Pay Off Debt or Invest? (How to Do BOTH with Real Estate)

David:
This is the BiggerPockets Podcast show, 9 41. What’s going on everyone? Welcome to the BiggerPockets scene green episode. I am your host, David Greene here today with my co-host, Rob Abasolo. And as you can tell from that green light behind me, we are going to be answering your questions from the BiggerPockets universe and helping everybody build wealth through real estate today. And boy, have we got an awesome show for you. Rob. How are you feeling,

Rob:
David? I’m feeling great my friend. I’m on my second coke zero of the day, and I can’t imagine this day getting any better.

David:
Well, it’s about to, Rob, I got some news for you. We got some great stuff for everybody today. We’re going to be covering home warranties and what you should know about them and if they’re worth the investment, what to do when you inherit $1.3 million of property and how to scale a portfolio from there. Yeah, NBD when improving your property makes sense versus when it’s just a waste of your money. How to navigate $320,000 of student loan debt when you’re an aspiring real estate investor. And if robots or other changes to the industry are going to crash home values in the future. All that and more on today’s episode of Seeing Green.

Rob:
Oh, and most importantly, let’s not forget, David, if anyone listening at home wants a chance to ask their question, head on over to biggerpockets.com/david. The link is in the description down below. So go pause this, send us a quick little question. Let’s jump right in.

David:
Our next question comes from Reuben Ludick in Seattle. Reuben writes, I’m originally from South Africa, but living in the Seattle area, I have rentals in Washington state and Florida. Oh boy, he’s got a cover. Rob literally crisscross right across the entire country. Did you know that that’s the way that they measure TV screens, by the way?

Rob:
Yeah, it’s actually diagonal not from corner to corner,

David:
Exactly. Same way this person buys real estate.

Rob:
He’s the best buy of real estate.

David:
Invest the best buy. Would you recommend purchasing a home warranty on every rental property that I get? We’ve been making decent cashflow, $500 a month per property on our units, but our appliances and acs have been going out one after the other, and our CapEx is eating up a good amount of our cashflow. Our idea is to pay approximately $500 per unit annually and have pretty much all the appliance major components covered. We’ve sacrificed about $40 a month per unit on cashflow, but then have a peace of mind knowing our CapEx is minimal. Appreciate all your content. This is a good question. I like this on seeing green. It

Rob:
Is, it’s a good question. I have thoughts

David:
Serious.

Rob:
I’m 50 50. I think most conventional thinking would tell you not to buy a home warranty. I will say I have home warranties on a few of my rental properties, short-term rentals specifically, and it is nice, but it is sort of like a blessing and a curse, right? So on one end, if something breaks, let’s say that it’s your ac, you have the option of getting it covered. Now, where this really backfires on you is that typically the vendors that come with a home warranty company, like let’s say your AC brakes, they’re not sending you the best AC repair people ever. It’s usually a lower grade vendor in my opinion. And then also it’s not super fast. And so with the world of short-term rentals, it’s all about hospitality and fixing a problem super fast. So sometimes you may not get that AC tech out to your property for 2, 3, 4, 5, 6 days, but if you have a guest at your property at that moment, and let’s say that guest paid you two, three or $4,000 for a vacation, they aren’t going to be happy waiting. And so you sometimes have to bite the bullet and pay for just a random vendor not associated with your home warranty company regardless and pay a ton of money outside of the warranty. So it’s kind of one of those things where most of the time you can use it, sometimes you can’t, and the times that you can’t ends up being really costly. So it’s like, I don’t know, man, it’s a hard one. I do it though. I will say that and I’ve used it and it’s actually saved me a ton of money. It’s

David:
One of those in theory or in practice things kind like our last guest in theory, the cashflow should be coming in from the property and I should be able to structure my finances around it. In practice, it never works out. In theory, a home warranty would cover these things that break, but in practice they find every single chance they can to say, we’re not going to cover it. We’re going to make you fight us on it. Now, Rob, I believe you have a story that you could share about our Scottsdale property with its big expensive custom water heater. Remember that one?

