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

0:00Ashley Kehr:Today we're tackling some of the biggest rookie debates out there. Do you follow Dave Ramsey and keep things debt-free? Or do you scale with leverage like so many investors here on BiggerPockets?

0:12Tony J. Robinson:And what about house hacking? Is it still worth it if you don't want to rent by the room? Plus, we're talking about one of the toughest rookie hurdles. What's harder when you're just starting out? Is it finding good deals or getting your financing?

0:29Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kerr.

0:32Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's go on to today's first question. So our first question today comes from Noah. And Noah says, what are your thoughts on Dave Ramsey? Would you rather have one property paid off that's worth$500 ,000 or maybe having$600 ,000 in five leveraged properties? I think there's something to be said about the stress of leverage. I used to want the latter, but now I'm not sure. Who is combining Ramsey with more of the BP style? Are you being more conservative in this economy? Good question. And I would think that a lot of the folks in the audience know Dave Ramsey really quickly for those who maybe aren't super familiar with what he teaches.

1:07Tony J. Robinson:Dave basically says that all debt is bad debt, no matter what the circumstance, and you should never have debt. The only caveat to his rule is that if you do want to buy real estate for your personal residence, you should only buy it on a 15-year fixed note and then pay it off as fast as you can. I don't even know if he's okay. I think he's, even when it comes to investment properties, only wants you to pay cash. Yeah, Dave, he's got a pretty hard line in the sand about using debt under any circumstances. So, Ash, I don't know. Maybe I'll let you lead with this. What are your initial thoughts?

1:35Ashley Kehr:Yeah. I mean, I was a Dave Ramsey fan. I read the, what is it, like the Extreme Money Makeover book. And I followed his debt snowball. I paid off. We had farm equipment debt. We had a home equity line of credit I paid off and my student loans. So we had those three things. And I had my little spreadsheet and my snowball tracker. So I started with the highest interest rate and went down to the lowest interest rate until they were all paid off. A big fan of that. I would say as far as his investing advice, I would not agree with. And I don't think there's a wrong or a right because investing can be emotional.

2:17Ashley Kehr:And if you're not sleeping at night, even though you're making a great return, that's not exactly a healthy lifestyle to be living if you're so worried because you're over leveraged. So in my portfolio, I do have a mix. I do like to have a couple property is completely paid off or like now that I've been investing for over 10 years, some of my properties are on 15-year notes and the balances are really low. So I still have a mortgage, but I have a ton of equity that I could tap into. I think there's a good mix of this. And I think the best thing to actually do is to run the numbers and look, okay, if you had that$500 ,000 property and you held it for 10 years, what would be your cashflow?

3:02Ashley Kehr:How much money would you make from cash flow over those 10 years? And what would the property be worth in 10 years? Then I would take that, if you took that money and bought five properties, what would your monthly cash flow look like? What would the mortgages be paid down to in 10 years? And what would your equity be in 10 years? And I would at least use the numbers as a starting point as to, okay, this is what the numbers look like. And actually, I'll make more money at the end of 10 years and have more equity if I go and buy these five properties instead of this one property. Other things you have to take into consideration, though, are five properties that's more to manage, more asset management, that's more overhead.

3:48Ashley Kehr:So like you have five different insurance policies to track. You have five sets of property taxes to pay. So even though it may not seem like a big deal, think about how much time you have or what resources or property managers you're going to use to actually manage these properties over the 10 years too.

4:06Tony J. Robinson:Yeah, I totally agree with everything you said, Ash. And I think there is something to be said about Ramsey's advice working really well in the personal finance space, but not maybe being the best in the investing space. Because I think about someone who only wants to pay cash for a rental property. And if that were the case, I never would have gotten started, you know, and I wouldn't have a portfolio today if I was only waiting to pay cash on, on deals, at least in the market that I'm in, you know, like, like I live in an expensive market. So I think there is a way to, to maybe blend those two things.

4:37And I think what

4:38Tony J. Robinson:comes to mind for me is if you're concerned about over leveraging, then maybe you set a rule where it's like, Hey, I'm only going to, you know, put down at minimum 30%, like every deal that I buy, I'm going to be at no more than 70 % loan-to-value, right? Which means you put down at least 30 % on every deal. Maybe it's 40%. But I think there is maybe a way where you can blend the benefits of leverage because leverage is one of the tools that makes real estate investing so attractive is that you get to control an asset that's worth half a million dollars with only 10, 20, 30 % of the actual value of the asset.

