting actually is cheaper in the short term. This was a really fun one that we got into. If a 30-year loan or a 40-year loan with 10 years of interest-only payments is the better option. And how to make a decision between focusing on relationships or real estate when you feel that you got to make a choice and make a decision there.
This was a fantastic episode with some of the best questions we’ve ever received. I want to thank you all, give you a big shout-out for asking great questions and continuing to support the show by asking them.
Before we get into the show today’s quick tip brought to you in the Batman voice is consider that investing in today’s market is different than investing in a market even as short as six months to a year ago. Things are changing very, very quickly and that’s why you need to be listening to podcasts to get new information.
My personal strategy, the way that I’ve adjusted is I’m focused more on building a financial fortress than I am on just expanding as quick as I can. When I’m making investing decisions, I’m thinking about defense and how I can protect my wealth, not just offense and how I can grow it.
Most wealth will grow on its own over time if you make wise decisions. So you don’t have to focus on that, but you do need to focus on protecting what you have, especially as things change. So always ask yourself the question, what will I do if things go poorly?
All right, I hope you enjoy today’s show. Let’s get to our first question.
Hey David, hope all is well. I am reaching out with a question for you on the house hacking strategy. So I’m currently looking to relocate to Boston, which is a fairly expensive market, and as I’ve started to crunch the numbers on the properties that I’m looking at, which are mainly three units, I’ve found that in many cases my out-of-pocket cost on a monthly basis would be more than if I rented.
And so what I’m trying to figure out now is if it makes sense to pay a little bit more every month than what I would pay if I rented so that I can get into a property earlier and start building up equity, building up my wealth, which is my ultimate goal, or whether I should focus in the short term on renting, paying as little as I can every month, saving as much money as I can and then getting into properties down the road.
Would love to hear your thoughts on this. Thanks so much as always for your time.
All right, Collin, thank you for that. This is a good question. What do we do when we can actually rent for less than what it costs to own?
Well, there’s a few factors that I think you should take into this decision. You kind of hit on it at the very end there, so I know you’re thinking the right way. You’re asking, should I be trying to build equity or should I not and try to save a little bit of money? Because when you own a home, you pay for more than just the mortgage, the tax, the insurance. There are capital expenditures, there is maintenance. There are other things that are going to go into owning a home.
So the question here is really what do you want your future to look like? 30 years down the road, 20 years down the road, 10 years down the road, what kind of a position do you want to be in? Because while rent may be cheaper right now, it tends to not stay that way. Rent tends to not go down or even stay the same, it tends to go up.
And when you have inflation, rent goes up quickly, especially when you have a shortage of housing, which we have in most cities. Not everywhere of course, there’s some places where more people are leaving than are moving in, but man, if you’re in one of those areas that people are moving to and you’re not having increasing supply, rents can get out of hand very, very quickly.
The other thing is you’re talking about Boston. That is a high appreciating market and appreciation doesn’t just affect the value of the property, it affects what the rents are as well. So if you were asking this question and you were somewhere where you’re talking about a $65,000 house and rents are $400 a month, I don’t think there’s as much at stake there. That would be okay to continue renting.
But for you talking about being in a major metro area where prices are going to be going up, especially when rates come back down, where rents are going to continue to increase as wages increase and inflation increases, it becomes exponentially more expensive to continue renting in a market like that long term.
So one of the mistakes I see people make is they look at the rent right now versus the cost of home ownership right now, and it’s almost always cheaper to rent. In fact, I bet if you went back and studied the housing market over the last 50 years at almost every single point in that 50 years at the time you bought the house, it would’ve been cheaper to rent than to own. But if you go back to any of those points 20 years ago, 30 years ago, 40 years ago, and you compare it to now, owning is much cheaper than renting.
So do your best to face your fears and get away from this idea of what’s cheaper right now and think about the future. 10 years of paying that place down, of rents going up, but your mortgage being locked in place, pretty significant.
And with house hacking, I say this all the time, it’s not just that you’re saving in the rent you would’ve been paying going up, you’re also charging more rent to the people that are renting from you. So it’s a double whammy, so to speak.
In that case, it sounds like it would be better for you to buy right now, even though it might be a little bit more expensive than renting and own a home instead of paying somebody else. In 10 years, you’re not going to regret it.