Rob:
Oh my gosh, yeah. Yeah, we had a Scottsdale property, we had a home warranty, but oh, here’s the other thing. Sometimes this stuff falls on a weekend when most people are closed. Certainly the vendors at a home warranty company will assign to you, they’ll be closed, and so you have to call the emergency repair person, emergency electrician, whatever, and you have to buck up for that one. But I believe in our instance at the Scottsdale property, it was over the weekend and the guests needed hot water. These guests are paying between one to $2,000 a night to stay at our property. So obviously they’re going to say, Hey, I paid a lot of money, I expect hot water, which is actually pretty fair. And so we had to just get an emergency plumber out there to go to Home Depot or Lowe’s and get a water heater, and I think we ended up spending 3000 bucks.

Rob:
And I called you and I was like, ah, dude, we have to spend $3,000 and what do you think? And you’re like, well, what are our options? I was like, well, option one is we refund this guest five grand or option two is we spend 3000 and you’re like, well spend the 3000, but you were like, can we wait until Monday or whatever? And I was like, ah, we’d have to refund ’em anyways. So in that instance, it was a bummer because we had to pay 3000 bucks out pocket when our warranty company would’ve covered it had we just waited two or three days,

David:
Which is a luxury you have with a long-term rental, but not a short-term rental. So let’s factor this in. Also for reen, it sounds like he’s operating traditional rentals, but if it’s a short-term rental, you may not even be able to use that home warranty. So that may factor into the decision what type of property is, and do you have the luxury of waiting for someone to go out there and fix your pool heater or your HVAC or your hot water, or do you have to get a fixed ASAP and you’re going to pay top dollar for it? So the home warranty is not going to help you. Just remember when you get these things that they’re not guaranteed, salesmen will always sell it like, oh, it’s great, we’ll take care of everything, but there’s always fine print. So there’s a difference in theory than in practice.

Rob:
So with that said, are you anti or are you pro?

David:
I am pro home warranty, but not for the reasons that Reuben is talking about. So he’s saying, I just don’t want this CapEx. You’re still going to have that CapEx, but you may be able to take a dent out of it by getting a home warranty and you may get a home warranty. I don’t know that it makes sense for a brand new house with a brand new AC and a brand new roof and all the pieces that are typically going to wear down. You’re not going to need the home warranty, but an older home, you’re probably going to get your more bank for your buck. Which is funny because the people who buy the new homes who get home warranties are sort of subsidizing the people that are getting them on the older

Rob:
Homes. I guess that’s the game, right? We got to get in the home warranty game. I mean, I will say this one time my dryer broke and I called the home warranty company. I was like, yeah, no problem. I’ve had them cut me checks just straight away, no problem. And then my dryer broke and I sent them out and then they were like, we’ve declined your request. And I called and I was like, Hey, what’s going on? Because you have to pay a, I dunno, like a fee if someone comes out like a serviceman comes out, you have to pay $150 deductible. So I paid the one 50, they declined my request and I called. I was like, what’s going on? My dryer’s broken. And they’re like, yes, the dryer repairman said that you broke the dryer intentionally, and so we are not going to pay. I was like, what? I was like, how would I break my dryer? It was mind blowing to me and they declined it. So that was one instance where I was like, Ugh, I hate home warranties,

David:
Home warranty fraud is on the rise led by Rob Abso breaking dryers like he’s breaking hearts.

Rob:
Exactly. I mean granted, I should not have tried to dry 18 clay bricks, but that’s a lesson learned. Alright,

David:
We hope that helps you Ruben. We’re

Rob:
Going to hear a quick word from our show sponsors and then we’ll be right back and we’re back. You’re listening to the BiggerPockets Real Estate podcast. Let’s get back into it.

David:
Our next question is from Evan Nelson in Santa Barbara.

Evan:
Hey David, I’m Evan Nelson and I am from Santa Barbara, California. And my question is, I recently inherited a duplex here in Santa Barbara. The estimated value is about $1.3 million and I would like to use the property as leverage to start a real estate investment portfolio. So my question is, if you were in my position today, what would be your strategy for beginning to invest in other real estate properties? I’m totally open to the idea of investing out of state. I’m really not sure if a HELOC option would be better than a traditional mortgage, but wanted to get your advice and looking forward to hearing your response on the podcast.

David:
All right, Evan, thank you for your question. Robbie, what are you thinking?

Rob:
Okay, so a little context. He’s got no debt and the value is estimated at $1.3 million. So he just owns this place free and clear. That’s nuts.

David:
Inherit himself a Santa Barbara present, 1.3 million duplex I believe it was.

