The Top 10 Real Estate Rookie Questions Answered by Tony and Ashley

Ashley:
This is Real Estate Rookie, show number 44.

Tony:
It’s never too early to start talking to your kids about investing, like Ashley said. Your youngest son is three, that’s amazing, to make sure that it’s a very normal part of the conversation.

Ashley:
My name is Ashley Kehr, and I’m here today with my lovely co-host, Tony Robinson. We have a very special episode for you guys. It’s just going to be honest. You’re going to get all of us the whole episode, and we’re going to be answering questions from the Rookie Request Line. Thank you to everyone who sent in their voicemails. Tony and I got to listen to all of them, they get emailed directly to us, and we picked out 10 of them that we are going to answer. And we also get a special cameo from the show producer, Kevin today too.

Tony:
Yeah. I love these kinds of episodes because, Ashley, we do our best during the interviews to pull out some really good questions from the guests, but to actually hear all of the listeners’ questions and be able to dive into them deeply, I’m excited for that.

Ashley:
Yeah. Before we jump into the first question, I want you guys to know that you can call 1-888-5-ROOKIE, and call and leave us a voicemail at anytime. Tony will listen to it if you leave it at 1:00 AM or you leave it at 3:00 PM. So make sure to call me with your questions and we could play it on a future episode of the Real Estate Rookie Podcast.

Tony:
All right. Our first question today.

Sty Rafael:
Hello, good afternoon. My name is Sty Rafael. I’m actually a graduating senior in college. I live here in Laurel, Maryland. One of the questions that I have, during my real estate investing career, I wanted to know, how should I go about purchasing my first property? Whether I should purchase it through an LLC or purchase it under my individual name. And what are some good accounting software that I should use when it comes to understanding the costs for the renovation, the loan, and backend of things like that. Appreciate your advice. Thanks.

Tony:
Sty, I think for me, it’s really a personal decision on what your goals are. I know for me, especially for someone getting started, I like the simplicity of just keeping your loan in your own name. One, it’s easier because you don’t have to worry about setting up the LLC. Two, you’ll typically get better financing terms. When you do it through an LLC, a lot of times you’re getting commercial rates, which are shorter terms, higher interest rates. But when you do it in your own name, you get a nice 30-year fixed and you can take advantage of the really low interest rates that we’re seeing right now. For me, as a newbie, your first real estate investment, I say just do it in your own name.

Ashley:
Yeah. And you can put umbrella policy to protect you, give you that insurance, that liability protection. Just to bounce off of what Tony had said, is that it really depends on what your goal for the property is. Do you want that long-term, fixed rate, that really nice, sweet residential loan, or are you looking for something that maybe you even plan on refinancing down the road where you’re okay with a five-year fixed and doing that commercial? Also, what do your personal finances look like? Residential loans, they’re going to be looking at your credit score, what your income is. Do you have that W2 income?
Maybe if you’ve been self-employed, you don’t exactly have two years of tax returns, the commercial route would be better for you, and then you can go ahead and put it in an LLC anyways because they’re going to be looking at the property, what the value of the property is, what the numbers on the property are. So there are a lot of variables you have to look at for that, so I definitely recommend checking out what your goals are and what you can get approved for too with your financing. Because I think Tony would agree that really putting it in an LLC or your personal name comes down to the financing of the property.

Tony:
Yeah, absolutely. And you make a really good point about the refinancing portion, because I know you’ve always mentioned on the show, Ashley, that at one point you had like a 7% or a 9% interest loan or something like that, but you’re able to refinance it and it still made sense in the long run, right?

Ashley:
Yeah. Yeah, definitely. So there’s a lot of great options for financing depending whether you do the LLC or your individual name. I just highly recommend if you do your individual name, that you put an umbrella policy on that property.

Tony:
Ashley, elaborate on that a bit for guests who maybe aren’t familiar with umbrella policy.

Ashley:
Yeah. So what it is it’s an extension of your current homeowner’s policy. Maybe you have your primary residence, you have two automobiles, and you have your investment property, this umbrella policy would cover all of those and be an extension to the separate policies you have on there. So maybe your liability on your investment property is only 200,000 that they would cover if someone sued you, well, this umbrella policy can bring that limit up to a million dollars where they would pay that out, cover legal fees for if someone were to Sue you for that individual property.
And that just protects you from, if you didn’t have that umbrella policy, someone could possibly sue you and take your cars, take your primary residence, take everything you own. And that’s why a lot of people shy away from doing it in your personal name, is because they don’t want to get sued and have their personal assets taken away. Does that answer that?

