Getting Into Your First Property is Cheaper

David:
This is the BiggerPockets Podcast show 771.

Kristina:
So I’m like, “What else are they doing? What else are they doing to these people that are really financially strapped to squeeze as much pennies as they can at them?” It’s like shaking them upside down and try to squeeze every penny out of them.

David:
Bullies in high school, right?

Kristina:
Right. That’s what it felt like. It totally feels like that.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets for Real Estate podcast here today with a Seeing Greene episode. And I brought friends. None more important than my good friend, Rob Abasolo. Rob, good afternoon to you.

Rob:
Howdy? How are you doing? Yeah, you having a good time over there?

David:
We had a great time. We actually have another person who’s going to be joining us, Kristina Smallhorn, who runs a YouTube channel and specializes in home affordability. And today, Rob, Kristina and I will be taking turns answering questions from you, the best audience in the entire world, about home affordability and concerns in the market. In today’s show, we are going to cover when you should build-to-rent and when you shouldn’t, if the 40-year mortgage is actually a good idea, things that you never knew about, home affordability. And as a bonus to you, our loyal listeners, you are going to get to hear our Dave Ramsey impressions, all that and more on today’s Seeing Greene. Rob, what was some of your favorite parts of today’s show?

Rob:
Aside from all of the bullets you just gave, you didn’t leave me a bone here. You got to toss me a bone to every so often. But I will say at the very end of the episode, I think that we got pretty, I don’t want to say not too real, but we got pretty real about affordability of homes, how it’s kind of a problem that a lot of people can’t afford to get into homes with today’s standard of living, some possible solutions. Just some questions, we ask questions that I feel like we don’t really ask all that often on the podcast. And so I think it’s nice to kind of bring this perspective in to just kind of keep us grounded a bit, you know?

David:
Absolutely. We are committed to keeping it real. That’s what we do today. If you would like to be featured on a BiggerPockets podcast yourself, go to biggerpockets.com/david where you can submit your questions and hopefully we choose one to get it answered. So make sure you leave a good one. And as you listen to today’s show, leave us some comments on the BiggerPockets’ YouTube channel. If you’re listening on there, we want to hear what you thought. Did you laugh? Did you cry? Did you think? What do you wish that we would’ve talked about? And what were you happy that we discussed.
Before we bring in Kristina, today’s quick tip is, when you’re heading into buy a new construction property or even if you think you’re just going to look, you can easily get screwed. They have lots of ways to do it. Listen to today’s show and I am going to give you some three pointers to make sure you don’t get burned by new home construction. That’s all I have. Let’s get to Kristina.
Welcome everybody to the BiggerPockets Podcast here today with a Seeing Greene episode. Now normally on these Seeing Greene episodes, I am, so to speak, the only tree in the forest, but I brought some trees with me. I have my good friend Rob Abasolo, as well as our guest today, Kristina Smallhorn, to help me answer questions. And together, we all trees make up a forest. So this is going to be a Seeing Forest Greene episode. Hope you see what I did there. Kristina, welcome to the show and thank you for coming.

Kristina:
Thank you for having me. I’m very excited to be here.

David:
Yes. Can you give our audience a very brief, maybe summary of what your experience with real estate is like and how you serve people?

Kristina:
I’ve been in real estate since 2008. I’m a real estate agent here in Louisiana. I mostly focus and work with people that are looking for affordable housing options, whether that be a manufactured home, modular home, tiny home and pieces of affordable land to build their most affordable housing option. I’m trying to get them out of the rental game without having to sink down thousands and thousands of dollars. Most people or a lot of people that are looking to buy are right now affordability is such a problem. I’m giving them ideas of alternative ways to get into the real estate game.

David:
And It’s clear to me that you are a YouTuber because you understand metadata. You worked affordable like four times into your question there, which would be great on a YouTube algorithm and also will stick in our viewer’s minds as, “That’s the person to go to if I need something affordable.” Well done.

Kristina:
Ooh, I totally didn’t plan that.

David:
Yeah, but it’s just a part of your nature. That’s how giving you are. And Rob, who are you? For anyone that doesn’t know.

Rob:
I am also a YouTuber. I build tiny houses. I’m also the co-host, the titular co-host of the BiggerPockets Podcast. And I’m just guest starring today.

David:
And for those that don’t speak fancy, can you explain what titular means?

Rob:
Oof. I think it’s like a informal title or it’s like a title that’s given to me that doesn’t really mean anything other than, “Look, I just show up at a talk on a microphone.”

David:
I don’t know if that word means what you think it means.

Rob:
I’m pretty sure. I’m going to look it. “Holding or constituting a purely formal position or title without any real authority.” Ba, ba, ba, bam. How does that feel in front of all of our listeners?

David:
Is that what you said?

Rob:
In so many words.

David:
Well, we will accept it. Judges say that that is an acceptable answer. Kristina, why is affordability so important to you that it is baked into your subconscious and comes out of your words? The Bible says that the words of the mouth are the overflow of the heart. We can tell affordability is written deeply into your heart. Why is that so?

Kristina:
It probably really started with me with a client that I was trying to help. This guy had lived on his family land and he had a manufactured home and he didn’t know what to do. He wanted to sell his manufactured home but wanted to keep the land. I’m like, “Real estate agents don’t work that way. We can’t do that.” And he’s like, “This loan is killing me. They only give you so many periods of time to finance this.” And I’m like, “Well, let me see your loan. What are you doing?”
So the way that they had done his loan, instead of rolling the land in the manufactured home in together where you could have gotten an FHA or even a rural development loan which have cost him a lot less, they put him in something called a chattel loan, which I had never heard of until, I mean, it was like my first years in real estate. So I looked it up and what he was paying in interest was ridiculous.
And so I got him connected with somebody that’s in this industry as far as lending, and he was like, “Yeah, we can put him in a 30-year loan that will save him almost $250 a month,” which doesn’t seem like a lot, but this was enough for him to not lose his house. And so he was able to do that, but they didn’t do that for him at the beginning when they should have. And that just ticked me off. And that was the people that finance on the lots because they knew that they could get him for more money and it gives them a bonus to do this. And that just lit a fire in my hiney. So I’m like, “What else are they doing? What else are they doing to these people that are really financially strapped to squeeze as much pennies as they can? It’s like shaking them up upside down and try to squeeze every penny out of them.

