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5 Real Estate Deals Using Other People’s Money

5 Real Estate Deals Using Other People’s Money

You want to invest in real estate, but you don’t have the money. Are you out of luck? Good news—money is NOT a dealbreaker. There are several levers you can pull to get the capital you need, and today’s guest is going to share them with you!

Welcome back to the Real Estate Rookie podcast! Shortly after being cut, former professional football player Darnell Leslie was determined to try his hand at real estate investing. There was only one problem: he needed money. But, after convincing some family members to partner with him, Darnell quickly realized that he could use other people’s money to fund ALL of his real estate deals. He started building his network and found private money and hard money lenders, using a polished private capital “pitch” to bring them on board. Over the last few years, he has completed five deals using very little of his own money!

Is money the ONE thing stopping you from buying real estate? In this episode, you’ll learn everything you need to know to start using other people’s money instead. From structuring private money and hard money agreements to buying materials for your renovation projects, Darnell walks you through each step!

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Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate rookie episode 396. Are you unsure how to structure a private or hard money deal? Today we’ll get into what is working using other people’s money OPM. My name is Ashley Kehr and I’m here with Tony Jay Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today’s guest is buying properties, all cash, building his portfolio using other people’s money, the holy grail of real estate investing. He’s making flips more affordable for his area to ensure they actually sail on the backend. And we’ll learn how consistency is key to staying actionable, and we will hear how he’s doing this himself. So Darnell, welcome to the Real Estate Rookie Podcast.

Darnell :
What is going on? I’m so hyped to be here for you guys. First off, I want to give you guys your flowers. I started off watching BiggerPockets maybe three or four years ago, and I honestly pivoted from watching the actual show to watching the Rookie podcast when you guys launched this right after Covid. And you guys have extremely helped me just propel my business. So shout out to you too, and I appreciate you guys having me.

Ashley:
Well, we are so excited to have you here. Full circle moment. You start out listening to the podcast and now you are here to share your experience and to help others get started. Darnell, how did you even get started in real estate investing? Was it family or what kind of happened in your life that brought you to that starting point?

Darnell :
Yeah, for me, real estate investing was a foreign language of sort. I had no idea what it even was. I thought you had to be a millionaire to buy properties and invest in houses and just live and pay a mortgage. It was probably my last year playing ball up in Canada. I was with the Hamilton Tiger Cats and one of my buddies had told me to be Rich Dad, poor dad. So pretty cliche story, right? I read the audio book, I had the book on my phone, and I was listening to it and it dawned on me like, look, I can make money outside of playing football. One, that was one reality that I didn’t really understand because I was so focused on playing ball. But reading Rich Dad, poor Dad taught me how to make money, leveraging your time, how to make money, leveraging other money and just rinse and repeating that whole process. So for me, real estate investing was the pivotal moment after reading that book and I shortly realized that you can buy properties using OPM other people’s money by getting into few different masterminds with Amy Maju and I joined Matt Fair, Klaus Mastermind as well. So there’s been a whole bunch of just small intricacies that have played a part into me getting my first deal, but that’s kind of how I got my start, reached that poor dad.

Ashley:
And were there any pivotal books or podcasts or what were some of the resources? You had mentioned masterminds. What other things kind of helped you gain that knowledge to get the momentum to actually take action?

Darnell :
Going to meetups as well really helped me. Obviously reading the books was cool, watching a lot of YouTube videos and content and things of that nature. But I think when you actually put the rubber to the road and you get around other like-minded people getting to meet up events and seeing how they’re growing their portfolios and you ask the questions live in person and just hearing from a whole bunch of different talks and hosts that are at these meetup events, that really is what kind of propelled me. But also being involved on the BiggerPockets community on the forms page, that was huge and pivotal as well. That same last year that I was playing ball in Canada, I made a dummy BiggerPockets profile. I had no photo on it. It was just really just my name. And it was like some made up bio. I’m a property manager looking to invest in x, Y, Z market, no idea. But I was on the forums watching and listening and seeing people ask and respond to questions. And to me that just, it sparked another trigger on my mind just allowing me to understand that people are willing to help you out there and people want to see you excel in real estate. There’s a lot of people that want to extend their hand and just give you guidance. So for me, it was getting around those actual individuals and getting the meetups. That’s really what kind of propelled me.

Ashley:
Darnell, you mentioned playing football. I see the jerseys up behind you. Has that experience in your football career kind of led you into real estate or what kind of has made that transition into doing real estate from football? At what point did you decide I need to have something else after football?

Darnell :
Again, real estate was very foreign that last year of playing ball. It was like, all right, what’s rich, sad, poor dad? What does real estate? How do you make money work for you? And that sort of thing. But then it was really covid that had hit that I think we all are aware of that kind of shut the world down. For me. Unfortunately, I lost my last job playing football due to Covid. I was playing with the New York guardians in the XFL during 2019, and that league folded due to Covid. The whole world shut down. So I lost my job and I came back home. I was in kind of a bad mental state. I was living back home with my mom and dad. Nobody wants to be in that place where you’re not doing what you think you should be doing with your life.

Darnell :
So I just had to do a lot of internal digging and diving and figuring out what exactly that next path would be for me. And again, reading Rich Dad Cord Dad, that was a spark in my mind as to, well, you can’t make money outside of football and doing other things. So again, just diving into the content. YouTube University, BiggerPockets obviously was pivotal, but just listening to podcasts day in and day out, I literally listened to David Green every single day in the gym, just trying to figure out ways to get involved in real estate. So for me, that’s kind of how that transition happened. It wasn’t the easiest. It was pretty abrupt, but it was worth it. I would do it all over again if I could.

Tony:
Yeah. You mentioned a few times. I know just diving deep into the content and the community, and I think a lot of people also, they know BiggerPockets do the podcast and maybe the YouTube channel, but they aren’t aware of the vast wealth of knowledge that exists inside of the BiggerPockets guys. The forums go back to the beginning of BiggerPockets. That’s where it started. And that’s actually how I found about BP is that I was doing a Google search for whatever, how to buy your first rental property. And I stumbled across the BiggerPockets forums. And like you said, Darnell, there’s so many experienced and investors who are inside of the forums that are just giving value, giving value, giving value. So for all of our rookies, I’m sure a lot of you maybe are already in the Facebook group, but go and join the forums as well and use that as another resource to give you some of that support as you go on this journey. Now, Darnell, you also mentioned Matt Faircloth and I love Matt. He’s a great guy, him and his wife, both amazing real estate investors. But I read his book when I was getting started as well, how to Raise Private Capital. Did you read that book? I guess how did that influence you as you kind of started this journey?

Darnell :
I read that book too late, to be honest. I read that book after pitching myself and the vision that I had for my family to my family about starting our own real estate company and business. I read that book really after my second or third deal because I was raising OPM organically, but not really intentional around it. Didn’t have any formal approach to doing it or what the mindset should be when you’re doing it and how to protect your lenders ultimately and adding value to them. So reading that book came kind of a year or two late for me, but at the same time, it was perfect timing because that’s when I was really trying to be more professional in my approach to raising private capital. So understanding, again, the ways to protect your lenders, the ways to approach them and give them more value, that book was everything I needed. It was like the literal blueprint to raising private capital.

Ashley:
Can you maybe give us a little insight as to what that pitch was like to your family?

Darnell :
Yeah, I’d love to. So it is funny. So again, it was Covid. I had just bought a condo in Germantown, Maryland, and again, I’m scratching my head, football’s done. And at this point I’m like, look, I don’t want to work a nine to five my entire life. I know I’m going to probably have to get my feet under me and start getting just momentum with being an actual working class person as opposed to just playing football my entire life. So I had to figure out a way to get out of that rat race one way or another. And again, reading Rich Dad, poor Dad taught me that you can do that through real estate. So I put together this five page, five or six page PowerPoint that literally spelt out what the LLC name could be, what our goal would be with real estate, how we would raise the funds and the capital, kind of where our target market would be, what the benefits are for us, not just myself, but for my younger cousins and my children and my nieces and nephews, and just everybody that comes behind me because I’m at the point now where I’m really in sacrifice, my time and freedom to see my younger generation succeed.

Darnell :
And that was the entire vision that I had for my family. So I put that deck together pretty much, and we got on the call for maybe an hour, an hour and a half on Zoom, this covid, this like May, and we’re just talking ping ponging back and forth, and I’m like, well, shoot, my family’s actually buying into this. They really believe in the vision that I have and that they can see us going long term. So for me, it was very easy. They were all very supportive. I come from a very big foreign family. I’m Jamaican, so they’re all hustlers by nature. A lot of them are already involved in real estate at a higher level than I am, but just being able to talk to them and bounce ideas off of them really just made this whole process easy starting out.

Ashley:
Darnell, we’re going to take a short break and when we come back, I want to see how you’re structuring those kind of proposals and the pitches differently now compared to when you first did it for your family. So we’ll be right back. Okay. We are back with Darnell who just told us about doing his first ever pitch to his family to get them started in real estate investing with him to get their first deal. And so you sat down, you did a five or six point presentation over Zoom that you went through with them, and everybody seems on board. So now what do you do differently in your presentation? So one thing that I noticed is you said in that presentation to your family, you did a slide about LLC names, potential names. How important is that now to you when you’re actually doing a proposal? And then go ahead and tell us what your proposal looks like now.

Darnell :
Yeah, for sure. Great point, Ashley. And I think that was believe one of the things that I also realized moving forward is you don’t have to have all the steps and the finer details figured out before you get started. And I think that’s what stunts the growth and progress of a lot of entrepreneurs, especially in real estate. So that was a step that I probably could have stepped out on and skipped, but I think that was just another thing that I was trying to do to show that I’m taking the initiative. So I wanted to get that out there, but that’s a great point. I don’t think it’s very necessary, but it was something that I wanted to do just so that they understood that Darnell is he’s doing what he needs to do for the family.

Ashley:
Darnell, I just want to say you have no idea how many times I spent designing logos and business cards for the different things I’ve started is time wasters from actually implementing. And I just wanted to highlight that that’s a step you can actually skip when you’re trying to build your business as to it’s not the immediate need. Yeah,

Darnell :
A hundred percent. And I didn’t even realize that until after effect. To your point, logos and names and color schemes, they all look cool, but start the business. Just start the business and then let the momentum take you to the next step and the next step and the next step. And I learned that just through experience. So if any tip for any rookie out there, anybody listening, take the initiative, take the action, just start and then take the momentum from there. But I guess how I’m pitching my deals now or talking to lenders now, it’s been very organic. The first time that I actually raised capital after that event with my family was two family members. After that, it went on a separate venture and the way it was, I had a formal deck. So in the meantime of me getting fired from football and getting cut my last year from that league forwarding to maybe the start of 2020 or the end of 2021, at this point I’m understanding I can raise capital from my family, so how can I do it with other people?

Darnell :
So I used that deck on two of my family members, but then also on another friend of mine, I guess you can call ’em that, we’ve just been talking about real estate ping pong ideas back and forth. So it was three letters that I brought in on my next deal after that. So the pitch was from Amy. It was a deck that literally had my face on the front page, what my career was like, who I was as a person, kind of selling yourself to the private lender themselves. Initially they wanted be able to trust me as a person with their capital and to build this business. The next few slides detailed out what the fix and flip was or what the bur strategy was or what the buy hole was going to be. And it broke it down slide by slide as to how we’re going to raise the capital, how we’re going to actually go ahead and flip or renovate the property, make it get up to standards, but then how we’re going to get you your money back.

Darnell :
Most importantly, that next slide broke down the details as to what the difference between investing your real estate does for you and what the difference in investing in stock bonds, mutual funds and other commodities does for you. And the last step pretty much tied it all together and asked for any questions. And then at that point, me being the deal maker in a sense, would have to answer their questions, make them feel okay, and make sure that they’re getting all the value that they need for me to be secured. So the pitch now, and I’ve used this once in the past, I don’t use it. I haven’t used it since because again, all my lenders are organically now my network, but her pitch of just introducing yourself, Hey Ashley, I’m Darnell Leslie. I’m a local real estate investor, and I help my investors make double digit returns backed by real estate.

Darnell :
Are you interested? When she said that and put that in the PowerPoint, I’m like, well, if I’m an investor who has a lot of money, why would I not be enticed by that? Tell me more please. And now if you have a slam dunk deal, obviously I’m going to give you money if I want to make some money. So putting kind of all the pieces together from Amy and reading Matt Fair Klaus’s book, that really just propelled me and put me on a different level of being more professional without presenting myself to my private lenders so that they can feel more comfortable, that I can provide value to them. So that was kind of how that all went.

Tony:
I love that framework. And a couple follow up questions here. So you put together the deck. Are you just emailing it over to them and letting them read through it as they want? Or are you saying, if I’m trying to pitch Ashley, I’m saying, Hey Ash, I want to walk you through this yellow hop into Zoom call, and you’re walking them through the presentation on the actual Zoom call together. What? What’s been your strategy when you were using that deck?

Darnell :
That was it, Tony. That was spot on. So the three lenders that I had on my next deal, each got on a separate Zoom call. Obviously, I’m not going to disclose your identity, so I don’t want you to all co. Well, we’re all lending money to so-and-So no, this is a private matter professional, right? You’re doing business with me and my company and I’m trying to provide value to you and your family. So we got on a one-on-one Zoom call. It was maybe like 35 minutes, 45 minutes each. The deck was fairly simple, but really straight to the point. All these individuals knew me as a person already. So the selling piece really wasn’t selling, it was just me reiterating, look, this is who you’re dealing with. This is who Darnell is, this is what kind of person that I am from the personal side, but what I’m getting to on the investing side and professional side. And so all of those calls went very smoothly. I want to say most of them didn’t last longer than I expected it to. Again, they had no questions. They were like, look, Darnell, we love you. We know you. We like this deal. What are the next steps? How can we help you? And so I was just, again, I’m blessed to come from a family and a network of people that really understand who I’m as a person. So that’s kind of how that went. So

Tony:
Darnell, were all of these people then family members or was it anyone else that you had met through networking or events?

Darnell :
Two were family. One was again, another close friend or a mutual connection that I know from playing football.

Tony:
Gotcha. And so I guess just last question on the actual pitch piece, how did you initially present the idea to them? Were these the same family members that were in that first deal with you or was this someone else, a newer family member, and you said, Hey, I’ve got something for you. Let’s hop on a call. How did you actually get them to the point of getting on that Zoom call with you?

Darnell :
Yeah, so I have again, mom dad’s side, right? The business is through my mom’s side of the family. There’s nine of them, my mom’s one of 10. So the nine aunts, uncles and relatives. Our LLC has maybe eight or nine different people in it. So one of the individuals from that LLC invested into the next deal. My dad’s side. Another individual invested into this deal, and then on the third side was just a mutual connection,

Tony:
But specifically how did you get them onto the Zoom call was just a text saying, Hey, I got an opportunity for you.

Ashley:
You invited them out for coffee and started telling them about it. What was the initial conversation that was brought up, especially to that friend that’s not part of your family that maybe heard your family talking about it, but what was that first interaction you had with them?

Darnell :
So these are all people that I’ve talked about really stayed with in the past. Right after reading Reset, poor ed in Canada. I’m coming home and I’m talking, I’m pitching ideas. Obviously, I don’t know what anybody in my family makes per number or what any of my friends or network makes per number. But one of the things that I’m realizing is that when I’m putting myself out there, has that, Hey, I’m getting into real estate. I want to do X, Y, Z in real estate and I want to build my business this way. And they’re saying, well, hey, look, I got some money. I’m able to cash out some stocks. What do you want to do in real estate that I can add value to and be a part of and help you build? So it was really the natural organic conversations that were happening to where when I knew that I had a next deal coming up, I’m going to you because it was just something that I kept of because I knew that I wanted to be able to build a portfolio using OPM and add value to other people that wanted to invest in real estate that really had no time or know how to do.

Darnell :
So really it was just through formal conversation or informal conversation, I’ll say that turned into us getting on a call and taking the next step is to investing together.

Ashley:
So Darnell, now that you have your investors, how are you actually structuring these agreements? What are the terms? What are the payments like?

Darnell :
Yeah, so they’re very fluid and I think that’s the benefit of OPM and that’s why I want to continue building my business using OPM as opposed to using a bank. You both know, no, you don’t have hard terms. Your terms are really based on what makes sense for you and what makes sense for your lender. For me in my business, if my lenders are to give me 50% of the amount I need or less, they’re going to get 8% back on their money annualized return. Hopefully I’m in the deal for four to six months. So it’s a very quick return on your money. If they’re giving me 50% or anything to the full amount, you’ll get 10%. If you’re giving me all the money that I need for purchase in rehab, you’ll get 12% annualized. So I kind of break it down into three different stages to keep it very cut and dry so they understand, well, I could receive X, Y, Z based on how much I’m giving him for this deal.

Darnell :
The way I protect them is through mainly it’s a promissory note, but I’ve had one lender so far that wants to also be put on title insurance. So I add ’em as the owner on the title insurance. So if I just run away with their money, they still can legally show, Hey, I’m on title insurance on this property. I have some sort of claim to the rights on this property. I’ve also heard other ways where people are adding their lenders onto or writing their lenders out. Unrecorded deed of trust. I’ve never gone that route. None of my lenders have ever asked for it, but if they did, I’d be open to doing it because I understand how that process could go with title. I understand it’s another layer of security, and I know that it’s for me, my lenders that I’m working with consistently, they already know I’m not going to run away. Again, it comes down to them trusting you as the person and trusting your business model and trusting how you operate with them and being communicative and just not trying to be shady with what you’re doing. So I think it all comes back down to trust, but there’s a few ways that I can protect them, but the main way is always through a promissory note.

Tony:
Yeah, I’m curious how you set it up as well, but I know that’s how I do all of my private money transactions where I give them both the deed of trust is what is called in California, but whatever your mortgage security document is, but it’s a deed of trust that gets filed with the county shows that my private money lenders have a lien against that for their note amount. And then I also give them the promissory note. So I give them both the documents. Every time I do a transaction, it’s a little bit more hoops, but for me, I just feel like it does make us come across a little bit more professional when they can see that the paperwork’s there and everything’s tied in. And if Tony did run away in the middle of the night, they do have some form of recourse for any deals. Since you’ve done Ash, how did you structure from a paperwork side of things?

Ashley:
Yeah, I’ve only ever used the same several money lenders, and it’s just been a promissory note. And I think that kind of goes back to Darnell’s point. He started out with family, friends, people that knew him that the same with me as people I’ve known for a while, that they know where I live, they know where they can come after me if something happens at their property. But I’m doing a new private money loan with somebody, I’ve never done it before, that lives out of state. We know each other, but he does a lot of private money loans. In this time, we will be doing a deed of trust for the property. So it’ll be my first time actually having to do that.

Tony:
And darn, I don’t know if we asked, but are you using the private money to fund flips or burs? What exactly are you using the private money for

Darnell :
All exit strategies? I’ve only wholesaled one deal, but I’m using private money right now to get into the property. So if I can purchase a property all cash, I will do that using OPM just because of where the hard money fees are right now. But if I can use that money to also rehab the property, depending on if it’s a cosmetic flip and it’ll take maybe fewer 30 grand as opposed to being a full gut needing another 120,000. So just depending on where it is, that’s how I’ll kind of use the OPM and

Tony:
What market

Darnell :
I’m in, the DMV market, dc, Maryland, Virginia,

Ashley:
Darnell. Once you have your private money lender, what’s kind of the process? Is it okay, you’ll get your money back at the 12 months? I’ll talk to you then. What’s the length of your agreement and how does it actually pan out? Are you making interest payments along the way? Are they getting a lump sum at the end?

Darnell :
Yeah, great question. So for me, again, going back to the whole trust thing of everything we’ve been saying, I’m very transparent when it comes to my lenders. I understand that this is a big investment. If you’re giving me $150,000 for something, you want to hear progress reports on this property. There’s people out there that I’m sure will just take your money run and not talk to you until the deal’s done. No, outside of seeing my social media and seeing what I post on a daily basis, I’m going to shoot you a text at least once a month, give you photo updates, personalized so you can understand this is where your money is going, this is what it’s getting paid toward, and this is a progress report that we’re making on that deal. So I’m very transparent in that factor when it comes to actually paying the lenders back their money again, I’ve been in a flip the longest for nine months out in dc, a headache, but on close date, you get wired that money the same day.

