Rookie Reply: Finding & Financing Bigger Real Estate Deals

Ashley:
This is Real Estate Rookie, episode 128. We are here to talk to you guys about real estate investing and how to get started as a rookie investor, whether you are brand new or have your first couple deals, Tony, and I, my wonderful co-host, want to help you break down what strategy, how to invest, and what to do to get started. Tony, what is going on today?

Tony:
Ashley Kehr, what’s going on? What a wonderful introduction for all of the first time listeners here to the Real Estate Rookie podcast. I love how you broke that down. But no, today’s a good day. It’s a beautiful morning here in SoCal. It’s actually been raining the past four days, which is rare for us and the sun finally broke. So we got a beautiful day coming out. But yeah, what’s new in your neck of the woods?

Ashley:
I think we need to set a ground rule, first of all, that starting now until spring, we can’t talk about weather because it’s just going to make me depressed talking about your weather compared to my snowy Buffalo weather every day.

Tony:
It’s literally going to be 96 and sunny all day today. And we’re in the thick of fall right now.

Ashley:
I actually do winter though. I do that. We have all different seasons. I went and I got all my snowboard gear, so I am ready for the snow to fall this year.

Tony:
If I ever moved to Buffalo, I would be on house arrest from fall until springtime. I can’t imagine having to bundle up to go grocery shopping or shovel in snow to get out of your house. So I would just give up, I’d stay home all season.

Ashley:
Well, they have Instacart so you can get your groceries delivered and then you just marry a husband who does the snow thing for you.

Tony:
There you go. That was always my backup plan is marry the right husband. So.

Ashley:
Yeah. Yeah. Yeah. But you could also outsource snow plowing, but I love those snowy days where you stay inside, you don’t have to go anywhere. Everything shuts down. Okay. So on with the episode, enough with the weather. Today, Tony and I started talking before we actually started recording, and updating each other on the deals that we have going on. And there’s a bunch of useful information, a bunch of struggles we’re going through. So we actually thought we could turn it into an episode for you guys and you guys can see me, listen to me, have a mental breakdown.

Tony:
So Ash, maybe before we jump into what deals we’re working on, it might be helpful to give the listeners an idea of what our bigger goals are that are driving some of these deals that we’re looking at. So why don’t you go first? What’s the current big goal you’ve got for yourself? And then I’ll share mine afterwards.

Ashley:
Okay. So my big focus right now are campgrounds, RV parks. So not mobile home parks, but campgrounds. And then to build a little capital to purchase these properties, I am doing cabins, I guess, per se. So I’m buying small pieces of land, small parcels, three to 10 acres. And I know that may not sound small to you, but for a cabin out here in the country, that is a small lot. And then we are going to rehab them, and then flip some of them to people who live in the city that want to have that place to get away. Our focus is going to be near state land so that you can go and hunt, you can hike, you can do whatever on that land. And then you have your little cabin to go back to. Also, we have a lot of little ski resorts around near us too. So that are my two main focuses right now.

Tony:
Gotcha. Yeah. And what amazing transition. You and I talked earlier in the year about how both of us were a little uncertain of what the future looked like. And just recently, I feel like we both figured out what that looks at least to a lesser extent. So yeah, my goals as we move forward are continuing in the vacation rental space. We’re going to continue to buy single family residences and use those as short term rentals, but we’ll probably slow down our acquisition a bit to maybe four. I’m saying slow down, maybe four to six a year, probably what we’re we’re going to try and do at this point.
But the bigger goal for us is to start moving into the larger commercial space. So we want to start acquiring boutique motels and hotels. So buying up some old mom and pop hotels, renovating them, making them trendy, new, 2021, 2022 standards and still leverage Airbnb and Vrbo as platforms to drive a lot of the guests that stay there. So definitely a graduation from where we’ve been the past year and a half or so, but I’m excited to dive in and make it happen.

Ashley:
Awesome. So tell us about what deals you have going on right now, what you’re looking at.