5:12Tony J. Robinson:And I think you would be maybe reducing some of the benefits of real estate if you aren't using leverage at all. So I think there's a middle point here where it's like, hey, what is the amount of leverage that I'm comfortable with? And it's more of a sliding scale, I think, than a black or white. You know, every property is at 99 % or I'm at 0%. And there's maybe something to be said there. I think the last thing that I'll add is that it might also vary depending on where you're at in your life and what season you're in. And I think a lot of folks are familiar with investing in stocks. And typically you'll see younger folks maybe going after a more aggressive stock portfolio where they can maybe take some bigger swings and we have a few misses because they've got a longer time horizon until they actually need those funds.

5:58Tony J. Robinson:And it could be the same if you're investing in real estate later in life. Maybe you've got a good amount of capital and what's more important to you than maximizing your return on that capital, it's the preservation of that capital. And if that's the case, then yeah, maybe buying more properties in cash or putting more properties on a 15-year note makes more sense if you're closer to that timeframe in your life. So I think blending the two of those ideas together, but then also trying to understand, okay, where am I at in my investing journey and trying to put together the pieces in a way that makes sense for your specific situation.

6:27Ashley Kehr:We have to take a short break, but when we come back, we're going to discuss if this one strategy is still viable in today's economy. We'll be right back.

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10:25Ashley Kehr:Okay, so our next question is about house hacking. Hello, everyone. I'm trying to understand if house hacking is still a viable option if you pursue any options beyond rent by the room. Does anyone have any examples where they were able to do a house hack without this method and where the average single family home price is around$400 ,000? I am hoping to pursue a house hack in Raleigh, North Carolina or surrounding areas. The general trend that I have been seeing is that cash flow is going to be hard to generate in today's market unless you are able to rent by the room. Unfortunately, this is not an option for my spouse and I due to past experiences with roommates.

11:04Ashley Kehr:My wife is open to a situation where we are able to create separate living spaces, hence my question. Okay, so let's kind of summarize this here. A rookie couple wants to house hack, but without roommates. So they want separate doors, separate walls. they're curious if this is still viable. So I guess we need to define what viable means. And he didn't mention the word cash flow. So I want you to think of it this way, is that when you buy your investment property, the goal, yes, is to cash flow and put money into your pocket without having expenses on your own. For house hacking, you're living in the property.

11:42Ashley Kehr:So if I were to go out and buy an investment property, I'm still paying my cost of living to live in my property, and then the tenants are covering the mortgage on the investment property I purchased. Tony, he has decided to go house hack. He is living in the property. He's renting out one side and he's living in the other side. So I have that cost of living now and he doesn't because his tenant is paying his mortgage. So I think you have to not just look at what the cash flow is on a house hack, but look at how much money you're saving by not living somewhere else, either renting or paying a mortgage.

12:23Ashley Kehr:So as long as you are decreasing your living expenses, or maybe you're living or moving to a bigger property that you couldn't afford without having someone supplemented income, maybe you just found out you're having triplets and need a bigger house and renting out one side or the garage or basement or something like that can help offset that. So the goal of house hacking is really to offset your own cost of living. And if you can cash flow, that's great. That's awesome. That makes it so much more worth it. But don't get strung up that it's not a deal because think about how much you would be paying to live in a property that's similar.

13:04Ashley Kehr:And it's probably going to be a lot less with having, you know, renting out another unit or having your roommate.

13:12Tony J. Robinson:And I think we can even expand because it seems like this person's thinking about house hacking only in the sense of buying a single family home and then renting out the spare bedrooms. And while that's one version of house hacking, I think there are lots of other ways you can go about house hacking. You can rent out the basement. Like say you have an unfinished basement. If you buy a house, you finish out the basement, put a separate entrance, now you can rent out the basement. If you have an ADU in the back, we just did an episode. We just did an interview with Lekha Devtha, and she talked about building dadus, detached ADUs.

13:46Tony J. Robinson:So you could do that, where you live in the front house and you rent out the back house. You could buy small multifamily, duplex, triplex, fourplex, where you live in one unit and you're renting out the other units. So I think one potential solution is just expanding your buy box to potentially identify other types of structures that would still allow you to house hack while keeping your space separate from where your tenants are.