Now, if you can repeat this process with a new home every year for 10 years, you’re probably going to be a millionaire. And this question of, well, should I have saved money on rent instead of buying isn’t even going to be in your mind.
All right, our next question comes from Adam Quinonez in SoCal. Is doing a HELOC on my primary residence wise for my first investment deal? Also, if yes, would it be a better strategy to use the BRRRR method to recoup the initial cost? Thank you.
Well, Adam, I can’t say for sure if you should use a HELOC on your primary residence to buy your first investment property because I don’t know what your financial situation is like, but I know that if it’s a good deal that usually ends up working well. If it’s not a good deal though, it can hurt you twice because now you’re saddled with extra debt and you have a property where you’re losing money on. This is where I don’t have enough information about your specific situation to get into this and this is where having more specific information about your situation would allow me to give you better advice.
The concern here is that because you haven’t bought a property before, you’re probably not going to make a great decision on your very first home. So now you’re increasing your risk factors and you’re increasing the likelihood that the deal you buy goes bad. Throwing a HELOC on top of it, you actually needed to do extra good to be able to pay for the extra money that comes out of the HELOC. So in some cases this could work out, in other cases it might not.
I would say I would not recommend that you go forward with this strategy unless you have enough money and reserves and you make a decent enough income that if you do lose money on the investment property, it’s not going to bankrupt you. It’s okay, everybody, to lose some money the first year, the first two years of owning an investment property. It’s okay to lose money in real estate, believe it or not, in the short term. It’s not okay to lose money in the long term and it’s not okay to lose money if you cannot afford to lose money in real estate.
That’s a really key point I want to make. This is why I’m always saying to save reserves, to continue working, to increase your income everywhere you can, to be a great employee, to work hard to push yourself because you want more money coming in to cover up for the inevitable risk of investing in real estate. It’s like everything else. There’s going to be times where you lose money.
Now to the question of should I use the BRRRR method? Yeah, that’s ideal because you’re giving a loan to yourself with this HELOC. You’d like to be able to pay that back after you refinance, but you just can’t assume that every BRRRR’s going to recoup a hundred percent of the money. In fact, oftentimes they don’t recoup a hundred percent of the money. That’s actually rare when that does happen. So you don’t want to depend on that.
And an alternative to BRRRR is house hacking. Look, if you go invest money in a BRRRR and you pull out 90% of it, you only left 10% of the deal. That’s a win, that’s better than 20 or 25% if you bought it traditionally. But you can house hack and put 5% down or three and a half percent down and when you do that, you don’t even have to BRRRR.
If this is your first deal, I’d much rather see you take the HELOC on the property and buy another primary residence to move into to house hack and get your housing expenses lower. Take the place you have now and make that a rental. Then I would want to see you go try to take on a rehab project, something big like a BRRRR that could go bad, if you’re having to borrow money from your HELOC to pay for it.
Again, you know your financial situation much more than I do. I didn’t have a ton of information to go off of here. But in general, if this is your first investment property, I don’t love you having to use a HELOC unless you have a great deal.
Hey, what’s up BiggerPockets? First of all, really want to thank Dave and Rob. They’ve been extremely impactful to me in my journey for financial freedom. Thank you guys so much.
A little bit about me, my fiancée and I did a live and flip three years ago that just recently netted us 130K. We put all of that into a house hack, a one bedroom STR house hack that’s going to cash flow us 4K this month and should average over 2K cash flow per month.
I also just recently started a co-hosting company that’s allowed me to develop a lot of the systems I need to scale my portfolio while also helping other hosts be able to grow their business and increase their revenue and essentially pay for myself while managing their business for them.
I consume most of the content out there on Airbnb optimization, arbitrage, acquisition, how to scale my Airbnb business. And right now I’ve opened some HELOCs one on my house and one on my mom’s house, which should give us access to about 250K in capital. My goal is to become financially free via cash flow and then start building wealth.
So most of my cash is being saved right now and I want to start leveraging some of this debt. So how do I spend it? Should I primarily focus on, one, networking, content, social media and marketing? This would grow my co-hosting business and my fundraising credibility, capability. Two, acquiring my next STRs via arbitrage or purchase through the HELOCs to grow my cash flow and add to my visible co-hosting portfolio. Or three, investments in high level education on sales or content creation, which I consider to be my weak points right now.