David:
Bullies in high school, right?

Kristina:
Right. That’s what it felt like. It totally feels like that. I think that’s kind of like where the slimy sales agent comes in. And so even my husband and I would go onto these lots and kind of like, “We lied. I’m not going to lie. We’re going to lie. We lied.”

David:
Wait a minute. You’re not going to lie, you lied.

Kristina:
I’m not going to lie. We totally lied to these people.

David:
This is becoming lies’ception. Can I trust that this is not a lie if you lied? Or is that the only time you can trust someone is if they say, “I’m not lying”?

Rob:
How many layers deep are we here?

Kristina:
I was playing a character basically. And I was trying to find out what the salespeople were doing. It was very clear that they had rehearsed a script for quite some time so they knew how to be very evasive in their questions and pushing you towards that financing in their office, financing in their office. And I’m like, “Well, you know what? I’m going to put educational videos out there telling people you don’t have to finance in their office.”

David:
Before we get to today’s questions, would you guys like me to share an industry secret that no one would know about real estate if they weren’t a mortgage broker and a real estate agent at the same time?

Kristina:
Tell me.

David:
This is going to blow people’s minds away.

Rob:
What if Kristina and I both were like, “No, let’s just get to the question actually”? That’d be very awkward, right?

David:
That would’ve been impressive if you had the cajones to actually do that on my show. “Actually, no, David, I think we’ve heard from you enough.” Then you just started reading the first question. That’d been funny.

Rob:
Okay. Yes, we do want to know. Tell us.

David:
For the listeners, oftentimes you will go into a new construction situation with this beautiful home development and you see the flags in the air and you go in there and they don’t want you to have an agent because they don’t want to pay a commission. They’ll get you to sign up. And if you sign up, you are now ineligible to have an agent represent you on the transaction. First thing, don’t go in there and say, “I’m just going to look,” because the minute you sign in to look at homes, which they make you do, you’ve disqualified yourself from being able to have buyer representation. Number two, they do not use the same forms that realtors use state approved forms that everyone uses. They have forms that… Because those state approved forms are more or less completely neutral, the way that you fill them out will put leverage in one side or the other. Well, these construction forms are 100% geared towards protecting them and not you. And you would not understand the subtlety of these details until you were screwed, unless you were a real estate agent.
And number three, most important, they will usually have a lender that they say, “Use our preferred lender and we will pay for 1% of your closing costs, $10,000 of your closing costs,” whatever. First off, they’re making way more money from you not having a realtor, so you’re not actually saving that. And second off, you’re not even saving it on the loan. What’s happening is that lender is going to give you a interest rate above par, above the par for that time which may not make sense to you, but what they’re basically doing is giving you a higher rate and then contributing that lender credit towards you and telling you that they’re saving you that $10,000. They’re really not. You could have got that same credit using a different lender that you had a relationship with. They’re not giving you anything free. They just move the pieces around. So like you said, Kristina, it is very, very, very dicey when you walk into those situations and you’re doing it without any kind of a guide.
So quick tip of the day, if you’re going to look at new construction homes, go find your agent first. Kristina, anything you want to add on that before we get into the questions?

Kristina:
Yeah. So you want to add to that that way that they even make more money. So you use their lender, you don’t use their agent. And they also want you to use their preferred title company. And they usually own the lender and the title company. So yeah, they’re making their money.

David:
All right. You guys are welcome for these industry standards.

Rob:
Listen guys, I just want to say this, be careful saying this stuff. I made a video on YouTube not too long ago called… Well actually about a year and a half ago. It’s called The Harsh Reality about Prefabs and Why I Won’t Ever Buy Them. It was about this industry and I said things like this. Wooh! The angry comments… This is the only time I get angry comments from people are whenever I talk about this industry specifically. So just watch out you guys. You officially have targets on your back now.

David:
Tell them to bring it. I stand in between the bad guys and the good people of the BiggerPockets community and I will continue to hold the line like a good Spartan. All right, our first question comes from Jerome. Jerome says, “Should investors begin to pivot towards build-to-rent, in other words, developing, as well as owners who plan on occupying?” His hypothesis that it will become increasingly more economical for buyers to purchase land plots and rent while they develop and BRRRR their primary homes. Kristina, what say you?

Kristina:
I hate build-to-rent. I mean, I guess if you’re an investor, I mean that’s fantastic, those build-to-rent because I mean, I believe that the younger generations, kids my daughter’s age, are convinced they will never be able to afford a home. So if you’re going to invest in build-to-rent communities, go for it. There’s probably going to be a big… The future looks like there’s going to be more people renting than buying. But I’m one of those people that makes the videos that tell people try to vote against build-to-rent communities in your area.

David:
So you say try to vote against them?

Kristina:
Yeah, I vote against them always.

David:
Okay. So what’s the reason why you don’t think people should get into that?

Rob:
But before we get into the reason, David, what is build-to-rent.

David:
Oh, this is just like it sounds. You’re building a house, but instead of selling it to somebody else, you’re keeping it, refinancing it. I guess it’s a form of BRRRR. Instead of Buy, Rehab, Rent, Refinance, Repeat, it’d be like build, part of building is rehabbing. Then you would rent it out and then refinance to get out of the construction loan and then keep it as a rental property.

Rob:
Oh, okay. Cool. Cool. So it’s like a new construction BRRRR? Got it.

David:
Yeah, a new construction.

Kristina:
Oh, I was thinking that you were talking about build-to-rent communities where the big investors come in, make these whole community that’s just build-to-rent.

David:
Oh, okay. So I don’t think that’s what the… That’s a good answer to the question that you thought I was asking. I don’t know, but I think Jerome is saying, “I can’t find a deal. It’s too expensive to buy a property to somebody else. I can build it for cheaper than I could buy it. Is this something that investors should start looking into?”