Rob:
Well, I would say the temptation would be to get that money and go out and buy a bunch of stuff, but I would probably mean if he’s not really a seasoned real estate investor, I’d probably tell him to get a HELOC and use that to maybe go do a smaller project to just cut his teeth a little bit in the real estate side of things. I think that could be a small flip, a small rehab, a small brrr, but I would do something. He’s got basically the access to cash to do any real estate project that he wants for a starter. I would probably start there versus going out and getting hard money and doing a flip and all that stuff. I would use my HELOC to basically as a gift. It’s amazing. I’d use that as a way to fund a small flip or something probably.

David:
That’s good. Okay, first question I ask when I’m in Evan’s position here, when I own real estate like this, would I buy it like it is or would I not buy it like it is? So for Evan, I think one of the questions he should ask is, if I had 1.3 million, would I buy this exact duplex right now or would I not? If the answer is no, I would say, well, what would I buy instead with 1.3? Maybe you sell it and put the money towards that. If you say, no, I like this duplex, I would buy it now that means you should keep it. Now we can move on to our other options. With what you’ve got, obviously a duplex in Santa Barbara at 1.3 million is not very likely to cashflow very solid. Now it’s paid for in cash, so it’s going to cashflow, but if he puts leverage on it, that’s a different story.

David:
If he was to borrow 80% of the value of this thing, I doubt it would cashflow, but it probably is going to appreciate over time. So we could work some portfolio architecture into this portfolio he’s talking about right away. He keeps this property, he refis it, he pulls some money out, he’s got a property that is going to experience what I call market appreciation equity. It’s going to appreciate faster than other properties in surrounding areas for the longterm. Now he can balance his portfolio out by adding some cashflow properties or using money. To flip what you said, Rob, the tricky thing is if he goes and he pulls 900 grand out of this thing or something like that, that’s a lot of debt he’s taking on. What does he do with that 900 grand? Is he going to go get himself in a more trouble? He’s a new investor, doesn’t know what he’s doing.

Rob:
Well, that’s what I’m saying. That’s why I like a heloc because a heloc, you don’t really make payments on the heloc. It’s like a credit card. You don’t make payments on it unless you use some amount of that credit line, if you will. So I like that. And I don’t know if I said this a home equity line of credit, that’s what a HELOC is. It’s basically borrowing against the equity of your property. But I like that he has the option to basically have this big funding mechanism and he can just take as much as he needs to start a project and see it through. Whereas if he goes and he does a refi like you’re talking about, or like you just mentioned, 80%, he’s in debt now and he has to make payments, and I think that’s a tough treadmill to get on, especially at the $900,000 range. So I’d rather him just have the option to use his funds, but not necessarily use them until he’s worthy.

David:
So let’s talk pros and cons. HELOC versus cash out refi, you do go the cash out refi route. Pros, lower interest rate cons. You have to use that money for something because paying for it every single month, it’s not flexible.

Rob:
Yep. Another pro it is tax free. Well, and so will the heloc, but that is something to consider. Yeah,

David:
They’re both going to be tax free. That’s right now the HELOC road, the pros are going to be you have flexibility. You don’t have to use that money because you put a HELOC on it for a million or 1.1 or whatever he can get. You don’t actually pay a mortgage on that money until you use the money. The con is that you’re getting an adjustable rate mortgage and the rate will be higher. So because Evan is a newer investor, we’re leaning towards HELOC because we don’t want him to get stuck with all this money and not know what to do with it. But if this was Rob or me, it would make more sense for us to go the cash out refi route because now we could go deploy a million dollars or 900,000 without as much risk because we’re a little bit more experienced.

David:
So Evan, we think you should take the HELOC and learn how to play slowly. Like Rob said, try to flip a house at a lower price point, try to put money down on a vacation property and try your hand at short-term rental investing or medium term rental investing. Maybe even take some money out to put the down payment on a primary residence. Get yourself a house hack or something like that. But don’t go big at the point that you feel like, I think I got this real estate thing down. I know what I’m in for. Now you can talk about refinancing out of the HELOC into a cash out refinance, locking in a 30 year fixed rate, getting the lower interest rate, and then deploying the capital as you see fit. How’s that sound, Rob? Love

Rob:
It. Yeah, that’s good. Yeah, earn the right to use your 900 K. Don’t come out swinging

David:
The right way to use 900 K with Rob episode. There you

Rob:
Go. You heard it here first.

