Rookie Reply: Best HVACs, HELOCs, and Using Home Equity to Buy Rentals

Ashley Kehr:
This is Real Estate Rookie Episode 290.

Tony Robinson:
The cost between a mini-split ductless HVAC system versus the traditional systems are pretty comparable. But the reason we typically go with the mini-splits is because you’re able to, hopefully, this is our logic, is save on your costs a little bit because you’re able to turn it on by the room. So if you only have one unit going, then it’s only just that one part of the house that’s going as opposed to a lot of the central heating and air maybe you only have if it’s a small house. Maybe there’s just like one unit that’s trying to cool the entire house.

Ashley Kehr:
My name is Ashley Kehr and I’m here with my co-host Tony Robinson.

Tony Robinson:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. We’re back with another rookie reply where we get to answer questions from our rookie audience and give you guys the insights as if you’re sitting in the same room as me and Ashley today.

Ashley Kehr:
Today is a rookie reply. We are actually going to be turned into expert HVAC service text, Tony and I, and also our producer does chime in to correct us. So maybe not that expert, but we are going to talk about different ways to heat and cool your house. I promise this does have something to do with real estate investing. When you are looking at properties, what are the different options you may have and what may be better or worse for you depending on the property, the area you’re in and what kind of investment you are doing? The next thing that I really like we touch on are security deposits. You are inheriting a tenant. What happens with the security deposit? Are you getting a check? Are they having to pay you the security deposit? Do you get it from the seller? Do you have to come up with your own security deposit for the tenant? We’ll talk about all things’ security deposit.

Tony Robinson:
Yeah, we also talk a little bit about the difference between a home equity line of credit and a traditional line of credit because those things, even though they sound somewhat similar, there’s actually a difference between the two. So we want to make sure you understand when to use one and when to use the other. But I also want to give a quick shout out to someone by the username of Brit G. She left to say, five star review on Apple Podcast and she says, “I’m an elementary school teacher in the Los Angeles area. I’ve always been told I picked the wrong career if I want to own property in LA. While real estate rookie is helping me emerge from that lie I’ve ignorantly bought into and providing hope and practical steps to finally move towards real estate ownership. The Pace Morby episode specifically is so motivating. Thank you, Tony and Ashley.”
So Brit, we are super excited for you and I love that you said that you’ve woken up from that lie because becoming a real estate investor works in any market and any cycle. There are always people being successful with these strategies. So yeah, we appreciate that. If you’re a rookie audience member and you haven’t yet left us an honest rating review on Apple Podcast or Spotify or wherever it is you’re listening, please take a few minutes to do that. The more reviews we get, the more folks we can reach. The more folks we can reach, the more folks we can help

Ashley Kehr:
Or kindly ask all of your friends and family to do so on your behalf.

Tony Robinson:
There you go.

Ashley Kehr:
But seriously, thank you guys so much. We love reading your reviews, especially when you tell us how the podcast has helped you, what you realize, how you’ve been inspired and motivated. Also, I love the mention of the Pace Morby podcast episode right there too. That really was a great one. Before this episode started, Tony put me into group text with Pace Morby. I am now texting all my friends. I’m in a group text with Pace Morby, but we might have something super exciting that we may be working on with Pace. So stay tuned to see what that may be in the coming weeks or month. This is going to be very weather dependent as we have learned.
Okay, today’s question, our first one up is from Alex Diehl, “House A and house B are exactly the same except House A has HVAC and house B has window units. How big of a difference will this make in rents? Other things being equal?” First, I think we should explain exactly what an HVAC system is. Actually, what does it even stand for? Heating Ventilation?

Tony Robinson:
Oh, I was going to say, I don’t know what the V stands for. Heating and air conditioning, but yeah, ventilation sounds right.

Ashley Kehr:
So this is a unit in your house, sometimes it can still produce just heat and you don’t have to get the cooling system that goes with it for air conditioning. But typically, there are vents placed around your house. They do duct work throughout the house and commonly, it is a forced air unit that you use to heat your house. They’re saying the House A has this option where it’s like a built-in system throughout your house. House B has window units. So this is where I’m not sure on the exact details as far as window units doesn’t mean air conditioning units because I don’t think I’ve ever seen heating units that are in the window. Have you, Tony? Heating units in the window? I’ve only seen AC window units, so I wonder if this question is just the air conditioning is through the whole house or has AC window units.