Darnell :
I’m not holding your money for a year. I’m not trying to use that money on another quick deal. No, when this property is done, I need your okay and understanding that this promissory note is now null and void and we’re moving on to the next deal. And if you want to keep your principal capital with me and I pay you out your interest, that’s even awesome because now I have more money to sit with that I can use for an EMD that I can use for proof of funds that I can use to get us the next deal moving forward as opposed to being kind of sheisty and not letting you know exactly where we are in the process just so I can hold onto your money for another three or four months. So it’s all transparency for me,

Tony:
And it’s interesting you run it that way. I almost do it the opposite. Not in an effort to conceal information, but just like, Hey, you’re trusting me with this process. So trust me and me and my private money learners, even joke when they’re wired funds in for a deal, we’re like, okay, cool, I’ll talk to you in four months when the wire comes back. So I guess it depends on your relationship with the private money lender. So Darnell, I want to dig into how your ability to raise private money has actually impacted your investing, but we’ll get to that right after. A quick word from our sales sponsors. Alright, we are back and Darnell, just talk through how he’s structuring his different deals, the paperwork that he’s using, how he’s making it legit. But I want to know, Darnell, how has your ability to raise OPM impacted your investing so far?

Darnell :
Oh man. It’s skyrocketed in the sense of just giving me more confidence with just also the ease of mind as well. We all have LLCs, right? In businesses, not that you need one to necessarily get every sort of bank loan. You can go no doc and DSCR, but when you’re dealing with hard money companies, it’s a lot because they ask for so much documentation, they don’t drag their feet, but you’re kind of going on their time of how things are getting done and you have to meet all the requirements to make sure that they can actually fund the deal that you want them to fund. If your credit score is shot, you’re probably not going to get as much guaranteed on this loan as you want to, right? If you don’t have the necessary proof of funds or you can’t close on x, y, Z date, you’re probably not going to get the money that you want.

Darnell :
So there’s a lot of rules and restrictions that go into dealing with hard money companies, and if you need that route, that’s a great route. That’s how I kind of started off. But for me, private capital has allowed me to think less about the whole formal process of securing a deal. Whereas if you can just open your phone and look into your business bank account and see what you need to close on the property, then you just coordinate with closing and title yourself and you handle it that way. So it’s allowed me to just take a step back and be more levelheaded in the situation to be more calm, but also using private capital, I’m paying less fees, so I’m recouping and keeping more money in my pocket when I go to purchase and sell the deal. I’m not paying points, I’m not paying origination fees, I’m not paying money to get into loan because I already have the money, but also on the backend, I’m not paying you 15% plus a monthly payout on your interest. So is kind of a smaller and minute difference in the numbers of things, but at the same time, if I can keep two and a half points and 3% on the loan, I’m going to do that all day every day. So it’ll allow you to scale a little bit more just by keeping more money and recouping more money after the sale.

Ashley:
So Darnell, you had mentioned that you held onto one property.

Darnell :
I’ve kept two. I’ll say I have a burr and then I have one that I also bird in Hagerstown, so I have two bur. Okay.

Ashley:
And then how many have you actually acquired with private money throughout this time?

Darnell :
I’m going to say five.

Ashley:
And that’s over the course 2022. Wow. Yeah, that’s awesome. So by purchasing these properties and using the private money, what would be just maybe your top one thing or three things that a rookie investor should be doing right now, if they have the same goal of you of doing five flips throughout the next couple years, acquiring a couple properties to hold, what’s one to three things that they can take action on that they can do right now to start raising private money?

Darnell :
Man, sell yourself. Understand your skills, hone in on those. If you’re a great deal finder, start finding great deals. And actually that might be the thing that I’ll say. So besides selling yourself and understanding your strength, be able to find a great deal and learn how to underwrite. And if you can’t underwrite, find a real estate friendly agent on BiggerPockets. They have ’em all over the place and have them or ask them to run numbers for you on this deal rental property or flip, whatever the case is. But just start understanding the intangibles that you bring to the table. I think a lot of people listening to this show might work nine to five. So you have communication skills, you have organization skills, you have time management, you have a lot of intangible qualities that go into raising private capital and at the next step understand what a great deal looks like. So you can pitch that to an investor. You have to make the deal look so good that they would feel bad for not investing with you a hundred percent. The deal has to make sense numbers wise to where they just feel like, well

Ashley:
Dang, they’re missing out a

Darnell :
Hundred percent. That’s it, right? So understand your traits and your skills, sell yourself, but be able to find a great deal and run numbers.

Ashley:
So when you’re running the numbers and you’re doing your underwriting, how are you deciding which those two that you decided to keep as a burr and then the ones you have flipped, how did you actually decide which strategy you’re going to be using?

Darnell :
Yeah, great question. So for me, I do all that early on in the game before I’ll make an offer a really advantageous offer for myself. I’ll say, I don’t want to say low ball, it’ll be advantageous for me, but at that point I’m running numbers based on what that looks like and I always want to make sure I have more than one extra strategy in place. So I always have two or more. So if it’s going to be a great flip, it also has to be a deal that can somewhat cash flow and if not, it’ll be an area that can appreciate over the next two or somewhat some odd years if I have to hold the property long-term or I have to be able to just wholesale it off back or do a short-term rental and be like Tony. But so for me it’s really just understanding the multiple exit strategies and being able to be an agent with long and foster that’s allowed me to do a lot of the digging on the back end that people don’t have access to.

Darnell :
It’s one thing to use a little, but it’s a whole nother thing to be able to tap into the MLS and see real live property data and ownership data in one place and get on the leasing portal and see what properties in that subdivision are also renting. You can get the same data from Zillow, from Zillow, Redfin, and truly all those websites. But I think being able to be an agent and see that data before it actually comes live on market from other comps, I think that’s another advantage. But for me, that’s kind of how I’m doing it. I’m looking at the numbers early on and just trying to figure out if it’s a burr, can I refi out all my money plus my private lender’s money and pay them back? Maybe I don’t keep any money for myself, but I have the property long term that’s payout for me and that’s enough for me. I’ve got cashflow and that’s enough for me. So just understanding the different exit strategies and trying to make sense of what the profit will look like short and long term.

Tony:
Darnell, I’m curious, when you’re trying to make that decision, do you have certain metrics, I need X dollars per month, I’m going to keep it as a rental or x percent ROI, if I’m going to use this as a flip, are there benchmarks that you’re using?

Darnell :
So kind of loose? I’m not too stuck on either, but for rental property, I’m trying to get 12% cash on cash return. So whatever money I put in on the down payment, any repairs, I need to recoup at least 12% of that annually just to make it make sense long-term based on where I could put my money in the stock market or some other commodity. So I think stocks are going at what, seven to 8%, so it’s got to be comparable, but to the high side for a flip, I’m looking to get at least 30% return on investment. So all the money that I’m putting into that deal, based on what it’ll sell at, I need to be able to make at least 30% of my money to make that deal make sense for my time. And I can go either way on the deal just depending on how I see the market fluctuating and where I see rates going and where I see buyer activity at. But for me, those are kind of the two metrics, 30% on the flip, and then 12% on a long-term rental.

Tony:
One follow-up. Question to that, Darnell, do you feel that given where interest rates are today and on a rental property, maybe you’re between high sixes, low sevens today, maybe a little bit higher depending on what kind of debt you’re using, do you feel that these somewhat more elevated rates, are you still finding deals that will allow you to get a 12% kind of double digit return on a long-term rental?

Darnell :
It’s hard. The one I closed as a burr in Hagerstown, maybe four or five months ago, that one is I think nine or 8%. But the reason that I took that deal was because it was a fix and flip cosmetic job. Bought it for one 30, put 30 K into it, it appraised for like 2 35. So I was able to take out all my capital plus the investor’s interest and still be at where the market rent was, right? So my mortgage on that property was what? Right now it’s 1650 and I’m renting it out for 1850. So I’m not really cash flowing in a sense. And one of the thing I want to highlight to the rookies is your cashflow is not yours. So that $200 bump that I’m getting in monthly income from that property that’s staying in the property, that’s rainy day money. So for me, I’m able to find deals that maybe aren’t panning out to be that full 12%, but you can definitely find ’em depending on how steep you buy or how low you buy and how much the rehab is for sure.

Tony:
So you hit on something, Darnell, that kind of leads me into my next question about depends on how you find them. So what strategies are you using to find these deals? Are you going on market? Do you have a wholesaler you’re working with? Are you going direct to seller? What strategies have you used that have worked well for you so far?

Darnell :
I’m going to all of them. I’m not picky. Whatever can bring me of the best deal possible that makes sense for me and my lenders, that’s what I’m going with. I’ve used wholesalers twice. I’ve used an agent on my last flipping Frederick. I used word of mouth on the birth that I’m living in now. Whenever the deal can make sense numbers wise, that’s the deal that I’m going to underwrite the hardest and that’s what I’m going to take. I think a lot of people, they shy against going to wholesalers because oh, I don’t want somebody to get an additional $20,000 off of me. That’s crazy. I can find my own deal. It might be, but if you can all win in the end of the day, who cares if they make 20 K on your deal? You win, your investors win, they win. It’s what real estate’s about. It’s a people business. So if they can do their job and make 20,000, thank you, sir. Thank you. You gave me a great deal for 20 k. I appreciate you. So I’m really not opposed to either, but I’m getting deals through every single way.

Ashley:
Darnell, how are you handling that deal flow? As in you’re getting stuff from agents, maybe you’re even spending your own time on Zillow, you’re getting stuff from wholesalers. If you get an email, here’s a property. Are you stopping everything and analyzing it or do you have some kind of system or process to handle that deal flow as different people send you deals that they’re seeing?

Darnell :
Yeah, for me it’s very slow paced. So every time I’ve had an active project under rehab, I’m not looking at any new deals only because I’m the type of person where I don’t want to spread myself too thin. And I am in a sense, a one man operation. From my business entity standpoint, I don’t have VAs, I don’t have a staff working with me. It is really just me doing the in and out daily numbers on these deals and management. So as deals come in, they kind sit in my inbox and if I have a downtime, I’ll kind of click through really quick and look at the spreads and see, oh, that looks cool. Let me see what that’s like. But I’m probably not going to end up buying three and four deals at a time right now just because one, my capital wouldn’t stretch that far. My lenders, but also I’m not at the point to where I’m scaling my business to outsource roles to where somebody can be a PM at this job, somebody can be a PM at this job. Somebody can run numbers on these two jobs. So me being a one man team right now is really allowing me to just be slower in the process. But I am looking at deals pretty much daily if that answers your question.

Ashley:
And you know what, Darnell, that’s actually a superpower to have the patience to do that. I mean that is actually really hard to do, is to do one at a time and not feel like you should be doing more because everybody else is doing more or just getting excited. I have the adrenaline rush now I need to find another deal that takes really, really strategic patience and that is a superpower to know that this is what’s working for you and being able to maintain that and go with that. So yeah, that’s definitely a superpower I want to highlight for you.

Darnell :
I had to tell myself to do that and sit down a little bit. I was finding myself getting this frenzy and FOMO of deal, deal, deal, squirrel, and it is unhealthy for you because if you’re not at that position to actively attain those deals and operate them at a successful rate, then you’re going to put yourself in a bad position. So I had to really tell myself, Darnell, you’ve got to deal going on right now. Focus on this. Give this deal your entire attention. When this is done, a next deal will come to you. You have to understand it and believe that, that there’s millions of properties for sale every day. So I don’t want to be in a chase for properties. I think that’s when you can get in a lot of troubles when you start chasing the money and the accolades and whatever comes with it. So spot on

Ashley:
And just having the time to focus on that one deal, you’re probably making a better profit on it because you are being diligent in that focus on that one property instead of spreading yourself too thin. We’ve had guests on the podcast that say, you know what? We’re not buying more properties right now. We’re stabilizing the ones we have, especially short-term rentals as we’re adding Tony, adding a pool, the adding asana, a hot tub, all these different things to just add more revenue to the thing that the property they already have. And focusing on that and the operations of it. I think that’s such a hard thing to do, especially with social media and you see everybody’s buying, oh, and all these things going on, the shiny object syndrome, but that is a real superpower, having that patience to really focus on one thing and what you’re doing. And I’m sure there’s times during the rehab where it’s kind of almost stagnant and boring a little bit as to like, okay, I could have time to actually look at another deal. But

Tony:
Yeah, Ash, you bring a really good point. And honestly it makes me think of some of the investors that I look up to or entrepreneurs that I look up to who have told me that at certain points they had to scale back their business because they realized they had scaled so big that even though the revenue was more, the actual money in their pocket at the end of the day was less because they had so much infrastructure to support this business that they built. So I feel like when you can scale a little bit more slowly and really only add in people as you actually need them, then it becomes easier to make sure that not only are you protecting the top line, but the bottom line as well. Right. But darn, it’s something you mentioned earlier that I just want to circle back to really quickly was that I think you said you picked up one of these properties for like $130,000 or something like that. So I guess what price points are you targeting? What is your underwriting process look like? How are you identifying what’s a good deal and what’s not a good deal?

Darnell :
So price points are really open in the DMV market in dc, right? For an example, a three bed, two bath throw home in DC could go for half a million dollars, but a three bed, two bath, single family house up north Maryland can go for $136,000. So it’s a vast difference in the matter of an hour and a half drive going up two 70 highway. And so for me, again, it comes down to the numbers. If I can understand that I can get really a really steep deal in DC but still be able to cashflow very strongly on that 12% mark or get a good 30% on a flip. I’m going to take it in DC and I’m going to try to raise more private capital and maybe bring in some hard money because I know that’s still a great deal overall. Whereas in Hagerstown or Frederick, I can purchase these properties all cash because I have that amount of money in a business bank account that I can use.

Darnell :
So it really depends on the market between dc, Maryland, Virginia, even up in Baltimore can kind of be cheaper side depending on where you are. So it depends on what part of the DMV I’m in that my underwriting would change, then my price points would change. Sorry. But the underwriting is pretty much stagnant across the board. So fix and flip, again, I’m looking at purchase price, looking at rehab costs, looking at paying commissions upfront, adding all those factors in. And then on the resale, what’s the estimated A RV, what’s the estimated commissions and taxes, and then looking at the net profit there. And on a rental, it’s the same exact thing. What’s the monthly mortgage going to be at? Maybe worst case, half a point higher on a mortgage. What are the repairs needed? What are the possible CapEx is? And building that in and try to back check to figure out what my net monthly income would be on that property as well. So it really just depends on where I’m at in the market, but there’s such a vast difference, Tony,

Tony:
I think that’s one of the bigger challenges too. Dunno of going into some of these bigger cities where it’s like you have these massive swings and prices. It’s like where I’m at in SoCal, you’re not going to see a half a million dollar property and a hundred thousand dollars property anywhere near each other. So we know that we’re kind of playing within the same box. But some of these other markets, there are those big swings. And I think that’s where maybe some of the rookie investors who’re trying to go out of state, they can kind of maybe miss the mark sometimes because they go into some of these markets and like, man, I can pick up a house for a hundred thousand dollars, but if you don’t know that area, you could end up buying it. Maybe a place that’s not really supportive of your investment goals. Ash, do you see swings like that in purchase prices where you’re at? Or is it all pretty consistent?

Ashley:
It’s all pretty consistent, I would say as far as swing, maybe it’s such on a smaller scale, you’re not going to, in the country you’ll see a million dollar house and then a hundred thousand dollars house just because it’s in the rural area of where people have land and they either have a small house, they have a medium sized house, they have a big house. But when you get into the city, the price is pretty consistent per neighborhood. I would say that even if you know the different streets you want to be in and stuff that there is a little bit of difference, but not huge and drastic like that at all. But I do want to ask Darnell about your rehabs. When you’re going and looking at a project, are you doing full gut rehabs? Cosmetic? What’s your ideal type of rehab?

Darnell :
I like the worst of the worst houses. I like to walk through the houses and have to cover.

Tony:
Have hold your nose. Yeah,

Ashley:
Don’t open the fridge.

Tony:
Don’t open the fridge, don’t open the toilets, don’t open the toilets.

Darnell :
Yeah, I like the full gut jobs mainly because it allows you to want to be more competitive in your purchase price and your offers, things like that. But also I’m kind of like a visionary in a sense. So I like to see the worst of the worst. Imagine going through a demo process, getting it up to the immaculate HGTV finishes, and just looking back four or five months ago and seeing that transition, that change, that property went through, that I can give and sell to a deserving family. To me that’s so gratifying. I’m not going to turn my shoulder on a cosmetic job if it’ll make me in my business of money, obviously. But I like the projects that are the worst of the worst. You got to do structural work, finish work, everything in between, only because again, it’s the most fulfilling to me. But I know some people, they don’t want to walk through a house that smells like cat pee necessarily, but I get it.

Ashley:
So when you’re doing these rehabs, are you using the private money to fund the contractors and the material cost too? Or are you using different strategies for that?

Darnell :
Yeah, so private capital for me again, is the seed. It’s the start money for me. And if I need more capital and I can’t raise it myself, I’m going to hard money. But initially the private capital would be my down payment, closing costs, holding costs, and anything I can use on the backend for the rehab, I’ll use private capital. I’ll use the hard money to actually purchase the property with the remaining 85 to 80%. And if I need more money for the rehab, I’ll use hard money. But ideally it’s going to be strictly just for purchasing is the hard money. And then if I can use private to get into the deal and rehab, I’ll use private because usually those are your costs that’ll fluctuate the most. And so now what I’m actually doing is I’m focused on building business credit. So one of the things that I’ve done after my last flip was I opened up a Home Depot credit card and I opened up a form to core credit card.

Darnell :
Why? Because that’s, I’m going to get most of my materials moving forward. So I have a credit line with Home Depot now that’s allowing me on the flip that I have in Frederick to go to Home Depot and buy up to, I think it’s like $23,000 worth of material on a credit card that I’m paying 0% interest for 12 years. That’s OPM in a different stance, but it’s corporate OPM if you think about it, right? But I’m still paying 0% on that money and then within 12 months I’ll be well out of that flip. So I’ll pay that card off in full, right? It’s not going to crush my credit score because it’s tied to my business, but I’m also going to be replenishing that card fully. So if it does hurt my credit at any point, it’ll be rebounded at a later date. So it’s understanding how to collateralize and find different ways of purchasing collateralizing and rehabbing a property. So I’m using OPM to get into the deal strong, using hard money to the remainder of the deal, using again, OPM to rehab the deal and then using business line of credit to also help me purchase materials and finishes that I need also. So it’s a mix of all, it’s kind of some sort of arbitrage, I’ll say.

Ashley:
Yeah, Darnell mine and Tony’s eyes got real big. You said 12 years instead of 12 months?

Tony:
I know it’s 12 months. Okay, it’s 12. 12

Ashley:
Months. Yeah, I was going to say, yeah, our got real big. And then you said, again, I’ve paid off 12 months and my rehabs are done. But yeah, I’ve done that too, is open up the 0% interest credit card for rehab and I just give it to my contractor and we load it up and then when we refinance the property, the credit card is paid off just like any other debt on the property. And having that safety net of making sure that credit card payment doesn’t start accruing interest, that you’re getting one that’s 12 months or 18 months so that you have enough time to make sure you paid it off. And I just like to give a disclaimer, if you are not good with credit cards or you have a lot of other credit card debt, probably don’t do this strategy. And honestly, probably you won’t get approved anyways for a 0% interest credit card if you do have bad credit and don’t have a good history with credit card. But just a full disclaimer there, make sure you can be responsible and you’re not stuck with $20,000 in material costs and 25% interest, you end up having to pay on it because you can’t pay it off.