David:
Alright, great question there Evan, and congrats on the Santa Barbara duplex. We hope that you’re enjoying the shared conversation so far and thank you for spending your time with us. We love that the most. Make sure to light, comment and subscribe if you’re listening to this on YouTube and let us know what advice you would have given any of our guests today if you think that we missed something and let us know what your favorite part of the show is. Rob, so far, what’s been your favorite part of the show?

Rob:
Well, I always like that every single question on the surface sometimes feels like it could be similar, but it’s just the really beautiful thing about seeing green specifically is how nuanced everything is in very basic categories. So it allows us to actually give creative answers to like, Hey, how would I spend $900,000? You would think we have the same answer every single time, but genuinely it’s completely situational based on that person’s circumstances, which is how this, I mean, this show always feels so fresh when we do it because of that. That’s

David:
A great point, and I think it’s better for people who are listening because rather than hearing the story of what someone else did who may or may not have anything in common with you, the answers that we’re giving here could be customized and fit for the individual situation that the listener is in. Some of them are experienced investors and they’re like, got it, catch out refi. Here’s the pros and cons, versus someone who’s not an experienced investor who just got told, Hey, don’t listen to these stories of people that went and got 400 units in 14 minutes. It’s much better to take this thing slow.

Rob:
I also really like not knowing the answer sometimes and thinking through how I would think through this stuff personally, because I know how I think about my basic philosophies and fundamentals in the short-term rental space or anything in my portfolio, but sometimes genuinely these questions I’m like, all right, how would I approach this if I were in this situation? And it just, I dunno, keeps me sharp.

David:
Alright, if you’re enjoying this show, do me a huge favor. Please go and leave us a review wherever you listen to your podcast and make sure that you subscribe to it. Apple recently redid their algorithm and a lot of our subscribes and listens went away. So if you go give us a comment, it will be super impactful and I’ll heart you forever. Alright. At this segment of the show, we’d like to go over comments that you have all left on previous YouTube episodes and you get to hear what other people are saying. Remember, if you would like to be featured on the show, you can either leave a comment on this YouTube or you can head over to biggerpockets.com/david and submit your question there. Loose smile says, I love this podcast. I listen to it every day while at the gym and I’ve learned so much. I’m truly grateful for everyone’s knowledge that’s being shared here. What a nice one, Rob, you’re a gym goer now. I see those muscles popping out of that shirt. What do you listen to when you’re working out?

Rob:
So here’s what I do, okay? I can’t always watch YouTube videos, so what I’ll do is I’ll click them so that they’re in my watch history and then I’ll click out of them. That way when I go to the gym, I’ll go to my YouTube history and start listening to all of the YouTube videos that I wanted to get back to. And when you have YouTube premium, you can listen to it as a podcast.

David:
There we go. All right. Our next comment comes from Coach Anthony Bergos question, I’m currently paying 3% interest with my current mortgage and I have a lot of equity somewhere near 200 grand. Would buying a property that already has a tenant that costs less than 200 grand be a smart way to invest? And if not, why not? Okay, so the question is, is it a good idea to buy a property that already has a tenant in it so that you get cashflow right off the bat or do you think that’s a bad idea, Rob?

Rob:
I think the real estate community in general agrees it’s a bad idea. I don’t think I know anyone that’s ever been down. I think pretty much sometimes you’ll read the only person that’s down is the real estate agent who writes the description that says tenant already in place. Like it’s a benefit outside of, but they’re also the same agent that’s like location, don’t walk, run. So yeah, I would say no, it’s not a good idea. You want to screen your own tenant, meet your own tenant, build a rapport with your own tenant. Yeah, just because you’re previous, the previous owner slash landlord liked the tenant and had a good rapport, that doesn’t mean that you’re going to have that same relationship with them. And they always say buyers are liars, sellers are

David:
Worse. So you can’t necessarily trust the seller of the property when they say, oh yeah, David, he’s a great tenant. He pays on time every month because it’s probably a little inflated there. Here’s a good rule of thumb. Very few people who have a car that’s working really well think about selling it. And very few real estate investors that have a tenant that’s a really good tenant want to get rid of the property with the tenant in it, you’re usually inheriting a problem. Okay, that’s a good, so you’re saying that every car on Craigslist, there’s something wrong under the hood. There’s a high percentage of people that are selling used cars that know the mechanic just said you’re going to have to replace the whole thing, and they said, Nope, just going to sell it and let somebody else take care of it. And I feel like it’s very similar for real estate investors.