14:08Ashley Kehr:Yeah. And along those lines is looking at what strategy to actually house hack because you could have somebody that's in there all the time, but you could also do a short-term rental or a mid-term rental where you're choosing when you want to open up the bookings for someone to book. You have great flexibility as long as your regulation or your state allows for it, but You can go ahead and kind of fit a strategy that will fit to your lifestyle. So, for example, there are times like Christmas when you just want the whole property to yourself or whatever it may be. Then or you're having family visiting and they can stay in that other unit.

14:42Ashley Kehr:Then maybe short term rental or midterm rental or a combination of both in that other unit can make it more worthwhile.

14:50Tony J. Robinson:Something else that I think we should highlight here, Ash. They said that rinsing by the room isn't an option for my spouse and I due to past experiences with roommates. and obviously you are the resident expert at tenant screening here. I wonder, Ash, if there is a way that they can maybe adjust their tenant screening processes to alleviate those issues, because it sounds like they said roommates. So I'm assuming they were maybe living with someone just in a traditional roommate setting. But if you're doing house hacking, you're actually that person's landlord. Though we did have a bit of a horror story in a recent episode where someone had to evict someone who was renting a room in their house.

15:26Tony J. Robinson:But what would your recommendation be to them, Ashley, in terms of screening this tenant to avoid any potential issues?

15:33Ashley Kehr:Well, especially when it's your primary residence, you have more leeway if you're living in the property as to who can actually rent from you. So you have more discretion. So for example, you could say only girls ages 20 to 30. That may be appropriate because they're around your age and you want someone your age living there. And with if I was renting out an investment property, I could not put any of that into the listing as to this is who exactly, you know, the demographic of the person that I want to live with me. So you do have a lot more leeway into choosing who you want to live with you.

16:08Ashley Kehr:And it could be honestly that like you don't feel a good vibe or that you're not going to get along with the person, whatever. There's a lot more excuses that you can use to not accept the person to move into your room in your house. So I think that's a big factor into play is that you can have more discretion as to who you choose to actually be your roommate. You could also do the short-term rental strategy for rent by the room too. So maybe if you're gone for a weekend or something like that, you could rent out your room or you could be there. We don't have a lot of rent by the room, short-term rental listings near me at least, but I've seen them all over the place in other cities available.

16:49Ashley Kehr:So then that also depends how comfortable you are, because that's also complete strangers coming in and staying with you. So that might actually be worse for you than actually going through the screening criteria, but doing a really thorough screening of them. So the, you know, like I use, there's TurboTenant, there's RentReady, all these different property management softwares that will actually do the tenant screening for you, a background check, actually the credit screening. You can check for any criminal activity, any past evictions, things like that. But also you should be doing social media scrubbing through social media, looking at their Facebook profile.

17:33Ashley Kehr:Do they have a picture where they're showing their house like, oh, just hanging at home today. And it's literally just like a trashed apartment with garbage and pizza boxes and stuff all over can give you an idea of how they would treat your home. So definitely go to social media.

17:50Tony J. Robinson:Ash, have you seen tenants with posting those kind of pictures where they're in their units of trash all over the place?

17:55Ashley Kehr:No, no, but my sister, her tenant, actually, she found her tenant's TikTok and they live upstairs, downstairs. My sister just moved out, actually. She just bought a new house, but she found her TikTok and she found some, let's see, what's the paraphernalia? She was doing her apartment and some provocative posting that was happening in the apartment or whatever, but nothing illegal, nothing bad or whatever. Then the apartment wasn't trashed at all, but it was just funny.

18:32Tony J. Robinson:Well, yeah, you know, I think that, and to your point, like, you can probably head off a lot of issues with the right screening up front. And if you're not in a rush to find someone and you really take your time to go through those motions, I know I can think of one couple in my life, one of our partners. He and his wife house hacked their primary residence, I think, for the majority of their time owning it until they had, I think, two kids. They have three now. I think their first two kids, they were still renting out rooms in their primary residence to help offset that cost. So it's something that's worked well for many people.

19:11Tony J. Robinson:So you got a few options here. Raleigh is a big market. You know, it's a big city. I'm sure there's a lot of demand for room rentals. Just got to figure out the right way to execute on it.