Tony Robinson:
Yeah, I’ve actually never purchased a home with just a window unit. Every property that I’ve purchased has either had central heating and air. A swamp cooler is actually a really popular thing out in the desert. Then we do a lot of mini-splits for most of our properties, honestly. So yeah, I’m not sure if window units have the ability to push heat either.

Ashley Kehr:
So as far as the question goes, it’s how big of a difference will this make in rents? Other things being equal? I think the best thing to do is to look at comparables in your area. What do other houses have? If every other house for rent does have HVAC systems and then yours has window units, this may reflect on the price because people expect to have that, that HVAC, that forced air. If you look at rental units and it’s all different kinds of air conditioning and heat throughout the units for different properties for rent, then it may not affect your rent price at all. There’s two 40 unit apartment complexes that we have here, and each one for the AC has wall units, but they’re not like the mini-split units. It actually is half inside the wall, half outside the wall, almost like a window unit, but it’s put into the wall instead. Those are the AC units. The rent is not affected at all compared to other units in the area based on that.

Tony Robinson:
Yeah, I love your advice, Ashley, about looking at your comparables because I think Alex, for you, that’ll be the best source of truth for you. But I guess just for those that are curious, I recently had to install a mini-split system on a few of our rehabs. I’d say, “Installed,” we’re paying about three to 4,000 bucks per unit. We had a three bedroom that we did one on and that was about 15 grand because we put one in each bedroom, the one in the living room kitchen area as well. But I’ve actually never installed central heating and air on a property before. Have you had to install central heating, Ash? What’s the ballpark price on that?

Ashley Kehr:
Yeah, so I just did one in a cabin. The cabin is about a little under a thousand feet square footage, but the bedrooms are open loft, so there’s not a lot of closed off rooms in there. But I think it was around $8,000 to put the forced air unit in it with the AC with it. So heat and AC.

Tony Robinson:
Yeah, and that’s what I’ve come to see is that the cost between a mini-split, a ductless HVAC system versus the traditional systems are pretty comparable. But the reason we typically go with the mini-splits is because you’re able to, hopefully, this is our logic, is save on your costs a little bit because you’re able to turn it on by the room. So if you only have one unit going, then it’s only just that one part of the house that’s going as opposed to a lot of the central heating and air maybe if it’s a small house, maybe there’s just one unit that’s trying to cool the entire house. So that’s been our logic. Have you priced out between the central versus the mini-splits for your properties or do you just always go with the central?

Ashley Kehr:
We did a couple mini-splits probably two or three years ago in properties. Our big four unit we did. Those ended up being $5,000 each installed for them. One big decision for me though, as to whether I’m going to install those or do forced air is based on if I’m tearing out the walls or anything, if I’m doing a full gut rehab, because putting in that duct work, sometimes they have to go through, cut through the floor, go through the walls, especially if you have a second story, they’ll need to run it through something to get it up to the second story. So that’s definitely a big decision maker is if I am going to have the walls open already to run the duct work to do the forced air units. Of course there’s like that industrial look where it’s up in the ceiling and that’s actually what we did in the cabin we had.
There’s this huge pipe that runs from one loft to another into the actual closets, and then from there, it goes down into the little rooms and then it has the vents out into the main space off of the big pipe that goes across. So I think there’s so many different ways to install these things and it’s where getting a good contractor that will price out your different options for you. We originally had two contractors come out and quote this for us, and this property actually had radiant in floor heat, which is another heating option. There was when they did a pressure test on the lines underneath the concrete, because this cabin is just on a concrete slab, it didn’t pass the pressure test, meaning that there was a leak somewhere. So our options were to guess where it was and rip up the concrete floor or just not use the radiant in floor heat at all.
So we decided to just abandon that and that’s where we went and put the forced air unit in. In the other cabin though, it had a basement where you were able to access the lines for the radiant in floor heat underneath the floor. That actually passed the pressure test anyways, so we ended up just putting a new boiler in that system to run the radiant heat and we didn’t put a forced air unit into that at all. So that cabin with the radiant and floor heat, it doesn’t have a AC option. So eventually, we’ll have to go and probably put the mini-split unit in for AC in that property.