David:
Let me ask a bonus question. How about a leaseback whenever the owner that’s selling the property says, Hey, I would like to live there for three months at this predetermined rate. How do you feel about that different scenario? I’m okay with that. If the owner is going to lease the property back from you, that’s different than inheriting a tenant. That’s usually a person who just needs more time to find their next property. But that does kind of open up a can of worms on the owner could technically they could be an awful, I mean they’ve already sold the house. There’s no real repercussions there. So that could also be relatively risky, right? Well, you keep a deposit from ’em. We do this all the time on the David Green team, you get a deposit from the owner who is now a tenant because they’re want to leasing it back from you for three months. So if they tear up their own house because you own it now you take it out of their deposit. Okay. Alright, sold. Good question though. Alright, up next we have a new listener question about starting out in an expensive market and using robot labor. Should we be worried about real estate values? We’re going to get into that right after this quick break.

David:
Alright, welcome back robot labor, the Tesla robot, is it going to impact real estate? We’re going to be talking about that and student loans right now. Our next question comes from Adam Zamorek.

Adam:
Hi David. My name is Adam Zamick out of Boston, Massachusetts. I’m looking into purchasing my first investment property and just had a few questions regarding my situation. I’m a medical professional recently out of training, making good money, but I do have about $320,000 in government student loans and I do have about 40,000 currently saved up. So my first question is whether or not you think it would be a good idea to even start investing right now? Given my high loan situation and with the high prices here in Boston and the high mortgage rates, my current monthly minimum payments are fairly low since all the interest is subsidized as well. Thought now would be a good time since I had the money saved up for a down payment. So just wondering what your recommendation would be on that Second, regarding strategy. I think house hacking is something I’m definitely more interested in, especially since I’m spending about 3,200 per month here in Boston.

Adam:
So I think that would definitely cover my expenses. I am also interested in the brrrr method after listening to a few of your podcasts regarding building value in homes. My goals are definitely more in the way of building long-term wealth with appreciation, and I thought since I’m in such a good market here in Boston for that, that would be a good method for me as well. So just wondering your thoughts on that. And then lastly, I do have the option for a physician mortgage where I can put little or no money down for a down payment. I know interest rates are generally a little higher in that situation, but just wondering if you guys had any thoughts on that. I thought that maybe if I could put a little less money down that I’ll have more money to use for maybe a better property or even to pay down my loan a little bit. But any advice is appreciated. Thank you.

David:
Oh boy. All right, Adam? Yeah, 320 5K. Is that what I heard? Oh

Rob:
My god, yeah, I think that’s exactly what you heard. How do we get him out of this debt, I think is my first question, and my thought is more like, oh man, he’s got to take larger swaths of, he’s got to rip a few flips to really knock that debt down, I feel like,

David:
And he’s probably not going to be able to do that if he’s a doctor or some kind of a physician. So here’s how I’m looking at it. He’s got 320 5K on one side of the ledger, but he’s making 250 to 300,000 on the other. So that debt is going to be taken care of by the money he’s making. It just means the next couple years of his life, he should plan on making no money, mostly going to go towards the debt. So I would put some of that 20 to 25 KA month that he’s making towards his savings, build up that 40 k. The rest of it I would put towards paying off that debt and I’d be living on mac and cheese. I mean, not literally mac and cheese, but I’d be living a very frugal lifestyle like you said, Rob. And so that debt was paid down significantly, but with the money that I was saving, I would just do the house hack.

David:
I’d buy a property, I’d figure out a way to rent rooms out. You’re probably not at home a whole lot. If you’re a physician, you’re going to be working a lot and be working overtime. So having roommates isn’t going to crush you. And you have people at the hospital that are going to need places to stay to people that work shift work are the perfect rent by the room tenants because you’re never all at the house at the same time. And if there’s a shared bathroom you don’t run into it with, you need to poop when somebody else has to poop. That’s always the danger when you’re working. The pad split model is the shared pooping situation. So he’s in an advantage, I think with some of the things that are going on here. And I still think he can house hack. He can also buy in some of the better neighborhoods in Boston and he can focus on triplexes, fourplexes, really big properties that have lots of bedrooms, properties that have basements that can be converted. There’s a lot of flexibility and that physician loan allows him to keep more of that money in savings or put it towards fixing up the property. He doesn’t have to pose much down. That’s where I’m thinking he starts. What about you, Rob?