I’ll be doing all three, so I guess you could say I’m in a bit of analysis paralysis in terms of how to take the next big step. Thanks again so much. You guys have truly changed my life. I appreciate it.
All right, thank you Drew, and thank you for the kind words. Excited to answer your question here, and thanks for asking it. If any of you would like to have your questions submitted here, just go to biggerpockets.com/david. You can submit a question just like Drew did.
All right, Drew, if I remember correctly, it sounds like you got three options that you can put this money into. You can either invest into the business that you created to try to get more clients coming in to earn more revenue. You could invest into more short-term rentals or you could invest into education to try to improve yourself.
I don’t know enough of the numbers for how your business is doing, how much time you want to put into this to be able to tell where the best ROI is going to be. But I do remember you saying that you recently started this business and you only own one short-term rental right now.
I don’t think it’s super wise to try to scale a huge business teaching other people how to run short-term rentals when you only have one. You can’t know some of the problems that are going to pop up when you only have one property. Sometimes you hit it lucky and you get an easier one and as you get more and more, stuff pops up that you wouldn’t have known could go wrong.
You’re basically not going to be an incredibly well-rounded educator until you get several properties and you see things going wrong that you couldn’t have anticipated and you adapt to that. That’s why people pay a coach. That’s why people listen to a podcast like this. It’s not all the stuff I can tell someone that can go well. It’s all of the anticipation I have for things that can go wrong and how I prepare them to get ahead of those problems before they happen.
You also mentioned that you’ve been building out some systems. I don’t think you want to be coaching and training other people until you have well established systems that, like I said, help prevent mistakes from going wrong.
So right off the bat, I think it’s cool that you’re doing some coaching and you’re helping some people, but I wouldn’t want to see you dump a ton of gasoline on that fire because it’s still so small. You just got a little bit of kindling, you’ve been rubbing the sticks together, you got a little bit of smoke coming out. You don’t want to dump gas onto a fire until it’s a big healthy raging bonfire. Once you’ve got the solid base of wood that’s in there and the flames are hot, then yeah, dump your gasoline on it.
But if you try to dump too much marketing money onto a business that’s new, has barely got started, you don’t have systems, you don’t have support, you don’t have employees, you don’t understand how to do it, sometimes rather than the gasoline making the fire go bigger, it actually snuffs it out and you lose what you even have right now.
Now that brings us to option number two, should you buy more short term rentals? I’m leaning towards this. If you’ve got the one and it’s going to average 2K a month, I would lean towards you should get another one, because you’re going to have increasing returns on your time.
You’re not going to have to build a new system from the ground up getting a new short term rental, especially if it’s in the same market as the one that you have right now. You’ll actually be able to benefit from economies of scale, buying a second property in the same area, using the same systems, using the same software, and using the same knowledge. You’ll make a lot less mistakes. This is very synergistically sound.
Your third option was to invest in training, which you say is a weakness of yours or more courses. That could be good, but I think if you’re already managing a rental, it’s probably not necessary. I’d rather see you get a couple of them and hit a ceiling.
Let’s say you get three or four short-term rentals and you’re like, “Man, I don’t know how to keep up with customer complaints. I don’t know how to keep up with managing the cleaners.” At that point, you see what your own limitations and your flaws are. That’s when I would invest the money into the coaching.
Right now they’re going to be teaching you a bunch of stuff that isn’t even a problem in your business because you’re only running one and some of that money could be wasted. You won’t get as much value out of it.
So on one hand you’ve got your marketing company, on the other hand you’ve got investing in yourself, and then the other you’ve got the actual real estate. I’d buy the real estate and once I had enough of the real estate, I would invest in the coaching. And once I had some of the knowledge from the coaching and the real estate portfolio to back it up, then I would dump money onto the business you’re trying to create to show other people how to do the same as you. And at that point you should have a well-oiled machine and be well on your way to doing great financially.
Thank you for asking this question, Drew. I like that I got to dissect that and give you some advice. And make sure you keep in touch with us and let us know how it’s going.