Tony Robinson:
Isn’t it crazy how every market has its own solution for heating and cooling? Radiant floor heat? I’m not even sure what you mean when you say that. I don’t think I’ve ever walked a property that has radiant … Just give me a visual of what that even looks like.

Ashley Kehr:
So you live in a warm climate, so you don’t need this, but imagine getting out of the shower and you have some nice tile floor that feels really cold on your feet. Well, you have that radiant floor heat that emits the heat up from the floor and now the tile is nice and warm and cozy and your feet don’t get cold. Actually, my house now, the whole house is radiant in floor heat. So every piece of flooring, the basement, the garage, and then it’s a ranch to the whole first level. It’s all radiant and floor heat and that’s how we heat our house. Then it’s set up into different zones. So there’s thermostats for different bedrooms, main area, things like that. So yeah, there’s so many different options.

Tony Robinson:
Interesting. Do you guys have swamp coolers in buffalo?

Ashley Kehr:
No. The only reason I know about that is because we did talk about this once and you had told me what it was, but I think you should explain it again. But yeah, I had never heard of it.

Tony Robinson:
Yeah. I had never really heard of it either. So we started investing in the desert, but it’s a common cooling option for folks who live in the desert. But basically the swamp cooler, it pulls in, it almost works like the window unit where it’s pulling in air and then it’s pushing it down into the house, but it’s not working off the traditional thing. But usually, they sit on top of the roof. I want to say there’s some kind of moisture element to it as well because now they always have these drip pants and stuff, but the thing is they’re confusing to use.
You have to open your windows a certain way and we just didn’t think the guests and short-term rentals weren’t familiar with swamp coolers could use them in the right way because we didn’t even really fully understand them. So typically, we just take off the swamp coolers and that’s what we end up put in the mini-split systems. But they are a low cost way to keep your house cool. I’ve been told, if you get a good swamp cooler, it can work just as well as central air does, but at a fraction of the cost. So an option for you guys.

Ashley Kehr:
So I think to wrap up this question here is that if it was me personally, if everything else was the same, I’d go with the house with the HVAC system instead of the window units. First of all, I think it’s a nicer look, not having the window units sticking out, especially if you’re using the AC ones, typically in colder months when you don’t need the AC, depending where this property is, you have to take the AC unit out of the window, you close the window back up and then when spring comes again, you have to put it back in.

Tony Robinson:
Stick it back in.

Ashley Kehr:
Yeah. Also, HVAC systems tend to be more energy efficient than these window units at using electric or gas or however your HVAC system is run.

Tony Robinson:
Our producer just corrected me too about the swamp cooler. He said, “Yes, they use evaporate cooling, the air flows over cool water pads and then lowers the temperature.” So there you go. That’s how the swamp coolers work. So shout out to Eric for a coming in clutch with that last little bit of information.

Ashley Kehr:
Then he also wanted to add that the window units could be a safety concern too for falls and break-ins possibly.

Tony Robinson:
That’s actually true. Have you bought any furniture from, I don’t know, anywhere recently? We bought a dresser and when we were putting the dresser together for one of the properties, and this was a couple of years ago, but it had directions that had wanted us to secure the back of the dresser to the wall, it had an anchor to take the back of the dresser into the drywall to stop things from tipping over because I guess there had been instances of these dressers tipping over on a small children. So that’s actually a really good point. Safety concerns about the wall units also.