Kristina:
Hey, it’s not a bad idea, I don’t think build-to-rent is a bad idea if you’re planning on doing that. I was confused by your question. I’m so sorry about that. But if you can get them building materials for cheaper and there’s nothing in your area, why not do it? Especially if you have your own land already.

David:
Well, I’m sorry for confusing. Hopefully artificial intelligence doesn’t take my job and ask the questions better. Rob has me terrified now. Rob, what’s your take on this build-to-rent debacle?

Rob:
So here’s the deal. I think that… So people often ask me this when they’re like, “Hey, should I just buy a house or should I build-to-rent?” And ultimately this is what I think. It all comes down to your preference and your goals, right? So if you need to cash flow now, then you should not do build-to-rent. You should go and find a property, buy it right now and make whatever money you can from buying said property.
But if your long-term goal, if you’re like, “I don’t need the cash flow now. I’m willing to wait,” then build-to-rent is a really great option. It’s going to take anywhere from 14 to 18 months to complete a project, but the upside of it is that you’re building in so much equity, it is so much cheaper because you’re building it at your cost effectively, right? And your cash flow will inevitably be better. You just have to wait 14 to 18 months. So it really depends on how squeezed you are for cash flow. If you need it now, not a great strategy. But if you can wait, then I think it’s probably the best way to build equity in real estate.

Kristina:
I like Rob’s answer better. Could I answer this really quick? I’m so sorry to interrupt you, David, but I have to. I can’t help myself.

David:
It’s my forest. You are allowed to be your tree.

Kristina:
I liked Rob’s answer better. But as he was talking, I started thinking about it. If you have a piece of land and you don’t want to wait all those months in it’s zone that you’re able to put in a manufactured home, then you can put a manufactured home in that space. And yes, those rent like hotcake cakes, people will rent a manufactured home. And so you’re like instantaneous rental right away. And you can find really good deals for foreclosed manufactured homes. You can get an almost brand new, like a year old for $6,000. That’s happens. That happens all the time. And you put that in the spot, set it up, call it a day, and now you’ve got an instant rental if you really wanted to go cash flow quick.

Rob:
So you could actually get a manufactured home that cheap, 6,000 to $10,000?

Kristina:
If you go to these websites that have foreclosed properties from your local banks and lenders. And a lot of times because of people having those chattel loans, they have to repossess the house. And when they repossess it, because of the fact that it can’t be refinanced again, you cannot finance it again because it’s been moved twice at this point. So now it’s like a dead property, but that’s why you get it so cheap. You can get it 6,000, $10,000, something like that. And it’s brand new. Sometimes they still even have the stickers in them, you know?

David:
Let’s break this down a little bit more, Kristina. What is a chattel loan?

Kristina:
A chattel loan is basically, it’s not tied to anything, so like a lot of times when people will compare it to a car loan. So

David:
It’s an unsecured loan so to speak?

Kristina:
Yes.

David:
And how does that apply to the real estate property?

Kristina:
So some people have a piece of land, they’ll own a piece of land and they’ll want to have a house put on there. So they’re afraid to kind of tie the land in with the piece of property. So they have this chattel loan on their manufactured home and they’re going to go ahead and put it there. But it doesn’t really work out into their benefit because they don’t really get a very good interest rate on that and they can’t rule any other amenities to the property that you would need, like utilities, electricity, anything like that. So it’s better to do almost like a new construction loan.

David:
Let me see if I can break this down and then get your clarity from it. So to understand this better, when we think of getting a loan on a house, what we’re actually getting is a loan on a house with land attached to it. You’re getting both when you get that loan. And then that conforms to government standards. So now you can get a 30-year fixed straight loan, which makes your payment less, keeps your interest rates lower. That’s what everyone is used to hearing. But there are loans that are different than that. For instance, you can get a loan on a car, not a house. But most loans that you get are tied to an asset, that’s called secured, which keeps the interest rate lower because the idea is if you don’t pay back that loan, the person can foreclose and take your car, take your house, take whatever.
Unsecured loans would be something like a credit card loan where it’s not tied to anything. So it’s riskier for the person giving the loan, which means they make up for that risk by giving you a higher rate, which is why a credit card rate is higher than a home mortgage or a HELOC or a loan you take against your stock portfolio. So secured loans are something that if you don’t pay it back, they could take something from you, which we also call collateral. If you’ve ever heard that phrase, that might have just clicked, “Oh, it’s like collateral.” Like you ever been in a restaurant, you forgot your wallet and you’re like, “I got to leave and get my wallet,” and they’re like, The hell you do. You’re not leaving until you pay.” And what do you say? “Well, what if I leave my car keys here with you so you know that I don’t leave?” That’s how collateral works. It reduces the risk of the person that’s owed.
A chattel loan is a form of an unsecured loan that you take out to buy the land that you put the house on? Or is it to buy the house when you already own the land?

Kristina:
You could do either. So some people will buy a manufactured home and put it in a rented, like mobile home park. So you just have the loan on the manufactured home itself.

David:
So they could take the home if you don’t make the payment, but they can’t take the land? You keep the land?

Kristina:
They cannot take the land. If it’s a chattel loan, they cannot take your land.

David:
Makes sense. So this is why these loans apply to mobile home parks or RVs because you can move the house off of the land. They’re not tied together like we would normally think about it. But you said the rates are higher, right?

Kristina:
Right.

David:
And you also mentioned something along the lines of you can only refinance them twice, is that right?

Kristina:
That will depend on the lender. There is stipulations on how you can refinance the age of the manufactured home. They’re much more difficult to refinance when you do refinance them and they will refinance at a higher rate as well.

David:
Especially if rates have gone up since the time that you’ve got it, right?

Kristina:
Correct.

David:
Okay, so this is why you don’t like this method because it’s putting people at risk who don’t quite understand these are not 30 year fixed rate mortgages like a normal house. They’re going to be due sooner and the rates can go up.

Kristina:
Right. But I don’t think the product should be eliminated because there’s plenty of people… If you look a lot of retirees, they buy their small little manufactured park. They’ve on a fixed income, they know that they can afford it, and they were able to move their little manufactured home into the park and it’s a retirement community. They’re all over New Jersey and Florida. So they rent that land underneath it and they have the chattel loan on the manufactured home. I think the product is necessary. I think some of the practices with the product is terrible.