All right, at this part of the show I like to read comments that y’all have left on YouTube from previous shows. This is one of my favorite segments of the show because sometimes you guys say some funny or some insightful stuff and I get to share it with the rest of the audience.
Our first YouTube comment comes from episode 687 and it’s from Laila Atallah. I love you’re Seeing Greene episodes, David. This episode was jam-packed with gems and it was intriguing to hear a bit of what’s going on your computer screen all day as you manage your businesses.
Yes, please do a lot more episodes where you and other investors share all the details start to finish and the dollar amounts and other relevant metrics of the deal, rehab, ongoing management costs, big repairs, cash flow, cash on cash return, et cetera. Also, please share a bunch of stories of people’s different real estate failures with all of the numbers of what exactly went wrong and the lessons we all can learn.
Well, I can see that Laila is definitely a stickler for details and she wants all the details. So we will keep that in mind and we’ll look for more people to come in and share specific numbers in the future.
Our next comment comes from Lorena Zaragoza. OMG, David, when do you sleep? Side note here, are you supposed to say OMG or oh my God? I’ve always read it as OMG when somebody texts that. I don’t ever actually read out loud oh my God. Same for WTF, which is why I think it’s funny that people send that because how much time are you really spending? But I don’t know. Let me know in the comments. Are you supposed to pronounce this OMG or oh my gosh?
OMG David, when do you sleep? I’m going through a divorce and I’m getting myself positioned to not only survive but thrive going from two incomes to just mine. Sold the marital home and used part of my portion as down payment on my home. Reserved money to build a 700 square foot ADU, fully stocked and furnished to rent out. I’m renting my master on Furnish Finder and will also list my ADU on Furnish Finder once it’s built.
If all goes well, I will have replaced 75% of my ex-spouse’s take home in just over a year. Please have an episode for people going through a divorce. I’m 50 years old and using my energy and resources to launch forward into my real estate investing journey. Thank you.
Well, I’m sorry to hear about the divorce there Lorena, but I’m glad to know that you are taking that negative energy and turning it into something positive by investing into real estate. So thank you for your comment and all the detail there and I do wish you the best.
Our next comment comes from TJ. I always look forward to Seeing Greene episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thank you.
Well, thank you TJ. We appreciate you guys being here. And we can’t make these shows without you, so go to biggerpockets.com/david and submit me your trickiest, your craziest or your most practical question. I don’t care what it is, I just want to be able to help other people by getting it out there and letting them hear.
All right, if you guys don’t mind before moving on, please take a second to like, share and subscribe this and then leave your own comment on YouTube telling me what you think of this episode. Anything funny, entertaining, insightful, profound, whatever you can think of. I love it.
Our next video question comes from Colin Higgins in Titusville, Florida.
Hi David, my name’s Colin Higgins and I’m a realtor here in Titusville, Florida. Right now I’m reading one of your books. I’m actually listening to the audio book which is Sold. And it’s filled with tons of great information, but I did have a question about some things that you mentioned in chapter four.
In chapter four, you’re talking about things that you can bring to the table that help close the deal both on the buyer’s behalf or the seller’s behalf, what have you. And one of the things mentioned, which is offering the sellers a free or reduced cost renter buyback agreement in circumstances where the buyers would have to break their lease in order to move into the new home.
Now this is interesting to me because when I’ve heard of rent buyback agreements, I’ve always heard of them pertaining towards the sellers, so the sellers can figure out where they’re going to move next and that buys them some time. I’ve never heard it pertain to the buyers and I’m just curious what this exactly means.
Is it that they’re getting their lease bought out so that they can move in? How does this pertain to the buyers, if you could clarify that. But anyways, thanks for taking my question. I’m a fan of the show. I know this will help myself, it’ll help my clients and it’ll help everyone else on BiggerPockets and YouTube.
Thank you for that, Colin. I appreciate your question and it’s going to be cool to get to share with other people what goes on behind the curtains in the real estate world of negotiating deals. Here’s the gist of what we’re getting at here.
When negotiating, my mind always looks for a way that I can give something up to the other side, that my side doesn’t care about or value. You don’t want to give up the things that your side really, really cares about, like the price of the home. That matters a lot to the buyer. You don’t want to have to give up by paying more because that’s going to hurt your buyer.