Darnell :
I think one more thing I would add to that, Ashley, is you get approved for that sort of financing the same way you would for a personal credit card. The banks do try to do their best to protect themselves and protect you as a lender and the borrower as a borrower, sorry. So again, if you can’t afford that type of stress, definitely don’t do it. But there’s a lot of benefits that come to it because once you pay those cards off in full, your next strategy should be, Hey, I’m going to hit the bank up again. Excuse me, Mr. Banker. Mrs. Banker, can I get an increase on my line of credit? So the next flip, I have $50,000 worth of line of credit that I can use for the rehab moving forward. So it’s just a way to just be strategic, but you hit it spot on, be responsible with it.

Tony:
Last question. I’ll ask for you now before we wrap things up is I’m curious, are there any safeguards that you’re using when you’re using the hard money while doing the rehabs? Have you found anything that works well for you navigating that relationship?

Darnell :
Yeah, for sure. I actually found my current hard money lender that I’m using through social media. He found me by me posting videos about my previous flips. He was like, yo, I’m a lender. Let’s touch base. Let’s get on a call. Let’s figure out how we can help you. And I was like, let’s do it. So me posting on social media allowed me to find this current lender, but I think continually going back to him as my lender is going to help me grow my business because it’s all relationships. So he’s going to see that I have a slam dunk deal that’ll make his company money. I’m going to see that he trusts me as a borrower and I can close on a deal that actually makes sense and make myself some money. So when I continually go back to him and replenish those lines of credit in that loan, it’ll just make the relationship stronger.

Darnell :
Because we each trust each other. We know that we can both do our job to the highest extent. So going back to the same lender over and over and using that relationship is going to be key for me and really anybody that uses bank financing moving forward. So one of the ways that hard money kind of protects you is that they require you to give them an itemized scope of work. They’re in it for you to win as the investor, but they’re ultimately in it for them so they can make their money back for their company. If your deal doesn’t make sense, they’re not going to invest with you, which is why they’re making sure that they have their systems in place to make sure that they can ultimately win as well. So with all the hard money companies that I’ve worked with in the past, they’ve asked for the itemized scope of work, right?

Darnell :
They’ve asked to see the bid from the actual contractor doing the work. So the itemized scope of work is going to literally tell you and spell out, alright, demo’s going to cost five grand reframing and finishing off a bathroom is going to cost seven grand. Laying new LVP flooring throughout, it’s going to cost three grand. So they want to see those type of concrete numbers so that they know exactly where their money is going and to make sure that they do actually make sense. And you’re not telling them some fluff that they’ve been through and see that a kitchen remodel is going to cost you a thousand dollars. They’re going to automatically raise their red flag and start asking more questions. So the hard money company is really there to protect you as a lender. And although it’s a lot of documentation and talking back and forth and conversations, it’s ultimately for your best interest as an investor.

Darnell :
And so that’s kind of how they protect themselves and you on the front end. But also throughout the deal, I’ve dealt with hard money companies that will require you to have a draw schedule. The draw schedule being how many times they’re going to give you money to draw out of escrow for the rehab budget. So the two hard money companies that I used early on, they required a four draw schedule, meaning I would have to front the first initial payment. I want to say the first demo that I did was six grand. So I fronted the first six grand they wanted to see, I had skin in the game, I was committed to the property, I was committed to the deal. So I fronted that six grand and as soon as they saw that demo was done, they brought an inspector out. They charged me a fee to bring the inspector out there to walk through the property and see that the demo was done, and then they replenished my six grand.

Darnell :
But then they also gave me that second draw of money, which is going to be for the structural framing of the property. So that was draw two. Once the structural framing is done, then they bring in the inspector again to say, Hey, Darnell, we see that the structural framing is done on the property. What’s the next step that you need on this scope of work? You have the third draw being for $30,000 for putting in drywall and insulation and rough and plumbing, things like that. Then they’ll front the third draw. Once they come back and you say, Hey, Mr. Linder, I’m done with the third draw. We now need the fourth and final draw. They’ll come back and bring the inspector again and they’ll see that, all right, Darnell, you’ve finished off all the stuff behind the walls. Rough and plumbing’s, good drywall’s up, paint’s done. Here’s the for throw the payer contractors out. So that’s really how the contractors will protect you ultimately as the borrower, because they got to protect themselves as well. But in that process, they’re just making sure that you’re doing your due diligence and you’re an active investor in your property, not just letting the contractors run wild with their money. So that’s kind of how they work.

Ashley:
And before everyone starts thinking, this is so nice of the lender, like, wow, what customer service above and beyond they are charging you for each of those site visits, just so you know, for all of the inspector’s work. But Darnell, thank you so much for joining us. This was a phenomenal episode on private money, a little bit of hard money. We really appreciate you taking the time to come on here and to share your experience. We’re going to put your information into the show notes so people can learn more about you and reach out to you. I’m Ashley, and he’s Tony. Thank you guys so much for joining us on this week’s Real Estate rookie, and we’ll see you on the next episode.

Watch the Episode Here

https://youtube.com/watch?v=crud7Ub27wI123

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In This Episode We Cover:

  • How Darnell uses other people’s money to fund his real estate deals
  • How to start raising private money today (tips for new investors!)
  • Why you MUST have multiple exit strategies when buying property
  • The private capital “pitch” to help you raise funds for your next investment
  • How to structure your private money and hard money agreements
  • The interest-free way to buy materials for your rehab projects
  • And So Much More!

Links from the Show

Books Mentioned in the Show

Connect with Darnell:

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

5 Real Estate Deals Using Other People’s Money

Rookie Reply: Using a Car as a Down Payment (!?), ADUs, & House Hacking 101

House hacking and renting by the room are two of the easiest ways for rookies to dive into the world of real estate investing. Both investing strategies are affordable, low-risk, and easy to implement. The best part? They can help cover your mortgage payment each month and give you MORE money to invest!

Welcome back to another Rookie Reply! Want to earn some extra cash flow by adding an accessory dwelling unit (ADU) to your rental property? In this episode, we’ll show you how to present your plan to the city and get your new unit approved. If you need money for a down payment, you’ll want to hear about the creative method one of our recent guests used to come up with funds. We even talk about buying abandoned houses—how to locate the “missing” owner and swoop in with your irresistible offer!

If you want Ashley and Tony to answer a real estate question, you can submit a question here, post in the Real Estate Rookie Facebook Group, or call us at the Rookie Request Line (1-888-5-ROOKIE).

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate rookie episode 395. Would you consider using a Tesla as a down payment on your house? We’re going to find out today. My name is Ashley Care, and I am here with Tony j Robinson.

Tony :
And welcome to the Real Estate Rookie Podcast, where every week, three times a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And like Ashley said, we got some great questions lined up for today. We’re going to talk about accessory dwelling units, when you can build them when you can’t, and what to do if you get stuck caught up by the city when they’re telling that you can’t build one out. And be sure to stick around until the end, because we’ve got a really cool story about kicking squatters out of your property with a 100% success rate. But first, let’s get into how Teslas are covering someone’s down payment. So one of the biggest questions that we get from Ricky Investors is, how do I get the capital to fund maybe my second, my third, or my fourth deal? And there are some traditional ways of just saving up your cold hard cash from your jobs, but there’s some more creative ways to do that as well. So we’re bringing back Chase Rifa, who was on episode 393 to talk about one of the ways that he creatively financed the cost for one of his investment property. So Chase, welcome back to the show. Brothers. Super excited to have you.

Chase:
Thank you. Thank you for having me back. Yes, creative financing. I think it was more of a product of the time, but I think it’s just taking advantage and also striking while the iron’s hot, I guess s, it was a pretty electric time, that time. So with that said, at the time that we were scaling, I was just, man, look at that Tesla model SI so want that looks so cool. But my wife was like, we’re not having that. We have kids we can’t ride in that. I was like, okay, fine. I’ll pre-order the model Y because that’s the one you want. And then I was like, well, what about this one, the Model X, it could qualify for section 1 79. It’s got 6,000 pounds.

Ashley:
Chase, explain real quick what that is for someone who, oh, sorry. Yeah. Has no

Chase:
Idea. Yeah, so Section 1 79 allows you to write off a, at the time with 100% bonus depreciation, completely writing it off of your business. If it’s 6,000 pounds or more, it’s usually dealt with machinery, but it was actually dubbed the Hummer rule because the Hummer at the time was heavier than 6,000 pounds. And then after that, because electric vehicles with their batteries are so heavy, they also qualify for that. I believe it’s the gross vehicle weight above 6,000 pounds.

Ashley:
And Gew wagons, you can’t forget about everybody who gets G wagons to qualify.

Chase:
Oh yeah, all the time they talk about GWAS all the time. Yeah. So that’s the reason why we brought up the Model X because it qualified for that. And then another one that qualified for it was a new company called the Rivian R one T. So we put in a pre-order for that, and you’re like, why are you talking about all these things? Well, at the time I was like, well, it’s a hundred dollars and it’s refundable, who cares? But the pandemic hit, and Elon started raising the prices and I’m like, oh, shoot, if I take delivery of this, I’m going to have instant equity. When does that ever happen? So I thought, no, it couldn’t be. I took delivery, I just a hundred percent financed it, and then I listed it right away. I drove it around looking cool, but I didn’t put that many miles on it. And then I sold it. I sold the S, the Y, the X and the Rivian. Oh my God. And then all for a profit. And then I used all of that and we purchased another property in the Smokies.

Ashley:
And what was the profit on that?

Chase:
Right. Okay, so the Y wasn’t as much. It was about five to 7,000 x pretty good, surprisingly wasn’t that much either. It was seven to 10,000. But the Model S was a $19,000 profit, and the Rivian was like a $23,000 profit. Shut

Ashley:
Up dude. And you’re saying not that much on the other ones. What was your time into that? I mean, not that much time spent compared to No, not that much. Time spent the 5 23. Oh my gosh. Wow.

Chase:
Yeah, on the rivian, because I was a early pre holder, and at first I thought I was going to keep it. I was like, wow, this is the ultimate truck. It’s faster than anything. And then my wife and I discussed it. I was like, everything on it is electronic. It’s going to fail. And so yeah, we sold it and now I just drive a 2000 land cruiser that will never break, but yeah, I’d rather have rather have a property anyway. Yeah,

Tony :
Dude, what a creative hack to really fund that next deal of all the almost 400 episodes we’ve done. I don’t think I’ve ever heard that strategy. It does remind me though, Ashley, I wish I could remember which guess this was, we had a guess who came on and there were only buying new construction townhomes. Do you remember that? And he’d buy in the first phase, and by the time the last phase of the new construction finished, he had enough equity where he could just sell and then get his next deal. So it was almost like a flip, but he didn’t have to do any work. It was just the appreciation coming from the new builds. Right.

Chase:
Love that.

Ashley:
Geez, one question I have is, what was the outcome of the property that you actually used this money for? Did the money cover the full down payment on the property you bought?

Chase:
Yeah, it did. It covered the full down payment of it. I think we had to come in with a little bit of money, and then we negotiated closing costs with the seller and the lender. But I mean, it essentially bought us another property to scale, which was incredible. And it really taught us how to scale in that. And now Smokey’s is one of our favorite markets now, and that’s where we’re going to build in the future.

Ashley:
Very cool. Well Chase, thank you so much for sharing this story with us. One thing I do have to ask, I don’t know if either of you will know the answer, but Tony, I thank you, had said before that you do have a deposit on a Tesla truck, and I had heard somewhere that you can’t resell them, that they’re not allowing you to resell them. Is that true? Do you guys know that, that maybe this hack will not work anymore?

Tony :
I did see that floating around, but I feel like there was so much bad press. I think Tesla change in that, not doing it language or something. Yeah, so I dunno, I could be wrong. I’m still waiting on my cyber truck, I think three years later, four years later. So we’ll see what happens.

Chase:
I did a pre-order for that too. Yeah,

Tony :
Yeah. Chase, appreciate you coming on brother. And again, for all of our rookies that are listening, if you want Chase’s full background, head over to episode 393 to get Chase’s backstory, height got started and all that good stuff. But Chase, thank you for coming back for round two.

Chase:
Thank you, Tony. Thank you Ashley.

Tony :
Well, I think that might be the craziest story I’ve ever heard about how to fund your down payment, but now you guys got another tool in your tool belt. So coming up we’ve got a story on abandoned houses and dealing with the city on an A DU. But first let’s hear a quick word from our show sponsors. Alright, welcome back guys. Coming up, we’ve got a question about dealing with the city about building an A DU. But first we have an abandoned house question. So Paul Singer asks, I found an abandoned house in my neighborhood that I would like to buy. I looked up the owner’s name and their address and it’s listed at the same house. Any recommendations on what to do next to potentially figure out how to get ahold of them or to find out the status of the house? So we’ve got another abandoned house. Ash, what’s your go-to for looking up homeowner information in this kind of situation?

Ashley:
So I did it once before and I don’t think I would go this route again, but me and my business partner, he actually wanted to buy this house as his primary residence. It was a vacant house and we actually went to the neighbor’s house and we asked the neighbors what were going on and we actually found out the property had gone into foreclosure. So it was the same thing when you looked up the property, looked up the owners, their mailing address for all the property taxes, everything was still, the system hadn’t updated it to the bank yet. So that was kind of our first step of, okay, now we need to locate the bank, find out which bank owns it now, things like that. And it actually ended up going up for auction, the property. But now what I would do is I would do a little bit more computer work instead of actively going and because everyone knows I’m so introverted of knocking on people’s doors.

Ashley:
But the first step I would take is to literally just doing a Google search of the people’s name and seeing whatever you can find like white pages. There’s a lot of different websites that give you some kind free information about people that you can look up. So there’s other ones too, like search people free.com and then maybe you can kind of find a new updated address for these people. Just digging online is really the first step. The second thing you can do is actually search the property address and look up to is there any sales record? Maybe the county hasn’t really updated their system yet, their records yet where it’s not recorded. And then also I like to go to the county clerk’s office of records. So the website for your county that keeps all of the record files. Most of the times these are online and they are free to pull.

Ashley:
You don’t have to usually pay for any kind of access to these files. And I would search the person’s name that way also. And you would be able to see any deeds. So any deeds that were put in their name or taken out of their name, you would also see any mortgages they got, you could see judgements against them. And so I would start from there and look at if maybe they’re actually deeded a new property too or if you can see that there was actually a foreclosure filed against them. So those would kind of be my three routes as to where it’d go to start digging into finding the owner of the property. Tony, what about you?

Tony :
Yeah, everything that you said, Asha, I totally agree with. I think trying to skip trace them as well. If you use a paid tool like Prop Stream, you can skip trace these owners and Skip Trace just basically means it’s looking up contact info like phone numbers and emails. And a lot of times you’re going to get back junk, but all you need is one good working number out of whatever it spits back. And then you can reach out via email, via text call to see if you can get them on the phone. The other thing that works pretty well is, and this is a feature that I think might be specific to Stream, but I’m sure some of the other tools have this as well. But inside a prop stream, if you type in the address, there’s a bunch of different tabs here like transaction history, mortgage balance, et cetera.

Tony :
But one of those tabs is linked properties and when you type in linked properties or when you click on that tab, it’ll show you any other properties associated with that owner. So they might have another address somewhere else where they’ve been associated to. So you can reach out via L there as well. So like Ashley said, I think leaning on the kind of digital resources is a good place to start. That way you’re not chasing around. But for me, skip tracing phone numbers, emails, and then looking for maybe other associated properties they might have. Alright, so our next question today comes from Dax V and Dax says, Hey guys, I’m in the process of doing a meeting with the city and I’m presenting my plan to add an A DU in one of our units. I talked to the planning department and they mentioned that ADUs are not designed to be rental units.

Tony :
Examples of living arrangements according to them include seniors occupying a second family living unit or apartment or families with elderly parents unable to live alone. What would you say to them if you, we have some equity trapped in one of our properties and we’re planning to use that to add the unit. Appreciate any feedback. So before we answer DAXs question, I just want to take a second to kind of clarify what we believe this question is actually asking. So basically DAXs owns a property, he has some equity, he wants to use that equity to build an A DU or an accessory dwelling unit. Basically a small unit on the back of his primary residence. But the planning department who’s in charge of telling you what you can and can’t do with the property within that city had told him that ADUs cannot be used as rentals.

Tony :
You can only use ’em if you’re like housing a family member or someone like that that maybe is unable to live by themselves. So I think the first thing, and we kind talked about this before we went live on the recording here, I think the first thing is, and this is for all of our rookies, just before you actually close on any property, and Dax, assuming this might be your primary residence or maybe that wasn’t the case, but for anyone that’s doing this with the intention of it being a rental, you’ll always want to check with the planning department before you actually close to ensure that the local rules and regulations around ADUs or building align with your business plan. Because the last thing you want to do is buy a property, then realize that you can’t actually build the A DU and now you’re stuck with this property. So Ash, if you are in D’S position, you’ve got this feedback from the planning department that hey, maybe you can’t do it as a rental, this A DU, what steps did you take from there? Yeah,

Ashley:
I think my first thing is actually reading the code and making sure that it’s not just a guideline, that it’s actually a rule or regulation that you can’t, and that’s not just that they’re saying the idea for us to allow ADUs was for this purpose and not that they’re physically saying you literally can’t do it, it’s against the laws, you’ll be fine, blah, blah, blah violation. So that would be the first step. The second step would be actually going before the planning board. So that’s maybe hiring your architect. They’ll often actually go in front of the planning board for you and you don’t even have to do that where they’ll submit a proposal for you, they’ll submit the drawings and you can go ahead and go before the planning board to get the approval for the additional unit and what the purpose of that is going to be.

Ashley:
Sometimes you’ll have to be there to answer questions or your architect will actually take care of all the questions and you don’t even have to go. So that would be my first step is to actually submitting a proposal to the planning board. And what the planning board will do during that time is they will actually, when your date is scheduled for that meeting, they will send out letters to all the neighboring parcels to let them know. So there’s one property where I gets this constantly of people who are requesting zoning variances because maybe they want to put a fence up and it’s going to be a little bit closer than is allowed, or they want to develop something on a parcel of land, all these different things, and they notify so that if you want to dispute it as to say, no, this is not a benefit to me as the owner of my parcel can go. So that is something that could come up is where your neighbors all come and say, no, we don’t want rental units in here and we’re going to pitch to the planning board why you should not be allowed to have that as a rental unit. So that would be my first step there is actually submitting the proposal to the planning board and going through the process of getting it approved so that later on down the road you don’t get in trouble and have to shut down your rental property.

Tony :
Yeah, we just released episode 3 88 with Ashley Robinson, no relation to neither Ashley care nor Tony Robinson, but episode 3 88 and she talked all about how she was able to rezone a property that she purchased because she was bumping up against a similar issue. So Dax, maybe if it’s not, Hey, can I get this approved under the current zoning, maybe is there a clear path forward for you to rezone that current parcel so that it can be used in the way that you want to use it? Now the other thing that I’ll share as well, Dax, is that instead of going to the planning department, the city, whoever, and saying, Hey, I want to turn this into an A DU, what should I do? Say, Hey, I just want to build the second structure on this land that I already own. What is the best path forward for me to do that?

Tony :
And maybe they tell you that instead of trying to zone that property as an A DU or build it as an A DU, maybe just split the parcel and now you’ve got two separate parcels, right? You’ve got two separate addresses, so now you can build it up as its own structure but still use the equity from that first property. So there’s a lot of different ways to skin the cap, but I think sharing what your ideal end result is with the planning department and if they’re good people, if they’re nice people, maybe they’ll help you figure out what the best path forward is for you. But yeah, splitting that parcel might be a good option for you as well. Well Dax, hopefully you’re able to use that information to give you some insight on how to navigate this whole planning situation you got going on up next we’ve got a question about house hacking and we’re also going to be talking a little bit about summer rentals, but first we’re going to take a quick break to hear a word from our show sponsors.

Tony :
Alright, we are back. We just heard about D’S situation from the planning commission and how to navigate that and our next question comes from George Martin and George says, I’m under contract on my first house hack and was hoping to get some advice from others who have done it before right now. George has a few points here, so bear with me as I read through these. George says, is it recommended to get a separate bank account to collect rent from the other unit even if it’s just going right to the mortgage payment? I’m inheriting a tenant for four months until her lease is up. She’s been renting for almost 10 years and paying the same rent since she moved in. She’s paying nine 50 and market rent is about 1500 to 1700. Her unit’s very outdated. It just needs a little creativity and some sweat equity when she moves.