Ashley Kehr:
Yeah. That actually happened. My son, when he was younger, he tried to climb up the dresser and luckily, he had pulled out the bottom drawer, so the bottom drawer held it a little bit so it never completely fell. But those sturdy Amish furniture, that sturdy drawer held the whole dresser. Okay, let’s go on to our next question. This one is from Eric Hyman. Once again, you guys, thank you so much for submitting questions to us. If you would like to submit your own question, please leave it on the Real Estate Rookie Facebook page and also coming soon, Tony and I will also have links in our link trees in our profiles on our Instagram accounts at wealth and rentals and at Tony J Robinson. Then your last option, and probably the easiest is just go to bigger pockets.com/reply and leave your question there.
Okay, so Eric’s question is, “I recently purchased a property for a hundred thousand dollars and put down 25,000 and the appraisal came back at 125,000. So I have some nice instant equity there. My question is, how soon after taking ownership can I take out a HELOC out on this property? I’m already looking at another property and I could use the HELOC as the down payment. Would a bank do this or want me to wait? Secondly, how much could I get? Would it be 80% of the 50K inequity, so 40K? Thanks.”

Tony Robinson:
Yeah. Well, lots of good questions here and I feel like we’ve been getting a lot of questions recently about lines of credit and HELOCs. I think the first thing that I’ll say is that most banks only give HELOCs, Home Equity Lines of Credit on your primary residence. You can get a commercial line of credit. I’ve tried, I’ve found it pretty difficult, the kind of local banks I chatted with here in California. Ashley, I think you’ve had some success with lines of credit in your neck of the woods, but I would say most banks aren’t going to give you a HELOC per se on an investment property, but they will give you a HELOC on a primary residence. Have you noticed anything different from that, Ash, or does that jive with what you’ve seen as well?

Ashley Kehr:
Yeah, I’ve been able to do two commercial lines of credit on rental properties that are in LLCs, but they’re not the best of rates and you’re going to get a way better rate if it is your primary residence. But the biggest thing is just going to different banks and asking what they have to offer on the property because you’ll be surprised at what some banks can do, especially small local banks. That’s where I’ve had the best luck, I guess, is using those small local banks. One bank that I’ve used the most frequent only has seven branches I think, and it might even be less than that.

Tony Robinson:
I think one thing to call out though and definitely check with whatever bank you end up getting your HELOC with, but what I’ve seen some people do is if they live in their property and they plan on moving, before they move, they’ll pull a HELOC on that property. Now like I said, make sure you understand the limitations of whatever HELOC you’re using. Do you have to live in it for the duration of the HELOC or you just need to be in at the time that you close in the HELOC? But I have seen some investors do that where they know that they have a decent amount of equity in the home that they have and before they turn that home into a rental property, they then go out and get the line of credit and then use that after the fact.

Ashley Kehr:
This is such a great alternative to selling your house if you want your don’t want to rent it out because you have a hundred thousand dollars in equity sitting into it and you just seem like that would be a waste to let that equity go instead of selling it, just go ahead and take out that HELOC so you can still tap into that money on the property too and use it for your next investment. As far as the second question, would it be 80% of the equity that is left in the property? So the way a HELOC works is you’ll take the appraised value of the property, what your current mortgage is, and then subtract that to get with equity you have and then they will lend up to a certain amount. So in this example, he’s saying, “80%.” So if the property appraised at 125,000, the mortgage is 75,000 and then he would be able to take up that difference, whatever that difference is from the 75,000 to 80% of 125. Tony, what is that math? Have you been calculating as I’ve been trying out?

Tony Robinson:
Yeah, so you do 125 times 80% minus your 75 leaves you with 25K.

Ashley Kehr:
Okay, so 25 K is left in equity. So as far as him saying the 50%, it’s not 80% of the equity that’s left in the property, it’s 80% of the whole appraised value. So I think that’s what we need to make clear for him. I think that’s where the confusion is. It’s not 80% of the equity, it’s 80% of the appraised value minus what you already have your mortgage for. So that would be, he’d be able to get the 25,000 instead of 40,000 on the property.

Tony Robinson:
Then one other question that Eric asked is, is there a time period on the HELOC? So I know for a lot of cash out refinances, there’s a seasoning period where they want to see you hold the property for six months or so is what you typically hear to be able to do a cash-out refinance. But I’m honestly actually not sure if there’s a time period on getting a [inaudible 00:20:50] on your primary residence. Are you aware of any restrictions?