Rob:
No, I think that’s good. He’s open to house hacking. He’s not going to be there. It’s actually a pretty ideal scenario for both him and honestly, because he’s in the medical world, he could probably march straight down to his HR department or the staffing department and maybe even work out a midterm rental type of contract where he’s actually housing people in his property for a month or two at a time, and that would bring much higher cashflow than a typical long-term rental. It requires a little bit more maintenance, a little bit more schmoozing, but he works at the hospital anyways, so perhaps he could do that. And he only works four days a week, so I think he could feasibly do something like that.

David:
He did mention that his interest rate on that debt is 1%. That makes me feel a little bit better.

Rob:
Dang, that’s not bad. Yeah,

David:
That does take away some of the urgency of paying it down and that his current rent is $3,250 a month. House hacking can knock out three grand right off the bat. That’s 36 grand a year. That could be a significant chunk of the down payment for 36 K. Yeah. Yeah.

Rob:
He could save 36,000 a year and knock out some serious principle on that debt.

David:
Absolutely. And save some money for future houses. So if you play your cars right here, Adam, you can get out of this debt much faster than people who don’t use real estate investing. So let’s sum this up. You’re definitely going to house hack. You’re going to use that physician loan and you’re going to buy in the best neighborhoods that you can and get your housing expense as close to zero as possible. We’d like to see at 250 bucks a month or less for what you’re coming out of pocket. You’re going to buy another house the next year and you’re going to do the same thing. You’re going to repeat this. You don’t need to worry about brrring right now because there’s no point of pulling money out of a property if you’re not putting much money down. These physician loans give you a very low down payment option. So don’t worry about a complicated brrrr and refinancing when you can just put low money down on the property. After doing this for several years, you should have three, four, or five properties in great areas. You should have no or low housing expenses yourself, and you should be making good money that you’re putting towards paying this debt off. And there is a possibility that five years from now you’ve got $500,000 of equity in real estate and $300,000 paid off and you are 80% of the way to make yourself a millionaire,

Rob:
Then it really starts stacking up when you got no debt and you’re making that much money, you can become a millionaire in real estate. I’m not going to say pretty quickly, but much easier than most. It’s a good salary.

David:
That’s a great point. Yeah. So thanks for listening, Adam. Thanks for your question and make sure you’re listening to our podcast while you’re working those hospital shifts. Alright, our next question comes from Colin Smith in Colorado Springs. This question is in regards to the Seeing Green episode, talking about theoretical downfall of real estate values instead of population decline. Another potential risk is Tesla’s human bot. If these bots could reduce the cost of construction and remove the human labor and error factors, plus construction could occur around the clock, track home neighborhoods could be developed in lightning speed. This would not only apply to new construction, but home maintenance, repairs, remodels, make readies and cleaning. What are your thoughts on the downfall of real estate values, including rental rates if this idea comes to fruition?

Rob:
Well, okay, let’s talk about it. So he’s basically saying if we can fix the housing crisis, does that squash home values? I mean maybe, but I guess the flip side of that would be home values are lower so we can get in at a more affordable price and thus cashflow might be more obtainable.

David:
But then there’s another problem. The people that used to rent our properties were cleaners and handymen and blue collar workers whose jobs were replaced by robots. So now they’re not making money, so now they can’t pay the rent. Is that going to lead to more foreclosures?

Rob:
Okay, well that’s interesting. Well, what do robots typically pay in rent? I think we need to know that first. How much are they willing to pay? We need to get all the criteria out there. Oh, I don’t know. I mean, first of all, I don’t think this would happen all that quickly. There’s all those YouTube videos that are like this 3D printed house was printed in two days, and then it’s like, oh, cool, how much is it? And it’s like $150,000 for this 10 square foot box. And it’s like, okay, so we got a ways to go. I also don’t think it’s going to be around the clock because you still have to factor in neighbors and people being annoyed at construction noise and all that stuff. So I definitely think it’s something that’s going to enhance construction, but it’s not going to take the place. I mean, you still need to operators for all that stuff. So personally, I think that the best companies will just figure out how to utilize this type of stuff to make better product more efficiently. It might create more margins honestly, for the real estate community, but it’s just a guess on my end.