Tony :
I plan on spending a couple of months updating the house to better my chances of getting close to market rent. I wasn’t planning on saving anything from her rent for CapEx or maintenance since I plan on taking care of that in a few months when she’s out, I have the cash reserves to cover those expect in case something goes wrong. And those first few months while she’s still there. Any tax related advice you wish you had known before you house hack? And then last, I’m scheduling a visit with my accountant later this month to put together a game plan, but I was curious to hear from others’ expenses. So George has a lot there. I think first ash, maybe let’s just define house hacking and what that is for maybe some of our newer Ricky audience members. So house hacking is when you buy a property to live in for yourself and then you rent out other portions of that house of that property, long-term, short-term, midterm, whatever it may be to someone else.

Tony :
So it could be, hey, I’m a single young professional and I’m buying a six bedroom house and I’m going to rent out the other five bedrooms. Or it could be like our friend Craig Op who wrote the book on house hacking for BiggerPockets and he got a big house and slept on the couch so he could rent out all the rooms. But that’s one way of house hacking. You could buy a primary home within an A DU in the back, right? A small accessory dwelling unit. You could buy a duplex or a triplex where you live in one unit and rent out the other. So that is house hacking at its core. So let’s just break some of these questions out, Ash. I think the first one is, is it recommended to get a separate bank account to collect rent from the other unit even though it’s just going right towards the mortgage? So what would you do in that situation? Would you set it up separately or would you collect it and how would you handle it?

Ashley:
At first when you read this, I thought it was going to say separate from my personal bank account, but that you definitely want to do you want to collect rent in a different bank account, even if you own it individually, set up a separate bank account, even your personal name, and then have the rent go into that and pay the expenses out of that. It’ll make your bookkeeping so much easier than commingling with your personal account. Okay, but this question is if you have two units, should you put the rent income for each unit into a separate bank account for each unit or the same one? 100% the same one because you’re just creating more work by doing it in two different things. You’ll have to set up automatic payments out of two accounts to cover your mortgage. So the same rental units, the only reason you would do separate bank accounts for your rental units is if maybe there is a different partnership or different, you have like my sister and I own a house, her rent isn’t going into the same bank account that the properties are that I own in my personal name, even though my personal name is on the property, her and I own together.

Ashley:
We’re just not going to, we have a separate bank account that, so if you do have a partner, then also if you have an LLC or you have an entity, whatever it may be, or you’re doing a joint venture, I would keep that separate from the other properties that I have that don’t have any partners on them. And then keep my partners bank accounts separate too. So you could follow that if there’s different entities, keep them separate. But if you have these properties in your personal name or they’re all in the same LLC, super easy to use the same bank account and base lane bank, you can have one bank account, you can actually create individual accounts. So if you wanted to keep track of it by unit, you can separate it so that bank account X, XX has a subdivision of it of unit one and then unit two and you can have the rent go into each of those. But by property type, maybe you’ll want to classify it as that. I do for all my bookkeeping, the rent is from this property, this rent is from that property. That’s where it may be beneficial, but if all the units are in the same property, I don’t see it. Any benefit is just more work for you.

Tony :
Yeah, I had agree with that Ash. I think in this specific situation where it’s a house hack one account for the whole house hack probably makes sense. I actually do have a separate checking account for every single one of our properties. And the reason I did it that way is because I feel like it is a little bit more work on the front end to set everything up and kind of keeping track of the debit cards and the account numbers and all that stuff. But I feel like it makes a monthly bookkeeping a little bit easier because now my bookkeeper never has to ask me like, Hey, what property was this for? And as long as we’re being diligent about uploading receipts and making sure she has that visibility, she almost never in theory should have to ask us questions about, Hey, what are these transactions?

Tony :
Because the bank account will always tell her which property it’s for and the receipt or the whatever memo note we add will tell her what it’s about. Different ways to skin the cat there. But I agree with you. I think one account for a house hack probably makes the most sense. Next one here he says, so I’m inheriting a tenant four months until her lease is up. She’s been there for 10 years, she’s paying nine 50, market rent is 1500 to 1700. Little bit of updating or a little bit of updating needs to be done from there. But I guess his question here is, or maybe the comment really that we should give him some feedback on. He says, I wasn’t planning on saving anything from her rent for CapEx or maintenance since I plan on taking care of that in a few months when she moves out, I have the cash reserves to cover those expenses in case something goes wrong while she’s still there. I guess what are your thoughts on that Ash? Would you, because I dunno, I guess he’s just going to be using it to maybe apply towards the mortgage or put it in his pocket, whatever it may be. What are your thoughts on not saving any of that rent payment for CapEx reserves, et cetera?

Ashley:
Yeah, I think that if you already have the X amount that you feel comfortable, you already have three to six months and I say heavier onto the six month side of those reserves saved up, there’s no reason to keep adding to the pot. But if an expense does come up and you to spend $250 for a plumber to come out, then that month’s cashflow, you’re not going to take it and use for whatever. You’re going to replenish your reserves. So that’s where I would say is to, if you’re actually have to dip into your reserves, go ahead and replenish it. But to have money just building this huge amount of cash reserves at some point right now, you could be making 5% having that in a bank account, so not totally a bad thing, but dumping so much money into your reserves and having a ridiculous amount, you’re going to actually lose out on other investment opportunities.

Ashley:
And in this case, having, it’s a very minimal amount of cashflow, she’s paying way below market value. It’s not going to make that huge of an impact if you do save it the next four months. But I don’t see any need as long as you have reserves in place for CapEx or maintenance, but also that you have enough reserves in place to cover those three months that you’re going to be renovating it. So make sure you can pay the utilities, you can pay the insurance, you can pay the mortgage on the property, you can pay to have the grass cut, whatever your expenses are for that property, make sure you can cover them for those three months, it’s going to be vacant. And I would even add in some cushion too, in case the rehab takes longer than you think you have a little bit extra. So that six months of reserves would be great there.

Tony :
Next piece of this question here is any tax related advice you wish you had known before you house hacked? I’ve never personally house hacked, so I would say definitely talk to a good real estate, CPA, who knows the space incredibly well and get their insights. But I mean a lot of the basics apply here, right? George is, like I actually mentioned, having a separate account, not commingling everything. Really understanding what the expenses are related to the unit that you’re not living in, right? Making sure that you’re getting all your deductions there. And I wonder, I’ve never asked this question before, but I wonder, Ash maybe can you do a cost segregation study on a house hack? And if so, I would assume that just maybe take the percentage that’s not being lived in by you. Do you know the answer to that? I’d assume the answer is yes, you can. I don’t, yeah, no, I don’t would ask that question for sure, George, because if you can do a cost segregation setting and that’ll also help kind of offset some of your tax liability from the revenue that you’re generating from this rental as well. So something to look into, any tax advice outside of that house you feel George might need to know.

Ashley:
The only thing I can think of is maximizing your expenses as to can you prorate your utilities because they’re occupying X percentage of the house so you can write off so much of the utility usage. Things like that is what I would want to talk to a CPA about is to see if I was able to do that.

Tony :
Alright, so our last and final question today comes from Z who and Z says, I’m looking to rent out a room in my residence potentially to a college student taking summer courses or internships. What is the best way to approach this? Should I make a three month lease, June to August considered a short-term slash midterm rental stay put cash under the table with no lease? Would this be considered a sole proprietor LC for tax filing? Alright, so a couple things to break down here. So Z says that I’m looking to rent out a room, so just a room, not even the entire unit, just a room within Z’s personal residence. So first piece here is should I make a three month lease or should I just put cash under the table with no lease? Ash, what’s your take first on lease versus no lease?

Ashley:
Well, every investor loves cash,

Tony :
But

Ashley:
Literally not cash because it’s way better to actually have an agreement in place. We heard a bunch of horror stories, including Lakers, who was recently on about getting squatters in your property and you don’t want somebody to move into your property and there’d be no lease agreement and they actually create their own fake lease agreement to say that they actually do live there. So definitely would put a lease agreement in place. I think your proposal of doing a three month lease from June to August is great. First of all, make sure that you can actually, oh, it’s your primary residence. I was going to say make sure you have permission from the landlord to actually sublease. But yeah, do the three month lease from June to August, but you could also list it on Airbnb and just have them book the three months. So we do that for any medium term rentals.

Ashley:
We have them book directly through Airbnb. It’s just so much easier because we have the system set up and we feel like there’s support from Airbnb, there’s the air coverage, but I have actually learned a lot by going to different conferences, including Tony’s conferences, summit and other ones as to it’s very easy to go out and find other insurance that protects you and protects the renter too. So that shouldn’t be something holding me back from making that transition. But that’s the way we do it for any midterm rental, we just have them book it through Airbnb because it is the simplest, easiest thing for me to not have to spend a lot of time on it. But I do know other investors that actually do a lease agreement and they’ll use rent ready to have them electronically sign the lease agreement to make payment, things like that.

Tony :
Yeah, right with you Ash, we usually go through just the online travel agency, so Airbnb and VRBO for our midterm stays as well. We’ve got one guy who’s been in one of our units for, I think he’s going on month four right now and just every month he just re-ups for another month and we’ve had to move him around between units a couple of times, but he’s been with us for almost four months now. I think there’s so little headache or admin work related to just running it through Airbnb. So I like that. Is he another option to source potential tenants? You could go through Furnish Finder, that’s another option for you. Local Facebook groups for folks who might be posting, looking for places to stay. If you go that route, obviously you would have to create your own lease for that timeframe because Furnace Finder is just a marketplace. It doesn’t actually facilitate the transactions, but those are options for you as well. I would though caution you to make sure you have some kind of agreement in place, either through Airbnb or some kind of rental agreement and not go the route of having no lease because Ashley said squatters are a real thing. Actually, I got to share this because I read this article, Ashley, lemme know if you saw this in there. It’s a guy, his name is Flash Shelton. Flash Shelton is his name. So if you guys Google his name, I think that

Ashley:
Shelton would’ve stuck out to me. So I don’t think I know this story.

Tony :
This guy is a professional squatter remover. So his service, it’s a service that he offers to people where he’ll go and squat on your squatter. So he’ll camp outside the home, try and get an understanding of when they go, when they leave, and once he has a good idea of their patterns when they leave the house, he’ll go in, come in with the lease of his own, signed by the landlord saying, I have a lease, and he’ll move in on top of the squatters. And he said usually they’re out within a day. So if you do ever get caught with a squatter, look up Flash Shelton, he might be able to help you out.

Ashley:
That’s so funny because when Laca first told me, and we did this off the record, off the air is when she told me what was happening, I was like, why don’t you just get some big macho guy to just move in with all his guns

Tony :
And everything. That’s literally what this guy is. He comes in with three of his friends, they’re all armed, who would want to stay in there? And he said they’re just in there eating food, turning up the volume on the tv, just doing anything they can to annoy these people. And he’s had, based on the article that I read, a 100% success rate of getting people out. Wow. Oh my gosh. So anyway, flash Shelton, if you guys are looking for someone to remove your squatter, no way. Maybe he’ll sponsor our podcast. I was going to say, we got to get into sponsors. I read that story, I was like, this is crazy. Cool. Awesome. Well, Z hopefully got some value from that, but just a few things to consider. You’re getting into that summer room rental. Well guys, great episode today. Really loved opening up with Chase’s story about using his electric vehicles to fund his down payment for his rental property. We talked about house hacking, we talked about ADUs and obviously finished off with a couple of questions here as well. So if you guys haven’t yet, please give us a follow on whatever podcast platform it’s you’re listening to. If you’re on YouTube, be sure to subscribe. Mine and Ashley’s contact info are down in the show notes for today’s episode. But as always, guys, we appreciate you hanging out with us. If

Ashley:
You would like to have your question answered on rookie reply, you can go to biggerpockets.com/reply. Thank you guys so much for listening. I’m Ashley. And he’s Tony, and we’ll see you guys next time.

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover:

  • House hacking explained (collecting rents, renovations, and tax benefits!)
  • How to add an accessory dwelling unit (ADU) to an existing property
  • Creative ways to fund the down payment for your next rental property
  • How to find the owner of an abandoned house and make an offer
  • Why you MUST have a lease agreement in place when renting by the room
  • How to remove squatters from your property (with a 100% success rate!)
  • And So Much More!

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Books Mentioned in the Show

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

5 Real Estate Deals Using Other People’s Money

The Hidden Property Damage That Could Ruin Your Home Renovation…

Added home renovation costs can ruin your plans to own the perfect rental property. When this happens, how do you come up with the extra funds? More importantly, how do you prevent this from happening altogether? We’ve got plenty of answers for you in today’s episode!

Welcome back to the Real Estate Rookie podcast! Jessica Bryant Walton owns several doors in Anchorage, Alaska. As you’re about to find out, investing where winters are long, water damage is common, and frozen pipes are everyday occurrences isn’t for the faint of heart. Jessica and her husband had just bought a duplex, only to find out that the previous owner had disguised a MAJOR leak and extensive damage with a second roof. What they anticipated would be a $40,000 rehab ended up costing over $130,000!

Fortunately, Jessica and her husband came up with creative ways to fund their renovations, increase rents, and lower their overhead by self-managing the property. But there are valuable lessons to take away from their experience. You’ll learn why you should consider getting your real estate license, how to find the best contractors for your rehab projects, and the importance of always keeping a paper trail!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is real estate rookie episode 394. Do rental properties need two roofs? We will get a horror story all the way from Alaska and why buying in the winter can create more issues than you would expect. I’m your investigative journalist, Ashley Care, and today we are going to break down a horror story. Welcome to the Rookie podcast. For three times a week we share the motivation, inspiration, and stories to get you started in real estate. Today we have a guest, Jessica Bryant Walton on as an investor from Florida, but calls Alaska home. We are going to hear what happened on their duplex renovation that took two and a half years. We’ll get to know Alaska as a rental market, some landlord maintenance tips and so much more. Just as a reminder, if you have a horror story you want to talk to me about, maybe you need a therapy session or you just need to vent, go to biggerpockets.com/reply and select horror story and our producers will review and reach out. Okay. So Jessica, welcome to the show. Thank you so much for being trusting with me and vulnerable to relive this horror story you’re about to get into with us.

Jessica :
Yeah, thanks for having me.

Ashley:
So let’s start out with your fixer upper rental. Tell us about

Jessica :
It. So it was your standard duplex. It was an upstairs, downstairs duplex in pretty rough shape, but the price reflected that. So we had been looking for a while and we were new investors, didn’t have a ton of cash, so we kind of were willing to do the sweat equity and get our hands dirty to find a good deal.

Ashley:
And was this your first or second purchase?

Jessica :
This was our second. So my husband lived in one previously and I kind of talked him into doing more deals and we’d been looking for a while and found this one.

Ashley:
Okay. So what made the deals stand out to you first approaching it? Why did you think it was a good deal at the time? The

Jessica :
Price definitely. It looked like it needed a lot of work, but nothing really structural. It was mostly cosmetic. It was just an older building. We found one in a good side of town that we had been looking for a while and the price was good.

Ashley:
As you’re making your offer on this property, what are some of the steps that you took to get the deal under contract?

Jessica :
We probably put a price in a little higher than we wanted just to kind of lock it in there. So there was a tenant downstairs and we had only viewed the top unit, so we went in and checked it out. We thought, yeah, this isn’t too bad, we can definitely do this work ourselves. And so we gave a pretty close to asking price offer.

Ashley:
And then what made this deal go horribly wrong?

Jessica :
Well, it was winter and it was covid, so there was some surprises that popped up after our initial walkthrough and after the inspection and everything had passed when we actually got in there and got our hands dirty and started finding things hidden.

Ashley:
So this was after you had already purchased the property. Did you do an inspection on this property at all?

Jessica :
We did do an inspection. We had used this inspector previously. He was great, but like I said, it was during Covid, so he was definitely super cautious. It was during winter so he could only see so much of the roof. He climbed up there and looked around, but the issues we found were more internal in the roof, so we didn’t find these until after we owned it and started tearing things apart.

Ashley:
So we kind of referenced this in the intro here, but there was two roofs on this house. So was this more protection that you are extra covered in case one blows off, you got another room? Yeah,

Jessica :
I wish. So when we first went and saw the property, like I said, there was nothing too structural, but when you first walked in, the entryway was kind of low. So that was kind of one of the things we wanted to lift up. There was space there. We knew we could lift the inside up the ceiling, so we thought maybe just that one little area we could kind of open up. Our contractor was about six four and it was pretty close to hitting his head when he walked in. So we thought maybe just a small little room. We can raise that up just a little bit.

Ashley:
And at the time your contractor said, this is no problem, we can go ahead and do this.

Jessica :
Yeah, he thought it wasn’t going to be a problem and then we started poking around and that’s when we really found the issues.

Ashley:
So as you’re poking around, is this you guys doing the demo yourselves or is your contractor doing it?

Jessica :
So we brought the contractor in and there was a little half wall I wanted removed and then I asked him about that lower ceiling portion in the entryway and he says, yeah, it shouldn’t be a problem. The rest of your ceiling is nice and high, so it’s not going to be an issue. We started poking in the drywall and things and that’s when we noticed a little bit of moisture. So we started poking more and more and then there was a lot of moisture and when we pulled that down and poked the vapor barrier, that’s when the real trouble started. There was literal water pouring out of the vapor barrier.

Ashley:
So this would’ve been in between the two roofs then the two roofs, is

Jessica :
That correct? So that lower portion of the ceiling was actually right above that was an old roof, and they must’ve had issues that they did not disclose and instead of ripping that down and replacing it, they just built another equally shoddy roof on top of that and hit it. So that’s what the contract or that’s what the inspector saw.

Ashley:
Oh my gosh. So you’re really not going to see evidence of that, especially in winter in Alaska when you can’t even really see the roof. I’m assuming that it had snow on top of it that there’s not a lot of access to that.

Jessica :
Yeah, the inspector got up there, he looked around and everything that he could see looked totally fine. You wouldn’t see it until you were inside the unit pulling drywall down, ripping through the vapor barrier that you really see the gallons and gallons of water that were just sitting there.

Ashley:
Oh my gosh. So basically at this point, this is water just pouring into this unit that you, you’re trying to renovate buckets

Jessica :
Full all over? Yeah, we had five gallon buckets throughout the whole unit. We just started poking holes and just letting ’em drain into it. It was a long, long process.

Ashley:
What is going through your mind at that moment as to obviously you finished the deal, but at any point in time were you just so discouraged you wanted to give up?

Jessica :
Yeah, we started freaking out. We ran downstairs because there were tenants living down there that came with the property and told them about the issues and they were kind of like, well, yeah, this place has been leaking for years. Did you not know that? And that’s when it really hit us that, oh my gosh, we were totally screwed over. These people lied about it on their form. She knew there was damage and leaking and she did not disclose it.

Ashley:
Wow. So was there any evidence of just any water stains on the ceiling at all when you had gone into the unit? Maybe did they even repaint over some of them if there had

Jessica :
Been? That’s the thing is it was very old and dated inside, but it did look like the paint was somewhat new. So yeah, we think that she probably covered it up.

Ashley:
Okay. So you have the water pouring in, you have the buckets, you finally get all the water out of the roof. What is the next step and is this your contractor kind of guiding you through the process as to here’s what we have to do, here’s our game plan.

Jessica :
So we hadn’t reached back out to the contractor yet. We were kind of in panic mode, so we immediately got on the roof with shovels and started scraping every bit of snow off we could to see if maybe it was something we could fix ourselves. We weren’t sure. And then we immediately contacted a lawyer and said, there’s something wrong here. This lady has clearly lied and not disclosed what she knew. And so we started moving forward with the lawyer process.

Ashley:
So at this time, what does your lawyer advise you? Do you have any recourse going after the seller for something that they didn’t disclose to you?

