Cash Flow or Equity: Which One Should Beginners Invest for? (Rookie Reply)

Ashley:
Let’s get your questions answered. Welcome to the Rookie Podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to kickstart your investing journey. I am Ashley Kehr and usually Tony Robinson is here, but we are joined by Noah Bacon. You might recognize him from being on the Rookie podcast before and from his YouTube series, how I started aired on the BiggerPockets Real Estate rookie YouTube channel. Today we are diving into the BiggerPockets forums to get your questions answered. The forums are honestly the best place for you to quickly get all your real estate investing questions answered by many experts. So today we are going to discuss whether you should chase cashflow or equity for rookie investors, how to determine how much capital you need to get started and ways to transition out of your first house hack. So Noah, welcome to the Rookie podcast as my co-host today.

Noah:
Thank you, Ashley. It’s always an honor to be here. Really excited to pick your brain a little bit, pick some rookie questions off the forums and learn from the best with you.

Ashley:
I’m actually excited about a little debate here because this first question out here, I think we might have different answers on it and we can get into a little heated discussion here. Noah,

Noah:
I’m looking forward to it. I love the age old debate here of equity versus cashflow, and I’d love to hear where your stance is because I’m sure mine’s going to be a little bit different.

Ashley:
Okay. Well, Noah, do you want to read off the question that was brought to us from the BiggerPockets forms?

Noah:
Yeah, absolutely, Ashley. So let me read the first question here directly from the forums that I found. Cashflow investing is for rookie investors. Sorry, I know this one’s going to be painful for many rookie investors just getting started who want to live on the beach with their mail order cash, but this is not the way investing works. The real wealth is in equity. Equity and debt pay down are king. I’ve been investing for 15 years, I own over 60 units, manage 700 and have data and analytics on everything. The data is clear, stable B class investing of quality assets professionally managed, makes investors rich through equity, play the long game, buy good properties with low cash returns and stable tenancy. Do you agree or do you disagree with this? And Ashley, I’ll start with you. Do you disagree or do you agree that equity is king instead of cashflow?

Ashley:
I think this is a great long-term play. I want to kind of set the stakes here on this as to are we going to assume that this is for a new person getting started? Because I think it’s hard to actually debate and say cashflow is king or equity is king based off of is this going to be something you start today and do forever or is this something you’re just starting now? And then it gives you the option to pivot. So if you’re open to it, I would like to debate it as to starting out what should happen, but what are your thoughts?

Noah:
I love that stance too, and that’s exactly how I would love to set the scene. So let’s say somebody is a rookie investor looking to get their first property and their intention is to have this property for 10 plus years, not just have it for one to two years, look for a flip and start to move their pieces around. So let’s have that long-term aspect for somebody that’s just getting started out for their first property.

Ashley:
Okay, so my choice for rookie investors starting out is to go for cashflow. Then as you build your foundation and get stabilized, then that will provide you the opportunity to go for equity. So that would be kind of my basis is I am team cashflow. You guys can make the shirts. I will wear one that says Ashley’s team cashflow

Noah:
And I’m going to be on the other side of it. So I guess you can make me a pair of shorts that says team equity or have on the back of my shirt team equity. But I take the stance on the other side where I do think having cashflow is extremely important. I’m not discounting that by any means. I look at it a little bit differently as if you have the rental income coming in and you’re break even, maybe even a little bit negative and you have enough to keep the lights on and you’ve done your due diligence upfront, the equity to me is going to give you so much more of a return down the road, like we said, a 10 year investment than you’re ever going to have with, let’s say you’re going for 200, $300 a cashflow per month and it’s not going to appreciate the way that you’re anticipating.

Ashley:
The first thing that made me be on team Cashflow was the fact that a rookie investor is not experienced, that there’s going to be mistakes made when analyzing a deal, when underwriting a deal, when doing the due diligence. I want that cashflow there to cover any of those unexpected costs that didn’t come up. So maybe you are buying the property cashflowing, but then you underwrote it wrong and now you are breaking even. So that’s my number one thing that I want cashflow for a rookie investor because you’re not experienced. You may not know everything there is to know about analyzing a deal and you may make a mistake and that cashflow will give you the room and the opportunity to actually eat that and it not be a devastating decision because you already bought the property at breaking even.

