How Do I Start Investing When There’s NO Cash Flow?

David:
This is the BiggerPockets Podcast show 882. What’s going on everyone? Guess what? We got a green light special for you. If you haven’t seen one of these shows before you’re in for a treat. Today we have a Seeing Greene show where I take questions from you, our listener base, and I answer them for everybody else to hear so we can all build well together. Today’s show is awesome. What to do with $20,000 if you’re in college and looking to start investing? How to get started later in life in a market where finding cash flow is harder than ever? And more in today’s Seeing Greene.
And if you’re new to the show I’m David Greene. I’m a former law enforcement officer who saved up a bunch of money working overtime and working in restaurants, bought some rental properties, then bought a bunch more, learned how to use the Burr method, bought out of state, built a pretty big portfolio, got a real estate license, got a brokers license, run real estate teams, run mortgage companies. I’ve basically been immersed in all things real estate. And my guess is you have to and that’s why you’re here. In these shows, I take my experience in real estate and I share it answering the questions that people have where they’re stuck in their journey or they want to accelerate their success. Our first question comes from Tomi, a frequent question asker, who wants to know about valuing a lower mortgage rate when purchasing a property subject to.

Tomi:
Hey, David, this is Tomi in San Antonio. I was wondering, when do you think it’s a good time to go with the builder’s contract in order to get their incentives on a new build considering our high interest rate environment? I would love your info. Thanks again for all the knowledge. Following you has been awesome. Take care.

David:
And thank you, Tomi. What a great question. And thank you for always asking such good questions on Seeing Greene, we’ve had you on before, you’re always bringing up such good points. And if you would like your great question answered on Seeing Greene head over to biggerpockets.com/david where you can submit it there. And if you like these shows and you’re excited to hear what we are getting into today, please leave us a comment on YouTube and let us know what you think about Seeing Greene.
All right. So Tomi your question was, how much value should I ascribe to a lower interest rate? And I love the way you’re asking that because I can see what your mind’s doing. You’re trying to transpose the deal terms into something that fits on a spreadsheet. Your mind is looking for some clarity here. You’re like all right, normally a house is worth $500,000, and you’re looking at the interest rate as one of the factors that makes it worth a hypothetical $500,000.
So you’re saying, well, if it’s worth $500,000 at 7% and it’s … If it goes down to 5% it should be worth more because you’d theoretically be getting more cash flow. The problem is real estate values are not as easy to predict as what we would like them to be. I mean, if we’re getting honest here, the whole idea of what a house is worth is actually subjective. No one likes subjectivity. So we’ve created this idea of appraisals or different ways to value real estate like cap rates and NOI for commercial property because we want to have some baseline understanding of what a property is worth, but you want to know what it’s really worth, what somebody’s willing to pay for it. And that’s why marketing is so prevalent within the world of real estate because if you can make somebody want something they will pay more for it.
Now, we still do use a comparable sales approach because banks are going to be lending on properties and they want to make sure that you’re not buying it for significantly more than they could sell it to somebody else. Meaning, they want to make sure you don’t value it significantly more than what the rest of the market might. Now here’s the bad news. You can’t say, “Well, I’d pay this much money more for a lower interest rate.” But what you can do is compare the property with the lower interest rate that you could get in a subject to deal to the other properties that are available for you and the prices they’re at. That’s a much better way of looking at it, okay? I have this option, option A, and then I have all these options over here on the market, options B, C, D, and E.
Does that deal with the lower interest rate cash flow significantly more than the deals that have the higher rates? Is it in a market where you think that the value is going to go up significantly? So is the lower rate going to allow you to hold it longer so that it will be worth more later? Or is it a market where values are not going to be going up much, you’re not going to get much appreciation there? So getting the lower rate is going to get you some more cash flow in the beginning but that’s all you’re ever going to get. These are the questions you’re going to have to ask Tomi. Unfortunately, you’re not going to be able to say, for every 1% it goes down I add 5% to the purchase price of what I’m willing to pay for the house.