Jessica :
Especially with the tenant downstairs telling us that Yeah, we knew about this. It had leaked down into their unit before we contacted the lawyer, told them everything that happened, showed them the inspection and all, and they basically said the inspector couldn’t see anything, he’s not at fault. So we have to move forward from that and go towards a previous owner. The lawyer started looking into it and found that this person had sold the property. She really didn’t have any other assets other than that. So by the time we would chase her down, she had moved out of state. They pretty much told us that all the money we would spend in lawyer fees, we weren’t going to really make any money back after we went after her because there was no other assets to take from her,

Ashley:
Which at that point that has to feel pretty discouraging and frustrating, I’m sure. Yep.

Jessica :
We thought the whole unit inside would be about $40,000 to fix and then this whole roof issue on top of it just blew that out of the water. Obviously

Ashley:
We’re going to take a short break and when we get back I want to go into more of the numbers on this property on this house. So we’ll be right back after this break. Okay. We’re back from our short break with Jessica who’s just telling us her horror story of buying a rental property and all of a sudden just having water pour through the roof as they find out that there was shoddy roof work done and there was two roofs that were on the property which did not provide extra protection. So you just kind of mentioned how much you spent on the rehab, so you’re including this new cost for the roof. What did the total numbers end up being on this property? Well,

Jessica :
We had planned to spend about 40 in the rehab, but when we found this roof issue, we just stopped completely. We weren’t going to do anything until we took care of the roof. So we called the contractor back and told him we don’t want to have any more hidden surprises. So instead of just fixing this portion, let’s just take the whole thing off, starts from scratch and make sure we’ve got a good roof after this. So he gave us a quote of about $60,000 in addition to our 40,000 plan. So that was startling for sure, but we didn’t really have a choice. We said let’s just, I don’t want to worry about this for the next 10, 20 years, so let’s just take the whole thing off and rebuild it. And with that we really wanted to raise the roof up a little bit that inside where it was low. So we decided to add on an additional trust package and that was another 12,000.

Ashley:
So where did you come up with the money for this to pay for these renovations when you had only planned for doing 40,000?

Jessica :
Yeah, so luckily my husband has a W2 job, so we ended up taking out from his retirement from his 401k, some interest free loans essentially. And then he had a lot of saved PTO up, so we kind of cashed a good bit of that in to pay for this.

Ashley:
At the beginning of this episode you had mentioned, you said to your husband you wanted to keep doing this and it kind of seemed like this was your idea. At any point in time was there any frustration with him or did he say we never should have done this? What was kind of that balance between you two? As of now he’s having to pull out of his 401k and different things like that?

Jessica :
Yeah, I mean there was definitely a lot of frustration. We still go back and forth about this today, like, oh, we should have never done this. And then at the same time we say, no, it was such a good learning experience, I’m glad it happened at the beginning when it was manageable for us. So it’s worked out

Ashley:
And that’s the best thing about having a great partner, not even if it’s your spouse, but a partner on board that’s working with you through the project and is going to understand and see and be there to support you through these issues too.

Jessica :
Yeah, absolutely. He’s definitely the responsible one who’s always saved and he prepares for things like this. So we buckle down and we worked through it.

Ashley:
Okay. So what ended up being the outcome of this? You do the roof, you get that fixed, you raise the roof, and then how long before you actually dig into finishing the inside of the property?

Jessica :
So with Alaska, we have obviously a very long winter, so your window of construction is very short. So we had bought this place late winter planning to do our remodel through the summer, the roof issue happened and so we had to hire a contractor and some contractors, they’re not always on time. It ended up taking them the entire summer, calling them, chasing them down to finish the project. It got to a point where they had removed the entire roof, put the truss package up, and our house was essentially just an open shell at this point. Now we’re coming then to the fall end of summer, which is rainy season. So we went there and they had our entire duplex open with just a clear sheet over the top of the whole roof and it is dumping rain for days and days and days. And we’re calling them like, please can you get over here? They can’t do anything while it’s raining. So we were there at least three times a day with our sticks and our brooms pushing up the plastic sheeting to just shut off all of this water so that it didn’t collapse. The sheeting flood out the unit, flood the unit below them. So the

Ashley:
Water nightmare just keeps getting worse. It keeps

Jessica :
Going. Yeah. After they pulled off the roof, we’re just sitting there with it open and that’s when our rainy season comes. My gosh. So it’s just dumping and dumping. So at this point we are pretty overwhelmed thinking we’re running out of time for the roof to finish, then we still have to do the whole inside. And then also at the end of summer, that’s kind of when your touristy season stops, it’s going to be hard to get a renter in once winter hits. So we decided at that point we’re already paying for the contractor to do the roof, we’re just going to hire someone to finish the inside when they’re done because we can’t keep up with it when there’s no way we’ll finish it in time. So that was the additional $40,000 we had planned to spend for the inside. We ended up hiring a contractor to finish it out and that was 60 grand total.

Ashley:
And how was that experience with that contractor?

Jessica :
The inside contractor, a literal dream? He saved us. He was in and out in six weeks, just top quality work. He was so good, especially compared to the roofing contractors that we had hired.

Ashley:
So what were some lessons learned, especially comparing those two contractors? What are things you would do different in your experience of managing a contractor and hiring a contractor?

Jessica :
Definitely get references. My interior contractor, I’ll use him for the rest of my life. The roofing contractor, you’re going to have to see their work for sure. Talk to people, set a very strict schedule for them because once you pay them, they don’t have the incentive to come back. So split your payments up into little brackets as they do amount of work to make sure that they’re there on time, they’re finishing things and check everything in the winter way more than you think you’re going to.

Ashley:
So once this project is complete, you’ve got all your rehab done. What was next? Did you guys refinance at all and have it appraised or did you just keep your data on it and then just rent it out?

Jessica :
No, we did not refinance. We got it when it was still a pretty good rate. We got it at a 4.65%, so we were happy with that. We just were still paying on the loan for the contractor, the interest free loan, basically paying back into the retirement. After that was done, we finally decided to get the lower tenant out of there so we could remodel that unit. He had been there for about 10 years, I think way below market. He was with it when we got it and he had just been there for a long time. So it was time to get into that unit.

Ashley:
And this time period had been how long from the day you purchased it until the day that you were able to rent it out?

Jessica :
That was about 10 months. Yeah, we got it. We closed in January and I think they were finally done with everything in about October.

Ashley:
So after you’ve gotten that wrapped up, everything’s set, what is your feelings towards real estate? Are you continuing on or are you saying you’re throwing in the towel as to I am never going through that again.

Jessica :
Yeah, no, we definitely were continuing with it. So after we were done with that, we decided to do the remodel downstairs ourselves. So we just finished that up a year after. We had planned for about three to four months. And that remodel on our own took about a year for us total working after work weekends we’re done, we’ve recovered, we’ve rested, and we’re looking forward to the next project.

Ashley:
So two and a half years later

Jessica :
Essentially.

Ashley:
And it’s completely done. And then what ended up being the final numbers on that?

Jessica :
So when we bought it, our numbers that we had projected for rental at that time were about 1460 per unit. When we bought the property, we put 20% down and our mortgage total was about 1500. So it’s just over 1500 per month. After doing the upgraded remodel, a little bit nicer version than we wanted. We are now renting out for 2200 upstairs. That’s a furnished all inclusive rental. And then the downstairs is 1800 a month.

Ashley:
So

Jessica :
Much better than we expected.

Ashley:
Yeah. And what was the person paying downstairs? Were they paying 1460 when you first bought it or were they paying some different

Jessica :
He was paying 1200. Oh wow. 1200. Yeah.

Ashley:
So let’s go into that, a little bit of the market in Alaska. So what actual city is this in?

Jessica :
So we are in Anchorage, which is kind of the main city in Alaska. I think we’ve got a lot of tourists in the summer. It’s super, super busy in the summertime. We have a big military base in town here, so we’ve got a lot of that. And then just a lot of families living here.

Ashley:
And then what are some of the things that if someone is looking to invest in this market that they should be looking out for when purchasing a property in Anchorage?

Jessica :
Okay. Well pretty much every time we’ve bought any sort of real estate or things in Anchorage, we always buy in the winter, which is tough because there’s a lot of things you can miss, but you also get a better deal because nobody wants to move in the middle of winter, move in or out. So I would say check previous listing photos. If you can get up on the roof, check every little nook and cranny, make sure there’s no leaking because that’s a huge issue here is wintertime freezing and then pipes leak and obviously roof leaks like we experienced.

Ashley:
Okay. And as we were jumping onto this call, you did mention that there was a moose outside in your yard. So is there anything we need to know about the animals and the wildlife in Anchorage before investing there? One thing in my market is you can sometimes find wood bees that will literally, if there’s a house with wood siding and they can be literally infested with it where they’ve drilled holes into the siding. So is there any kind of wildlife that you need to be aware about?

Jessica :
Nothing that will really affect the houses. Maybe spruce beetles occasionally, but yeah, moose are everywhere. They’re all over the city. They are silent, but they’re huge. You can open your door and they’ll be there blocking your car and you can’t get to work for the day. They’re just moose are literally everywhere in Anchorage.

Ashley:
Okay. We’re going to take a short break and when we get back I want to touch on managing your properties and what advice you have for rookie investors. We’ll be right back and we are back with Jessica. So Jessica, are you self managing your properties?

Jessica :
We are. I manage them myself. I work from home usually, so we have four doors total that we manage right now. And then my husband’s kind of the handyman so to speak, or if we have to hire someone out for a plumber. But yeah, I manage them all myself.

Ashley:
And are you using any software or different things like that to manage it?

Jessica :
No, I mostly just use Excel spreadsheets and things like that and do it myself.

Ashley:
And what do you find easier to manage? Which strategy?

Jessica :
It’s a little bit of both. I mean I definitely kind of the short midterm rentals, they’re fun to go over there and flip and stay on top of it, but my ultimate goal is to become a snowbird. I’m originally from Florida. I’m not built for the Alaska winters, so I kind of like to have long-term people there during the winters.

Ashley:
So with doing yourself managing, do you have any horror stories of any communication with tenants that you can think of off the top of your head? So we went over a horror story of a contractor issue and also a buying issue of a property that had an issue. Do you have any horror stories of an experience as a property manager? I

Jessica :
Wouldn’t say we have any horror stories, nothing too terrible during Covid. We did have someone who sort of became a squatter, wasn’t paying their rent, refused to get out, but really I would much rather keep a unit empty and wait for a good tenant than I would to rush into the unit just to get that monthly rent. It definitely pays in the long run to wait for a good solid tenant.

Ashley:
And I think that’s so different than a lot of other markets where you can usually do a long-term rental the whole season or a short-term rental the whole season. But mixing it up, how does that complicate your vacancy and the amount of time and energy put into a property when you’re having to rent out the short-term rental for the busy season and then having to adjust during the winter months?

Jessica :
So we learned that the hard way everybody gets so excited by the short-term rental availability in Alaska summers because you can just charge an astronomical amount, which a lot of people do. And so we did a short-term furnished rental for the first time last summer and made amazing money. But then once September October came, there was nobody, it was hard to find a long-term tenant to go in there and it just sat empty for a long time. So I think it’s better in the long run to find someone with a median rent. It’s going to be their long-term and you don’t have to worry about

Ashley:
It. Yeah, I think that would be aggravating to me as to almost the scarcity mindset of like, okay, it’s getting to the end of the season. I’m going to be vacant for the next six months or something like that. Worried about having to rush to get a long-term tenant in place. There’s a ski town near us that is kind of similar where they put in a lot of short-term rental laws, stricter laws than what they had before where you can’t do a short-term rental anymore and you have to do long-term or at least 30 days or more. So people are getting strategic with giving discounts for having it rented over the winter months for a period of three months and then after that, turning it into a long-term rental over the summer for seasonal workers or things like that. So just the idea of the Anchorage model kind of reminds me of what they’re having to do there. But there is constantly four rent signs over the summer of them not being able to fill because there’s just not that much going on and everybody wants to be there in the winter months too.

Jessica :
Yeah, everyone wants to be here in the summer and our municipality recently passed a code stating that any residence is allowed to have an A DU in the backyard or adjacent to their property. So I think that’s really going to help with the summer rentals and legislature is trying to pass right now where Alaskans have to have only renting to Alaskans. You can only have one short-term rental because so many people kick their tenants out to try to get that summertime money. So it’s really hard for families to find long-term reasonable priced homes here.

Ashley:
Wow, that makes a lot of sense. I didn’t even think about that as far as you’re looking for units, but you can only find them from a certain amount of time and then you have to relocate for the summer months and then come back to find housing. That’s such a great point. How do you think that new law is going to be effective? Do you think that is going to help with only letting each person only have one short-term rental per person?

Jessica :
I do think it will help. There’s so many people that want to just have long-term affordable housing here, so I think having an A DU will be much better for the short-term summer tourist people just to stay in a little cabin or something at someone’s house.

Ashley:
And then my next question is when you do have the long-term tenants in place over the winter, are you giving them any kind of guidance or even if you still have it as a short-term rental over the winter, guidance as to how to deal with the elements of the weather there? Are you creating any kind of handbook or guide to assist your renters into caring for the property? I mean even just in Buffalo we have pipes freeze and things like that and I would think that there would be a lot more extreme circumstances in Alaska than here.

Jessica :
Yeah, definitely The pipe freezing is the number one issue. When we were just doing this last remodel, we were gone for about a week during really cold snap and we came back and the pipes were not turning on. We panicked. Luckily the water hoses at the end of the season because they will absolutely freeze, and if you’re going to go out of town for long periods, the best thing to do is to kind of those exterior walls that have plumbing is you need to leave it on a little bit of a drip so it doesn’t freeze up because it gets negative 30 here sometimes in the winter. And it doesn’t matter how long you’re gone or how well your house is insulated, those pipes will definitely freeze if they’re not used.

Ashley:
Do you have any other tips that you would give to rookie investors who are thinking of self-managing as far as what are the best ways to communicate with your tenants that you have found?

Jessica :
I don’t believe in phone calls. I won’t do phone calls with my tenants. I say, please text me or please email me because one, I have a bad memory, but two, I want everything in writing. I don’t want to ever confuse anything or have them come back and say, you told me this or you told me that. I want that proof in writing always, because you never know when you’re going to need it. I

Ashley:
100% agree with that. I do that with almost everything, attorneys, loan officers, everything. I had countertops installed one time at a property and they sent me the bill for it and they had included that there was going to be tile backsplash and I hadn’t even been to the property at all to look at it or not tile backsplash, but the countertop backsplash. And I was like, wait, no, I did not order this. And I went back and I found the email that said, I do not want this. And so they took it off because I had said I didn’t want it to their salesperson and they still had put it on and installed it, but they were nice enough to take it off, but I didn’t have that email. They’re probably not going to believe me that. I said, no, I didn’t want that. Please take that off. So having everything in writing I think is a great advice.

Jessica :
Yeah, I’ve just recently found through my phone on my text messages, there’s a little section where you can schedule text messages far in advance. I’m four hours away from my family, so I do that a lot for them. But I’ll go through when I have a new tenant and schedule a text message the first week of October, please remember to remove your hose at this time to plug in your car is here and leave your pipes open. Just every little thing they need to know, I just schedule it in advance so that I don’t forget.

Ashley:
That is another great tip. And you can do that by text email many different ways and any property management software too is schedule those reoccurring messages so that they happen at certain times throughout the year. For our property management company, we do build out almost like a timeline of here’s our maintenance that we have to do throughout the year. That’s always has to be done, such as cleaning out the gutters, cleaning up leaves, things like that. But we don’t really have any that go out to the tenants on a quarterly basis or whatever. When it starts to snow, we’ll send them a reminder, but that’s a great idea to pre-schedule all of that communication just so that every year it’s automated and not even having to push a button. Yeah. Do you do any of this with your contractors? So you seem to have great communication, keeping everything in writing with your tenants, learning from your experience with the bad contractor, working with the good contractor, are you doing the same technique with them where all communication is in writing too?

Jessica :
Definitely, yes. I text everything, email everything to them because I will forget. I have very bad short-term memory, so I have to text things. I even send reminders to myself to check back in with them if I forget something. But luckily we don’t need contractors that often. The number one we usually need is a plumber. And that’s another issue. I don’t know if this is Alaska or if you’re experiencing this in the lower 48, but trying to find a plumber lately has just been so hard. We’ll have to call five or six, and a lot of them don’t want to come because it’s a crawl space or there’s just not enough them to do the amount of work that’s needed

Ashley:
For ours. We basically have just been working with one plumber, and I think the fact that we’ve given him so much work over the past year that we were actually just talking about this the other day, is to how grateful we are that they make us a priority too. But that’s the advantage of being able to use them consistently and constantly, which it’s not a good thing for me. That means I’ve had a lot of plumbing

Jessica :
S it’s okay, they’re worth the weight and gold this contractors,

Ashley:
But one contractor that we don’t, well, one specialty that we don’t have a lot of use for and don’t use frequently as an electrician. And so we actually did just try out a new electrician recently and we ended up having to go with somebody who just started their business because that was the issue. It was very hard to find an electrician who was experienced in things like this. And we found this guy who just went out on his own left the company he had been working for and he was great. He was great. And so he really didn’t have any marketing. It was actually the girl that waxes my eyebrows, her husband. She had posted it on her Facebook that he was going out on his own and I screenshot it and saved it. And then when we couldn’t find anybody that we had used before that was able to come out, we ended up contacting him. It’s just amazing the different ways that you can find contractors. So how did you find both of your contractors?

Jessica :
Usually what I do with my contractors, and the same thing we did with the plumbing contractor is we were trying to DIY something. We went to the local plumbing supply store and I’m asking all these questions and that’s where we found our contractor. I asked him all the plumbers in town, do you have anybody you recommend? He was like, this is the best guy. He does the best work. He’s a good price. He is an honest person. So that I think is a really good place to get a good contractor. They know everything about all of them in town. Yeah,

Ashley:
That’s a great idea. A lot of people say you go into Lowe’s, you go into Home Depot, you see who’s there at 6:00 AM but going into the more specific niche is a great idea. When I built my house, my contractor got all of his plumbing stuff from an actual plumbing fixture store that had just plumbing materials there. And most likely if you have an experienced contractor, they’re going to be going to those kind of stores because they have credit there. They get discounts there. They want the best materials instead of going to Lowe’s and Home Depot too.

Jessica :
And usually if you find one good contractor that you can work with, ask them. They have other people in other realms that they reach out to and they work with.

Ashley:
Now what about your agent or your lender? Did you use an agent on any of your properties to purchase these?

Jessica :
Yeah, for this property, we had an agent. We had found a new agent. I didn’t realize that she was so new. I mean, she’s a great, wonderful person, but we went and put the property, we went and viewed the property and put an offer in, and we still thought there’s a little room for negotiation after we do the inspection and everything. And we put the offer in after only viewing the top unit. We hadn’t viewed the second unit. So once we put the offer in and then got the inspection back, we realized there were so many more issues. We said, okay. We talked to the agent and said, can you maybe renegotiate with the person selling and see if we can get a little money off of this? And she pretty much talked to her boss and came back and said, oh, I’m so sorry. You’re locked in on price. You filled out this form, that means you’re locked in. You can’t go back, which we didn’t have that much experience with real estate. I’m like, what? I didn’t know this was a thing. So we kind of got stuck with this offer that we had put in per the realtor’s recommendation, and we really couldn’t negotiate. We really had hoped to get at least maybe 20 grand more off towards the problems that we found after the inspection.

Ashley:
Yeah, that’s crazy. That really does not sound like that was supposed to happen at all. I

Jessica :
Think she just was so new and didn’t really know what she was talking about, and we didn’t know and lesson learned.