David:
I’ve thought about this myself quite a bit. I was worried about 3D printed housing becoming super cheap, and then the value of the real estate going down. What I came up with was they’re only going to be able to create 3D houses that are super cheap in the areas where you don’t already have houses built. And we always build in the best areas first. So it’s not like anyone’s leaving that beach front property wide open while they’re going and building houses in the middle of nothing. So when they do put these houses up, they’re not going to be in the best location. So if this is a concern of yours, prioritize location over the gratification of quick cashflow or cheap real estate because that’s the stuff I think that’ll be the most exposed if we do see disruption in the industry from these types of methods.

Rob:
I was going to be in the outskirts of city is like new suburbs and everything like that. I mean location, location people. Not to sound like a realtor here, but regardless, you still want to be in the heart of a city that will always carry the best real estate values. And you’re not going to see a neighborhood of 3D printed houses in LA because there’s no land. There’s all the land is taken, all the good land is taken in cities. So you’ll see this more on the outskirts. It might affect those areas, but yeah, I don’t know if it’s

David:
Going to be like maybe like Joshua Tree. You might see people putting up a lot of these kind of properties out in the desert. There’s a lot

Rob:
Of land though.

David:
That’s exactly right. So take that into consideration when making your decisions on what to buy, which is why I’m frequently saying stop looking at year one when buying real estate and start looking at year 5, 10, 15, and 20. Think about where the puck is going, not where it is. Alright, our next question comes from Nick Papadakis in New Jersey. I

Rob:
Think it’s,

David:
So this is the person that Eminem battled in eight mile. Nick Papadak. Yes,

Rob:
Maybe.

David:
And Clarence parents had a real nice marriage. All right. Nick says, you often talk about one of the better strategies for investing in today’s markets is looking for value add opportunities through adding more bedrooms, bathrooms, ADUs, et cetera. How easy is it to add value to a property? Do you need to get building permits? Check with the zoning board, get architects involved. If you have the square footage, when would you not want to add another bedroom? What’s a good benchmark for payback period on the investment versus rent increase separately? You often talk about one of the best ways to start out is by house hacking and renting rooms. Is it legal to rent by rooms and does it make the eviction process more complicated? Sincerely yours, Papa Doc. Rob, what do you think about this? This isn’t really your wheelhouse as much as mine.

Rob:
Yeah. Well, let’s start with this first question. He says, how easy is it to add value to a property? Do you need to get building permits, check with zoning board, get architects involved? Maybe? I guess it really depends on the jurisdiction and it also depends on what level of renovation that you’re going to do to a property. So for me, I added an A DU. If you’re talking about adding square footage, especially on a detached property, it could be pretty expensive. You do need to get building permits. You definitely need some type of engineer to stamp your plans. You might need a draftsman or an architect to do it. So when you’re talking about building an entirely new structure, don’t really think there’s a way to skirt around the red tape. Now, you could possibly add square footage to a property. David, whenever you’re doing your brrrrs, let’s say you find a garage and you want to turn that into a bedroom, does that require permits or does it depend on the municipality?

David:
Funny question. Everything requires permits. And I’m not exaggerating that in Contra Costa County where I live in California, if you change the faucet on your sink, if you change the light structure and your house, if you take out the carpet and you put in linoleum, it’s almost everything other than paint will require a building permit. No,

Rob:
In LA you need a permit to paint the outside of your house.

David:
There you go. Right? The government’s find ways to government, they find ways to give themselves more power and more control, and so they’re going to come in and say, yes, you need permits. So the answer is almost always going to be yes. But the real question is, if I don’t get the permits, will there be a problem? Now, that’s a more nuanced issue there. A lot of people make home improvements on their homes and they don’t get permits, and no one ever cares. I don’t think I’ve ever sold a home ever that had permits for every single thing that was ever done because when people change out their light fixtures or they change out their sink faucets, they don’t go get permits. If you’re going to be doing electrical work, plumbing work, adding existing square footage, it’s almost always the better route to check with the city and say, what’s your process look like? Am I going to have to go through an architect and an engineer? Sometimes the answer is yes. I’ve flipped houses before where they literally said, draw it out on a napkin, give us something, put it on a piece of paper, a little picture of what you’re going to do, and our planning department will approve

Rob:
It. So he’s wanting to know, now, when would you not want to add another bedroom? If you have the square footage? Is there a moment where you’re like, oh, let’s not add another bedroom? I suppose it would come down to the comps. If you’re looking at four bedrooms versus three bedrooms, and there’s a pretty significant delta between both, you’d want to add that fourth bedroom. But if you find that the property values are pretty consistent regardless, then I suppose that’d be an instance in which you wouldn’t want to do it. But I feel like that probably is more on the rare side, right?