Rob:
I’ve got a follow-up question. Before the follow-up, fun fact. The way that I learned what collateral was an episode of The Brady Bunch. I don’t know if anybody ever saw that episode. They were trying to get their parents like an engrave silver platter. If anybody learned that from that episode, please leave a comment in the YouTube video just so I know I’m not alone here. But what I wanted to clarify with you, Kristina, was you’re saying these homes, they’re 6 to 10K, is this effectively like a mobile home? Because aren’t there also manufactured homes that are like 200K or 300K that are effectively stick-built homes that are kind of shipped in and built on site? Are they different things?

Kristina:
Okay, so I’m talking about manufactured homes. They used to be called mobile homes or trailer homes. But what you’re talking about is modular homes that look like stick-built homes. Both of them are made in a manufactured plant, so they’re still considered manufactured homes. What the building standard they’re built to is what changes. So when you have a manufactured home, they’re built to HUD specifications. Usually they have the same appearance, they kind of look like the one straight across. They have the skirting at the bottom. Sometimes people will put some kind of decking on the front and the back.

Rob:
Like a flower bed or something?

Kristina:
Yeah. They don’t have a garage or anything like that unless you build it on afterwards. But a modular home, it looks just like a traditional built home. It just happens to be that each room is built in a factory. They bring those little cubes, they lock them together like little Legos and they’re little modules that are put together, but they’re all made in a manufacturing plant.

Rob:
Okay. So some similarities, but those are typically the more expensive of the two, right?

Kristina:
Right. Yeah, I mean the modular homes can go up into the millions.

David:
Okay, so the idea here is order to improve affordability would be you buy land, you then buy a manufactured home. Or how are we classifying the other type? Fabricated?

Rob:
Modular.

David:
Manufactured or modular. And manufactured is the better quality, more expensive type, is that right?

Kristina:
Modular’s the more expensive.

David:
Yeah, modular/prefab. That would be the more expensive, like box bowl or some of these that are really high end shipping containers.

Kristina:
Right. So you have to be careful though, because not all prefabs… Or actually, even though they’re built to modular standards, there may not be modular standards for your specific area. Just because it’s built to modular standards, it may not meet building code for your specific state. So just be very careful.

Rob:
The local building. Especially if you live somewhere like California. I’ve gone down this route so many times. I think so many Californians have where they’re like, “Oh, I’m going to buy a piece of land in Malibu for… Look, this one’s like $12,000. I’m just going to put this $50,000 home on it.” And it’s like, “Eh, the land is unbuildable and the actual house itself will probably cost a lot more than that.” I’m curious though, Kristina, is there a secret to buying the right kind of land? Is there any kind of watch-outs or red flags that one should consider in those instances?

Kristina:
I’ll give you one of my favorite tips to give people if you’re looking for a piece of land, is to find a piece of land that had a old house on it or an old manufactured home because that means that it’s already had utilities to the area. That’s like to me a gem. When you are walking through a piece of land and you find an old frame of a house or an old slab there, that is like you’ve just hit the jackpot because they’ve already had utilities out there, so it’s going to be a lot easier for you.

David:
That was my next question. So I remember a certain person that is very attached to my life, whose name I will not say, called me one time, incredibly excited about this amazing deal in the Smoky Mountains where it was like 50 acres and he had done the math in his head. Well now we know it’s a he. And was like, “All right, if we turn these into half acre plots, we could do a hundred houses and the land’s only this much money and we can build for this much per square foot. We’re going to build this many at a time and then refinance them and then build the next ones. We’re going to have a whole community of cabins. Real estate developing is not that hard, David, let’s move on this thing.”
I listened to him and I was like, “Okay, how much is it going to cost to run the utilities and the sewage and the electrical?” And there was this very long awkward pause. And I realized that person did not think that that is a part of building a home. And that’s the part that gets everyone when they ask this question.

Rob:
That’s the expensive part for sure.

David:
Yes, that’s the hard part. It can be-

Rob:
That’s always utilities.

David:
… wildly expensive to have to run utilities when they’re up on the middle of a mountain in front of nothing how you’re going to get electricity up there and if you want the plumbing and everything. So Kristina, what advice do you have for people who got all excited hearing this and then are now being brought down to earth that there’s actually some work that goes into the infrastructure to put up residential dwelling?

Kristina:
I think that people are… They have wild ideas. I always call them the dreamers because those people, they start talking, I’m like, “They have not even put into perspective all the things that can happen to a piece of land.” There’s so many things. And in every area you live in, there’s going to be some other element that you never thought of. When it comes to zoning, when it comes to flood conditions, when it comes to wetlands, you have to put all of that in perspective. So whenever you’re looking at a piece of dirt, I suggest you put together a spreadsheet of all these things, all the certificates does it have. Does it have a flood certificate? Does it have a mining certificate? Is there any leases on this land that you need to know about?
There’s so many things before you even decide to put a house there because you may not be able to put a house on a piece of land, especially if it’s never had a home there before. That’s why I always say it’s like the biggest green flag is that if it’s already had a house there, you’ve already jumped over a thousand hurdles. Because even though you have a piece of dirt too, the land quality may not be good enough to support a house on it itself. So you’ll have to have soil tests too. I mean, it’s insane how many things that can happen with dirt.

Rob:
Yeah, it’s not like you just go and build a permit. You… Sorry. It’s not like you just go and pull a permit. There’s a whole process that goes into that. And oh man, I could honestly talk about what to look for and land all day. I kind of want to, but it’s fine. Maybe there’s a question that will get us back into the land side of things.

Kristina:
I have a thousand videos about buying land on YouTube. All the things, the pitfalls you can have about buying land. But there is a really good book out there. I didn’t write it. Her name’s Cheryl Sain, and it’s like The 10 Things You Didn’t Know About Buying Land and it kind of walks you… I call it the Land Buying Bible. She has a great book on that.

David:
So you’re a bit of an architect. You show up at this landscape and you get on your hands and knees with your microscope and you go digging through the dirt with a little brush, but you’re not looking for dinosaur bones, you’re looking for foundation, 2 by 4s, any indication that at some point a house was built on this land, right?