Ashley:
And we just had, on my rookie bootcamp, we had a guest on Angel Garcia and he was talking about continuously educating himself, and he talked about something similar where he had no, well, I guess not, kind of similar, but he had no idea the process of buying a car. And he was like, I don’t want to go in there and get duped. So he spent hours researching the process of buying a car and what happens when you go into the finance manager, all these different things. But his point to the rookies in the group was, you need to spend time learning a process because you’re not going to know. Not everybody is going to be able to assist you and to help you along the way and think about all the different steps that you’re taking throughout real estate. Not everyone is going to handhold you and be your best friend.
Just like your example of the agent too. I had an agent that lost my earnest money deposit and tried to blame it. And the secretary of the admin that worked at his brokerage, and actually somebody else that worked at the office told me, no, he lied to you. It was not the admin. He just blamed it on her. And it was almost the deal almost fell through because of that. And there’s just all these different things that can come up. But if I would’ve known better as to, I need to track. So now every time the agent that I do have, that’s great. I take a picture of the envelope, I’m sending it in, I take a picture of the actual check and I mark what date I’m actually sending it out and everything like that, and track all of this from these lessons learned. And even if we watch a million YouTube videos on the process of getting a property under contract, working with a real estate agent, there’s still going to be things that come up. But I thought that was really interesting what Angel said as to continuously educating yourself on these processes.

Jessica :
So after I had this experience, I was so bummed about it. I actually went and started studying real estate. I went all the way through the process, got my license. I don’t actually plan on using it, but I just wanted to know every detail about it. So I got my license. Like I said, I don’t plan on using it, but I met so many good realtors that we’re going to use in the future, and now I know so much more about it, I won’t be caught off guard again.

Ashley:
And let me ask you this, how much was it to actually take the course?

Jessica :
Oh, I think in total and the license for about a year. So I think I spent about $3,000, which seems like a lot of money, but I think of it as an investment. That’s an education I took. It’s just like taking a class at college now. I know everything there is to know all the little details that we would’ve missed before

Ashley:
And New York State just to take the course. And if you don’t actually go for the exam or get your license just to take the course, it’s like $99. Oh, wow. So if you’re really intrigued and interested, I think it was Real Estate U because I’ve started to take it three or four times and I’ve just never completed it. So good for you. But it

Jessica :
Was worth it just to be able to have that access to go and view houses whenever we wanted to. I’m like, oh, I’ve got the license legally, let’s just go see a bunch of properties. So we learned so much just by doing that.

Ashley:
That is such a great advantage of not having to schedule a showing and coordinate with when the house is available to be seen when your agent is available and you being able to go to. So along with getting your real estate license, is there anything else that we need to know about you as far as things you have? Are you a licensed home inspector now

Jessica :
Too? No, no, not quite. My husband was pushing for me to become an appraiser. I’m like, no, that’s too much for me. I need something I can do from home. So I’ve kind of been studying more of different properties you’re allowed to have on different pieces of land, basically. So we’re looking to buy some acreage, see the different things that you’re allowed to set up as far as short-term rentals, farm stays, things like that.

Ashley:
Oh, awesome. I love the idea of generating multiple income streams off of a plot of land, a parcel of land.

Jessica :
So that’s really what I would love to do in the future is to kind of find a piece of land, do something like agritourism or eco lodging, something like that where people are visiting, they’re kind of connecting with nature, staying on the property with plants and animals. A farm, stay like that.

Ashley:
Yeah, that’s very awesome. Well, thank you so much for coming on today and sharing your story of what happened with your duplex, but also giving a ton of advice. I think the parts of communication with your tenants, how to find good contractors and just the lessons you have learned are very valuable to our rookie listeners. So thank you so much for taking the time, Jessica.

Jessica :
Yeah, I appreciate you having me.

Ashley:
We will include Jessica’s information into the show notes. Thank you guys so much for listening. And if you have your own horror story that you’d like to come and share with me, you can go to biggerpockets.com/reply. I would love to have you on as a guest so we can laugh together and we can cry together about the horror experience. I’m Ashley, and thank you so much for watching or listening. We’ll see you guys next time.

Watch the Episode Here

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In This Episode We Cover:

  • How Jessica’s $40K renovation turned into a $130K+ “nightmare” rehab
  • Self-management tips for long-term and short-term rentals
  • The BEST way to source contractors for your renovation projects
  • Why you shouldn’t speak with your tenants over the phone
  • What you need to know before investing in an Alaska rental market
  • Why you should get your real estate license (even if you don’t plan to use it!)
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

5 Real Estate Deals Using Other People’s Money

$120K/Year from ONE “Sensory” Rental Property with a “Secret” Amenity

If you want your rental property to succeed, you’ve got to give people a reason to keep coming back. That’s exactly what today’s guest is doing—creating a one-of-one experience that people can’t get anywhere else. It’s what keeps his property booked year-round!

Welcome back to the Real Estate Rookie podcast! Just three years ago, Chase Charifa bought his first rental property—a black, mid-century cabin tucked away in Big Bear, California. By engaging each of the guest’s five senses and adding intrigue with a “secret” amenity, Chase and his wife, April, have created an unforgettable guest experience that allows them to stand out in their market. As a result, this short-term rental brings in about $120,000 per year!

But that’s not all. Since launching his Airbnb, Chase has taken on another four rentals, three new construction projects, and a parcel of land. How has Chase been able to scale his portfolio in only a few years? In this episode, he shares how he was able to fund several deals using creative financing and smart tax strategies. He also talks about the huge opportunity that exists with real estate development. You’ll learn how to find land, get approved for a construction loan, and build your own development team!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real estate Rookie episode 393 Financing can be a big obstacle for getting deals done, but today we will explore how a creative eye and an handle on funding we’ll get you a deal. My name is Ashley Care and I am here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we are getting into unlocking a property’s potential with Chase Sharifa. Now, how to target and how Chase and his wife targeted the five senses when they incorporate a secret amenity into their properties, why ground up construction is something rookies may be missing out on and so much more. So Chase, welcome to the podcast brother. Super excited to have you here.

Chase:
Thank you, Ashley. Thank you Tony. I’m so excited to be here. Yeah, I’m excited to share what we’ve learned and what we’re all

Tony:
About. Funny side story, chase and I are actually neighbors. We literally live in the same subdivision and he and my wife Sarah have bumped into each other out walking the babies and stuff. So excited to have someone from So Couch you is kind of representing brother. So Chase,

Ashley:
Can we start off with you telling us about how creative you got in your real estate journey?

Chase:
Sure. Yeah. So I guess the creativity portion came from our first property. So we call it the Lightfoot Cabin. Funny enough, the name is not so creative, it’s just a street that it’s on, but it essentially created our brand. Lightfoot is kind of synonymous with all the things that we now do. So it was back in the pandemic and everyone was kind of into, I guess, unquote Van Life and my wife and I wanted to get into that, but I guess one car dealership dealer said, yeah, you could use a second home loan on this. And I’m like, well Chase, you’re a lender second home. Why am I using it on a depreciating asset? No hate on the van Life people. But I was like, well, why don’t we buy a actual vacation home instead? And naturally in SoCal we think of Big Bear. So we started going up there and one day we went up while it was snowing and we found this property actually outside of Big Bear, and it was just so magical that the snow was falling and it still needed work, but it really drew us in and that was at that point where we made an offer and then we put in all our creative work.
This property was built around 1960s, I believe, 1965. So we really wanted to go with a mid-century vibe, which at the time, 2021, that’s what we were really excited about. I knew I needed one thing where this has to be a black cabin. I mean, I think my favorite color is black. My truck is black, most of my shirts are black. Anyway, I was like, it has to be a black cabin with a cedar outside. So that’s kind of what we went with. And we had just a feeling at the time because we were traveling that this needed to be a couple’s getaway, even though a lot of other people were telling us, don’t paint it black, don’t make it a couple’s getaway. Airbnb is all about beds with heads, but we really wanted to focus in on the couple’s getaway and also making the experience more than just arriving there and sleeping.
So we came up with this five senses type of thing where visually it’ll be there. But also our thought process was as you walk in, we wanted music to be playing, so then it would kind of fill the space a little bit more. We also put a scent near the front door that we now curate for it adding to the five s senses now that you have smell and you have sight, you have hearing, and then as you walk down to the main level, there are fresh cookies or some sort of pastry there to incorporate that sense of taste. And then we have, one of my friends found a way to wifi connect our gas fireplace so that we could turn it on as soon as they unlock the SLE Glock. So then now you have everything kind of into a well-rounded full experience as you enter. So that’s kind of what we did for that space.

Ashley:
That’s awesome. So let me just ask about that fireplace real quick. The first thing I thought of when you said that, so are you manually having to turn the fireplace on so you’re having to watch when somebody actually checks in, or did you find a way to automate that process too?

Chase:
We haven’t found a way to automate that process. Right now, this is the only property that we do that on. It’s the one that’s closest to us and it’s like our flagship property. So it’s kind of the one that we try to go all out on to make our portfolio look good. And I guess it’s the one that we’re, we test out the most. We try to do the most creative things on this one and see if it sticks or if it doesn’t stick well,

Ashley:
I think that’s where the story may be going with you as to how these personal touches and actually having a hands-on Airbnb can be more profitable than something that’s more passive. Because you listen to a lot of investors say, put your systems and processes in order, automate, automate, automate, be hands off. You don’t want to have to know anything that’s going on. You don’t want to have to do everything, have a process or have a VA or have some kind of AI technology take care of that for you. So tell us a little bit more about what are some unique hands-on things that you are doing for this property that does take some time commitment for you, but as I hoped and we haven’t touched on, this had turned you a profit.

Chase:
It has, yeah. So something that unique that we do for our property is we have a secret amenity. So a lot of people claim they have something hidden, but they still promote it on social media. We don’t at all. My idea was kind of like a fight club John Wick type of thing. So it’s like a secret through and through. So the day that you’re going to check in, the guests get a text three hours before saying, Hey, we’re excited for you to come in by the way your adventure starts now you’re going to be going through a treasure hunt and your first clue is on the island, just get started. And so it already hypes up everyone and they’re like, what is happening? My son loves amazing race. He goes, daddy clue. So I was like, oh, we got to leave a clue. So we created all these little letters on each one because when my wife and I were dating, we used to give each other treasure hunts or scavenger hunts for dates.
So I was like, well, why can’t we do that to guests? So make it special already. So when they arrive, they open the door, they have the five senses, and they’re already so excited and so hyped. And then now there’s this treasure hunt that they got texted. They go to the island and they look at the first clue. And essentially it’s not a very difficult treasure hunt. What it is, it’s a way for them to tour the property to see all the highlights of the property, but through this treasure hunt. So they get to see the bathroom and they get to see this mirror that we liked or we really love our slatted wall and we want to take ’em to the typewriter that we curated from Facebook. And then they go to the record player so they know there’s a record player. And then the very end is that there is a last clue where I’m a big fan of Batman. And so I love the whole hidden door thing. So we installed a hidden bookcase door that leads to the base of it and the last clue says to open that up. And then it leads you to the clue, and then the clue leads you to a secret hidden cinema room.
And it has a sign that says silence is golden. So keep it hush hush. There’s a candy wall where you have all sorts of candies, there’s popcorn. We went all out, we did a laser projector thing. I forgot what it was called, but it’s a hundred inch projection screen. You just have to imagine it. I’ll never show you unless you stay there. I’m just kidding.

Ashley:
I’m just thinking you said this is romantic getaway for couples. My kids would go crazy over this scavenger and going in and finding that movie room.

Chase:
No, the last thing that I was just going to say was that we don’t advertise it at all on our Airbnb listing. So there’s no mention of movie room and then we tell all our guests to just, this is for you. So even when they book us, we tell them that, Hey, there’s so much more. And this secret amenity is for you, for trusting us, for picking our cabin. So

Tony:
Chase, I just looked up your listing on Airbnb and you guys did a phenomenal job, 4.99 rating across almost 200 reviews just on Airbnb alone. That’s hard to achieve, right? To hold them as a perfect five star rating with 200 different reviews. And I’ll also say, I think you’re incredibly brave for having such a cool amenity and not talking about it because as soon as we put anything in our property, the first thing we do is take pictures and put it up on the listing because we want people to know about it. But the fact you’ve curated this experience, I think just goes to show what it is you’re hoping to give your guests. And obviously it seems like it is working out well for you. Brother, if we can, I just want to lay the table here just a bit, but what’s your total portfolio look like today, chase?

Chase:
Outside of the primary, we have five current short-term rentals spread out through multiple states. Funny enough, when you were talking about the Smoky Mountains, my wife caught it back then and that was one of the reasons why we went. So just really cool thing when we were looking at BiggerPockets initially. So when we do have one in the Smoky Mountains in Gatlinburg and one in Sevierville Weirs Valley, we have one in Kentucky and also in Branson, Missouri. So we have five total. But the reason why I was breathing a little bit is because we have three new construction projects happening at the same time, kind of staggered throughout out, and we just closed on a land, a piece of land that we just acquired last week. So hopefully by the end of year we’ll hit nine or 10. Well

Ashley:
Chase, I do want to find out the outcome of this property and what the numbers are on this big bear deal. So we’re going to take a short break and when we get back we want to touch on that. Welcome back from our short break everyone. We are here with Chase who is going to break down the numbers for us on his big bear cabin that has the secret amenity chase. We can maybe offer you a couple rapid fire questions here to get into the numbers, but what was the purchase price on the property?

Chase:
The purchase price was 3 59. And

Ashley:
How did you finance the deal?

Chase:
I just financed through our company a second home loan. Actually, we didn’t even think we were going to rent it on Airbnb the first time, but yeah, it just happened to work out. Yeah, 10% down. But the funny thing was is in 2021, a lot of things were going over asking, and so we actually overpaid for this one just a bit like about $5,000 because it didn’t appraise for that amount of money.

Ashley:
And then the furnishings, did you pay for that out of pocket or did it come furnished?

Chase:
I think there was a few furnish furniture, but we mostly purchased everything new. We left the stove and things like that, and I think we sold the old refrigerator, so we kind of sold some things and then repurchased everything ourselves.

Ashley:
And what was the total cost of the furnishings and any rehab on the property?

Chase:
Furnishings and rehab was probably about 65,000, which sounds crazy to me. And I’m like, why would we do, we didn’t run numbers on this at all, just FYI feel terrible now I’m all about running numbers for all of our other properties, but this one was purely emotional and I feel bad for saying that, but it ended up working great.

Ashley:
Okay, so now that the property is all renovated, Tony, maybe you can ask better short-term rental questions as to what the gross income is, but I’ll start off with what’s your average daily nightly rate on this short-term rental?

Chase:
So it varies on seasonality for sure. So it could be as low as 2 25 and as high as $900 is the highest that we’ve ever gone.

Tony:
So what does revenue look like last year for you on this property chase?

Chase:
So we acquired the property 2021. So first full year 2022 was like 130,000. It dipped down a bit in 23 to 120,000. And that’s a combination of direct booking Airbnb and surprisingly not a lot of people know, but Gigster and Peerspace. So we do some photo shoots as well. Yeah, especially since we’re so close to la, we’ve had a lot of photo shoots where sometimes just the day rate for eight hours exceeds two or three nights, so sometimes it’s really good in that aspect.

Tony:
And what did you net on that one 20 for last

Chase:
Year? Expense ratio is roughly 55%. So after mortgages and all that stuff, because again, we were pretty lucky since we obtained the property April, 2021 and after we did the renovations, we went ahead and refinanced January of 2022 before February where they started adding in the loan level price adjustments for second homes and investment. So we got in pretty good. The interest rate on that is 3.375%. Yeah, because initially at the purchase we purchased that at 4.125, but because we added lender credit, so I knew that in six months after renovations we were going to refinance again. So we wanted to acquire the property with no closing costs.

Tony:
You guys are netting somewhere in the ballpark of like 50 grand a year, which is fantastic on a property of this size to have a one bedroom putting off 50 grand of profits is pretty crazy. Now one question that jumps out to me Chase, is as I look at your listing here, I see that you’ve been featured in Dwell, which is a big upscale real estate type publication, Conde Nast Traveler as well. So walk me through how you got your property featured in some of these publications.

Chase:
So the first one was actually Conde Nast Traveler, and it was just because we gave someone a really great experience. So we knew that the guest coming in was an influencer that was our first big influencer at the time. And all she asked was, Hey, I know you have a four night minimum, do you mind doing a three that minimum? And we said, no problem. We would love to host you. And it was for Christmas. And so I don’t want to say that we did everything right on that situation. I think it was just the perfect timing for everything, meaning she came during Christmas and we were worried about Covid because she may not come, but she ended up coming. We thought, Hey, let’s go above and beyond. It’s Christmas. So we put up a Christmas tree and put Christmas decoration, but we actually wrapped her a gift underneath the tree, so she would already have a gift from Santa.
And then yeah, during her stay it snowed. So it turned out really well. She loved the secret amenity. At the time, we actually didn’t have the Secret book shelf door, that was a later amenity, but what we used to do is we would leave music on for people to just come in and they would have to search where that music would come from and they would eventually find their way into the movie room. But we added the treasure hunt later to make it even more exciting I guess. But come to know, she was a new editor for Conde Nast and she wanted to tour all of California. And so she stayed at, I don’t know, I believe eight to 10 Airbnbs and she’s been traveling even before that. And she said that your place is my favorite and I’m going to write about it. And I’m like, she didn’t even tell us. She just published it.

Tony:
You just gave me an amazing idea. I’m going to have my team of virtual assistants log into my LinkedIn profile and just search for editors of Conde Nast of Dwell of all these other big publications and literally just offer them free, saves my properties, and then if we can get them to start writing about it, that’s a super, super, super efficient way to get some of this publication. So thank you Chase. I appreciate that. Man, that’s like a million dollar idea right there.

Chase:
That’s exactly what we did for Dwell and Sunset Mag. So after that it was just swear. So after that we leveraged the one and I said, Hey, and I just started emailing, sending letters, calling I sl into so many dms, but my wife was okay with it, so it was to different editors, and she was like, I can’t believe you got dwell. No way. I’m like, yeah. So I just kept, and it just so happened to, they said, we love it, we love this idea, we love to write about you. And it was great.

Ashley:
Pretty soon when we talk about building a team for short-term rentals, we’re going to be adding a PR person onto the list who goes out and solicits influencers and magazines to write articles. So Chase, I want to ask, what were you and your wife doing during this timeframe of your life? Were you guys working? What else was going on when you purchased this property?

Chase:
So at this time I was a full-time mortgage lender, and my wife was also a full-time optometrist. And once we got into it, I think around the time our first, our son was about one years old and we wanted to dive deep into it, and I told her, Hey, is this something you want to do? And she’s like, well, I love it, and then let’s just go all in. So she quit her optometry job so that we could go all in on real estate. I essentially had to keep my mortgage lending because it kind of went hand in hand, but so she just, full-time helps us host.

Ashley:
Oh, that’s awesome. And congratulations for both of you to be able to make that possible. I mean, that really is the dream of a lot of people. Why they get into real estate is being able to make that happen.

Chase:
Our main goal was just to be more present with our kids. And I asked her, Hey, you’re the doctor. You’re way smarter than me. You tell me what you want to do. She goes, no, I love being a doctor, but I can be that later. I can’t be a mom of these kids. And I was like, yeah. And we both work from home and we both get to have breakfast, lunch, and dinner with the kids, and that was our main goal. We wanted to be present and this was a way for us to do it.

Ashley:
So Chief, we’re going to take a short break, but when we come back, I want to touch on what your roles and responsibilities are for your partnership with your wife and what hers are. I want to get to understand are there any things that came from your previous experiences that helped you in the roles that you have today? So we’ll right back. Okay. Welcome back everyone. We are here with Chase, his wife recently quit her job to go full-time real estate. So Chase, let’s start with your wife. What are her roles and responsibilities in this job?

Chase:
So my wife, April is pretty much our operations manager for all the properties and also our design lead now. So we do hire designers on our team, but because we have so many projects going on all at once, we want to make sure that she’s not too spread out, too thin. So she handles most of the messages, inventory, some repair coordination, and then mostly just conceptualizing our new designs because we’re going more towards new construction. So picking material furniture and coordinating all of that.

Ashley:
And what experience has she had that has kind of brought her to be good at design? Was it optometry?

Chase:
So yeah, so she definitely has vision. So my wife and I have always been into hospitality. Her parents have owned multiple restaurants, donut shops, Louisiana Fried Chicken and Hospitality was always her number one thing. And as we dated, we actually started a little side business, a wedding videography, photography business and all that. Creativity from the hospitality and creativity kind of led her to this point. It started off with just maybe baking or designing some cakes and then doing a mood board or doing a backdrop for someone’s birthday, and then it just slowly kept moving towards building full houses and designing full houses.