Here’s my two cents. I don’t think you should pay more for a house because you’re getting a lower interest rate, I think that that’s a marketing tactic that people use. They go in there and they pay more than what they could sell the house to somebody else for and they say, “Well, it was worth it because I got this lower rate,” and they look at it like they’re buying the rate. The problem is you can’t get rid of the house if something goes wrong. You’re not going to be able to sell it to someone else or you’re going to lose money. It’s also a very shortsighted approach that says, “I’m going to pay X amount of money for cash flow.” So if I’m getting a lower rate I’m buying cash flow. The problem is the mortgage rate affects one of the expenses of your home which would be your principal and your interest.
And even though it seems like the biggest expense because it’s the most consistent, it’s really not. The killers of real estate are rarely ever going to be the interest rate, they’re going to be the maintenance, the capital expenditures, the vacancy, the way that you operate the property. One tenant that trashes your property and leaves, and you keep a $2,000 deposit but you got to spend $6,500 to repaint, do new flooring, fix the drywall, get rid of whatever smells they caused, fix all the landscaping, get rid of all the trash they left there, it could be the equivalent of 15 years of the interest that you think you save getting the better interest rate. So let’s all avoid getting into the starry-eyed rate talk and thinking that that’s the only expense you’re going to have. These are the ways that we need to be analyzing real estate deals and, unfortunately, it doesn’t all fit on a spreadsheet.
However, I love the way you’re thinking, Tomi. Your brain is working like an investors is, you’re on the right journey. Keep asking questions like that and eventually, the algorithm in your mind will develop itself to where you’ll know if it’s a good deal or not. All right, we’re going to take a quick minute to hear a word from today’s show sponsors. But after that, we are going to be getting into a question that is very close to something that I experienced myself. They’ve got a property with $265,000 of equity in Jacksonville, Florida, where I had a pretty sizable portfolio at one point, and they want to know what to do. So stick around because we’re going to be back after this short break where we are going to hear from someone who has a portfolio similar to mine.
And welcome back everybody, I missed you. I’ve been waiting this whole time for you to finally listen to that ad and I’m so glad that you’re back here. Our next question comes from Summer Wheatley in Florida. Wait, no, I got that wrong, it’s actually Summer Berkeley. I don’t know what Summer Wheatley’s up to. If anybody else knows if she ever made it to the dance with Napoleon let me know in the comments how we think that that went. All right. Summer says, “I live near Jacksonville. I have one owner-occupied-single-family home that I’d like to sell with about $265,000 in equity. I want to deploy that equity into a bigger income-producing property. What are your thoughts, David? Would I have any issues getting a commercial loan since it’s usually based on the operating income and my credit is as high as credit can be? Plus I have lots of cash reserves as well as experience in this business?”
Well, first off, Summer, congratulations on being the most popular girl in Napoleon’s high school. And congratulations on having all this cash saved up and a lot of equity in your property. This is a great problem to have and I’m happy to help you here. Summer also mentions that she wants to move from a family-friendly area where she lives now to more of a beach nightlife area as she’s a single person and wants to upgrade her living situation. And that she would like to pay cash for Airbnb-type property or a commercial property, but is also willing to get a loan if that would make more sense.
All right, Summer, so here’s what I would do if I was you. First off, I’d split up the goal of finding a commercial property that I could operate like a hotel or an Airbnb, that you asked about with the lending, and my goal of moving to an area that I want to live. It’s very difficult when you try to combine or stack goals together. For instance, if you say, “I want to buy a property in a high appreciating area that has a ton of equity in it, and I want to buy it below market value, and I want it to be move-in ready, and I want it to cash flow really, really high, and I want it to have a cute kitchen” you’re just going to be looking forever, you’re not going to find that.
Now, if you said, “I want to buy a property that has a lot of equity and I can buy it below market value stop,” you might be able to find one of those. Or I want to find a property that has a cute kitchen that I would like to live in, you might be able to find one of those. Or I want to find a cash flow property. But you’re probably not going to find them all in the same deal. You’re better off to separate those different things and say, “I want to find a property with a lot of equity to flip, then I want to put those profits into a property that cash flows. And then I want to use the cash flow to help supplement the mortgage of a house that I want to live in.” You see what I’m saying? When you try to stack everything into the same deal you end up just staying house single forever. But when you’re willing to say, “Okay, I’m looking for different things and different opportunities,” and then you combine them all into one portfolio, you’re much more likely to be successful.