Kristina:
Yes. And it hasn’t been there, I’m also getting on my hands and knees with a metal detector to see if there’s any pylons in the four corners to find out where they’re at. And if it’s there, I take a piece of string, then go around each corner so I can see exactly where the land is and meets and everything.

David:
Interesting.

Kristina:
Yeah, that’s one of my favorite tips.

David:
I think we just simultaneously created so much hope in people and stopped so many people from losing money.

Kristina:
I have another thing though. And if you are in an area that the land may not be good enough for a home, it might be okay for a manufactured home because they don’t weigh as much as the typical house. So if they’ve said no to a home and your area is zoned that you’re allowed to have a manufactured home there, you may want to have a survey done with that.

David:
Last question, how could someone tell what type of a property would go best on the type of land they’re looking at?

Kristina:
So I would work with a local real estate agent. I would work with a local real estate agent that understands the land and understands the area itself. And I would have a complete survey done on your property to let you know where all the pitfalls are because that survey is almost like your CARFAX. It’s your land facts of the land. And just make sure that you have everything that you need to know about that. That’s the only way you’re going to know if you have a good piece of property or not. You can do that during your due diligence period.

David:
So you can put it in a contract, give yourself a contingency to back out based on due diligence and that’s when you can look up the information?

Rob:
Yeah, basically an option period especially… Which I think is important no matter what land you buy, but I do have a lot of people that approach me that are like, “Oh man, I want to buy these 50 acres. It’s half a million dollars. What do you think?” And I’m like, “Give yourself a serious amount of due diligence to actually figured out because even when it says it’s no zoning or non-restrictive zoning and you can build whatever you want, it’s very rarely actually the case.” So that’s my general warning to everybody, it’s be very careful and go to your city planners and actually ask them what you can build on there. That’s going to be how you get the best answer to that question, I think.

David:
All right. Our next question comes from Matt. Matt says, “With home price appreciation and rising interest rates, decreasing affordability for first time homeowners, do you think there’s a possibility of a 40-year mortgage at some point or do you see some other way that the government might intervene to address the affordability issue?” Kristina, you’re passionate about affordability. I’m sure you’ve given this little thought. What’s your take here?

Kristina:
I hate the 40-year mortgage. I think it’s a really stupid idea.

David:
It’s tricky, isn’t it?

Kristina:
All they’re doing is adding… It’s dumb because all they’re doing is adding another 10 years where the bank could get more money. It’s not helping the person that’s actually buying the house. Your payment would go down so insignificantly over those 40 years that you’d be paying. All you’re doing is giving more money to the bank. 30 years is plenty of time. I think that there should be some programs currently when it comes to affordability. The cheapest homes, the least expensive homes in the area are being bought up by a lot of investors. And I think they should start capping how many houses in a neighborhood should be turned into rentals. I think that should be citywide in each city. I know that would really burn people’s rear end and [inaudible 00:29:30].

David:
Our audience is loving hearing this right now.

Kristina:
I mean, the thing is I’m not the investor that wants every house, the neighborhood to turn into rentals.

Rob:
That’s totally fair.

David:
So what would your thoughts be if you bought a house to live in it and then decide you want to move out? Would that mean that you can’t rent it out, you’d have to sell it to somebody else?

Kristina:
This would depend on how many houses in a neighborhood were already rentals.

David:
Like a condominium, like HOA that says, “You can only have X amount of these as rental properties.”

Kristina:
Correct. And every neighborhood can do that by the way. Even if you’re an older neighborhood, you can make an amendment to your covenants to allow for that to happen. I don’t think anybody wants to churn their whole entire neighborhood into rental units. I don’t think that anybody wants that. And I do believe rental homes have their place, but I don’t want to see our future generations only being renters and not having the opportunity to own a home. That’s how I feel about it.

David:
All right, and so the 40-year mortgage sum up, what is the reason you don’t like it?

Kristina:
I think that it’s making a person pay 10 more years to the bank for no reason. I don’t think it’s necessarily the best product for a person trying to buy a home. I think there should be some programs that incentivize people that have never owned a home, not people that didn’t have or owned a home in the last seven years. If you’ve never owned a house, you’ve never had been on title work where you owned a home, I think they should help those first time home buyers with some kind of closing cost package like they did back during the last housing crash when they helped first time home buyers. Right now, it’d be terrible for them to do something like that because we just don’t have enough supply of houses.
I also think that the government needs to incentivize builders to build more affordable housing, not just rental affordability because that’s what they do. They’re like, “Oh, we’re doing this for affordable housing, but it’s all rentals.” That is not helping the affordability problem. We need houses. There’s plenty of people with really good credit, they just can’t find any place to purchase a house.

David:
So let me break this down for anyone that hasn’t done the math on 30-year versus a 40-year mortgage. If you got a 30-year mortgage for $500,000 at a 6.5% interest rate, the total interest that you would pay on that would be $637,722. So that means you’d pay back almost 640,000 plus the 500,000 of principle. So you end up paying back over 1.1, okay? So remember that number of almost 638,000. If they put this to a 40-year mortgage, that interest of what I believe I said was 638,000 jumps up to 905,000. So you’re paying almost $300,000 more for the exact same property, nothing different putting it on a 40-year instead of a 30-year.
Now the same could be said if you go from 30-year back to 20, or 20 back to 10, right? There is an argument to be made that the longer you spread out this loan, the more expensive it becomes. The way it becomes misleading is that we’ve all created a baseline of what a house is worth based off of a 30-year mortgage. It’s just in your subconscious. That is how you look at real estate. The minute you turn this into 40, you will start to see home prices again continue to increase more and more and more because the payment got lower for the same property. And it’s a way of creating the look of affordability, but not actually making it affordable. In this case, it’s the opposite of affordable. You spent $300,000 more going from a 30 to a 40. So hearing that information, Kristina, what does that make you think about?

Kristina:
The banks probably want this product really bad. I think they really want it.