Tony:
Yeah, so we’ve got two properties we closed on last week. One was a house in Joshua Tree. One was a cabin in the Smoky Mountains. We actually just closed today on another cabin in the Smoky Mountains, and that we’ve got two more single family houses in Joshua Tree that we’ll be closing on at the end of the month. And all those will be short-term rentals in both of those markets, but we’re also actively underwriting deals in the commercial motel space. So there’s an asset in Utah near Zion National Park that we’re looking at. There’s an asset in the Forgotten Coast in Florida, which is another heavy vacation rental market that we’re looking at.
And then there’s one that I’m actually really, really excited about that’s in Blue Ridge, it’s got multiple cabins on there, but it also has a wedding venue, which is way out of all our ballpark. We’ve never done anything like that before, but if we can make the numbers work, I think that one might be the one I’m most excited about, because it comes with five cabins, a private lake, this really cool wedding venue. And then I think it sits on like 20 acres, which gives us more space to develop as well. So we’ll see if we can make any of those deals actually pencil out.

Ashley:
That’s so exciting. And that sounds similar to one deal. I have that I’m trying to work on now too, but the wedding venue space is so interesting to me. I the model of they pay just for the venue. And you’re bringing in your own caterers. You’re bringing in your own bartenders that have the liquor license. So all they’re paying is for a flat fee and then maybe a wedding coordinator that helps them just figure out their setup and where everybody has to go when the vendors do arrive. And it takes a lot of having to manage the event and having a ton of employees, such as running the catering company in house too.

Tony:
You took the words out of my mouth, Ashley. So we called the listing broker who was actually also the owner. So he’s a commercial broker, but he owned this property himself. And he said he and his wife were actually providing all of the services. So they were not just providing the venue, but they were acting as the event planner coordinator as well. And so they were just burned out from that whole model. So when Sarah and I, my wife, spoke about it, our plan was exactly what you said, where “We just give you the space. And then from there you figure everything else out.” Because we don’t want to be in the… I don’t want angry brides calling me you talking about, “Why can’t I figure this out?” So our goal, if we do move forward with that, would be just to run out the space and let them figure everything else out.

Ashley:
Yeah, which is real estate investing because you’re using real estate and you’re collecting rent from it. You’re just renting out by the day. So my business partner, Joe, he got married at a wedding venue like that, where you brought in your own caterer, you brought in your own flowers, everything was brought in. You just rented the space. And they had cabins too, where your family members or whoever could rent those cabins out from them too. So that seems it would be kind of similar to your setup, but they even had to get their own insurance too. So that was a low cost for the property owners for them because they had every person that came in bring their own liability insurance on top of theirs too. So it really kept their overhead down.

Tony:
Yeah. It seems it could be a promising deal. So that’s one that we’re exploring. The other two are actual motels that we’re pretty excited about. But I guess part of the struggle that I’m facing right now is the financing portion of taking down some of these deals. When you’re looking at some of these older assets that are poorly run, actually all three of these haven’t really been operated much in the last 12 months. The owners have just kind of, I don’t know if it was because of COVID or for whatever reason, but they just shut the doors and said, “We’re going to partially operate,” or “We’re not going to fully operate.” So typically, when you go to get a commercial loan on an asset like that, a bank’s going to want to see the previous 12 months, your income, your expenses, what the net operating income was and something like that.
And if you don’t have that, at least from the few banks that I’ve spoken with already, it becomes a big challenge to lend on something that. So I got to dig my feet in, do a little bit more homework to figure out the financing portion of it. I feel fairly confident that these are ranging between $2 million, I think, to like $5 million bucks. So could we raise the entire money to go out and buy that? I think so, but my thought process is bank debt is much cheaper than raising money from other investors, because other investors are going to want a pretty good return on their money. Whereas a bank you can get 4%, 5%, 6%, 7% depending on what loan you’re getting on the commercial side. So I just got to dig my feet in and figure out how we’re going to finance these if we do decide to move forward with them.

Ashley:
Yeah. That’s the same issue I’m running into too. And I’m putting myself in a position where it’s like, “Okay, put in the offer and then I’ll figure it out because I have to figure it out. I have no excuse.” But I know I have these different options, but it’s the same, this one deal where the property hasn’t been operating for a year and a half. So there’s no income. It was foreclosed on. So there’s no financial records at all because the owner is not giving them up. And anything else he had has been seized by the IRS that was actually on the property. So yeah, that does make it difficult.