Noah:
Yeah, that’s a really good point and I think you hit the nail on the head for a lot of people’s fears initially out the gate is that I’m not going to be able to keep the lights on monthly if my expenses do overtake my income. I’m maybe going with the assumption here that they have a bit of a reserve already in place to say if my tenant doesn’t pay this month, I’m not going to go underwater immediately. And I do think with let’s say a property that appreciates at a 5% rate compared to a property that appreciates at a 3% rate. I think the situation here, investing in a B class asset compared to a D class asset where you get more of that cashflow, yeah, you are getting a better return on the monthly, but are you having more risk with that cashflow? And that’s what I really like to look at in this situation.
I myself invest in B to a class properties that are relatively breakeven and I haven’t had many tenant concerns when I look at a C or a D class, sure it could bring me in an extra three, 400, maybe even $500 extra a month. That’s a great amount year over year if my tenants are paying on time, if there’s no maintenance concerns, there’s no property upkeep and I just assume in these higher cashflow areas that it’s going to come with a premium on that side where you’re going to never have more problems than in a B class with a potentially safer bet to mitigate your risk a little bit. So I think that the asset class has to really be in consideration here when we’re talking about cashflow versus equity as well.

Ashley:
Yeah, I 100% agree with that as to there’s that spectrum and you need to find that happy medium where it’s not going to be a D or low C class property, but a B class property where you’re getting some cashflow and we talk about cashflow, that doesn’t mean that I’m buying this one property and I’m quitting a W2 job because it’s so much cashflow, it’s minimal cashflow. And I kind of mirror this model after my own story as I started out with just buying properties that had a hundred to $200 cashflow. It was zero money into the deal. I had reserves set aside with my business partner. And so with that, we had that little bit of security of cashflow where we didn’t need to ever put money into the deal because something came up and it was just that cushion. But then five years down the road, we sold that property, we had mortgage pay down that was from the tenants.
We didn’t pay that down, and then we had built up some equity. Not a ton amount had changed because of actually the market conditions were great. So that really helped us. But even if it wouldn’t have changed that much, there still was some equity, there’s still going to be a little bit of appreciation every year as long as you’re taking care of the property. So then that’s where you can use the stack method is you’re buying these little cash flowing properties. Now you go ahead and you can 10 31 exchange into something different, and then that’s maybe when you go into a property that has, that’s more equity based than actual cashflow based.

Noah:
Absolutely, and I think what we talked about setting the scene here with this being a first time investor, I think your approach definitely changes as you have skin in the game. When I was looking at my first property, I probably got stuck closer to this analysis paralysis that we like to talk about where it took me six to eight months to really find that deal where it hit my cashflow numbers. Second time around, rates are rising, let’s get in and get the equity because like I’ve heard very commonly in the past is you make your money when you buy and if you have a rate at a lower percentage, you’re getting the equity right off the bat. My approach definitely changed from property one to two. As you can see, you need to get in there to get skin in the game and actually start to pay down your loan and actually gain the equity. I didn’t want to wait anymore. Did your approach change as you’ve gotten from rookie to more experienced investor, Ashley, where I have this analysis paralysis, I need a property that cash flows is $500 a month, are you still looking at that the same or are you looking at it differently where my equity position is what really matters now down the road?

Ashley:
Well, I actually do have something that could go towards your side of the argument as well as if you were in that predicament, maybe you owned a business and something happened with that business where you’ve lost all your income or lost your W2 job. If you have that rental property and you’ve been banking on equity and you’ve held it for a year, two years, and it does have that equity, you have the option to sell. So you could sell it, you could get rid of that debt, and then you have equity and if you are going to buy a cash flowing property, you most likely are going to have less equity in the property because you have more debt on it because you want as little of your own capital into the property. And so you’re not going to be able to pull out as much of it because you’re most likely have too much leverage in the property because you really wanted to maximize what your cash on cash return is, but also cash flowing on the property. So I would say it’s kind of like a double-edged sword. You do have options either way, and that’s why no matter what you should invest in real estate,

Noah:
You can have your cake and eat it too, is what you’re saying down the line. We eventually turn that equity into cash flowing properties. So I think we’re speaking the same language right here anyway.