Rob:
Let me chime in here. I think I can assist with the Pan-Pam situation. I don’t know how I feel about it, so just let me just say no dog in the race here. But I do think exactly what you just said, David. I mean 30-year mortgage, that’s what we know. It’s relative. It’s all relative to the product we know. If we had grown up where 40-year mortgages were the standard, we wouldn’t think there’s anything wrong with that. So I would say ultimately, yes, the banks are winning. But if you think about it from the perspective of someone that’s going to rent for 10 years before they buy their house anyway, I think that the argument could be made that at least they are building equity. And I also think that you could make the argument that appreciation is at work for 40 years versus 30 years. So although you are paying more interest, if you hold onto that property for 40 years, you will have a lot more equity and appreciation that happens over time.

David:
You would’ve got that appreciation the same way.

Kristina:
But it doesn’t make sense though, because the fact is now you’ve spread those payments out even longer. So your appreciation value is going to be… It’s going to be taken away-

David:
Because I guess, Rob, if you had the loan for 30 years, it’s paid off, now you still have 10 years of appreciation to get to the 40 period, but it’s 10 years of appreciation with no mortgage if it’s paid off in 30.

Rob:
Very, very… Well. And I guess I’m thinking of it more, I guess we should also clarify who this loan would work for because I’d think that it could work for investors who all they want is to leverage their money, have lower down payments so that they can cash flow more too. So I mean, I guess it would really depend on the use case. I think that the 40-year mortgage is specifically going to benefit an investor versus probably someone who’s going to own this home and pay way more interest as a result.

David:
And doesn’t understand finances the same way.

Rob:
Exactly. Yeah, for sure.

Kristina:
Right, like the ARM.

David:
Assuming that values were the same, you will cash flow more with a 40-year mortgage rather than a 30 right off the bat, but you will end up spending more in interest. It’s a trade-off, which those of us that are listening to podcasts like this in the real estate space understand the trade-off. We’re a little more… It’s like a HELOC. HELOC can be a great tool for an investor like us. It can be the worst financial decision anyone ever made for a non-educated homeowner who doesn’t know how these things work. They go take a HELOC, they spend $100,000 to put this fancy backyard, and they realized it made their house worth $3,000 more and they thought it was a good investment.

Kristina:
That swimming pool.

David:
Yes, the swimming pool’s like… What this actually reminds me of, funny I brought up HELOC, was 2004, 2005, 2006. It was a very similar scenario where affordability had gotten out of hand, the value of a house, what it would sell for. You have something to add there, Kristina?

Kristina:
Yeah, I want to add to this when you get finished.

David:
Okay. We’ll turn to you. Affordability had gotten out of hand because what someone was willing to pay for a house was much more than what the average person or normal person could afford because we had these variable interest rates. You could get in at 0% or 1%, then after two years it would adjust. So it made houses seem more affordable than they really were. They were not affordable. And the 40-year mortgage, the first time I ever saw it was in 2005, 2006, because they had the same problem, “How do we get you to qualify for this house because you don’t make enough money to buy it, but that’s how much they all cost?” So they started come up with these creative loan scenarios. The HELOC was another one, right? The adjust rate mortgage. All of these were solutions that banks came up with that, “You can’t afford the house, but we want houses to be affordable for people.” I’m not saying we’re at that level right now, but we are starting to see the exact same logic popping up 20 years later.

Kristina:
I was just going to say that the difference between that and now is the fact that then there were so many houses on the market that you could purchase.

David:
Too much supply, yes.

Kristina:
Too much supply. I mean, there were so many people that could enter in the market.

David:
Because they had been building crazy from 2000 to 2005, yes. Everywhere you went, they were building new homes.

Kristina:
And they were given loans to everybody under the sun. So yeah, I can understand at that time why they were coming up with some of these products, but I just don’t think we’re in that position now.

David:
That’s what’s different. So the affordability is probably similar. It was not affordable then, it’s not affordable now. The supply demand dynamic is much different now. There’s not enough supply, and that’s why these prices are still so high. It’s not out of balance as much as people think. Versus back then, houses were expensive but there was way too many of them. At least where I lived in in northern California, in the Central Valley, you could not drive down the freeway without seeing new home developments everywhere you looked. We actually have the problem… Well, opposite problem right now. We need more houses to be built. Like you mentioned, that’s the best way that we could bring affordability back.
Now, Rob, after I’ve already picked through this chicken wing and eaten all the big bites of chicken off of it, I’m now going to hand you the bone and say, would you like to find anything to comment on here?

Rob:
Yeah, yeah, no, no, I do actually. Well, I said if you buy a 30-year mortgage, right? Or I said, if you buy a 40-year mortgage loan product and it appreciates over 40 years, you said, “Well, you could just own it for 30 and then-”

David:
Okay, so my logic was-

Rob:
Well, no, I get that part, but is that not the same logic as why wouldn’t you get a 15-year mortgage and then just have an extra 15 years after you’ve paid it off to get appreciation? Can’t you keep always using that logic for shorter loan terms?

David:
Absolutely. And so I would also argue a 15-year mortgage is healthier if someone can afford it than a 30-year mortgage. Now we’re getting into Dave Ramsey territory. This is it. That’s the argument he makes.

Kristina:
“Well see, if you can’t buy the whole thing cash, then don’t buy it.”

Rob:
“If you don’t have $500 under your mattress, you are stupid.”

Kristina:
“If you are not eating sand for breakfast, you are stupid. There’s minerals in that sand.”

Rob:
“Do you know how much free sand there is on the beach and you’re not eating that? For the next year, you’ll be eating bags of sand until you are out of debt. Do you hear me?”

Kristina:
Oh, I heard you. Well, I heard you.

Rob:
We should have him on this show. That would be very funny.