Tony:
Yeah. That was like a crash course on insurance policies. And we talk about partnering all the time, and I think that’s why it’s super important because like I’m not interested in insurance policies and anything like that, but my partner, he handles all that for us, so he’s got all that set up. So yeah, that was good.

Ashley:
Yeah. Two years ago, I actually became a licensed insurance agent and I helped an investor start an insurance company and I wrote like my rental properties, his rental properties, but beyond that, I have no idea, I just work off referrals commission now. Do not ask me insurance questions. So let’s move on to our next voicemail.

Chu Young:
Hi, my name is Chu Young. I’m a rookie investor from New Jersey. And I just had a question on how to find a real estate agent. What kind of questions we could ask the real estate agent so that we can pick the right ones. Thank you very much.

Ashley:
This is a great question, one I tend to hear quite often is how to find a real estate agent. And just from the recommendations and what I’ve noticed from other investors that we’ve had on the podcast is that a lot of them call multiple realtors. Very few get so lucky that on the first one they call, that that’s their rockstar realtor. A lot of them call 10 to 30 different realtors and really pick their brains and see how you connect, mesh in how your goals can align with theirs. So the first thing is, you want to make a list of what are some realtors in your area. First thing I would do is find out if they are investors themselves, that definitely is going to be an advantage to you. And really just ask that question.
You can also ask if they’ve worked with investors before, and in what market. I mean, if you’re looking in a big city, maybe there’s only very certain neighborhoods. Well, one realtor could work in the neighborhood next door and not have ever touched a house in the neighborhood that you’re actually looking for. So make sure they’ve worked in the market that you want to purchase in too. So what are your goals? Are you looking to borrow a property? Are you looking just for turnkey? Are you looking to flip a house? Ask what experience they have with that? Maybe they’ve actually done a flip themselves or they’ve worked with an investor who does flips.
Then ask about the availability. When you call them, are they going to be ready to show you a house that day? And what dollar limit are they working upon? A lot of times, if you find a realtor that’s just starting out, they have a lot more time than an experienced real estate agent. So if you’re going to be looking at $20,000 houses, like I drag my realtor to, she’s awesome, she’s experienced, she does great. But if there is a rookie realtor out there, they’re going to be the ones that have the time to go and follow you around to all of these $20,000 properties. So that might be something to look at.
It doesn’t mean the realtor has to be super experienced. Are you looking for someone that is just going to take you to a whole bunch of showings, and that’s what you guys are going to do until you find the property? So that’s definitely something important. But just make a list of what your goals are for that property. And then how can that realtor line up? And then ask some questions based on that. Tony, I think both you and I have used, we talked about this the other day, about Find An Agent, browsing on there. BiggerPockets has actually a resource where you can go to biggerpockets.com/findanagent to actually look up recommended real estate agents in your area too.

Tony:
Yeah. So much good information there, Ashley. I think the only other thing that I’d add is, don’t be afraid to, I won’t say fire, but don’t be afraid to switch up who you’re working with. If you find an agent the first time and they’re not really providing you with the value that you feel that you need, or they’re not giving you the kind of time and attention that you need, don’t be afraid to find someone else. I think I cycled through like four or five realtors before I bought my first deal, and I think a lot of times, especially as an aspiring or first-time investor, you feel almost indebted to that first person because they took half a Saturday to drive you around and now you feel like you owe them something because they spent some time with you, but that’s that can’t be the mindset that you have.
If it’s not working, it’s not working, find somebody else. And I guess the only other thing I’d add to that too, Ashley, is, if you’re having a hard time finding someone, obviously BiggerPockets and all these other places, but also check Facebook groups. Facebook groups have been a great resource for me. Obviously, we’ve got the Real Estate Rookie Facebook group with tens of thousands of folks in there. So poke around and say what you’re looking for and I’m sure someone will reach out and lend a helping hand.

Ashley:
Yeah. And also a realtor or an agent could ask you to sign a document that you’re only going to work with them, and that puts you in a commitment with them. For example, it could be you’re signing, and for one year, if you purchase the house, you’re using them as a realtor, if you find an off-market deal, you’re still paying them a commission. And after the contract expires up to 30, 60 days after the contract expires, you owe them a commission if you close on a house after that window, that timeframe. I have had one agent ever ask me to do that. Other than that, I’ve never come about that. What about you, Tony?