Ashley:
Yeah, and I think that’s a great strategy to pivot. I think as rookie investors analyzing deals, look for that little bit of cash cashflow instead of saying, you know what? I don’t mind putting a hundred dollars, $200 into the property or breaking even because you just don’t know. And it just gives you that extra little sense of security and there are deals out there where you can find that extra little bit of cashflow for sure out there, even with putting no money into the deal. And if you don’t care that much about cash on cash return and you want to put a lot of capital in upfront, but your mortgage payment is a lot lower and you have less risk that way than you are going to get more cash flow because you’re getting more of your money back that you actually put into the property too. So that’s kind of a way to stay a little adverse, not to over-leverage yourself and still have that cashflow coming in, but just make sure you’re also calculating the cash on cash return and it’s not like you’re just getting 1% cash at cash return back after just dumped a hundred thousand dollars into a property.

Noah:
Absolutely, and this goes without saying to rookie investors, but don’t anticipate that your first couple of properties are going to replace your W2 income, have the mindset that this is going to take 30 years until your loan is paid off. That cashflow can be great to help you out in immediate concerns. Like Ashley said, if something goes wonky in your career and now you’re stuck without a job, it’s great to have that cashflow to supplement your life for the short term. Do not have that be your long-term outlook until you’ve reached a position where I can comfortably walk away and have this portfolio supplement my life. So I’m sure that goes without saying, but just a rookie warning sign of somebody who thought they were going to be a millionaire after owning properties for 24 months.

Ashley:
And I mean there are definitely people who do it, but we don’t hear down the road how it’s going. But I think that’s a great disclaimer as to you should look at this as whatever cashflow you make on this as bonus money and investment. So for example, if you have a 401k at work and you make returns on that money, you’re not saying, Hey, I’m pulling that money out, woo, I’m going to spend it. That’s just reinvested, reinvested, reinvested back into your 401k and that really is the best way. And then before you know it really starts to build up. But I completely agree, if you go in with wanting to completely quit your job, it is going to get frustrating and there’s nothing better than having multiple income streams coming in. So if you have your rental property income, maybe property manage those, you have partners and you charge a property management fee, maybe you make YouTube videos and you YouTube income coming in, all these different, you have your W2 income, maybe you got a landscaping company, there is nothing that’s going to build wealth faster than having multiple income streams because when one business is hurting or one income stream is hurting, you have the other ones to support that and that is going to be such a better tool for building wealth than just relying on one income stream of rental properties.
But another disclaimer makes you build that foundation first, then you go and you kind of pivot off. Don’t try and build out all these things at once. It’ll be overwhelming and you just won’t do a good job at each of them because you’re trying to do too many at once. Start with one

Noah:
Spoken like a true queen of finances where asset allocation and diversifying your assets is only going to benefit you down the road. I think, like you said, Ashley, this is a really amazing conversation to have for a rookie investor because you want to think from the exit position, where do I want to get to and how do I get there working back from let’s say 10 years to year 9, 8, 7, 6 to today, what am I going to do to take action and what strategy am I going to take to get there?

Ashley:
Noah, we have to take a quick break here, but I just want to say I’m really impressed with ourselves. We debated more like the vice president debate than the actual president that debated it here, comparing the two. So we’re going to take a quick break and when we come back we’re going to go into some more rookie reply questions such as how much capital did we each have to invest in our first property?

Noah:
Welcome back. Well, Ashley, I think we have another cool question here that we found from the forums about how much capital you need to get your first investment.

Ashley:
Yeah, so this one we pulled, it says, what would you say is the starting capital needed to sustainably invest in real estate? I feel like that’s the first thing I need to know in my planning. What was your experience with this? Is it wise to use loans to start? Please let this newbie know as much as you think is important. Okay, so let’s start off with I think the first thing. Let’s answer how much capital we each had to start investing in real estate and then tell why that was a good idea or a bad idea.