David:
Yeah, it is more rare. A lot of the times the city’s like, look, if you tell me what you’re doing, we’re going to be okay with it. We just want to know ahead of time. And sometimes they say, Nope, it’s going to be all this work. And then you get to make the decision on if it’s worth doing it for you or not. So the work itself is usually not that complicated, but different government municipalities have different regulations for how difficult they’re going to make this for you.

Rob:
Yeah, but in reference to his question about, he was mentioning when is it not right to do it? When would be a situation in which it’s not worth it to add an extra bedroom? That would pretty much just come down to the comps, right? If that extra bedroom produces a great enough delta to make the investment worth it,

David:
And you got to remember that adding value to real estate typically comes in two main categories, equity and revenue. Cashflow. So you may add an extra bedroom and it might add equity, or it might not based on the comps, but if you’re renting up by the rooms, even if it didn’t add equity, it might make sense for you. You might spend $1,500 to create a bedroom that rents for another $900 a month and you’ve made your money back in a month and a half, right? So when we’re asking these questions, we need a three dimensional view of what we’re doing with real estate, and that often doesn’t fit in a spreadsheet. And I’m kind of getting the feeling from Nick here who’s asking about this, that he’s a spreadsheet guy. He likes to say, how do I put this into a formula to decide if it’s going to make sense for me?

David:
So if you’re going to be adding bedrooms or bathrooms, ask yourself, how much cash will this add? And how much equity is this likely to add? If you’re going to be converting a garage into space, ask yourself, how hard is the city going to make it on me? Or how easy is the city going to make it on me? And is it going to add equity? Is it going to add cashflow? Is it going to add a little bit of both? And you kind of put the whole thing together to make the decision. So you really need to look holistically at these decisions. Do the due diligence, like talking to the city, looking up how much rent you’re going to get for the room and looking at comps to decide how much value it’s going to add to your property before you make your decision. Now, Nick’s last question here said, is it legal to rent by rooms and does it make the eviction process more complicated? Rob, do you have any experience with Rent by the room evictions?

Rob:
No. Thank goodness, and I plan to keep it that way. I mean, I guess it depends on what state you’re in. Actually, I’m pretty sure Florida, just like yesterday, signed a bill that allows you to immediately evict a squatter, but that’s not the case in most other states. I think regardless if someone is staying at your property for longer than 30 days, the eviction process gets a little muddy. One

David:
Of the ways that I’ve gone to prepare for this with my rent by the room properties is we put people on a month by month lease instead of the year lease, so that if there’s something that we don’t like about the tenant, they’re not getting along with the other roommates, they listen to music too loud, they don’t follow the house for rules or whatever. You don’t have to go through as big of a process to get ’em out of that property as when they’re in the rent by the room system. And that is definitely a question that I would run by either an attorney or a property management company that’s had to do these before, because it’s tough for us to answer until we’ve done one. But I know there’s so many people out there that have done this. You could easily put this in the BiggerPockets forums, and you get a ton of people that have handled Rent by the Room evictions that will tell you exactly where it went wrong, what they learned, and how they’re avoiding that in the future.

Rob:
Yeah, I had a friend, they were house hacking, and the person that was renting their room was like, yeah, I’m not going to pay. And they’re like, all right, well get out of here. And they’re like, yeah, I’m not going to do that. And they had a squatter for six months or something, and they had to coexist in the same house under the same roof for longer than they should have because they couldn’t get them out of there. So it does happen. It is pretty rare.

David:
All right. In today’s show, we had some great stuff. We talked about home warranties, when to use ’em, when not to use ’em, and what you probably didn’t know about ’em, what to do when you inherit 1.3 million of Santa Barbara goodness when improving your property. Makes sense when it doesn’t make sense, and what you should know before you jump into it and commit how to navigate $320,000 of student loan debt when you’re an aspiring investor. And most importantly, if real estate robots will change the industry as a whole. If you’d like to be featured on a future episode of Seeing Green, go to bigger pts.com/david and you could submit your question there. If you like these shows, please go subscribe to the BiggerPockets podcast and leave us a review on Seeing Green and what you love about it. Rob, thanks for joining me. You did a great job as always, and I had a blast with you. I’m going to let you get out of here. This is David Green for Rob, my partner in Studs, studs Cleaning Services, AB signing off.