Tony:
No. Wow. That’s actually the first I’ve heard of it. Now, I’ve seen it on the other side when you’re selling your property, that they say, “Hey, I’m the exclusive agent for this property until X, Y, Z date,” but I’ve never heard it on the buying side. For me personally, I don’t know if I would sign on with someone like that, just because… If it’s not someone that I know I’m going to work with long term, I’d be really hesitant to jump into that.

Ashley:
Right. I can see the goal of it, where this realtor is going to put in time, showing you houses, sending you deals. They want to make sure that they get something out of it at the end. But I think a really good realtor isn’t going to need you to sign one of those because they know they’re going to get the job done, they know they’re going to find you a property, they know they’re going to do whatever it takes. So I will say that this partner and I, that we still haven’t purchased a house, but last year, we signed a document with an agent of the two of us. So if the two of us bought a property together, this was the agent on it. I mean, we were taking him to 10 to $30,000 properties, dragging them all around town. It was the worst experience of my life working at this agent.
I actually used him with another partner on another deal and my check was lost for my deposit, and finally, a couple of days later, it showed up and it was a money order, not even a check. Yeah. So just because they make you sign one of those, it doesn’t mean that they’re a great realtor. I would say maybe it’s more the other way. Actually, I’d be interested to see if you guys want to share on the Facebook page what your experience has been with this. I’d be interested in reading that, if you guys have signed these documents. I don’t even know what they’re called, actually, but yeah.

Tony:
That’s great advice, because I know a lot of times you’ll just get a bunch of DocuSigns from your agent, and sometimes we’re not paying super close attention to everything that’s in there. So a good thing to screen for, Ashley. I really appreciate you bringing that up. I’ll take us to our next question.

Luis:
Hi, my name is Luis calling at of Inez, Texas. I just recently bought my first investment home. I took a line of credit out on my house, I bought another house and rented it out. What do you think is next for me? What is the best way, to take another loan out or to continue and acquire more properties? And I’m looking to do the borrow method. Thank you.

Tony:
Luis, first congrats on getting the first deal done. I think that’s where most people get stuck. So congratulations to you for getting that one completed. In terms of how you get more loans, I guess we need to know a little bit more about your situation. Is it more so that you’re concerned about the income required to qualify for another loan? Or is it more so that maybe you have the income, but not the down payment? Either way, I think my first piece of advice would be to partner up with someone else. If it’s cash that you need to close, maybe partner with the cash partner. If it’s income you need, partner with someone that’s got maybe not as much cash, but a little bit more income.
And in terms of how you find that partner, there’s so many different ways to do it. Obviously BiggerPockets, our Facebook group, there’s so many different ways to start networking with people and building those relationships. But I think that will be my first piece of advice. The second piece would be to shop around. Just because one bank thinks that maybe you’re not bankable, it doesn’t mean that every single bank is going to say the same thing. So go with some smaller local credit unions and banks, they tend to be a little bit more flexible in their lending practices, but just shop around as much as you can and let them know what it is you’re trying to do.
Maybe your terms won’t be as good as someone else’s, but at least you can get that loan secured to keep moving forward. I think those are all the big things. What do you got, Ashley?

Ashley:
Yeah. So from listening to it, I took away that maybe he paid cash for this property, that he took out a line of credit and now owns this investment property in cash. So my first instinct would be to refinance that property that you purchased with the line of credit money. So what you can do is, yes, you’re going to have your line of credit payment where you’re paying that back, and now you’re going to have your refinance. So you’ll be able to refinance this property because technically the bank will see this property as owned free and clear, that there’s not a mortgage on it because that line of credit is with your primary residence. So I would refinance that property and then use that money to buy the next property.
So the mortgage on your first investment property will be used to pay for your second property, then you’ll own that property in cash, and then you can keep going and going and going. And of course, obvious disclaimer, don’t get caught up over leveraging yourself. But if that’s how it is that you own that property free and clear, my first instinct would be to go to get financing on that. And then, like Tony touched on, if you don’t think that you can, or you’re not bankable, you can’t get another loan, maybe your debt to income ratio isn’t great because of your primary mortgage and your line of credit, try the commercial side. Try going to the commercial side and putting a loan on the property that way instead of a residential loan.