So let’s talk about what you can do in this case to find an area that you want to live in but it doesn’t break the bank. You should house hack. You should look for a property in an area that you want to live where other people also want to live. And you should look for a specific floor plan that would work for you to either rent the rooms out to other people … Maybe there’s a master bedroom on one side of the house that you can stay in, and then there’s other bedrooms on a different floor or a different story where other people could stay in. Maybe you find a house with an ADU that you live in. Or, you live in the main house and you rent out that ADU on Airbnb. A lot of the Airbnb restrictions in areas don’t apply to primary residences so you can get around some of that red tape if you take that road.
So now we’ve solved your first problem. You’re living in an area that you want to live and the cost of it is being supplemented by rental income. That takes a lot of pressure off of you and now you can focus on something that you could find which would be a cash-flowing commercial property. There’s probably going to be more opportunities in this space than almost anywhere else because the commercial markets have been trashed. Interest rates skyrocketing, balloon payments that are going to be due on commercial properties. There’s been a lot, a lot, lot of fluxx within that market. And there’s been a lot of people that have lost a lot of money when they were operating the property well but their note came due or their investors had to be paid off. And at the time they needed to refinance or sell, things didn’t work out.
It’s like musical chairs. When you’re walking around the chairs … If you’re in front of a chair when the music stops you’re good. That’s like having favorable interest rates when your note comes due. But if you happen to catch the bad luck of not being by a chair when the music stops, that would be rates being too high to refinance or sell, you’re stuck. Even if you are playing the game the right way sometimes things work against you when you’re in commercial properties. So I like this as an opportunity for you.
Now, when it comes to getting the loan you’re exactly right, you’re typically going to get approved based off of a little bit of your credit score but it’s going to more be the net operating income of the property which means the lender’s going to want to know well, how much money does the property generate? This is typically figured out by looking at all the leases that are in place and adding them up and that’s your income, and then looking at all the expenses that are going to be in place.
Now when you’re going to get financing for a commercial property, like what you mentioned, it’s usually a little bit trickier than if you’re trying to get it for a residential property because not as many people offer them. So I’m a loan broker. You could come to me and I would say, “Hey, you want to buy a house? Let’s look at all these different lenders we have and find the one with the best rate, the best terms, and the best service.”
But with commercial properties, you can do that it’s just way harder. A lot of these loans are done directly meaning you go to this specific bank and they tell you what they’re willing to offer. And it can be complicated. You’ve got different balloon payments, you’ve got recourse and non-recourse loans, you’ve got interest rates. A lot of these interest rates are adjustable. The minute it becomes adjustable there’s a lot of different ways that they can adjust. It’s not the same as getting a 30-year fixed rate loan like in residential real estate where you don’t have to be an expert. You do have to be an expert if you’re going to be getting into commercial financing, or you have to know an expert that can help you through this.
So while the gist of it is yeah, they’re going to look at the income that the property makes and underwrite it based off of that, and your credit will be involved. If it’s a recourse loan, it’s very easy to not understand the loan documents that the bank is coming up with and they’re not written to protect you. I just want everyone to hear this. When you’re buying a house that’s Fannie Mae or Freddie Mac backed, there are tons of protections built into that because these are insured by the federal government and they want to look after their tax-paying citizens. But that is not the case with these commercial loans that are not insured and you don’t have protections. And many of them have tiny little provisions that you would never see coming where you could technically be in default and they can foreclose on you even if you didn’t realize you did anything wrong.
I’m basically getting at the point that I’d love to see you take the equity that you’ve got and get deeper into investing. But I don’t want you to wander into that territory thinking that commercial works the same as residential, that the financing works the same, or that you’re going to combine your dream of living in an area with great nightlife, and a wonderful location, and great weather with cash flowing opportunity. Maybe 100 years ago, maybe 50 years ago when nobody really knew how real estate worked, and you could go in there and you could buy a commercial property and it’d probably have some residential spot above where you could live in the same building that you just bought. I don’t see very many opportunities out there like that now, and the ones that are often being chased down by big conglomerations, corporations, equity funds. There’s a lot of demand to find these kinds of properties so know who you’re going to be competing with.