Tony:
Yeah. Let’s talk about your deals, Ash. Then we can go back and forth because I’m sure there are some similar challenges between both of ours. So give us the update. What are some of the deals you’re looking at and what are some of the challenges around them?

Ashley:
So the first deal that I have under a contract, I’ve been having under a contract for a year and a half now. And I feel so bad-

Tony:
Literally, since I met you, you’ve been talking about this same property.

Ashley:
It’s the one property my husband wants to buy, and it’s another farm and it’s been a year and a half. The guy was going to go into foreclosure. So we’ve been working with him and the bank to try and buy it. We tried to do a short sale where we’ve negotiate with the bank and purchase it. But we wanted to purchase it for less than what was owed to the bank and owed for back taxes. So we couldn’t do a short sale and the bank wasn’t willing to work with us. And then we decided to do a subject 2, where we are actually going to take over his mortgage payments and the property will be deeded to us. So now, there’s just been a couple issues that come up. So the landowner, his ex-wife, we needed to get her off of the deed while she started to file bankruptcy.
So we had to wait for that to be all finalized before we could get at her off of the deed. And then since that time, more back taxes have accumulated. So we actually just made a payment the other day to pay off the back taxes, get caught up on that. And now, we are just waiting for the final numbers as to what needs to be paid to the bank to get the mortgage caught up, what our monthly payment will be. And then hopefully, by the end of the year, we will own this property.
And we will probably hold on to his mortgage for at least probably a year. And then we’ll actually go and refinance it. There are two single family houses on the property and one mobile home that are collecting rent. So I know one of the single family houses needs to have some mold remediation and different things done and then we can go refinance. But yeah. So that’s the one deal.

Tony:
Yeah. Well, let’s break something down, because you mentioned that you were purchasing this subject 2, that you were doing, this is a sub 2 deal. Break that down for the rookies. What does that mean?

Ashley:
Yeah. So that’s when you take over the mortgage payments for the landowner. So you can quick claim deed the property into your name, but the mortgage, they never switched the mortgage out of their name or pay off their mortgage. You just basically could log into their login for their bank account and or their mortgage, and you make the payments from your bank account.
So some of the things that could go wrong with this is that the lender could call the mortgage due because the deed has transferred. It’s no longer in that person’s name. The rumors out there are that as long as in mortgage payment is being made, that the bank isn’t going to notice. One thing you can also do is make sure that the insurance policy has the mortgage holder’s name on it and you could still keep their name on the deed.
So that’s what our attorney is doing, which I’m not an attorney, so I can’t give legal advice, but my attorney is keeping the landowner’s name on the deed and then having him sign a separate deed that when we do go to refinance him out, it will put us solely onto that deed. So there’s different ways to do it. Definitely consult an attorney to help you with this paperwork.
If you go into the Real Estate Rookie Facebook group, Kevin Christensen, you will see his name pop up, because he is one of our super active, awesome members. He does a lot of subject 2 deals and that’s how I learned. And then also, Bigger Pockets is having an episode. It might have already aired right around the time this one will air with Pace Morby. And he’s going to talk all about subject 2. So they are, will definitely be a lot better resource if you guys are interested in this than me.

Tony:
Gotcha. And so there is light at the end of the tunnel though, Ash, that this deal will finally close. It’s almost a race, at this point, to see if this deal will close first or if I’ll be able to sell my house in Shreveport, because they’re both taken about the same amount of time.