Tony:
Yeah, I think the only other thing to add there too, Ashley, is hard money. We know that hard money, they’re a lot more lenient with some of these things in traditional banks, but it’s going to be more expensive money. So if you’ve exhausted all these other options and you feel comfortable with hard money, that’s always a route to go down as well.

Ashley:
And we just had Jacqueline Smith on our last episode, 43, and she is using hard money for her flip. And even though she’s using hard money, she’s still estimating to make a $40,000, another profit off her current flip. And that just shows, if your numbers still work, go ahead and use that hard money. So you could be getting 4% at the bank and then you’re paying 15% for a hard money lender, but if the hard money is the only way you’re going to get money and your numbers still work, why not do it? You’re still going to be making that. For Jacqueline, that $40,000 profit at the end of the day. Our next question.

Luke:
Luke from [inaudible 00:16:33]. Other than investing in real estate, what is your favorite investing venture? What else do you invest in? Thanks. Bye.

Ashley:
Okay, Luke. I really like this question because it’s something I’m passionate about and I bug and nag my other partners for real estate on this and what they should be doing. So I started out with a financial advisor. I used the same one that my partners are using. And then I found the Debt Free Community on Instagram and we did the whole Dave Ramsey thing, paid off our personal debt, but we also learned about index funds. So index funds are, you’re investing in the stock market, but you’re investing in every single stock. So like the S&P 500, to purchase an index fund, you’re owning a little tiny piece of every single stock within the S&P 500. That is what I invest all my retirement funds’ accounts, are put into index funds. That’s what I invest in.
And then I also have a mixed use building where I put a business into it. So now I’m getting residential rental income from that building, I’m getting commercial rental income from that building, and then I also have business income coming from that same building. So multiple streams of income are very important to me. And then just investing in index funds.

Tony:
Ashley, let’s break that down a little bit. What are the benefits of investing in an index fund as opposed to, I don’t know, like a regular mutual fund or just buying a bunch of shares of one company? What are the benefits?

Ashley:
Okay. Well, first of all, another disclaimer, I’m not a personal financial advisor, but here’s my take on it in my opinion. I think that picking stocks is a lot like gambling. No one can predict the stock market and if they do, they get very lucky. I believe that investing in index funds, I am riding the total wave of the stock market. And if you look back like the past 30 years, index funds, the result of that, your return on that did a lot better than certain mutual funds. Yeah, a certain mutual fund might do great in one year, but the next two years, it could be bad because it’s just someone picking them using whatever they use to pick them. And I would rather own a little bit of everything and ride that whole wave than just trying to pick which ones I think are winners and selling the losers, whatever.
But there’s a lot of great Instagram accounts, Personal Finance Club. If you want to learn more about it, they talk about index funds. And then I do some index fund bonds too. Yeah, I do that.

Tony:
Yeah, interesting. So I guess for myself, obviously, outside of real estate, most of my investments are in the stock market, but they’re for the company that I work for. I haven’t diversified much away from that stock, one, because it’s done so well as of late. And then two, I’m usually just taking the gains that I get from the stock in my company and using that to fund my real estate purchases. So I think as my portfolio grows and I think we stabilize that a little bit, I’ll look to diverse a little bit, but for now, I’m enjoying the gains I’m seeing there and what I’m getting from the real estate. But I’ll definitely look into index funds.

Ashley:
Yeah. And one thing to add to that too, is that they’re really low cost. They don’t have high fees associated with them. A lot of times you’ll look at a mutual fund and it shows that you have this great return, but then you look at like the fees the advisor is charging, what the company is charging and all of these, it could be 2% or even higher taken out of your actual return. Some index funds are like 0.05% or something compared to what some of the other big hedge funds are charging. But also, BiggerPockets Money, that podcast, they talk about this all the time. So if you guys want to learn more about different types of investing and personal finance, definitely take a listen to the BiggerPockets Money Podcast. It comes out every Monday.

Tony:
And then Scott Trench’s book also, Set For Life. I know he talks about index funds in there. And then Tony Robbins, not me, but Tony Robbins, the personal development guru, he’s got a book called MONEY Master the Game, and he talks a lot about index funds in there as well. And what you talked about was the lack of fees and how cheap they are. So two resources for you guys to dig into if you’re looking for some more information on it. Awesome. So let’s jump to our next question here.