But there may be a situation where the buyer says, “I’m in no rush to actually move into the house. If the seller accepts my offer, I’m happy to let them stay there and rent the house back from me.” Well, sometimes your client can’t do that. Sometimes they got to move in right away. And so offering the seller rent back hurts your clients, but other times your clients don’t care, and in other cases it actually benefits your client to do that.
So I would frequently have people come and say, “Hey David, we want to buy a house.” By the way, if you guys are in my area, if you’re in California and you want to buy a house, please reach out to me. I am never too busy to help you become a homeowner or sell your house. I would love it if you do that.
So this person comes and they say, “Hey David, I want to buy a house, but I’m stuck in my lease for another three months.” Everyone thinks in their mind because they’re in a lease, they just can’t get out of it. Now, when the market was hot, I had many of these clients go to their landlord and say, “Will you let me out of the lease?”
And the majority of the time the landlord said, “Yes, I can rent it for way more than you’re paying right now. Give me a month to advertise it. When I find a new tenant, you can move out and they’ll move in.” And boom, the lease issue isn’t an issue at all, just no one thought to ask.
Well, in other situations the landlord may have said no, or you could have a situation like right now where rents probably won’t be higher than what your client is paying. So landlords aren’t going to just want to let them out for free. There’s going to be a penalty that your client doesn’t want to pay.
So in those situations, this is especially crucial in January, February, March where spring is coming and they’re going to get out of their lease in May or June, and I’m trying to avoid my buyer having to go into the market when it’s the hottest and the hardest to get a house. Well, if it’s wintertime, they’re at an advantage as a buyer.
So instead of waiting until springtime when their lease is over, I would say, what if we look for a home and we write offers on homes, but we say that the seller can rent it back for three months. What you do is you write the offers saying the seller’s going to rent the house back for whatever period of time it is that they need, and their rent is going to be whatever your client’s principal interest tax and insurance is.
Okay, so basically your client is paying the mortgage, but they’re receiving the equivalent from the seller of whatever that mortgage is so they’re not actually losing money. And when this works out, well, you’re shopping for a house in February, you get it at a better deal than you would’ve got it at in the spring, but your client doesn’t have to move in right away.
The sellers keep that, they stay in the home even though the title transfers to the buyers. The sellers stay there, which gives them more time to find their next house, which made them more likely to accept your client’s offer, which meant you could write an offer that was better for the buyer than the seller because the seller’s getting that flexibility. This also benefits the buyer because they don’t have to move into the property right away and they don’t have to worry about the expense of breaking their lease.
These win-wins are what negotiation is all about. It’s not about dominating the other side, putting your boot on their neck and forcing them to bow because you have the power. That’s the wrong way to look at negotiating. It’s about the agent being clever and creative, and that’s why I gave an example in the book.
Agents don’t even ask these questions. They don’t even ask the question of, if a client says, “Well, I’m in a lease right now.” Okay, well come to me in three months when you’re ready. Houses are a lot more expensive in the springtime than they would be.
Or what if they just start looking now, and if you don’t find anything you like, we don’t write an offer, but if you do, we write an offer telling the seller they can rent it back and if the seller doesn’t need to rent it back, we just move on from that house, we don’t buy it. There’s lots of creative options and as the agent, I really believe they need to do a better job of looking for ways to structure deals that benefit the clients they’re representing.
So thank you for asking that question, Colin. I am very pleased to see that you’re reading this book, that you’re caring about being a better agent, that you’re trying to represent your clients a bit more. We need more people like you in the BiggerPockets community that are taking this approach and actually educating themselves on how to do a better job. Real estate is very difficult and having a good agent can make it much easier.
If any of you are real estate agents and you want to hear more tips like this, go check out my other books. You can go to biggerpockets.com/store and you’re going to look for Sold, Skill, or my next book Scale, which will be coming out, all written for real estate agents to help them be better at their jobs.
Our next question comes from Dennis Robinson in Orange County. On one of the duplexes that I own that’s valued at 900,000, I have a 40-year fixed rate mortgage. The first 10 years is interest only at three quarters of a percent higher than my other identical duplex, which has a traditional 30-year loan.