Ashley:
Right. Right. Yeah. That’s so funny. Okay. So then my next deal, I just got under contract last week. It’s three acres and it’s a little cabin and just need some rehab, some love into it. So I am going to fix that up and then flip it. My dad is really trying to convince me to keep it as a short term rental because it is right near a go-kart track. And he is gun-ho on getting my boys racing this year. And he’s like, “We could just stay there on the weekend,” but then I’m not going to have any short to rental income if he’s there. But yeah. So that’s my newest one. And then tomorrow, I’m actually going to look at one on the same road that’s five acres on a small little cabin too. So I’m excited about those. Let’s see. What else? Oh, and then my most favorite property.
How could I forget about this? I have 30 acres under contract. It has three ponds and two cabins, and it’s super close to my house. So I’m actually going to turn one of the cabins into my office. And I got in under contract about a month ago. All cash so we were expecting a 30 day close. I’ve had a contractor there. I have everything ready to start the rehab as soon as we close. Well, I just found out the other day, two days ago that the property has a right of first refusal, which I did know. As soon as they accepted my offer, they did tell me that. And then they said, “Don’t send your deposit in, let us give this person time to perform on the right of first refusal.” So a right of first refusal is a deed that states that somebody has the option to purchase that property at the price that somebody else is willing to pay.
So for example, if I have a property, and maybe Tony sold it to me, and this is what happened in this situation. Tony sells it to me and he says, “But I’ll sell it to you at this price. But I want write a first refusal if you ever decide to sell it again.” So then Tony’s name would go into the deed saying that he is right of first refusal upon sale of the property. So then I go out and I get Joe who says, “Ashley, I will pay you $200,000 for this property.” I have to then go to Tony and say, “I have an offer to $200,000. Can you perform on this?” And then usually, a right of first refusal, the contract will have stipulations in it. You have 48 hours or you have a certain amount of time to actually perform and come up with the money to match that person’s offer or they get to go ahead and I would get to accept Joe’s offer.
So in this case, the person did not perform. So I sent in my deposit, we were moving forward, and then they just found out that the person who had the right of first refusal is actually suing them. So now, it is going to litigation and my contract is on hold. So that really stinks. I was really excited about this property and really wanted to get it closed before winter to do a couple things and get my office going over the winter. But it doesn’t look that will happen. We have no idea how long litigation will take on the property.

Tony:
So are you rescinding your offer or are you just going to wait it out?

Ashley:
No, I’m keeping it. Yeah, I’m going to wait it out. I put in a $10,000 deposit. So I am asking that they return $9,000 and leave $1,000 there just because we don’t know how long this could take. And $9,000, I can put out down a lot of other deposits.

Tony:
Go do some other stuff worth, right?

Ashley:
Yeah. Yeah. And plus, they did tell me that it was no longer an issue. The right of first refusal was gone. The lady didn’t perform, it was a non-issue. So the fact that they had misled me, and I guess non-intentionally, but so we’ll see if I get some of that back. But I’m going to hold on. I still really want the property.

Tony:
Man. Crazy, crazy New York, huh? So now, you got two properties that are like, “Oh, who?” I guess it’ll be a three way race now between your two properties and my Shreveport house. So.

Ashley:
I know hopefully nothing comes up with this little cabin property. And then my last offer, hopefully, will get accepted today or tomorrow. There’s two offers, it’s for a large campground. It hasn’t been active for a year and a half. It was a foreclosure. So I’ve been working with the bank. And this property is amazing. And it has a 20 acre pond. 700 acres, has 16 brand new cabins, 80 RV hookups. So I’ve been working on this with a partner, gone to the property twice. We started out with a very low offer, half of what the bank was actually asking. And then we found out all this information on the property. I actually found out who the maintenance guy was on that property for 37 years. And I paid him $100, and he met me, and took me around the property for three hours.
I mean, he could point at a building and tell you exactly all the mechanics of it, the square footage of it, when it was built, what it needs done to it. And so I was actually, after that, I was actually able to up my offer close to asking. And so now, I’m just waiting it out to see, but some limitations I’ve had with that is with this offer, I’m going to have to raise money or get partners on it. And the bank has stated that they want at least 10% down. And I don’t have enough of my own money to put that down right away. So I’m hoping that’s not the only limitation, that’s the reason they say no to my offer, but we will see.

Tony:
Can we dig into that? Because you’re saying that your bank is giving you 90% loan to value on an asset.

Ashley:
No, the bank that owns it right now. It’s a foreclosure.

Tony:
So there will willing to sell it at 90% of what the other guy owes? Or they’re willing to let you assume his mortgage?

Ashley:
No, they want my earnest money to be 10% of the purchase price.

Tony:
Oh. Oh, gotcha. Gotcha. Gotcha. Okay. I missed the earnest money. Okay. I was going to say, “How the heck are you?” Okay. So, but let’s talk about the financing portion then, because you and I are both in similar situations where we’re looking at some of these assets that haven’t been active. What’s your plan to finance this property that’s been sitting empty for a year and a half?