All right. Just to sum that up for you there, Summer. Remember, commercials very different than residential. The financing is very different. Make sure you have an experienced person read through the loan paperwork and you understand all the deals if you’re going to get into the commercial property. And don’t try to combine all of your goals in the same property, split them up into different properties and put them all into a portfolio, what I call portfolio architecture, and architect your dream life.
All right, we’re going to be getting into the next segment of Seeing Greene where we share comments from YouTube, from you, our listener base, which I love doing, as well as some of the reviews that you’ve left for the show. Remember, I want to see your comments too and I’d love to have you featured on an episode of Seeing Greene. You can do so by going down if you’re watching this on YouTube right now, and leaving a comment as you listen, or by going to wherever you listen to your podcast and leaving us a review. Those help a ton so please do it.
All right, let’s get into our first comment. This comes from episode 869 from Hellermann Industries. I love affordable housing and high-price markets right now. First-time home buyers are always active and not concerned about leaving their golden rate behind. Pick a strong market with strong fundamentals and appreciation and buy under the median price point. Your flips will have a solid audience. And small multifamily housing makes killer rentals right now because renters are getting priced out of full-sized homes. That’s a pretty insightful comment there, Hellermann, well done. This is the kind of stuff I like to see on Seeing Greene. Apparently, all of you listening to this are smarter than the average bear.
All right, our first Apple Review says, “Five-star values, hosts, and content. I’ve been listening for two and a half years and I’m so thankful for all I’ve learned and the connections I’ve made from this podcast. It’s the perfect blend of inspiring stories, investing fundamentals, real estate strategy, and up-to-date information on the market. I am now an investor myself.” This comes from Courtney Cozens via Apple podcast. And I happen to know Courtney if you weren’t aware. Many of you that are listening to Seeing Greene actually become friends of mine. I recently had Courtney interview me on my Instagram talking about how I became an agent, how I built a team, what my experience was like in law enforcement, working in restaurants. A lot of the stuff that’s in my book, Pillars of Wealth. Go give Courtney Cozens a follow and like her comment.
And our next comment says, “Trailer trash to trailer cash. Been following you guys since the beginning. If I can change my life in this business anyone can. Love this podcast.” From CD Kid Cat. That’s pretty cool. And it rhymed, trailer trash to trailer cash. I wonder how Eminem has never worked that into one of his verses. I haven’t heard that yet but I feel like it’s staring him in the face. If anybody here knows Eminem make sure that you let him know that he has missed a potential goldmine to put on one of his songs.
All right. I appreciate and love all of the engagement that y’all are giving us in the comments. Let me know what you think about today’s show and the advice that I’ve given so far, as well as what you’d like to hear on a Future Seeing Greene show so that we can grab that and throw it into our production process. If you’d like to be featured on the show you can do so by heading to biggerpockets.com/david and submitting your video question. All right. We’re going to take a quick break and then we’re going to be back with a question about what to do with 20K and what to do as an investor stuck in your 50s. All right. Our next question comes from William Warshaw.

William:
Hey, David, my name is William Warshaw, I’m from Los Angeles, California. I’m 19 years old and I’m in my dorm room so bear with me. I have 20 grand saved up and I just simply need help taking action in LA, Southern California. 20 grand’s not going to get you much. It’s going to be hard even with an FHA loan. Should I go long distance here? It’s, obviously, very scary going long distance. I’m halfway through your book. Or should I do something like Airbnb arbitrage? I know how you guys feel about that but I feel like I could build my capital even though the short-term aspect is a lot more demanding as a college student. What do you guys think I should do here? Give me options. Let me know what you would do in my situation. Big fan of the podcast. Thanks.