Jill:
Hello. My name is Jill, and I’m calling from the Portland, Oregon area. I’m calling to try to get some advice on where to start out. Unfortunately, I recently had to go bankrupt and I am in an area that’s very expensive. However, I sold my house and I have about 40 grand in my bank. And I am working part time and trying to become a real estate agent. I’m in the property management business right now, actually just a leasing agent, but I get to see a lot of it. I’m just having a hard time figuring out where to start. I don’t know how hard it’s going to be to find houses on financing after going bankrupt. So I would love some ideas. I would love to buy a duplex or something and live in one side to get started and then go from there.

Tony:
Jill, yeah, Portland’s expensive market. I hear you. I’m in California, I know what that feels like. I think the first question is, what’s your strategy? There’s so many different ways to get started in real estate investing that people, sometimes they don’t see the whole picture. If you want to start as a wholesaler, that’s a lot less expensive typically than putting 10, 20% down on an investment property. Property management, Ashley, that’s how you cut your teeth in real estate game. That’s a great way for you to learn while building some income as well so that when you do get that capital, you’re ready for it.
I think first you’ve got decide on what your strategy is. Once you’ve decided that, choose a market. Just because you live in Portland, Oregon, doesn’t necessarily mean you have to invest in Portland, Oregon. My first properties, my first investments were six, seven states away because I knew that I wanted to invest in a market that was easier to get into from a cost perspective. So maybe start looking at some other markets around Portland or even somewhere else, and get familiar with investing out of state. There’s a BiggerPockets book from David Green on long-distance real estate investing. Great book, great resource, read that front to back and start leveraging some of those resources.
And maybe your money that you feel won’t go far in Portland, Oregon, maybe it does go far somewhere else in the country. And then I guess the last one is house hack. And you mentioned that. If you are able to get approved for a home in Portland, and it doesn’t even necessarily have to be multifamily. You can house hack a single family house as well. You buy a house with three bedrooms, there’s only one of you. Well, now you have the two bedrooms, and that’s your opportunity to get some cashflow coming in from those other two bedrooms. My partner did this when he first started investing, he bought a big, I think four-bedroom house. It was just him and his wife, and they rented out the other three bedrooms, and that was the cashflow they needed to put them in a position to be able to invest down the road.
So you got a lot of options, Jill, if one of those works for you. What do you got, Ashley?

Ashley:
The first thing I thought of after reading this, I don’t know a ton about bankruptcy and how that affects getting a loan at all, but there are definitely a lot of ways to creative financing. On episode 23, we had Sarah on and she talked about how she’s recently going through a divorce so she can’t have a property in her name or else it will be part of the divorce. So what she did was she actually went out and found a private lender, but the private lender is owner of the deed, he has taken title of the property. Right now, she was doing a rent to own kind of agreement where she is paying…
Basically, the private lender purchased the house in cash, so now she is repaying the private lender and she’s living in the property as a house hack. She’s renting out the basement unit. The title is still in the private lender’s name. And then when her divorce is final, she’ll actually go and retain ownership of that and continue her payments. So right now, all of the rent, I say that in quotes, is actually going towards the purchase price of the property. And of course, she’s paying him interest since he is the lender on the property. So that is one way, you could do it, even if you need to find someone, show them the numbers of how you’re going to house hack that, whether it’s rent out rooms, like Tony said, or if it’s a duplex, so you’re able to add on a unit.
Them having the property in their name will make them a lot more comfortable because they won’t actually have to go through a foreclosure process, it would be more of an eviction if you stopped paying. And with having the bankruptcy on your credit, that might be a great way to get into a property, if you can find someone that would lend to you doing that situation. And then once you are able to get a loan on the property, you would go to the bank and pay off the private lender, and then the house would then go into your name. So that’s just the first thing I thought of. So that was Sarah on episode 23, if you want to go back in and listen to that. And she also gave a lot of other creative financing tips too. Okay. Our next question.

Lindsay:
Hi, this is Lindsay. I’m from Austin, Texas. I’m actually looking to buy my first investment property and would love to do it as a house hack, but I still have nine months left on my current lease and it would cost way too much to get out of it. So I was curious if you’re doing this as a first home buy with all the benefits that go with that, is it just a matter of not having anybody else living in it, renting it out and paying for it so it can be vacant, or are you not allowed to have any other property that you’re leasing and that needs to be your primary residence? Thank you. Love the podcast. Can’t wait to hear an answer.