Noah:
So for my first property I put 10% down. This was a property that I closed at 260,000, so I want to say cash to close, including the down payment of 26,000. I want to say it was all in around $35,000. That’s how much I put just to the table to closing with my reserves and everything else saved up. I had about $50,000 before I really started to consider investing into real estate. So I know 10% is higher than what some people look at for a three and a half, 5% or if you’re VA 0% down to really leverage, but I went a little bit more conservatively. I still pay private mortgage insurance, which takes a little bit of your return away, but 10% at a $260,000 property. I think for me to feel safe was that $50,000 amount to have reserves upfront. But Ashley, what about you? How much did you have saved for your first property?

Ashley:
Probably like $5,000, which is not a good idea. I had very little money. I had just gotten married, I was expecting a baby and basically all her money had gone to personal expenses in life and there wasn’t a lot of savings left, and so I partnered with somebody who had about $80,000 in his savings account, and that’s what we actually used to make the cash purchase of the property. And then the money that I had saved was used for some of the repairs. We put a split unit in and replaced the electrical panel and then a couple other things like that, but it was definitely not the best to do that, I would say is starting out that small, but that was something I knew going in was that I needed a partner for that security because I did not have the financial security to go in and purchase a property and know that I could cover the expenses for it every month or if there was a big expense that came up or a tenant stopped paying rent and I had to cover the mortgage.

Noah:
That’s amazing to hear that from day one that you were able to basically say not I can’t do this. How can I do this with what I have right now? And I think that’s what a lot of rookie investors are asking with today’s prices, with today’s interest rates is how can I actually do it? Another part of this question that was interesting to me was is it smart to use loans? And I think this is just hearing from your story and my story, we’re going to have a little bit difference here. It sounds like, and correct me if I’m wrong, but you guys purchased your property as partners with no loan. Is that correct?

Ashley:
Yes. And I will tell you that that was because we didn’t know any better. We did not know you could go to the bank and get a loan. We thought you had to buy in cash since we weren’t living there and it wasn’t a primary, so we just didn’t know any better,

Noah:
Then we may have the same opinion. We may not have any debate here, but I am all in favor of leveraging your money as far as it goes with loans. And I say as far as it goes, meaning you have that safety reserve, your numbers make sense that you’re either going to break even maybe cashflow a little bit negatively. Like we talked about how if you have a great equity position, it could make sense or you’re going to cashflow and have your cake and eat it too. I think with this unique scenario that you have to put a three and a half 5% on multifamilies now, it can really benefit you massively, but it can also really put you in a negative spot right out the gate. So I don’t want people to get confused when I’m saying leverage as far as you can leverage as far as you can in a very smart and very risk adverse way, and that’s what I did at 10%. It sounds like Ashley, you would agree that’s something you would’ve done probably for your first property, try to leverage as far as possible, and that’s what I would give advice to a rookie here, but you need to really make sure you’re not putting yourself underwater and basically paying a mortgage just to have a rental property.

Ashley:
And we actually did make a mortgage note payable to my partner, so our LLC for that property did pay him every month. So it was like we had a mortgage anyways, but yes, we would’ve rather have used his capital that he had for several down payments on properties. And when we went to go buy our third, we actually did go and refinance the first two to go and buy our third property. And that’s where we really were starting to get some more momentum is like, okay, great, we don’t have to actually save all this cash that we can go ahead and use debt to purchase the properties. But no, I wanted to ask you something about your PMI. So for anyone that doesn’t know if most often if you put down less than 20% down, you are going to get charged private mortgage insurance by the bank, and this just gives the bank some security that you’re not going to default and just in case there’s not really any equity for them to go and sell the property on your behalf, they have this insurance in place. Noah, what was the dollar amount of that per month and how long do you think until you’ll be able to get rid of it from the day you purchased it, how long until you can get rid of it?