David:
All right. Thanks, William, that’s great, man. If you guys weren’t watching this on YouTube you should be. William looks like a combination of Justin Bieber and Shawn Mendez got together and turned their hats backward. If you ever wanted to see the personification of Southern California check out Old William here. All right, William, here’s the first thing I want to say. Congrats on saving up 20 grand. First thing I want you to do, don’t lose it. Don’t go spending it on anything stupid. Don’t go invested into cryptocurrencies that you don’t understand. Don’t go buy an NFT, and don’t go start some online trading corporation or something that you think is going to make you a bunch of money. Second, congratulations on going to college and not just putting all of your efforts into becoming an online influencer, but I need to know a little bit more about what you’re studying in college so I can give you some advice on if I think that that’s a good idea or not.
Third, you’ve got 20 grand, why can’t you get more my man? You’re doing good. When I graduated college, and I’m not trying to compare me to you I’m just saying it’s possible, I graduated with my school paid off, no student debt, my car paid for in cash, and over $100,000 in the bank. I did that by working in restaurants and just staying late every single night. Perfecting my craft of being a waiter working as hard as I possibly could and saving all my money. You’re in school, you’re going to have to finish school. Do you want to finish school with 20 grand or do you want to finish school with 50 grand? Do you want to finish school with 20 grand or do you want to finish school with 100,000 grand? What are you doing for work right now that you can improve?
Remember, wealth building is not just about buying real estate though that is, obviously, an important component to it. It’s also about saving your money and making more money. William, I’d love to see you have the goal of buying a house, your first house hack, that you could rent to other people with as many bedrooms as you could get, maybe even bunk beds so that your friends could be paying you rent, and staying in this property or renting out to other college students that don’t want to live in the dorms, and I want you to make that the carrot that you pursue.
If you want to be a homeowner, and you want to buy your first house, I want to see you working more hours at a good job. If you’re working at some pizza joint, or if you’re doing DoorDash, there’s nothing wrong with it but there’s also nothing right with it. Find a job that challenges you. Find a job that every day you have to go to work and actually pray before you go in there, I hope I don’t make any mistakes because it’s that hard. It’s very good for a young man to be in a position where you’re doing something challenging, and difficult, and having to sharpen your sword of the skills that you’re providing in that workspace and pushing yourself. Too many people think that if you’re a young kid in college you’re not capable of anything but putting pepperoni on a pizza. It’s not true. Again, there’s nothing wrong if that’s what you’re doing, but if your goals are to be a millionaire through real estate there’s also nothing right with it. So push yourself, get a better job.
Now, the goal should be when you get out of college you want to buy a house but the money isn’t going to be your only problem, the financing is going to be a problem too. You’re going to have to show a debt-to-income ratio that a lender is going to be comfortable giving you a loan to. You’re going to have to show a debt-to-income ratio that’s going to satisfy a lender’s requirements which means you’re going to have to keep your debt low, you’re going to have to make more money. You see how making money just keeps working its way into this equation of real estate investing. We talk a lot about finding deals, acquiring deals, and though that is a way to make money it’s much harder. So put some focus towards your career, what you can do to bring value to the marketplace, and how you can build your skills.
And then in the meantime, start analyzing house hacks. Run three-bedroom properties, four-bedroom properties, five-bedroom properties, run duplexes, run triplexes. Find an agent that’s going to work with you, and have them send you deals to look at, and run the numbers of what the expenses would be, and what the income would be and look for patterns. What you’re looking for is a pattern that five-bedroom properties cash flow but you know you need at least three bedrooms, but you know need at least three bathrooms, you want to make sure that there’s plenty of parking. You want to get to the point that you know rent’s too low on this side of town to make it work but over here it could work. That way when you graduate, and you get the job, and you’re pre-approved to buy a house you’ve already got the information that you’re going to need to find the perfect one to start with.
Now, as far as how much money you want to have saved when you get out of college here’s what I would tell you. Look at what the average houses are going to cost that would work for a house hack, let’s say it’s $800,000. Assume you’re going to have to put 5% down on a conventional loan to get that house, that’s 40 grand. You’re going to need $10,000 for closing costs, and another five to $10,000 to improve the property. That’s going to put you right around 55 to $60,000. Now, you’re also going to need some money in the bank for reserves so add another 15 to 20 to that. And ideally, you want to be graduating college with 75 to $80,000 before you think about buying your first property.