While I’m enjoying the extra $1,000 per month cash flow on the 40-year loan, but I’m concerned that I’ll regret this decision in 10 years if I want to refi and no principal has been paid down. I’m 41 years old, so I feel like I’m just getting started in my investing career and I’m equally concerned about my long-term outlook as well as having a little extra cash to enjoy life, especially while my kids are young. Which loan would you consider a better choice in my situation?
Great question here, Dennis. All right, before I answer it, I want to give a highlight here. I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
Now, I’m not against the 40-year loan in a situation where you already own the house, but you’re refinancing it because you’re not paying more, you’re just getting a lower payment, stretching it out over 40 years. The same is true of interest-only payments. I’m a fan of interest-only payments, but not if the reason you’re doing it is you couldn’t afford the payment that also had principal.
All right, moving on to the next part of your question, should you go for the 30-year payment or the 40 year with 10 years interest only? It sounds like your concern here, my man, is that if you go with the 40-year interest only, you’re not going to pay your principal down enough over 10 years. Glad you asked that question because now we get to talk about amortization, which is a fancy word to describe the process of paying down a loan.
You said that the duplex is valued at 900,000. All right, now I’m sure that you don’t owe the full 900,000, but you didn’t mention how much you do owe. Let’s assume that you put 20% down just so I can do some math here. Okay, so it’s worth 900, you put 180 down, meaning that you owe $720,000.
Now assuming an interest rate of 7%, again, I don’t know exactly what your interest rate is, your principal and interest would be $4,790. But of that only $590 of that first payment would be going towards paying down the principal. So if we fast forward this 10 years, because you’re talking about a 10-year interest-only period, that’s 120 months. At that time, your loan balance would be $618,000 where you started off at 719,000. So it’s about a $100,000 is what you’d pay off over 10 years.
It’s not as much as you would think. And that’s because at the beginning of loans being paid off, a higher percentage goes to the interest than the principal. So you’re not paying off an even amount. A lot of people think like, oh, if I’m making a $4,000 a month payment, I’m paying $4,000 off of my balance. You’re not.
In this case, your payment was 4,790 and your first payment only paid off $590. And at the end of your first year, your 13th payment went up to 630, barely anything. It’s like a $30 difference in this case, $40 difference. So if you’re thinking that you’re paying massive amounts down on your mortgage because you’re making a $4,790 payment, you’re not paying off $4,800 a month, you’re paying off 5 or $600 a month and it slowly goes up.
Over 10 years, you’ve only paid off a 100 grand, but the payments you’ll have made over 10 years, let’s figure that out right now, if we take 4,790 times 12. So every year you’re paying 57,480 and then you multiply that times 10 years, you’ll have paid the bank $574,800 only to have paid off a 100 grand. You’re not paying off the full $574,800.
And that’s why interest-only loans are not as bad as what you might think. You’re not eliminating as much principal as people think, and over 10 years I imagine it’s going to be appreciating also probably more than a $100,000 that you didn’t pay off.
Okay, so for your specific situation, I think your 40-year loan with a 10 years interest only is a better financial choice for you. Take that $1,000 a month, save the majority of it just in case something terrible happens. Don’t just live off of that $1,000 a month. Maybe live off a couple hundred of it.
Put the other 7 or $800 off to the side, so if in 10 years when you got to refinance or whenever you got to refinance, if you haven’t paid off that principal, instead you’ve saved all that money that you could put towards the principal in a worst case scenario. I always plan for the worst case scenario.
Hope I didn’t confuse you too much with all this math talk and calculators here, but I appreciate you asking that question, Dennis, because our whole audience got to hear how not as much of a loan is being paid off as most people think.
All right, our next question comes from Lincoln in the Dallas, Texas area. I have cash savings of about $500,000. I bought my first single family house three months ago with $250,000 cash and now I’m waiting for the six months to get a loan and pull 200,000 of that out. A typical single family house in the area is 3 to 400,000.
Should I continue the practice of buying with cash to hopefully get a better deal? I’m assuming this is true, and then wait to refi and pull out the 80% or should I use the 500K as down payments on several properties all at once? Ooh, this is a good question here, Lincoln.