Noah:
Great questions, and this is something I’m sure a lot of rookies probably have in the back of their mind when they are talking to their lender or just even considering putting less than 20% down the PMI, typically what I hear is going to be half a percent of the loan value is what you’re going to pay on a monthly. For my situation, I put 10% down. Like I said, I’m only paying $98 a month in PMI, so I actually am paying about a hundred dollars a month. So to me, $1,200 a year isn’t the biggest deal. It is a tax deductible payment as well. So I always do kind of look at that with a grain of salt that this is, as much as mortgage insurance is not the most fun thing to pay, it is something you potentially get money back for at the end of the year.
So it’s not the end of the world. Another question that you asked Ashley was when do I expect to have this PMI drop off? I think you’ve said earlier in our conversation that if you put 20% down, you don’t have to worry about PMI. That’s exactly the target that I’m looking to hit. I actually think it’s a little bit higher in my mortgage. You have to get to 22 or 24%. So they actually made it a little bit more strict to incentivize the, well incentivize me the borrower to be paying my mortgage on time and paying a little addition on top of it. But if I currently right now got an appraisal today, if I got A-B-P-O-A broker’s price opinion, send somebody out there today, I guarantee you that I would meet that threshold of 22% loan to value ratio right now, or excuse me, 78% loan to value ratio.
And I’m sure today I could drop the PMI if I want to. Now I’ve kind of dragged my feet on it. There’s a bit of a cost analysis to doing an appraisal that’s about a thousand dollars. So I would get that money back, I’m sure immediately it’s just I need to take action and actually get this thing off of my loan. But it’s not a huge scary number. At least in the market that I was in for starting out could vary on your lender of course, but I wouldn’t let that number completely deter you away from investing until you’ve actually heard what that number is.

Ashley:
Yeah. And that right there just shows that down the road there is that potential for that added income along with increasing rents too over time that your mortgage payment will actually decrease by a hundred dollars a month, but you could have increased rental prices by then too. So there are added expenses and closing costs, all this stuff that comes with obtaining debt and leverage, but it’s not always a negative thing because you could either make $0 not doing anything or you could make some money and it’s not the perfect most perfect deal, but at least you are getting something. You’re getting started, you’re taking action, you have that investment. So I don’t want leverage to scare anyone or debt because it definitely is a way, and even though the interest rate looks awful, you don’t want to pay it. If that means you can make the deal work, even if it’s not the golden goose deal, you could have got in 2021 with a 1.99% interest rate that it’s still a deal.
It’s still a deal. Don’t get caught up in spending your time spending your money on the most perfect deal. It may come, but it may not come. So make sure that you’re not wasting your time trying to maximize your value. We see all the times the questions like I have $50,000 in capital, should I use it as a down payment? Should I purchase a house and a property with a partner? What is my best use of this 50,000? You can write out the numbers for each one, but you might get stuck in analysis paralysis and you just need to take action on one. Having options is so much better than somebody who only has one path to take. So once again, don’t get too caught up.

Noah:
And I think just think about it from the lender’s shoes as well. If Ashley or Noah comes to the bank and says, I want to borrow 95% loan to value ratio, that sounds extremely risky to them, I’m sure they’re going to put up 95% of a loan to say, Hey Noah, hey Ashley, I trust what you’re about to do. You’re only bringing 5% in. So it’s almost like, yeah, you are handcuffed for 30 years, but somebody’s willing to give you, let’s say $400,000 to go buy a property that you don’t have $400,000 laying around. So to me, what’s the PMI? Like you said, you get cashflow down the road, it improves your position and during that time you’re actually increasing your equity position. So it is that conversation again, can I have my cake and can I eat it too with cashflow and equity?

Ashley:
So the last kind of piece of this question is how much do you suggest that she would actually need to get started? She wants to start planning what is the starting capital she should have before she even starts to make offers on property.

Noah:
So it’s going to be really dependent on what your closing price is. Of course, I think with my example, it still could be really risky in people’s eyes that 10% down still having, well, let’s say you look at your reserves as basically your rental income. The property I was closing on was $2,000 a month of rent. I had $15,000 of reserves, still very, very conservative to have over a year of reserves, but in my two and a half years of investing, I’ve had $6,000 expense on a furnace. I’ve had a $9,000 bill on an eviction this year. That money’s already gone just off two really massive, massive expenses right out the gate. So I would say probably three years ago, I would never be saying this and say three months of reserves is going to be appropriate for you. In my opinion, save up a whole year, save up six months of reserves to really give yourself that safety net because as a rookie, you’re going to make mistakes. You’re going to have these problems come up that you’re inevitably going to pay a bigger premium than what you’re going to pay 10 years down the line because you didn’t have the right resource or the right contractor or the right idea of how to go about a project. So I think that the number is going to be really dependent on your purchase price, but have at least six months of reserves on top of your mortgage payments that’s going to cover you for at least six months.