Ashley Kehr:
No, I’m not. I only know of a seasoning period that a bank may require to go ahead and refinance a property, but not for a line of credit. But also it can depend on the bank. So asking different banks as to what their rules are for that. But a seasoning period to refinance can typically be six months to 12 months before they have you go and refinance. As far as a line of credit, I don’t think I’ve ever went and gotten a line of credit right after closing on a property, so I haven’t had any experience in that at all. Another thing I want to mention too, as far as the 80% of the appraised value to get that line of credit is that may vary too. That’s not like a lot of mortgages are standard at the 80% when you’re going to refinance, but as far as a HELOC, sometimes my one business partner, he took out a HELOC and they went up to 95% of the appraised value of his home.
So he actually had it kind of stacked. He had a mortgage that was actually with a private lender who he purchased … No, he didn’t purchase house from them, but they lended him the private money to do that and he’s pays them the mortgage payments. Then stacked on top of that, he went and got a home equity loan. So instead of a line of credit, it’s actually a payment plan split up where he is paying principle and interest on it. Then stacked on top of that, he had a line of credit, so he was very leveraged at 95% of the property. But the difference was, was that all those funds he was using to put in into our deals and our deals were paying him a mortgage payment, which more than covered the payments he was making for that additional home equity loan and that HELOC on the property too.
Okay. Let’s move on to our next question. This question is from Tim Laratour. “What is the advantage to a real estate investment company raising capital through private equity versus a bank? What’s in it for them? From an investor’s standpoint, this looks like a great source for passive income, but I’m weary.” So I think what he’s trying to say here is why would somebody go out and raise private money instead of going to a bank to fund their deal?

Tony Robinson:
Well, just to add some context. So specifically, Tim, he posted this in the Real Estate Rookie Facebook group, but he also linked to a company called RealtyMogul. If you all look up RealtyMogul, they’re essentially like a crowdfunding platform for real estate transactions. Let’s even take a step back, most people who are buying large real estate deals, big apartment complexes, large self storage facilities, big commercial mixed use developments, the majority of people who are purchasing or building those projects are not using all of their own money. They’re raising funds from two different sources. It’s usually a mix of these two sources. The first source and the majority of the cost comes from a bank. So they’ll go to a big bank and they’ll get maybe 70% of the total cost to purchase that property, and then the remaining 30%, they’ll go out and they’ll raise from other individuals who become their passive investors.
So this is called a syndication and you can syndicate anything but syndication in real estate. That’s how it goes. There’s one group of people who find the deal, put the deal together, secure the bank financing, and then they go out and they raise funds from other in individuals to cover the remaining balance. So usually 70, 30%. So Tim, first thing I’ll say is that it’s a very common practice and pretty much any big shopping center that you drive by or big apartment complex you drive by probably leverage some syndication to make that happen. So it is a very normal thing.

Ashley Kehr:
Then he said, “What’s in it for them?” What’s the reasoning for that?

Tony Robinson:
I think mostly it’s just the, say you want to buy a $100 million apartment complex and maybe you’re able to get 70 million from the bank, that’s still $30 million that you need to put up to be able to purchase that property. I’d say the average person probably doesn’t have 30 million bucks lying around, but maybe if they know enough other investors who have a hundred thousand, 250,000, $500,000, they’re able to stack up to get to that 30 million. So that’s a big part of the reason why folks leverage the syndication model is because the numbers are bigger than what they could take down comfortably themselves. Now there are some differences though, because like I said in this post, Tim links to RealtyMogul.
And they focus a little bit more on crowdfunding as opposed to a traditional syndication. So if you work with a traditional syn indicator, usually they’re going to offer you what’s called the 506B, which allows for both accredited and non-accredited investors or 506C, which only allows for accredited investors. Usually there’s some minimum investment. You might see 25K on a smaller deal, maybe 50 to a 100K on a bigger deal, which means at minimum you have to be able to put up maybe a six figure check to participate in that deal. If it’s only open to your accredited investors, you have to check certain boxes around your income or your net worth to be able to qualify to even be able to invest in those deals.
So that’s where the majority of action happens. Then on a crowdfunding platform like RealtyMogul, that one’s a little bit different because you don’t necessarily have to be an accredited investor, you don’t need to write a $50,000 check. A lot of these crowdfunding platforms allow you to get in with a hundred bucks and you’ll obviously own a very small share of that real estate deal, but your ability to get involved in the threshold is significantly lower. So yeah, it’s a win-win, I think for both people, assuming that the operator, the person putting the deal together knows what they’re doing and it could be a really easy way to get a passive return on your investment.