Tony:
So Chase, we know that your wife was the one with the vision and the relationship here, but what about you, brother? What was your background like? And we know you’re in the lending space now, but what led you into real estate investing?

Chase:
My dad was an engineer. My brother is an engineer, and I was going to be an engineer, and I got my license or what they call EIT, but I guess a failure at the time led me down this path, a failure, meaning looking back at it now, it wasn’t really what you knew, it’s who you knew. And back in college I was always like, well, why are you going out networking and talking to these other people you should be studying in the library? And I thought it was all about just knowledge only, but it doesn’t help anyone if nobody knows that you know that. And so I couldn’t get a job lending. So then I worked part-time as a barista and then as an assistant in mortgage lending. And then I pretty much took whatever job I could find to make it work for our family.
And then we started that videography business. So the reason why I bring up all those things is all those things made up to what we are today, meaning the photography in Conde Nast, those are all of our photos that made it on there. And in our cabin, our lending helped us get that. And my wife’s design helped us design that, and our just pure hustle was able to get us to get all these publications to notice us, and we’re finally coming full circle to where we are the investor or the developer that is working essentially with the engineer or the builder to create from ground up. Yeah, geez, that’s awesome. Congratulations. Thank you.

Tony:
Yeah, it’s crazy how when you look back, you can see how all the dots connect. And Steve Jobs talked about that in one of his speeches that he gave, but it’s like you can never identify looking forward how everything’s going to connect. But looking back, you always can So Chase, obviously you’re in the lending space, but I guess how did you know that that would continue to work for you?

Chase:
Actually, I learned from my clients. So I had a client and he just kept buying every year. I was like, how are you doing this? No offense, I see what your job is. I mean, you work for Trader Joe’s and you’re an assistant manager, but how are you doing this? And he just showed me how, well, because I have to see his tax returns and all that, and I see it on the schedule. I was like, how did you get this all done? And so from that client, I started diving deeper into it and I said, Hey, if you have a plan in place, you can actually make things happen. And understanding the lending and how it works and all the nuances allows you to scale efficiently and to be able to scale, even if you don’t have a lot of money, you’re just using it in a more impactful way.

Tony:
So you mentioned the word scale, and I think that’s what I would love to get into because I think you mentioned Chase, that you guys have five total short-term rentals. Is that correct? Yes. Yeah. And you’ve done that since 2021, which is a relatively brief period of time to move that quickly. So I guess I’m curious, you get this first property in Big Bear, absolutely crush it. When does that second property hit, and I guess how do you go about funding that second deal?

Chase:
Yeah, so that one was, we actually at the time, they still allowed HELOCs on second homes. So we took a HELOC out after the renovations. So we essentially got our money back, and then we actually went to Joshua Tree because we saw that a lot of people were there, and that was kind of our catalyst in learning how to remotely manage. But we got it October of 2021, and for some reason I had this feeling that, man, I feel like this is getting saturated. And maybe, but I mean saturation is a taboo word, but it just felt like there was a lot of competition coming to Joshua Tree with there’s people putting pools and really cool game rooms and garages, things like that with a Mario theme. There’s just these amazing couples that are doing these amazing things. And I was like, oh, shoot, I better go do I know there are beautiful couples out there that are smart that are doing all these things.
And so I was like, oh, shoot, I better go to somewhere else. And then we thought about Smoky Mountains, and another reason why we did that was because in the city that we were in, it’s called 29 Palms, the regulations were coming down. And I was like, well, I don’t want to operate somewhere where the city’s against you in the Smoky Mountains. They depend on that, and I love that. If the county and the city is kind of supportive of it, let’s go there. So we did a 10 31 exchange and we moved it to the Smoky Mountains. And then Chase,

Ashley:
Real quick, can you explain what a 10 31 exchange is please?

Chase:
Yeah. So 10 31 Exchange is just a tax deferral strategy. It doesn’t mean that we’re never going to pay taxes, just not on that transaction. So as long as it’s when you sell a property, an investment property and purchase another investment property or more expensive, then you could defer the taxes and I think it could mostly go into equity and it could pay for some closing costs. So we did have to come up with some closing costs, but most, our entire down payment was pretty much covered to purchase that property. The next one was kind of a unique one. Again, just taking advantage of what was happening in the market. I don’t know. For some reason at the time I was just like, man, I really wanted Tesla. Those Teslas look cool. But yeah, so while we were in the Smoky Mountains, we got connected with a realtor, her name’s Madeline, and then she was discussing something about Kentucky.
So I thought, okay, let’s take a look there. And then fast forward a few months later, one of my friends connected us to another realtor locally in Louisville, Kentucky, and I was like, why are we going there? And then she started explaining everything, and I was like, what’s in Louisville, Kentucky besides fried chicken? She was like, what? There is the oldest running sport. It’s called the Kentucky Derby. I’m like, oh, shoot. Yeah, that’s true, but that’s only one event. So we wanted to go to Louisville, and then we wanted to purchase something not too expensive because our budget was pretty limited at the time. And she said there was a derby, there was also new concerts coming in called Bourbon and Beyond. And at the time when we were going, I was like, what is Bourbon and beyond and why would someone go there? Well, Bruno Mars was the headliner, so a lot of people are going to go there.
I’m like, oh, okay. And then there’s another concert, I think a rock concert as well. But she goes essentially, besides all that, this is where bourbon is made and bourbon has no season. People drink bourbon all year long. And I was like, well, I don’t even drink. And that convinced me. So we went and looked for a property, and the reason why this one is actually our most favorite deal was because we found a property that was a single family, but it was on an oversized lot. And why we were so excited about that was my agent kept telling me, my agent, Miley Corona, kept telling me, Hey, I think you could split that and you could sell it off and you would be in this deal, no money. I was like, oh, or better yet, you could split that lot and build on it. I was like, no way. I can’t even fathom that. Is that possible? She goes, let’s do our due diligence. So we did. We looked for a surveyor, he double checked it, checked with the city, and he was all good. We made an offer and we closed on it. I

Ashley:
Have to highlight one thing that you said was you checked with the city and they okayed it. How important that piece is during your due diligence period to actually, or even before making the offer, is to check to see if you’re actually going to get approval, whether it from the code enforcement officer, the planning board, et cetera.

Chase:
Yeah, yeah, that was the scary part. I was like, oh, but the nice thing was no matter what, it was still a good property, but we really wanted that extra value. So we wanted to check and learning about the zoning laws and their density calculations was really critical in making sure that this deal was amazing. And once we closed on the deal, the one thing that we didn’t know was that subdividing and all that was actually very easy. The most difficult part that people don’t understand is about what’s called partial release. So what that is is whenever you purchase a property, whether it’s oversized lot or not, the lien is on the total property. So even if you subdivide it, there’s still a lien on the old lot and old house or existing plus the new subdivided lot, the lien is over all of them.
It’s a whole blanket, and some lenders do not allow partial releases until after a year. So in this case, our lender would not allow it to be done until a year, so we had to wait a year, then we had to apply, they had to do an appraisal to ensure that the subdivided lot, what is the remainder, can still comp with the area. Luckily for us, we did all that research, we put a presentation together for the lender. They loved it, and they said, you’re right, the comp show that it’s there, it’s actually increased in value. And so to release it, it was only about $10,000. So we got a lot for 10,000, which is great.

Tony:
Chase, one quick follow up on that. You said that you gave a presentation to the lender. Was this a local regional lender or who was this that you were able to give a presentation to?

Chase:
It was a servicer, and what I meant by a presentation was more than just writing an email. So I actually put a report together where I put my purpose and my goals. I researched comps with my realtor, I put comparisons on a grid of gross living area versus the main topic was the square footage of the lot. And that by removing that excess lot, it doesn’t degrade the property. It’s actually still pretty well. And so that’s what I wanted to show.

Tony:
So biggest question is the numbers on this thing, you go through all of that. How does it actually perform once you finish off this process? Yeah,

Chase:
That one. So at this point now we’re actually running numbers and we want to make sure that it does well. So this was a 300,000 purchase, and our goal is always 20% gross. ROI, meaning 20% of the purchase price. So this did 70 K, so it did pretty well. And we put in about 25, no, no, sorry, 25,000 furniture and about 10,000 in renovations because we renovated the bathroom and did paint and light fixtures and things like that. And so the return on it is really great, and we only sleep six in that one. But the great thing is that now we’re able to partially release the other side, and they actually just put up framing and roofing this week. So we’re actually building a duplex on the other side because due to the density calculations, we thought we were only going to build a house, a single family, but because the surveyor and I checked it ahead of time, when we did the density calcs, they say, oh, this is an R six property, which means once you split it, you can theoretically put a duplex on there. So we’re doing a two bed, two bath duplex each unit, and that was just a praise of an RV of 4 75, and we got a construction loan for the build, which was like three 30. And so that’s instant equity with nothing out of pocket.

Ashley:
Yeah. Chia, one question I have on this, are you going to that duplex? Is that going to be long-term rental or is that going to be more short-term rentals,

Chase:
We have two options. So we can’t do another short-term rental in the area because Louisville has very strict guidelines to short-term rentals. So you could only have one short-term rental per 600 feet. So for that one, it would have to be a mid-term rental, which is great in that area because there’s actually five hospitals around the area. There’s not as much demand for nurses anymore, but that is still an option. But our goal is to actually do long-term rental because renting is pretty limited there. And when we try to put our main single family house, which is the left side on long-term rental, we were able to garner activity at like 2,400, and that’s a three bedroom. So maybe getting this at 21 or 2200 each unit would be a pretty big win. And

Ashley:
Then what is going to be your cashflow average? I know you can’t say specifically, but what will be your average cashflow for these three units when everything is set and done and they’re all occupied and rented out?

Chase:
So I think for the duplex, it’s somewhere between a thousand to 2000, so let’s say 1500. So it is a 18,000 net on that because it’ll be a long-term. And then the other one is about a 50 or so percent expense ratio as well. So let’s say around 30. So 48,000 cashflow between these two. So that’s net after expenses. So I would say it’s not that bad for such a small investment. So

Tony:
Just last thing I want to call out about this. So you found this market almost by happenstance, just through having conversations. And for me, I think it can be overwhelming as a rookie investor to look at a map of the United States and seeing 19,000 different cities and try and choose the one that aligns best with your goals. And I love the process of talking to other people who know these markets really well, whether it be agents or investors, and getting a firsthand account of their experience in those markets. I went to the Smokey Mountains initially because I had a friend who bought there. I went to Joshua Reve for similar reasons we bought. So you start to identify, Hey, someone’s already laid the roadmap for me here. Let me use that as a proof of concept to say, this works well for me because you’re in California where I’m at. Have you ever heard of Shelby, bill, Kentucky before you bought out there? Probably not. But as you’ve identified, there’s a market there that supports this type of business. So I just wanted to make sure we highlight that for Ricky listeners because it’s a sticking point for a lot of people is choosing the right city. But I think Chase, you exemplified a great way to kind of navigate around that. Yeah,

Chase:
Thank you. Yeah, a lot of people do wonder why we spread out into so many markets, but I really enjoy it, one for our family because whenever we go on vacation, we get to go to all these different cool places. But I think once you get a process, the city is just another variable in your process and your operations, research the market, find your team, deploy that team, and I think varying your investments kind of balances out your portfolio. If you think about it, big Bear is a winter market, and so we do really well during that winter timeframe, which is great to balance the Smoky Mountains because after New Year’s it’s pretty slow till spring break, so it kind of holds over on that. So we’re not really negative during that timeframe. And then during the summer where Big Bear is slightly slower, we’re picking it up in the s Smokey. So it’s a really nice complimentary portfolio. I guess

Ashley:
Chase, as we wrap up here, we always put each guest information into the show notes and our rookies love to reach out to the guests and ask questions. So let me ask you this. What are your superpowers that rookies could reach out to you and learn from you? What are some of the things that you think that you stand out on and you would love to educate other people about?

Chase:
Yeah, I think it, it’s two things now. It’s the photography and the marketing aspect of it. How to best show your property on Airbnb and how to take photos and how to maximize whatever amenities you have. And also building, I mean, I don’t know if it’s a superpower yet, but man, I’m working hard to make it a superpower. Shoot. I mean every developer had to start sometime. So.

Tony:
And Chase, I think that actually leads into my next question, right? Because you’ve talked about the new builds a little bit, but I guess how do you vet the actual construction crew that’s doing the building, especially if you’re going into these new markets you’ve never been into before. What is your process for building the team to support the new development?

Chase:
Just like what I said before, the network is what really determines it. A lot of references help out a lot. And also surprisingly, sometimes I can’t do every loan. And so what I actually say is for construction or commercial, local is pretty good. So we work with a local credit union or a local bank because that’s more a relation type of thing. And the reason why I say that is they have the construction products that you may want, and they’re already approved with many builders around the area. So why that’s key is if they’re already approved, that means they’ve already vetted all these builders. They’ve already done projects with them. And I don’t know if you know the construction process, but there are three steps to it with the lender is it’s builder approval, project approval, and then borrower approval. So the builder approval is usually the hardest part. Actually, they run their credit, they want to make sure they have the experience, they have the liability insurance and the liquidity to be able to build these projects. And then it goes on to the project approval, your specific project with your plans and all that. And then the borrowers.

Ashley:
And if your builder is already approved, what a great reference to ask that lender. Have there been any issues with this builder, with any of your clients? Because they’re most likely going to know I built a house and we had a phenomenal builder. There was no issues, but if there wasn’t issue, I would’ve went to my lender and say, hold the draw. I don’t want him to be paid yet. These things need to be done. The lender is most likely going to know there was a holdup in the timeline if something wasn’t done correctly, and their inspector came out and said, no, don’t give out the draw. This needs to be fixed, or this isn’t done yet. So that’s also a great reference point too, is asking your lender if they know of any bad experiences or great experiences on this builder that’s already been approved by them.

Chase:
And then what people don’t realize is that they have their own team. And if you get embedded in that team, everything goes so smooth. In Kentucky, when we’re building the duplex, the builder is friends with the lender and the lender knows the surveyor. And so all three just made all the permits go smoother with the city, and they already know the process of the draws. And yeah, everything’s going faster than scheduled because everything’s just smoother with them already. They’re all familiar with one another.

Ashley:
Well, if you guys listening, want to learn from Chase before he becomes a nationwide builder and you can’t even get in contact with him, we’re going to put his information into the show notes so you can reach out to him if you have questions or want to learn more about him and his process. So Chase, thank you so much for joining us on this episode of Real Estate Rookie. I’m Ashley. He’s Tony, and we’ll see you guys next time.

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In This Episode We Cover:

  • How Chase brings in $120,000 per year from ONE rental property
  • The best way to get FREE real estate marketing for your short-term rental
  • How to create an unforgettable experience for your Airbnb guests
  • Scaling your portfolio with creative financing and tax strategies
  • How to incorporate a creative skill set into your real estate business
  • Getting started in real estate development and building your team
  • How to get approved for a construction loan (in three steps!)
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

5 Real Estate Deals Using Other People’s Money

Rookie Reply: Should I Move (and Quit My Job!) to Invest in Real Estate?

Can’t afford to buy a rental property due to your area’s high cost of living? At what point should you quit your W2 job and move elsewhere to realize your real estate investing dream? There are several factors at play here, but we tackle this exact scenario and much more in today’s Rookie Reply!

We also talk about partnerships and how to determine who should be responsible for capital, holding costs, and other expenses when flipping houses. Are you inhering tenants? There’s an important agreement you must have in place when taking over the property. Could one of your residents be subleasing your unit without your permission? You’ll learn how to navigate this situation when it comes to light, as well as what to do when a tenant violates your lease agreement. Want to avoid troublesome tenants altogether? Stick around until the end to hear how Ashley finds the best tenants in town!

If you want Ashley and Tony to answer a real estate question, you can submit a question here, post in the Real Estate Rookie Facebook Group, or call us at the Rookie Request Line (1-888-5-ROOKIE).

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley (00:00):
This is Real Estate Rookie episode 392. Quit Your Job or Move to Invest. Tenant Subleasing without permission. Is Vinyl Plank installed above or under the carpet? My name is Ashley Care and I’m here with Tony j Robinson

Tony (00:17):
And welcome to the Real Estate Rookie Podcast. For every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we got a lot of good real estate rookie questions for you. We’re going to talk about a physical altercation over a sublet property that led to maybe a potential eviction. We’re going to talk about inheriting tenants. How do you handle that? Do you need to sign a new lease? Do you inherit the existing lease? What do you do? We’ll talk about how to find good tenants, maybe if the traditional methods aren’t working. But first we’re going to get into a question about moving to support your real estate investing portfolio. Alright, so our first question up today comes from an investor in San Francisco. This question says, Hey there, I need your thoughts.

Tony (00:59):
Here’s my situation. I’m an RN in the Bay Area, RN is registered nurse. I’m an RN in the Bay Area and I’ve earned more than $180,000 last year without any overtime. It’s a good W2 drop, but it’s really hard to buy a house here and I don’t want to sacrifice my sanity by getting a second job. So I can afford to buy a house here in California. I’m thinking of moving to upstate New York where I already have a rental property and living in that area. I can use an FHA loan or conventional 5% to buy another rental property. I’m single and it’s easier for me to relocate. What’s holding me back here is that my W2 job pays so well. So if you are in my shoes, are you willing to let go of your good paying job and move to a place where I can scale my real estate portfolio? I know some would say it depends on my priorities and long-term plans, but I just want to hear your thoughts. Thanks so much. Tricky situation. Ash, what are your thoughts hearing that? Are you leaving a almost $200,000 a year? W2 job?

Ashley (01:56):
I mean I’ve never lived in San Francisco, but I would say yeah, 100% upstate New York over San Francisco. I’ve only heard things, I dunno, I’ve never been there, but

Ashley (02:06):
Okay, all you have to do is run the numbers on it. Okay, so you take your $180,000 salary, what was your cost of living in San Francisco? Okay, and what’s kind of that ratio there? And then what would you make living in upstate New York and what would your cost of living be and what does that ratio look like? So what’s the percentage difference? And maybe even though you’re making less money in New York, your living expenses will be so much lower, especially with doing an FHA, doing the house hack that you’re actually going to be able to save more of that money. So just because it’s just like looking at your revenue. If your revenue is X amount, Tony could have revenue of X amount, but if my expenses are more, I’m going to have less profit than Tony would have. Or he could be making less and still have less expenses, but he’s making more profit.

Ashley (03:02):
There’s just that bigger gap. So that’s what I would do is run the numbers as to what is actually going to, what’s the money in your pocket at the end of the day? And also California taxes and New York taxes. Make sure you’re looking at those as far as New York has state income tax, I’m not sure about California taxes, but also look at are there any tax advantages where your taxes be worse? So really factor in all of those implications and see at the end of the day, what’s the dollar amount you are actually left with in your pocket? And it could actually be more, even though you’re making less.

Tony (03:37):
The taxes piece I think is a really important thing to call out. When I was working one of my W2 jobs, I had a friend who relocated from Kansas, he got a promotion to come work in California long without promotion. He got a raise and even though he got a raise, his net take home at the end of the day was still less because of the difference in the taxes between where he was in Kansas and him coming to California. So definitely something to consider. I think the other piece here to this as well is a really solid understanding of what your goals are and what your personal objectives and timeline look like. Because if your goal is maybe, hey, I actually really do like being a nurse and I don’t plan on leaving this profession anytime soon, I’m fine doing this until I retire, then maybe the bigger focus for you is buying properties that appreciate well over time.

Tony (04:29):
So maybe it’s not moving to upstate New York and maybe it’s buying a house hack in the Bay area and that where you can still be out. I dunno if you have friends or family there, but you can still be in your hometown but still continue to build your portfolio as well. And it’s like every year just moving to another house hack. So I think a lot of it comes down to obviously the math equation, Nash, you talked about what do the numbers actually say, but you’ve got to factor in what is the actual reason that you’re investing in real estate? Is it because you want as much cashflow as possible and you’re trying to quit your job today? Is it that you want maybe some sort of tax benefits to offset this $180,000 W2 income? Is it the long-term appreciation? What is it that’s driving you? And let that influence the decision as well.