David:
So yeah, I mean, his logic is sound. It’s not practical. That’s what we’re balancing here. Of course, a 15-year mortgage is better than a 30. Of course paying cash is better than 15. Because supply and demand is so out of whack and because we printed so much money that needs to find a house, it is no longer practical to pay cash for a home, right? If you try to save up enough cash to buy a house, prices would probably appreciate faster than you could save money. You’d be 70 years old, you never would’ve caught up with it. You have to use debt. In this case, we are just bringing up the fact that it is becoming increasingly more comfortable for people to keep taking on more debt, keep taking on more debt without thinking about the type of debt they’re taking on.
I don’t know that 40-year mortgages are inherently evil. There are scenarios where they could make sense for the person. They are dangerous in the sense that if you take a 40-year mortgage to buy a property, housing prices are going to continue to increase because payments are going lower. It’s going to make you think in your head that house is worth 1.2 million. And then if they stop making 40-year mortgages, they go back to 30. Now no one can pay 1.2 million. You’re stuck with an asset worth 900,000 and you have to wait for inflation to bring it back to the 1.2. So if you’re going to do this, to your point, Rob, it has to be a cash flowing property that if the value of the asset decreases because they get rid of the 40-year mortgages, you’re okay holding it. It’s the person buying the house to live in that’s at risk.

Rob:
Yeah. Yeah. I mean, it gets an interesting talk because it’s like you’re saying you don’t think it’s inherently evil, but we’re talking a 30-year mortgage on a half a million-dollar house, you’re going to spend 700K on interest. That’s obviously a terrible financial decision when you look at it on paper like that. So I think it is kind of like, “Okay, 700K in interest, 800K,” they’re both awful, you know? It’s-

David:
They’re bad when you’re looking at the interest, but when you factor in how fast things are appreciating, you end up making money by paying all that interest, right? So you can’t say it’s good or it’s bad. You have to compare it. So when you compare a 30 to a 40, the 40 becomes dangerous because it can trick you. It’s deceiving. It’s deceptive is what I’m getting at. It will make you believe that house is worth more. But if it’s a 40-year or nothing and we don’t believe they’re going to get rid of 40 years, that might just become the norm. And then our baseline changes from houses being valued based on a 30-year mortgage payment into a 40, then it’s no longer dangerous because we’ve all adopted that this is just the new norm.

Rob:
And I think that’s the danger. Honestly, I mean, I already did think this, but talking this through, the danger would be for people to examine all financial decisions on a 40-year mortgage versus 30. I think that’s where the economy and people home buying and investing, I think that gets really in murky territory if we start really basically promoting paying multiple six figures more in interest.

David:
It’s not an easy answer to just fix your problem. There’s going to be consequences. If you go get a 40-year mortgage by your house, it’s more affordable. But what if you got to move and the next person doesn’t want a 40-year mortgage? They’re going to buy it based off of a 30-year mortgage system. You’re stuck. You can’t unload the property. That’s where I think the danger comes in.

Kristina:
The 40-year mortgage isn’t a new concept though. It’s been around. They’ve tried this a couple times and didn’t really work out.

David:
Always in times of unaffordability. That’s really the common denominator, is this pops up when housing is unaffordable. If we start to see adjustable rate mortgages for residential real estate becoming common, I’m going to be sounding the alarm, waving the flag. This is a legit indicator that we are heading into a collapse most likely of the housing market. So that’s why we’re talking about it.

Kristina:
Yeah. Well, I mean, and then it’s always out on the lenders. They can qualify people for the right kind of loan. We were looking at ARMs there for a hot minute when interest rates were coming about. People were talking about those like, “Oh, I think I’m going to do an ARM. I think I’m going to do a balloon payment.” For the average person that is not that good idea. The most people don’t understand how to work those loans correctly, especially if they’re going to be living in the house.

David:
So Kristina, you’re clearly passionate about this and helping people prevent themselves from making financial mistakes. What’s the biggest misconception that you’re hoping to set the record straight on with your YouTube channel?

Kristina:
Not everybody that is looking to get into an affordable home are stupid, and that these people are real people that are just looking for an affordable home. And just because they are affordable, that doesn’t mean their credit’s terrible. It doesn’t mean that they don’t have a job. It doesn’t mean they’re not working. These are people, a lot of them have great credit. They have really good paying jobs that they’ve been able to have a very good income on. They just can’t find an affordable house.
I think that society has looked down on people that live in what I call manufactured homes. Some people call them trailers or mobile homes. But they’re just people that are working and have a home and this is what they can afford. And telling people, “Well, you should have budgeted better and you could have bought a house” that is not helping the problem and buy anything to the imagination. And I’m just trying to give them a good resource so that way they can find an affordable home and they don’t get taken advantage of. That’s our passion.

David:
I’ve got some advice for the people listening in that position. I saw a meme yesterday and it was a jiu-jitsu meme, I know. It had a very good point. It said, for every day that you feel bad because you got your tail whipped at jiu-jitsu, you still beat the guy sitting at home on the couch.” And I so needed to hear that because what stops me from going is getting my tail whipped. And it’s not always a tail whip by another person. Sometimes I’m just frustrated with myself for having a hard time figuring this out. I’m frustrated with my conditioning. I’m frustrated with, “I learned this. Why did I forget it?” There’s always something in my head that fights me that makes me not enjoy going.
But if I look at it like, “If I went, I still beat all the people that didn’t go at all. It’s a clear win to go.” If you’re owning a mobile home, you are still beating the snot out of all the people renting a house from somebody else, right? Don’t compare yourself to the person that owns a home if you’re okay with where you’re at. Compare yourself to the person that’s not doing anything to improve their financial picture. You’re already in a better position. And buy another mobile home and another one. Maybe you could have six of those suckers, right?

Kristina:
Get the foreclosed one.

David:
There you go. It’s a way that you can make money in real estate. You don’t have to live in Beverly Hills to be able to make this happen. So I, for one, appreciate that you’re out there sending that message to that, and I’m sure our audience who is in that position does too.

Kristina:
Thank you.

David:
All right, Rob, what do you think so far? You like today’s show? Do you like being a part of Seeing Greene?

Rob:
I do like this show actually. And I do think it is nice. Usually we come in and we’re obviously wanting to know people’s story, but it is nice to kind of talk about some of these bigger topics. I actually agree with a lot of what you said Kristina about there are perfectly nice folks that are trying their hardest to get an affordable house, and it’s just not an option to them at this moment. I don’t really love the argument of like, “Just pull yourself up by the bootstraps because look at all the people who have done it” because it’s not that easy for a lot of people. It really, really, really isn’t. And so I definitely feel for that side of the industry. So my question that I was going to ask you were, are there solutions that you think if we did this, this would help solve this problem? Or do you think the solution lies in the government’s hands to create more subsidized housing? What would be kind of an ideal scenario? I’m sure you’ve talked about it on your channel, but I’m sort of curious on my end.