All right, first thing is there’s a fallacy that you’re getting a better deal when you pay cash. It’s not guaranteed. Sometimes it does help. I don’t think that’s wise. What I’d probably do is I’d write the offer with financing. Like let’s say that you want to buy a house that’s 400,000 and you write the offer for 350. Write it with financing, and if they say no, say fine, what if I give you all cash?
If they say yes to the cash when they said no to the financing, you did get a better deal and that’s going to work out good for you. But oftentimes they’ll say yes to the offer that you wrote of financing, so you didn’t actually get it at a better deal with cash.
Cash closes tend to be more advantageous when the seller is in distress and time is of the essence, when they’re headed to foreclosure, when they’ve got a notice of default, when they need a quick sale, yes, a cash purchase can help you because you don’t have to wait for the loan to fund.
But my mortgage company frequently funds loans in 14 days or 16 days, and most cash offers are like a two-week close. It’s the same freaking thing. So don’t get too caught up in thinking that cash is getting you a better deal.
Another thing to consider, what if rates are worse right now than they’re going to be in the future? If you think rates are going to get better, paying cash right now and then refinancing into a better rate in six months would help you. But what if it goes the other way? What if you could get a 7% interest rate today, but six-month rates are at 9%?
In that case, any benefit you thought you got from buying cash is erased because now you have a higher interest rate when you actually go in there to refi it. So you have to follow what’s going on with interest rates and how things are trending before you can make that decision.
There’s also the fact that home prices could continue going down, which I don’t know is guaranteed, but I think that it’s probably more likely that they’re going to stay the same or dip a little bit than it is that they’re going to go up. And I’m basing this off the fact that I don’t think that they’re going to go back up again until rates go down and we don’t have any reason to think that rates are going down in the next six months.
So I don’t think buying a whole bunch of properties right now is in your best interest because the market could be softening up in a lot of different places. What I would prefer to see is that you buy properties with financing right now and if the seller says no, try to get a better deal with your cash and then refinance.
Thank you for asking the question here, Lincoln. This was very well thought out and it gave me a chance to answer a pretty tricky dilemma that I think a lot of people are facing that have stacked up cash and waiting for an opportunity like this.
All right, we have time for one more question and this is going to be a video question that comes from Wyatt Johnson in Billings, Montana.
David, what’s up? My name’s Wyatt Johnson. I’m an electrician up here in Billings, Montana. A little bit of background on me. I’m 25, got three properties, should be closing on the next one here in January. But I’ve noticed that I’ve always put my work life above my social life, especially relationships and it sucks because I feel like a loser when I’m not hanging out with women and working too much, but then I feel like a loser when I’m hanging out with women because I’m not working as much as I think I should be.
So I was wondering if you had any advice on how to avoid that mindset and also be more effective at juggling the two things. Really appreciate you taking my question. Appreciate everything you guys put out there. My life would look a lot different if I didn’t have you to listen to every week. Thanks.
Wyatt, what an excellent question you’re asking here. This might be my favorite question someone’s asked at least off the top of my head in a very long time. I love that you asked it. And you’re summing something up that I think a lot of people go through, especially if you’re someone who values yourself based on how productive you are. There’s personality tests that people can take that will determine how much they value productivity. This is a great question to ask me because mine’s about as high as it could be. If I’m not being productive, I don’t feel good about myself.
Now productivity comes in many different ways. It doesn’t just mean making money because that’s always what the people who don’t value money jump in, there’s more to life than money. They can’t wait to come in and say that. I know, calm down.
You could be productive with health and fitness. Spending time at the gym is productive, if you’re working out really hard. You could be productive with meal prepping, right? If you’re at the grocery store shopping for good food and then you’re putting it into your fridge to eat healthy, that’s productive.
You could be productive in your relationship, right? I’ve never really been in a significant long-term relationship that was stable. So I can’t speak on this 100%, but I know the people that have, they always say it’s work, it’s work. Well, I think what they mean when they say it’s work is that it requires you to challenge your own natural self, like your personality tendencies that you need to hold with a loose hand.
And they’re also saying it’s an investment. You are constantly investing in your significant others’ wellbeing. You’re investing in the relationship showing that you value. You never get away from that. So there’s many ways to be productive is the first thing I’m getting at, but I love being productive.