Ashley (05:12):
Yeah, and I guess I’d be interested along those lines as to what the strategy would be if you didn’t move to New York. Would that instead be buying another investment property where you’re putting 20% down so it’s taking you longer to actually purchase property as far as the scaling piece and then you’re staying, and I know it was mentioned that would have to get a second job to be able to afford to even buy a house there in California. So it also goes along with a little bit of your lifestyle. Would you rather keep renting? Do you like renting? You can change to a new apartment every couple of years. Would you prefer to own your home and have that equity in the property? Get that appreciation as it build in creates that equity for you. So all great points, Tony. Yeah,

Tony (05:59):
So sorry investor from San Francisco. I know you were looking for a black or white yes or no, but there’s a lot of things to consider here, so hopefully we can use that to at least point you in the right direction. Alright, so our next question of today comes from Juan Alvarez. So Juan says, our tenant reached out confessing to subleasing a room, which is a clear violation of our lease agreement. She also mentioned being in a physical altercation, I’m assuming with this person who she was subleasing to due to non-payment and sought advice from the authorities who suggested contacting us to evict the individuals that she subleased to as our lease involves both our tenant and her boyfriend in Texas. How should we proceed? Ash? I’m super excited to get into this one. You’re right, we got to get Juan on the podcast, but we’re going to take a quick break, hear a word from our show sponsors and then we’ll get into Juan’s subleasing physical altercation, non-paying tenant issue. Alright, we’re back and we just heard a question from Juan who said that he basically has a tenant who subleased a room in his rental property without his permission and now this tenant won’t leave, the sublease tenant won’t leave. So Ash, what do you feel? What would you do if this happened in one of your rentals?

Ashley (07:07):
First one, you need to come on the episode and the podcast and we need to do a horror story therapy session with you, so please contact me. But this is crazy. I’d never even thought of this happening as to what would happen and would it become my responsibility as to getting this person out when you sublease. So all of our leases we say that you can’t sublease anyways. So first I would go back to your lease agreement and he said there it says a clear violation of the agreement. So that would be the starting point. I would go to an attorney and say, this is the lease agreement I had with this person. And what I would probably actually do is because this person got into a physical altercation with them, I’m assuming that it’s not a good situation for anybody that’s living there and I would probably start the process of doing an eviction for lease violation or give them a notice to cure the lease violation by ending the subleasing, but then obviously the person’s not moving out.

Ashley (08:15):
And then that’s where I would have my attorney take it forward with doing an actual eviction of the current tenants that are living there along with and any others, or there’s some way they phrase it, any additional occupants. So you’re naming the people that are actually on the lease and any other additional occupants for the eviction. And I would actually proceed probably with an eviction for all of them. I would hope that if the people that you did actually lease to have done a great job of paying rent and they’re actually not that bad that they will go through some kind of attorney or process themselves to get the person out so that they’re not evicted. But I would do something to kind of protect yourself by giving them the notice of saying they violated the lease and starting some kind of process almost to scare them as to you’re going to be evicted because you violated the lease.

Ashley (09:08):
If you don’t cure the lease and the cure is getting the person out and maybe they will be able to come to some kind of solution to get the person they subleased out to that. But as far as legally how that works as to, I would think that I as the owner of the property could evict that person even though I don’t have a lease agreement with them. But I would think that this person that did the sublease, they would actually be the one that should hire the attorney and pay for that person to be evicted. But I’ve never dealt with this or seen this, but that really could be a quite common issue actually, when you sublease,

Tony (09:47):
I feel like we need a real estate attorney or something to kind of walk us through this. And I’m curious on what state you’re in because obviously it’ll vary a little bit from state to state. So we sublease on our, I’m sorry, our arbitrage units. We have three of them in Dallas and we had an issue one day where a guest was supposed to check out, they didn’t check out. We literally had to call the cops to knock on the door and say, Hey, you guys got to go. And the cops didn’t give us any pushback even though we were subleasing. We said, Hey, this is our unit, this is arbitrage whatever. We walked ’em through and they showed up, they’re like, Hey, as long as there’s an adult present, that’s your representation. We’ll escort them out of the unit and they literally showed up knocking the door and the people left. So I’m curious where you’re at and what those rules might be. But Ash, I agree with you. I might just call and say, Hey, I have some, because the sublease should be like null and void, right? At least I would think if you signed a sublease when your lease explicitly didn’t allow for subleasing, that sublease shouldn’t even be valid. But

Ashley (10:45):
Then are you also going to say, I’m the person that did the sublease. Am I going to get in trouble because I actually wrote a fake lease to someone and then the person that’s not paying you rent can actually come and sue you now because they got kicked out by the cops and you actually did a fake lease with them and you’re not the owner of the property and you had no right per your original lease agreement.

Tony (11:10):
Yeah, I feel like if I’m Juan, I dunno, maybe just call the cops and see if they’ll escort them out without having to go through the actual eviction process. But again, I’m not an attorney so I think you need to talk to an attorney, Juan to figure out what the best kind of course of action here is for sure. Alright, so our next question here comes from Thomas O’Donnell and Thomas is actually a repeat asker. So shout out to you, Thomas, for staying active in the rookie community. But Thomas says, say you’re doing a fix and flip and you partner with someone who brings a down payment and covers the rehab costs and say that you plan to pay them back with interest after it’s finished. The question is, who is responsible for paying the loan on the property while it’s being rehabbed? Is that something you negotiate?

Tony (11:50):
Is it something that the managing partner who found the deal should be paying for will love some input on how things like this are handled? Thanks. So Thomas, I think first Ash, and I say this all the time, there is no right or wrong way to structure a partnership. If you have a partner who’s agreeing to cover the down payment and the rehab costs, you could do it either way. You could say, Hey partner, since you brought the down payment and the rehab, I’ll cover the monthly interest payments or whatever it is on the hard money loan while we’re going through this project. Or you could say, Hey partner, you’re going to cover everything, both the initial capital and the ongoing expenses, the holding costs, and then you’ll get paid back with interest at the end. So I don’t think there is a right or wrong way to lay that out. Ash, have you ever partnered with someone on a flip in that way?

Ashley (12:43):
Yeah, and the first thing I would say is before you even partnered with them, this has been something you should have added into your numbers. So I am right now just doing a flip with it, James Dard, we’re doing a joint venture agreement and there’s three of us in this deal and he sends us all of the numbers and at the bottom line it shows total cash needed for this deal and that includes the down payment, that includes the holding costs such as the utilities, the insurance, the interest payment for the hard money loan. So besides just the interest paying that while you’re doing the rehab, you got to think of those other holding costs, the insurance on the property, the utilities, property taxes too. So he has that all baked into his numbers as this is cash we’ll need throughout the project to pay that.

Ashley (13:32):
And then he has the closing costs. Once we sell the flip, do we need anything there? Everything. And then the bottom line is this is what the hard money loan is going to cover and this is what we need to cover out of pocket and it might be part of the rehab part of the purchase, things like that. And every dollar that needs to be spent is accounted for in there. So everybody knows upfront what is needed and usually does it a little extra as to adds a little contingency on their ads an extra month and better case scenario, we finish early and we don’t even spend that much money, but everybody wires in their percentage of that capital that they’re bringing to the table. So you know that you’re giving your money upfront. The only reason that any investor, including James who brought the deal or me who’s just investing capital would need to put money into the deal, is if all of a sudden there’s a big changeover that’s over our contingency where, okay, you know what?

Ashley (14:35):
Things have changed in the market. And actually the last property James and I bought, we had to do this where we needed to actually change the carport into a garage that wasn’t part of our initial numbers and that was where we actually had to infuse more money into the deal after the fact. But that’s stated in the joint venture agreement that if the operator, whoever’s operating the deal decides that something like this needs to be done, that’s where there’ll be a capital call to infuse more money into the deal. So that is all things you need to be clear about, but your partner can say, no, this is all I’m giving into the deal. So if there is a change order or reason, that falls on you as an operator to actually put that money into the deal. So it’s however you structure it, just make sure you have it written in your operating agreements, your joint venture, or however you’re structuring it that it’s all clearly laid out.

Tony (15:28):
Yeah, so well put Ash, and I couldn’t agree with you more. I think the only other thing I’d add to that, Thomas, is for me, whenever I’m doing a flip, I prefer to not bring on equity partners if it’s a flip and I really just like to raise it as private debt. So for me, say that I have a flip and maybe the total project cost is for round number sake, let’s just say a hundred thousand dollars, I’m buying it for maybe 50, I need another 50 for the rehab, whatever. So I’m all in for a hundred thousand. I’ll just raise the whole 100 and then pay them back with interest at the end of the flip. That way I’m not making payments throughout the life of the rehab and they just get one big lump sum at the end of the flip with their principal and their recruited interest.

Tony (16:12):
Now say that you maybe can’t raise the entire money you need for the project. Thomas, I’ve met a lot of folks who will use private money to handle the 80% of the project costs. I’m sorry, they’ll use hard money to handle 80% of the project costs and they’re bringing a private money lender to handle that last 20%. Some hard money learners are okay with it, some aren’t. You got to talk to ’em, make sure that they’re aware of where that other 20% is coming from. But in that scenario it’s the same thing. You’re raising all the capital that you need and then you’re just paying everyone back at the end once the rehab project is completed. So that’s my preferred method for flips just to give a fixed return and then kind of let myself take the upside. Now obviously the downside to that is that you got all the downside yourself as well.

Tony (16:51):
So if things don’t go according to plan, you got to cut a check, but there’s the upside there as well. Alright, jumping into our next question here. This one comes from upcoming landlord. This person says, when inheriting tenants, do you make them sign a new lease or if everything checks out with the original lease that they sign, is there a way to somehow transfer it to me if there’s an episode I can listen to or somebody already out there to help me learn about how to make this process smoother for us and the current tenants, please point me in the right direction. So Ash, what is a resource that you’ve seen that kind of helps a lot of our rookie investors answer questions just like

Ashley (17:26):
This? Not only seen Tony but created real estate bootcamp for landlords. So it’s on biggerpockets.com/bootcamps and it’s self-paced course you can go through that takes you step by step as to how to set up your own little self-managing landlord systems processes. And I actually, BiggerPockets is partnered with Rent Ready, which is a property management software. So if you are a pro member, you get a big discount on using rent ready. So I used a lot of their software to actually show as examples. So if you use Rent ready or want to sign up for them, the Landlord Bootcamp goes through the exact process of how to implement and how to use their software along with what it takes to actually be a new landlord. So as far as other resources, BiggerPockets also has all of the lease agreements that you need plus any accompanying addendum or amendment that you could think of for each individual state too.

Ashley (18:30):
So if you’re a pro member, you can get the copies of that too. So inheriting tenants, the number one thing that you need for inheriting tenants is an estoppel agreement. Okay? Estoppel agreement is where you’re going to give this to the tenants before you actually close on the property to get information about the tenants, the landlord and the property. So when you’re purchasing the property, the landlord is giving you information. The estoppel agreement is basically to verify what the landlord is saying is correct. So things that I like to put on the lease agreement is whose name is on the lease, who are the occupants, if there’s kids on there, husband, wife, roommates, whatever. Then I ask, what is your monthly rent that you pay? When was the last time you paid rent? Do you have any back rent that’s due? Do you own the appliances or does the landlord own the appliances?

Ashley (19:24):
What utilities do you pay for? What does the landlord pay for? Are there any repairs that you know of in the property that need to be done? That’s always a really helpful one. So there’s a bunch of questions you can go through and if you just Google stoppel agreement, it’s available in the landlord bootcamp. But if you just Google, there’s tons of different examples out there and just pull questions that you like and create your own and then you just have to ask the seller permission to contact the tenants to give them the estoppel agreement. It’s pretty industry standard. I would say that it shouldn’t be a big deal to actually send this out to the tenants, but they also give you their contact information too so you have it all, you can start setting up their tenant profiles, get their email, stuff like that so that you have all of your systems and processes ready to go on the day that you close. So that is the first thing that you need to do. And then as far as their lease agreements,

Tony (20:22):
Lemme just ask one question before we move off of that first piece because this is what always pops in my mind. What if there’s a disagreement between what the tenant says on the estoppel and what the landlord says and the actual or what the landlord has communicated to you in terms of what they thought the lease agreement was? How do you handle that discrepancy?

Ashley (20:41):
So if there is a lease agreement, I go by what the lease agreement says and if there’s a discrepancy in, say the landlord is saying they owe rent and then they’re saying they don’t owe any rent or whatever, vice versa, because the landlord could definitely be trying to sell the property and say, oh, everybody pays everybody’s great. Get these tenants away from me, take this property in them. And that’s where you can ask for bank statements or if they use a property management company, you can ask for verification of the rents actually being paid. Where that kind of gets hard is when it’s cash dealing. So you ask the tenant if they actually have receipts or anything like that. If they did pay in cash, what I would do, if there is a discrepancy and there is no record, there’s no way to verify it.

Ashley (21:28):
The tenant paid in cash, they don’t get receipts, anything like that. If there is some kind of discrepancy and it’s not like thousands of dollars, I would side on the side of the tenant and say, okay, the landlord’s saying you owe $300, you’re saying you don’t. I am going to just set you at zero and we’re going to start fresh. And I would go ahead and do that to build our rapport with the tenant and kind of see how it goes. And you know what, maybe it will start out great, maybe I’ll end up evicting them in three months, but either way I’m stuck with them day one and I’m going to try and get on the right foot instead of chasing them for $300 and not have any proof that they actually owe $300. But what you also can do is have your attorney, you’re starting fresh with that person too.

Ashley (22:19):
So make sure, and this happened to me before that when I did a closing on a property, the tenants owed the landlord money and he took it out of their security deposits and his attorney did it on the closing statement. I did not know any better that this was happening. And I was a young investor, I was just starting out. And so their security deposits diminished to the one had I think $65 locked when I took over as far as her security deposit. And then it’s like if she trashes the place, who cares? Because yeah, I have to do a judgment and all this stuff too. So make sure if they owe money, they owe back rent, that rent is owed to the other landlord and you’re not taking on that debt by having to recollect their security deposit or on your closing statement, giving the seller a $300 credit and then you being responsible for collecting that.

Ashley (23:20):
So just watch out for that too. But I wanted to touch on the actual question as far as the original lease, if they signed it, because there’s, if everything checks out, is there a way to transfer it to you so you can change a lease agreement? If both parties mutually agree, so you can ask them to sign a new lease agreement at any time. If they agree and they want to sign it, that’s fine, even if the old one didn’t expire. But if they refuse to, you have to keep the other one. But since the title has transferred to you, the property has transferred to you, that’s now a lease with you. But I do like to send out new lease agreements. It has to be the same terms or they have to agree to the new terms of the lease agreement. But usually I try to at least get them to sign where it’s my entity name, but if not, I wait until their renewal and then I give them a whole new lease agreement with my rules and my stipulations and most likely a rent increase.

Tony (24:21):
Alright guys, our next question coming up is about how to market your rental to make it stand out to attract those good clients if maybe some of the more tried and true methods aren’t working out for you. But first we’re going to take a quick word to hear from our show sponsors. Alright guys, we are back and coming up to our last couple of questions here. So this one is about marketing your rental. So this question says, where are y’all advertising rentals with lots of success and visibility? Marketplace? And I’m assuming they’re referring to Facebook marketplace doesn’t work well in my market as it’s always someone with lots of baggage that I can’t get approved and we are quite flexible or is working with the pm a good option? Good question to ask how they market as well.

Ashley (25:01):
So I used to use Facebook marketplace and you just get everybody that’s clicking, I’m interested and then they never respond or when is this available? Never respond. So I use AppFolio as my property management software and they actually have websites they’re affiliated with that will actually send out your listing. So signing up for basically any type of property management software has this feature where they will push your listing. So the best thing is you create your listing once and then they send it out to the websites and it’s all reformatted for each of the different websites like apartment.com and things like that, or rents.com, whatever they may be, Zillow, things like that. So I would definitely try using a property management software to push out your listings, but I think Zillow is a great one to look at. Lately we do a lot of business just off of our website of setting up our CEO so that if somebody Googles apartments in this town that we’re trying to be in one of the top websites that you actually go to and you can view our listing on there, submit your application right through there, create a portal profile, all this stuff.

Ashley (26:18):
So that’s also included with a lot of property management software too, is making a standard template where you just plug and play different information about your properties into the templates. Fairly reasonable. But yeah, Facebook marketplace is hard because of all of the people who aren’t really interested, all of the scams, things like that. But if that is the route that you end up having to go is, I would recommend doing a pre-leasing form where you’re verifying that they’re qualified for the apartment or that it suits their needs. So this isn’t housing discrimination, so you’re making sure you’re asking the right questions and you’re not violating any housing code, but you’re going to ask things like, do you have a pet? And if they say, yes, I have a pit bull, but your listing specifically states no pets, then obviously this isn’t a good fit for them. You shouldn’t waste any more time. And so you send them an automated response email, that template you’ve set up that just says, I’m sorry, but we don’t allow pets. Thank you for your interest in the property, blah, blah, blah. But if somebody fills it out and they do meet it, then that’s where you go ahead and take the next step. So it kind of helps filter out people instead of wasting your time doing all these showings, things like that on the property

Tony (27:42):
Too. Ash, what are you using to build out your own website? Is it through AppFolio or is it another software that you’re using?

Ashley (27:49):
Yeah, through AppFolio. They give you a template. There’s upgrade features where I worked with their design team to actually design the template and I want to say it was maybe $2,500 to actually create the website, how I wanted it and different features, things like that. And then I think it’s like a hundred dollars a month to actually maintain it. There’s definitely way cheaper options out there. I mean, $2,500 and you just have one or two properties probably doesn’t make sense, but there’s definitely a lot of cheaper options out there to build a website or for other property management softwares to use. Buildium has one that’s pretty inexpensive too to use.

Tony (28:31):
Yeah, super cool. I love that it’s kind of built in to the same platform you’re using to actually manage your properties as well. So we’re doing that with our short term also. And it’s good. It’s so nice to have that integration between your booking website or your marketing website and your back of house management,

Ashley (28:47):
Like doing one listing and then push to website, push to other sources or I don’t even remember what it’s called, but yeah, and then it goes out to the other listings.

Tony (28:55):
Well Ashley, you ready for the last question of the day?

Ashley (28:57):
Yes. Yes I

Tony (28:58):
Am. I think this might be the most important question that we answer out of maybe any episode we’ve ever done, but here’s a question, right? This came from another investing community group, but I still think it’s a good one for the Ricky podcast. It says, how bad would it be to put vinyl flooring over the carpet? Seems like it might provide some extra insulation. It’s a very padded carpet. So Ash, have you ever done that before? You ever just slap the vinyl down right over the carpet?

Ashley (29:26):
No, but I mean you saying it’s like the extra insulation, you do put a padding down before you put vinyl plank down, so maybe you are actually saving money there if it’s a really thin carpet. But I just texted Daryl because he actually did vinyl plank in one of our units the other day and I just texted him and I said, can you put vinyl plank over carpet? Could you actually do it if you wanted? But he didn’t respond in time, so I didn’t get his answer, but I was curious as to what he would say to that.

Tony (29:57):
I’m sure determined person probably could, right? You got enough determination, you could probably figure it out.

Ashley (30:02):
Thank you guys so much for listening. My name’s Ashley and he is Tony. If you haven’t already, make sure you’ve joined us in the Realestate Ricky Facebook group. You can also submit your own question and you can go to biggerpockets.com/reply if you want to be featured on this episode. And if you have a contracting question such as vinyl plank over carpet or something similar, Tony and I will be happy to text our contractors to find out the correct answer in that situation. Thank you guys so much for listening and we’ll talk to you guys soon.

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In This Episode We Cover:

  • When you should consider moving (and quitting your job!) for real estate
  • How to evict a subtenant who is illegally occupying your unit
  • The agreement you MUST have in place when inheriting tenants
  • How to determine who provides the capital in an investing partnership
  • What you should do when a tenant violates your lease agreement
  • How to attract the BEST tenants for your rental properties
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.