Ashley:
Yeah, I think looking at your market is a great starting point. And what’s the range of costs? So if you’re looking at duplexes in Buffalo, New York, maybe you’re looking in between 250,000 to $300,000 and you want to put 10% down, what’s 10% of that? You’re going to at least need that. Then you’re going to have closing costs. So what’s common for closing costs? And you can actually go to a loan officer and you can tell them, I want to buy a $300,000 property and they will give you a loan disclosure, an estimate that will tell you here’s what we estimate the fees to be and what the cash will be to close on a property for that amount in this market. And that will kind of give you, okay, I know I need at least this amount. Then you’re going to go into the reserves.
I highly agree with Noah doing six to 12 months, at least six months, and I look at as to if you are getting a little bit of cashflow, leaving that cashflow and just building up your account so that maybe you don’t even have to tap into your reserves, that if there’s an expense that comes up, you can tap into your cashflow and just leave your reserves sitting in a four and a half percent savings account and making you some money that way. And I say that with a grain of salt because I just got the notice that my account was decreasing from 5% to four and a half percent now with the recent fed decrease. So one time everybody’s all happy that their decreasing interest rates, but now my savings account rate has gone down. We’re going to take a quick break. Okay. Welcome back.

Noah:
We love talking about real estate. We love answering questions like this with all of you, and we’d love if you could hit the follow button on the podcast or wherever you are listening. So in our next question, we’re going to discuss how to transition from your first house hack into your next property.

Ashley:
So for this question right here, it says, I have been a huge fan of the BiggerPockets podcast for years now, but I am just now creating an account on this site. Well, welcome to being a member of the BiggerPockets community. I am currently house hacking my town home in Silver Springs and have been doing this so far for just short of several years. I’m looking to move as early as November of this year to get a second property closer to dc. I live in a town home with five bedrooms and am currently renting out four of the rooms. So he’s house hacking and I live in the master suite. It is worth noting that two of those bedrooms are in the basement, which have their own entrance and an independent unit. Today I have been self-managing my property and has been pretty straightforward since I was living there.
However, with me moving out, I will not be there all the time. And this is make me wonder how I can manage this property with five tenants. I would like to continue to self-manage this property, but I am open to a management company as of now. I’m looking for any advice on what I should be doing to prepare for this transition and how people have successfully managed room sharing properties. Any advice would be appreciated. Honestly. I think it would be easier not living in the apartment. You really have to try to keep the visa. You’re living with these people. So Noah, what do you think about this? Have you done this with your strategy is rent by the room?

Noah:
Yeah, so when I lived in my properties, they were rent by room. They were in HOA communities and when I moved out, they had to be full-time leases. So I was in a kind of unique situation here where I have this strategy now I need to kind of transition out of this strategy, keep it into my next property, but while I move out of property, one kind of switch around what I was doing with the leasing. So it sounds like for this property, there’s two ways that I would go about this and you can do full-time property manager. I don’t know how far he’s moving away from the property, but I do like to have just starting with the easiest first and to me that would be converting the property he’s moving out of into a duplex and using a full-time property manager. He says here that he has a separate entrance to the basement, so you can split it into two units, basically have a full-time property manager manage those as traditional long-term leases and separate units.
So not everybody that’s in the property is on their own lease can have all these crazy occupancy and turnover during the year. And you have that stability when you move out because moving from one property to the next, what you’re looking for is stability. You don’t want to go into property number two, completely over leveraged and mismanaging property number A. So for me, look for property manager and split it into a duplex or if you want to do the rent by the room situation. Have you made a relationship with any of the tenants that’s more substantial than the others? This is something I can speak on from my experience where I was moving out, one of the tenants that I was living with in my house hack, we had a really, really great relationship. I actually decreased his rent, put all three tenants on one lease.
He was responsible for a little bit less as he was basically referring new tenants coming into the property. As I was moving out, I like to call him my tenant property manager because he saved me a crap load of money. He saved me a lot of headache during my time as I was moving into the next property and I was focusing on leasing the next property I was moving into to have him basically have no days of vacancy for me and just decrease the rental rate just ever so slightly to keep him satisfied. It was a home run, really a home run right off the bat. So like I said, didn’t have any days of vacancy. I didn’t have to really worry about anything really going wrong for the next couple months as I had two really solidified leases in my properties. So that’s a really unique example, I’m sure. But if he had any great relationships with the tenants there, can you keep them satisfied with a very slight rental decrease while moving in more people to increase your bottom line basically?