Kristina:
Well, it isn’t just one magic pill and call it a day. The commercial real estate right now is, if anyone hasn’t told you, that a lot of areas is tanking like a rock. And you could turn a lot of those into affordable homes, even condos. We have a lot of empty malls throughout the United States. Why don’t you turn those into retirement facilities where everything on the upper level is medical related and then the seniors could live at the bottom for condos? I mean, that is an encompassing little community within a community. I mean, that would be so incredibly smart. There’s also a lot of land that’s owned by local governments that can be turned into housing.
And I’m not telling you, I’m not saying that every house has to be four bedrooms, three baths for people. Most people that are trying to get in their first home would be totally satisfied with a two bedroom, one bath, with a little kitchen and a backyard. And if they were able to get that in their community, they would buy it instantaneously. But there’s tons of places all around Colorado that have gotten so expensive that that dream of owning a home will never ever happen. We’ve gotten to the point where when I was growing up and when I was buying my first house, I was a hairdresser and my husband was selling cars, and we were able to afford to buy a home. That person today working in Orlando, Florida selling cars and a hairdresser most likely can’t afford a home in their local area, that’s a problem.
We used to be able to have people buy houses. So build houses that people can afford. Offer government-backed loans and incentives for those builders to build those. There’s tons of land that’s owned by the government and local governments as well that can be given to those developers to have that land. It is very possible to be done with modular construction. It was done after World War II. You can have those houses built just like that, just pop them right into place. They did it before, they can do it again. It’s possible. It’s just you got to have it available to people to buy. If you put it there, they will buy it.

Rob:
Ultimately, I’d agree with that. I think it seems like the government… And I think there probably are certain programs like the Opportunity Zone Act for example, but I think the government definitely would have to subsidize or incentivize investors to do so because from an investment standpoint, it’s really hard to tell someone to go flip a house, take all the financial risk of doing so, and then be like, “Hey, instead of making a hundred grand on your flip, what if you just made 50 so that another family can be into it?” And while that obviously is achieving a good goal of helping people get into it, it is hard to talk an investor into that logic, right? And that’s where I think probably, my guess, government incentives would come into play to help at least an investor play ball with the idea. Because honestly, it’s hard. It’s a argument to make, I think. I don’t know. What do you think about that?

Kristina:
I was just thinking incentives, like tax credits. They can give discounts on building the materials. They can all work together to make it work. Like I said, that land they own, they’ve owned forever. So if they just give that to them at a much more reasonable price, of course that they can build the houses for a lot less expensive because the land itself isn’t that expensive. Development of land is a big chunk of what costs a house. And if you eliminate that, that’s going to make the house a lot less expensive to build.

David:
All right, Kristina, last question from me before we ask people where to find out more about you. What are some resources that people can use if they want to get more into learning about the affordability space?

Kristina:
So I have the most incredible book, and this lady is such a nice lady. Her name is Whitney Sellers. The book that I wanted everybody to pick up if they’re wanting to get into the affordable housing space and investing in that is Housing for a Purpose. It’s a guide to investing in real estate for both profit and social good.

David:
All right.

Kristina:
Love her. Love this book. So good. And in the My Land [inaudible 00:50:27] you want to get into buying land, the 10 Things You Need To Know About Land By Cheryl Sain. She’s also a real estate agent by the way, because she’s really good. I called it the bible of buying real estate land. I actually have the book on my counter here.

David:
And if people want to know more about you, where can they go?

Kristina:
Well, I’m on the YouTubes. I’m on YouTube. Just look up my name. It’s Kristina with a K, and my last name is Smallhorn. I guarantee you probably won’t find another one.

Rob:
Go look it up, guys. It is a great channel. She dives into this topic quite a bit. I’ve seen you do a lot of your videos where you break down like, “This barn you can buy from Home Depot. Is it a good option? Is it a not option?” And I think it’s really nice that you’re bringing education to this side of things, because honestly, I don’t think that a lot of people are. So thank you.

Kristina:
Oh, thank you for having me on. I love talking about it. There’s some cool stuff on Home Depot, man. People turn those sheds into houses and they’re amazing.

Rob:
I’ve always wanted to do one.

David:
Rob, where-

Rob:
Where can people find me? That’s okay. You can find me on the YouTubes as well. Both of them. Both of the YouTubes, there’s two of them. You can find me at @robuilt. But before you do, go look up Kristina Smallhorn please. And then on Instagram you can find me at the same place, @robuilt.

David:
What about Vimeo? Can I find you on Vimeo?

Rob:
No, I’m not much of a Vimeo guy unfortunately. Not yet.

David:
Well, that’s a bummer because that’s all that I use. That’s probably why I’ve never seen your YouTube channel. You can find me everywhere @davidgreene24, same thing, YouTube, or davidgreene24.com to see what I got going on. Guys, if you like this content, if you enjoyed hearing about this, if you feel like your mind is blown and you’re hearing things you don’t hear anywhere else, please do us a favor and go leave us a five star review wherever you listen to your podcast. I’m only asking for this because it is very important that we get those. If you don’t leave us those reviews, we shrink further down the list even though it’s not fair. That’s what happens. And then go give everybody a follow. Follow Kristina, Rob and I. We will love you for that. And tune into the next BiggerPockets episode. Kristina, any last words you want to leave us with before we go?

Kristina:
Oh, I’m going to shamelessly plug. I have a YouTube course if you’re a real estate agent. It’s called the YouTube Video Geeks. And if you’re interested in it, let me know. I will hook you up and tell you all my secrets on how I built my YouTube channel.

David:
Yes, I’ll need that because we’ll be eating bags of sand if you don’t. I don’t know that my digester track can handle that.

Kristina:
Correct.

Rob:
“Stupid!”

David:
This is David Greene for Rob, “Hey, stupid!” Abasolo, signing off.