With that money, you want to be able to invest it in something that gets you a return but my advice to you is avoid risk. It’s more important that you keep it than that you grow it, okay? So go find yourself a certificate of deposit in a bank, I think I saw one for around 5% the other day, put it in there, collect your 5%, it makes it harder for you to take the money out and spend it on something dumb, and just keep putting the money that you make into that account to earn you some money until you graduate, you’re ready to buy the house.
All right. And our last question of the show comes from Cleven in Las Vegas. “Hi, David, we’ve tried to find rental properties for a year but cannot figure out how to get positive cash flow based on the current mortgage rates. We’re in our mid-50s and we moved to Vegas in 2022 after selling our house in New York where we capitalized on some gains. However, both my wife and my jobs became insecure recently. I don’t know if we should stop looking until the market gets more stable, and so do our jobs, or we should continue looking before the markets get crazy again. Thank you.” Oh boy, Cleven, this is a problem that most people are having right now so first off don’t feel bad.
Largely, cash flow did go away when the mortgage rates went up. The good news was that houses weren’t selling for as much over asking prices as they used to be but there’s always going to be a pick-your-poison element to real estate investing. We complained about the fact that you had to overbid on these properties, even though they cash flowed, now we complain about the fact they don’t cash flow. If something changes we’re going to be complaining about that. Properties will cash flow but under different conditions, you’re going to have to put more money down. So if you’re putting more capital into the deal you’re going to watch your ROI go down even though your cash flow is going to go up.
And my two cents on this is that if you have to stick a lot more capital into a deal to make it cash flow so that it’s safe, you need to have significantly more upside which means you need to be investing in an area that is likely to get more appreciation, or getting a deal that you bought for less than what it’s worth by a significant amount. So it’s one thing to think about there. You can still get cash flow but you’re going to have to put down more than 20%. So if you’re looking to invest in Vegas, my advice would be to find the neighborhoods or the areas that you think are going to appreciate more than their competition. I call this market appreciation equity. It’s the idea that not all markets appreciate at the same level.
The other thing that you could do is look for a different primary residence for you and your wife that has an element of it that could be rented out. Can you find a property that’s got a guest house, that’s got a basement that you guys can live in and rent out the rest of it? I know that’s not ideal, I know it’s not what you want to do. But if cash flow really is impossible to find, the other way that you can build wealth is by saving on your expenses.
Can you eliminate your mortgage or cut it down by a significant amount and save the difference? Remember, $2,000 a month saved off of your mortgage is the same as $2,000 a month in cash flow. It’s actually better because cash flow is taxed while savings are not. It’s very easy as investors to forget that saving money is just as powerful as making money. And you really don’t need to be super focused on cash flow until you’ve already reduced your budget by as much as you possibly can. So those are two things that you can work on while the market is currently in this stalemate.
Now, I just want to remind you, if we do get lower rates and you think you’re getting cash flow again you’re going to have to be ready to jump in fast because all the other investors are going to realize the same thing. And like locust, they’re all going to converge on these markets and bid the prices up to where guess what? They no longer cash flow. Easy cash flow is a thing of the past. I don’t think we’re going to see it again maybe ever. Cash flow is now going to be something that you have to work really hard to find or something that you have to work really hard to create, or something that you have to wait to materialize on its own through rising rents. But remember that there are other ways that you can make money through real estate so focus on those.
All right, that was our last question for today’s Seeing Greene. And I’m so glad you’re here we haven’t done one of these for a while and I’m really glad that we did. Remember, I want to have you featured on this show so head to bigger biggerpockets.com/david and submit your questions there. And comment on YouTube and let us know what you thought of today’s show, what you wish that I would’ve said, and what your favorite part of it was. Thanks, everybody. You can find my information in the show notes if you want to follow me and leave me a message. You can also find my books at biggerpockets.com/store if you want to read those. And leave me a comment there, I’d love you for that also. We will see you on the next one.