If I’m having a conversation with a friend or in a relationship, I don’t want to talk about the weather and sports. I want to get into significant things that matter. To me that’s being productive.
Now you’re posing this question of when I’m working all the time, I feel like a loser because I’m not enjoying all the fruits of my labor. I could be out there talking to some fly mamacitas and having a good time and being respected for all the work that I did, feeling good about myself. But when I’m doing that, I feel like I’m leaving something on the table and I could be working.
All right, I’m going to ask you to reframe the way that you’re looking at the situation. Don’t look at spending time with women as generally speaking, being productive. It’s the relationship that matters. It’s the woman that matters. If you’ve got a woman that you love that you can see I could spend the rest of my time with her, or you’re not sure, but that’s a possibility, the time that you put into them is an investment, if it’s for the purpose of figuring out could I marry them, could I be with this person?
And then once you realize that it’s not the right person, you invested time in getting to the answer, you’ve got your win, get out, get back to work, get back to the goals that you have and wait for the next person to come along to invest in.
If you’ve done that and you’ve got to the point that you’re like, I think this is one that I could spend the rest of my life with, you’re not wasting time spending time with that person. You are investing into a future with that person that should be paying off dividends.
Now, if that person sees you the same way, they’re not going to resent you going to work. They’re not going to resent you making money. They’re not going to resent you practicing a craft because they’re going to benefit for the rest of their life by the work you’re doing, the financials that you’re building and the empire you’re creating as an electrician. They’re actually going to invest into you because they want you to do that.
So when you find somebody that’s resentful that you’re not spending all your time with them or they’re not the number one priority a hundred percent of the time, or you’re not giving them enough attention, that’s a sign this is the wrong person because they’re not seeing you as a future. If they saw you as a future, they’d be investing into where you’re going, which is your job and your real estate investing because that’s part of their life. They’re going to benefit from all that stuff too.
If they’re seeing you as someone who just wants all your attention, all the resources that you have, but they don’t want to help you build more of those resources, that is a sure sign that this person is using you. They’re looking for something that they can take from you, not necessarily something they could give.
And maybe this is a lesson for all of us to learn, when you find the person who sees you as a potential person they could have in their future, they invest in you because a future with somebody, a partnership like that is something you share together. So investing in the other person is investing in yourself.
So to sum all this up, if you’re with a girl that you really, really like, you’re not wasting time and not being productive, you’re investing in your future. If you’re with girls that you don’t really like and you don’t see going anywhere, you are wasting your time and you’re not investing in your future.
And when you’re trying to figure out if that’s the right girl for you, use the same metric based on them. Is she investing into your future? Is she building you up and supporting you and encouraging you to do more, even if it comes at the expense of her own immediate gratification, the attention that she’s looking to get from you?
Or is she just trying to get your money and your time and your attention and your resources and she doesn’t care about if they’re ever going to run out because when they do run out, she’s going to move on to the next person?
I think this is something we all could benefit from learning and focusing on and I want to commend you for having the guts to ask this question. I don’t know if it answered exactly what you’re going for, but if it didn’t, make sure you send us another question with a beautiful background like you have in this one so that I can answer it again.
All right, that was our show for today. I hope you guys enjoyed a Seeing Greene episode where I just remembered I forgot to turn the light green behind me and it’s been blue this whole time. So I’m sorry if that confused you. I do get complaints about this. How am I supposed to know it’s a Seeing Greene when the light is blue? I realize that. Hopefully the title, calling it a Seeing Greene, me introducing it as a Seeing Greene and me talking the entire time without a co-host was enough for you to realize that was the case. I’m going to record another one pretty soon here and I’m going to have to remember to turn that light green.
Thank you guys all for your attention, for following us here. If you want to learn more about me, you could follow me anywhere online, @davidgreene24, that’s my handle on all social media. You could also check out my website, davidgreene24.com, which is new, but is being remade right now. So let me know what you think of it. You find a lot about what I’m doing, where I’m going, what I’m reading, what I’m buying, more stuff about me there.
Last but not least, please go to wherever you listen to your podcast, Apple Podcasts, Spotify, whatever it is and leave us a five-star review. Those help us a ton and we want to stay the top real estate investing podcast in the world. All right, thanks, you guys. If you have time, watch another video and I will see you on the next one.
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