Ashley Kehr:
Then his last question is, from an investor’s standpoint, this looks like a great source for passive income, but he’s not exactly sure if it is. So the best thing you can do is to vet the operator of the syndication deal or the crowdfunding platform. One way to do that is to talk to other people who are investing with them. So I think a great starting point was Tim putting this in the real estate rookie Facebook group, if anybody has invested with them to hear some feedback, do that in all different kinds of Facebook groups, put it out on Instagram and see what feedback you get.
The bigger pockets forums gold for finding out information on people or companies, lots of people will give you their opinion, but also do your own research before you invest in a syndication deal, actually understand what fees you are paying, how the deal is structured, when are you actually going to get your money back, all these different things that it can be extremely confusing. So my recommendation would be to go to YouTube University, learn to understand what a syndication deal is. You shouldn’t be investing in something just by, “Oh, this company on social media looks like they do a good job. This property looks really nice that they’re about to buy, I’m going to invest in it.” That should not be your reasoning for investing with someone. So take the time to actually do some research, vet the company, then also to understand what your investment is actually getting you. Worst case scenario, best case scenario.

Tony Robinson:
I guess just one last thing, Ashley, it might be cool if we bring on someone who’s an active passive investor in syndication’s to talk about how are they vetting these different operators? How are they potentially vetting the deals? What kind of returns are they typically able to achieve? Because honestly, lending money on the private, being a private moneylender or being an LP and other people’s syndication’s are the most passive ways to be a real estate investor. So get a healthy return because you’re going to get a better return than you would typically with a REIT, but it’s definitely not as much work as managing that deal yourself. So maybe we’ll plant that seed for our producers, maybe find some LP, some passive investors and have them give their experience to the rookie audience

Ashley Kehr:
Yeah. You know who I just saw recently that posted on social media. This can be our Instagram shout out of the week. We made some cool noise about that. But one person that I saw was at Honey Money, Rachel. So Rachel, she actually just posted how I think she wants to or has invested in five syndication deals. I know, I think it was at least three that she’s done so far, maybe even this year. She shares a lot about her journey of investing in the syndication’s and she used to be a very active hands-on investor with rental properties, went through a divorce and had to sell up her portfolio and now she’s stacking it back up while also investing in syndication’s. So she might actually be a great person to have on as to how she is choosing the syndication deal she’s investing in.

Tony Robinson:
Yeah, I’m actually in a group chat with Rachel and some other investors, so I got to hit her up and see if she’s down to come hop on because she’d be great.

Ashley Kehr:
Okay, so our next question is from Jared Sutherland. “Do you check rent is being paid during 10 day inspection periods or before? I will be inheriting tenants for four months. How does security deposit work? Is that transferred or does it come out of pocket? I haven’t bought with existing renters before. Thanks.” Okay, so for this one, inheriting Tenants always a controversial issue that we discuss here in the bigger pockets forums, Real Estate Rookie Facebook page.

Tony Robinson:
I’ve never inherited a tenant because I’ve always been too terrified. So you’re the person that they can speak on that.

Ashley Kehr:
I have. I’ve had good case. I’ve had more good cases than bad cases for sure. Inherited tenant.

Tony Robinson:
Yeah, and I feel like that’s how it’s with all parts of real estate investing, I haven’t met anyone that does any strategy where it’s like, this has gone wrong the majority of the time. Every strategy that people talk about that maybe they’re hesitant to go into, it could be people feel that way about short term rentals. People feel that way about Section eight. People feel that way about investing in Detroit. You can think of any asset class and there’s always this hesitation, but I feel like in general, the reason why real estate investing is so popular and so successful is because more often than not, if you do things the right way, it’s going to work out. So I’m sorry, I’m going off on a tangent now, Ashley.