Ashley:
Yeah. So there’s no bank financing available. I am talking with an SBA lender though. And he thinks there may be an option that after I close, to refinance out of a private investor or something like that, or money partners to do an SBA loan, that it might work. So I am working with him on that to see if there’s some thing we can work at out. And then I also have thought about taking on equity partners, giving them equity for money they put into the deal.
And then I also was recently introduced to crowdfunding and looking at getting a ton of partners, I guess. And so I’m really digging into that more. And I think we should do an episode on it, because I’m not too clear yet as to how exactly it works. But I do think that this is too small of a deal to do a full syndication on, that it’s just not worth the time and money it costs to start and do a syndication. And then my last option is to private money, have someone be a private money lender on the deal, which actually, would be my most favorite one because then I don’t have to take on any partners and I’d have full control.

Tony:
Yeah. So we’re in a very similar boat. There’s a small motel here in southern California in the lake city that I’m really infatuated with. But same thing, it’s been not operated it very well, they don’t have good financial, so it’s not super bankable. And I’m hoping, or I’m leaning towards potentially just trying to raise private money to cover the entire purchase as well. So I don’t know. If that SBA thing works out for you, I guess, let me know. And I’ll follows suit and see what you did. Well, what other challenges, Ash, are you seeing as you try and take down some of these bigger deals?

Ashley:
A limited mindset, like thinking to myself-

Tony:
Ooh, let’s talk about that.

Ashley:
Yeah. Thinking to myself like, “Wow, okay. Well, if this deal doesn’t go through, I won’t have a lot of work to do, so that’s a positive.” But I don’t want that to hold me back. I don’t want that temptation of, “Well, it’d be easier if I don’t get this deal,” to be the reason I don’t work as hard as I can to try to get the deal. But the biggest thing will be so many new things for me is raising money. I’ve never had to do that. I’ve been very fortunate to have very low cost deals, I guess, where it’s not a huge amount of money where I’ve been able to use my line of credits or private money from a few people. So that will definitely be a challenge for me to overcome, but I think that I can do it. I know that I can do it. And then just a whole new asset class for me. Campgrounds. But I worked really hard on my business plan and putting my numbers together. And I have to say that I’m actually very confident and excited more than I am nervous about going into the deal.

Tony:
That’s awesome. And a lot of what you said, Ashley, are the same emotions I’m dealing with as well. I’ve never purchased anything in the millions of dollars before. So it’s a play in that ballpark, is I think just the price tag, you get a little bit of sticker shock. And same I think there’s always a bit of nervousness when you’re raising a lot of money from people and they’re trusting in you to sure that that asset performs the way that you told them that it would. So there’s always a little bit of fear around that as well.
But like you said, I think it’s a bit of a limiting belief. And as long as we are diligent, and I’d say, conservative, to an extent, in our underwriting, we should be able to knock it out the park. So I’m glad that we’re both moving to the same pace and that we’re going to go on this path together.

Ashley:
I know. Tony, we’re the best. The best real estate besties.

Tony:
Yeah. Either we’re going in the right direction or three months from now, we’ll both be fired from Bigger Pockets because we’ve made these really bad investments. And now there’s two new hosts on this show. So.

Ashley:
Well, you know what we’ll do with the last dollars that we have, we’ll blow it out of Vegas pool party together and go down together.

Tony:
There you go.

Ashley:
Well, thank you guys so much for listening to this week’s Rookie Reply. Make sure you guys send us a message on Instagram or in the Real Estate Rookie Facebook group and let us know what deals you guys are working on and what challenges you need. You guys can call and leave us a voicemail too at 1-8-8-5-ROOKIE. And we may play it on the show. We’d love to hear your questions, but also what are you struggling with and what do you need? What can we help you guys with? Because you guys definitely help us so much. Ever since I started talking about campgrounds, I cannot even tell you guys how much I appreciate all the deals you guys have been sending me and the resources. So thank you guys so much. I’m Ashley at Wealth From Rentals, and he’s Tony @TonyJRobinson on Instagram. And we’ll see you guys back on Wednesday.