Ashley:
That’s a great point. I did that with a resident to mow the lawn. We decreased his rental rate a little bit and it would’ve cost probably four times to have somebody actually come and mow the property. It was a triplex then if we had him do it. And sometimes those resources are great. You do want to be very careful though and make sure that there’s an addendum to the lease or something that states what their specific duties are and that the rent will be increased back to the normal rate if those duties aren’t fulfilled or something like that to protect yourself and to protect them. So when you did this with that property manager or that tenant in place to act as your tenant manager, what were some of the things you didn’t have them do? Were they collecting rent or anything like that?

Noah:
No, they weren’t collecting rent. I was self-managing the property from afar. What I really relied on them heavy was for referrals for the application process. So basically I did everything as the property manager when it came to tenant screening, when it came to any tenant disputes, maintenance concerns, things like that. But to give you a little bit more of the situation, he was a manager at Amazon, actually referred me to two more managers at Amazon that were just looking for another place to live, get them all on one lease, decrease his rent because of basically a finder’s fee. And he was extremely responsive due to our relationship. Whenever dishwasher concern, fridge concern, anything with a neighbor that would potentially come up, Hey, they missed trash this week. I’m very happy to get that text from somebody that I can call a friend instead of a tenant that I don’t know. And I do get mixing business with. Friendship can be a little bit froggy here and there, but the relationship we had was very transactional and was, I’m going to scratch your back a little bit if you can scratch mine and help me find some tenants to move in. So it was a really cohesive relationship that we had throughout our house hacking tenancy. And then as I was turning into his full-time property manager,

Ashley:
Noah, what I’m getting from this is that somebody who’s in this situation needs to look and figure out, okay, here’s the reasons or here’s the things I need somebody to do in order for me not to hire a third party property management company. Here’s why I’m having reservations of self-managing. And for you it was finding the tenants and maybe showing the apartments, things like that. You couldn’t be there because you’re trying to get into your other place and you found somebody that could do that. And even though it seems like such a small role of all of the property management duties, you had systems set up the amazing software that’s out there to manage rentals, that you could handle it all. It was just those two little things that you needed someone like the boots on the ground. So I think that would be my suggestion is think about what are the hesitations or the reservations you have when renting out room by the room when you’re leaving the property, why do you think it would be difficult for you to manage from a far?
And then that’s maybe where you’re finding, okay, I need to hire this person to do this specific role. And it doesn’t even have to be a tenant. Maybe you just need a handyman that go over there and run over there. If there is some kind of issue that needs to be taken care of, then maybe it’s not a service call for a full on plumber to come. Different things like that. So yeah, I think that’s a great idea, Noah. Okay. Well thank you guys so much for joining us on this week’s Ricky reply. And Noah, thanks for being such an awesome co-host and providing new and insightful information to our rookie listeners.

Noah:
Thank you for having me, Ashley. It’s always an honor to be here with you.

Ashley:
If you have a question and you want to find out some more information about being a rookie real estate investor hat on over to biggerpockets.com/forums. And if you haven’t already, make sure you join BP and sign up as a member. Okay, well thank you so much for listening and we’ll see you guys next time. I’m Ashley and he’s Noah. We’ll see you on the next Rookie podcast.