Ashley Kehr:
No, no, I think that was great and definitely relatable and 100% accurate. Okay, so the first question is, do you check rent is being paid during the 10-day inspection period or before? So your 10-day inspection period’s, your due diligence, I would ask at any time. You don’t even have to wait until the 10-day inspection. This is actually something you could even ask for before you even put your offer in or when they sign the offer, if they will give it to you, that’s definitely up to the seller. But as far as if rent has been paid, there will be a rent rider attached to your contract. So if you are purchasing on market deal, the real estate agent will provide this to you where it will tell when was rent last paid. As far as checking the accuracy of that, well, it depends on how the tenant is paying rent and if the seller is actually reporting that rental income as to how much they can actually prove to you that the tenant has paid.
In this scenario, I usually have the seller of the property tell me what the rental payment is, how often they have paid, if they’re all caught up on rent. But then I also send a notice to the tenant called an estoppel agreement where they fill out the information, can I verify what the tenant is saying and what the landlord is saying? You can go as far as asking for bank statements from the landlord, asking them to show proof of the income being deposited each month. I’ve never done this, but it’s definitely one extra step you can take to verify that the rent is being paid and collected. As far as the security deposit, this is usually taken care of at closing where you will receive a credit on the closing statement.
So say the security deposit is $1,000 a month at closing, you’ll be paying a thousand dollars less for the property, for the security deposit, but then you will have to come up with the cash yourself to actually fund that person’s security deposit. So in four months when they’re leaving, if they have the right to their security deposit because there’s no damages, you have to come up with that thousand dollars. So make sure you have that money set aside and reserved for that. You can also negotiate though that it’s not taken off the closing statement and that you are still paying the normal purchase price and that the seller actually writes you a check for the security deposit.
One thing to be very cautious of, which happened to me when I was still very, very young at buying inherited tenants, I bought a couple properties from one investor and there was two tenants that owed him some rent still, they were not caught up on rent, and he actually took that money out of their security deposit and on the closing statement only gave me the remainder of their security deposit. That wasn’t what was supposed to be done, that wasn’t supposed to happen, but I just didn’t understand, I didn’t realize and I didn’t catch it and neither did my attorney. So that’s something I always check for now is make sure I’m getting the full security deposit back. If they owe him rent, they owe him rent, that shouldn’t come out of the security deposit because that is your security deposit now per the lease agreement that is in place.

Tony Robinson:
That’s super smart. I never thought to check for that, especially about if they owe that person, that shouldn’t come out of the money that you’re owed. That’s super smart.

Ashley Kehr:
A lot of leases in our lease that says the security deposit cannot be used for last month’s rent or rent owed because a lot of we had seen that sometimes people would be like, “Oh, just keep my security deposit.” But then we get into the unit, it’s like, “We need to do security deposit to do these other things.” So check because if that’s in the lease agreement, the seller doesn’t even have a right to that security deposit because they haven’t even left the unit. So definitely one thing to check for.

Tony Robinson:
Let me ask you this question. You’ve been investing for a while now. How many different versions of your lease agreement for your own portfolio do you think you’ve gone through? Ballpark.

Ashley Kehr:
When I started working as a property manager, it was a 40 unit apartment complex. It was a one-page lease agreement. Now the lease agreement is 10 pages, I think. Then with all the addendums, the cleaning checklist when you move out like, “Here’s the keys that you’re getting, here’s your pet addendum,” all these things that, it’s actually longer than that. But yeah, so it definitely changed. I’ve had a property management company in place, and actually in a couple of days is when the in-house property manager I’ve hired takes over. So I’ve created a new lease agreement again. So they had their own. But yeah, it definitely over time and has just adapted and changed.
For each property too, I don’t use the same lease agreement for every property because there’s different things like the 40 unit apartment complex I put in there, the entry doors are locked, you get a common area key. These are some of the rules, things like that. Somebody comes in and does the snowplowing and you’re not responsible for snow removal. Well, a single family home, they are responsible for snow removal. If I put things about the shared common areas in there, I’m like, “What do you mean? Who am I sharing this with? This is a single family home.” So making sure that your lease actually applies to the property too. Then I just save all of those templates’ template, lease agreement, and then whatever property it’s for.
A lot of the duplexes and stuff, I can pretty much use the same one where it’s fillable for utilities if they’re different, maybe I’m paying the water on one, but I’m not on the other things like that. So those are pretty much standard, but going through your lease agreement every once in a while, or even just keeping a little notes in your phone. So on Instagram or wherever you see somebody included one little thing into their lease agreement that made a difference, or they had this issue that came up and they’re like, “I never thought that would happen.” Go ahead, write it down. So every quarter or every year, whenever you’re going through your leases, you have that little notepad and you can go in and add those things in.

Tony Robinson:
Yeah. The reason why I ask that question is because I want all of our rookies to understand that your lease honestly should be a living, breathing document. As you said, as tenants move out or you experience different challenges with certain tenants, the way that you problem solve for that or future-proof for that to make sure it doesn’t happen again, is that you update your lease. We don’t have leases for any of our properties because everything’s short term. But what we do have are JV agreements with our different partners that we’ve worked with. I’d say that after almost every single partnership we’ve identified something that we wanted to change or update to that partnership for the next one. So yeah, a lot of your documents that you have in your business, whether for partnerships, whether for tenants, whether for whatever it may be, you always want to make it a habit of going back and updating those to reflect whatever newer information you’re receiving.

Ashley Kehr:
Yeah, it’s so funny. I was looking back through an old folder of when I first started property management and just looking at my checklist of when a new tenant moves in, here’s my checklist. I knew nothing about property management. I was thrown into this job. I had no one to mentor me or show me what to do. I was literally just Googling stuff and I was looking at it. I was like, “Geez, I actually should start using this again. This is actually pretty good.” Yeah.

Tony Robinson:
Yeah, it wasn’t too bad.

Ashley Kehr:
But yeah, so it’s just interesting to see all the things that evolved, but also how simplistic it was. But it worked for me so well, now I’d probably take the same thing and add 50 little line items underneath each thing to expand on it. But just going back, it’s just something, some little process, some little system, some lease agreement that you can just continuously build off.

Tony Robinson:
I guess just last comment on that, because you made such a good point there, Ashley, is that when you’re a brand new investor, and obviously this isn’t even just for investing, this is for anything that you’re trying to accomplish in life. But I’ll use investing because that’s what this podcast is about. When you’re looking at someone like Ashley or Tony from the Real Estate Rookie Podcast, or you’re looking at James Dainard and Kathy Fettke and Henry Washington from On the Market, or you’re looking at Rob and David from the Real Estate Podcast, it’s easy to hear about how their businesses are running or how they’ve set things up or how things are optimized and feel like you’re way behind because you haven’t established all of those things yet. But what you have to understand is that we’re all multiple steps into this journey, and we’ve already gone through those mistakes and those rough patches to identify where we need to make improvements.
That’s what I love about James Dainard. He, he’s always so open that the only reason he knows so much and he’s able to be so articulate about running his real estate business is because he’s made a ton of mistakes along the way. Every tip that he’s giving you when it comes to flipping houses, managing rehabs, wholesaling, whatever, is because he made a mistake to teach him that lesson. So for all of our rookies that are listening, don’t get demotivated by hearing how Ashley has a 10-page lease. Instead, take what she said at the beginning that she started with the one-page lease and it was over the course of her investing career that she was able to make those changes and adjustments to get to where she is today.

Ashley Kehr:
You can also go to biggerpockets.com/pro and become a pro member and get state specific lease agreements for free that were created by an attorney. That’s a great starting point for you to start looking at those. Then you can just download them and then you can tailor them and change them as much as you want to. Then of course, when you’re done, I would have an attorney approve them if you do make a lot of changes to that lease agreement. But that’s a great starting point right there is using those documents. Also, everyone listening, please do not tell James Dainard how much we talk about him on this podcast because he’ll never ever let me live it down. So this stays between us. This is a little rookie secret. Okay? Thank you guys so much for listening to this week’s rookie reply. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson, and we will be back on Wednesday with a guest.