Ashley:
Okay Lindsay. Well, I guess if you’re asking if you can go ahead and purchase it and maintain your lease, Tony, is that what it sounds like she’s asking?

Tony:
Yeah, I think so.

Ashley:
Okay. So really what I would do is I would move into the primary residence then just continue your lease. Just because you have that lease on that rental property doesn’t mean that you have to live there, you could move to the house hack. That’s actually what my brother is doing, he’s trying to buy a house hack right now, and he lives in North Carolina and has an apartment there and he’s still leasing it until his lease ends, but he’s living from my parents until he closes on a house hack. So you could do something like that, and you’re showing the bank that that is your primary residence, you just have this apartment that you rent.
Obviously that depends on if you can afford to have the lease and to pay the mortgage, but hopefully, if you’re going to do a house hack, then your other occupants are going to be paying that for you. Tony, what are your thoughts on that question?

Tony:
I guess the only thing to add would be, you can also look at subleasing that apartment. If you’re there and you’ve got how many, nine months left, talk to the landlord to see if you can sublease that out to someone else, so then you get someone in there, they’re covering that lease, then you go and you get your house hack. And that solves both problems so you don’t have to worry about carrying both the mortgage and the lease.

Ashley:
To touch on that too, Tony, real quick is when I managed an apartment complex, we actually had a clause in the lease where if you did need to vacate early, we would collect rent until the unit was rented out. And we had to actively search for someone to replace that unit. So look and see if maybe there is any type of loophole in your lease like that.

Tony:
One of the things that came to mind, so you’re in Austin, Texas, Austin is a desirable destination, so me putting my short term rental hat on, you can also possibly rental arbitrage this property, the arbitrage that you have this lease on. So if you’ve got nine months left, you go to the landlord, you say, “Hey, Mr. and Mrs. Landlord, I’ll continue to pay my lease, but I’m going to also put this property on Airbnb for the next nine months.” And you can pay them a premium on the rent, so your rent’s 1,500, you tell them, “I’ll pay you 2,000,” because you’re going to earn 4,000 per month on your Airbnb.
That might be a good way for you to get started as well, you turn your lease into a short-term rental and you go house hack this other property, now you’re making money both ways.

Ashley:
Yeah. That’s actually what I do for an apartment, I rent an apartment and then Airbnb it out, but make sure you ask that you can do, this is one place where it’s better to ask permission than it is to ask for forgiveness.

Tony:
Totally. All right. Awesome. Our next question-

Tom Nelson:
Hi, my name is Tom Nelson calling in from Chicago. And my question is, as far as a BRRRR method for a first time purchase/house hack, was wondering what your thoughts were, I have a direct condo, living in the city, I look to have three different exit strategies, either sell it up in two years, no capital gains tax, turn into a long-term rental, depending on HOA, or you do a short term Airbnb depending on the area, [00:29:35]HOA. Accept my question. I appreciate everything that you do. Bye-bye.

Tony:
Ashley and I are actually going to let our producer Kevin in on this one since he’s got more experience with condos. So let’s hear his advice for Tom. Take it away, Kevin.

Kevin:
Hey guys. Thanks Tom. I love this question. I actually got my start with a one-bedroom condo in a market similar to Chicago. They can be a great way to get started, especially in a high priced urban market they’re more affordable than the single family houses. Depending on your comfort level, I would look for a two-bedroom unit and rent out the other bedroom. Number one, you’re low-key house hacking if you do that, you’re spending less out of pocket than if you lived in a one bedroom yourself, and building more equity at the same time.
Number two, there’s just a bigger pool of buyers and renters for two bedroom condo units, couples, young professionals who want an office space, two young professionals who want to split up a rent payment. So that protects your investment a little bit better in my opinion, I think you’re going to find it difficult to BRRRR a condo because it’s tough to force that much appreciation when you can’t do things like adding bedrooms and bathrooms, majorly reconfiguring the floor plan, etc. You can find units that need work, but generally it’s going to be more cosmetic paint and carpet flooring work than a full remodel of the house where you’re forcing $50,000 of equity.
So let’s look at your three exit strategy so you can go through them one by one here, number one, selling it after two years with no capital gains tax. I love this option, but you do need to go in with eyes wide open to the possibility that the unit will be worth less in two years than it is today, because there’s a higher supply of condos in cities and anyone who’s lived in the city for the past several years know they’ve been building like crazy. So they’re more of a commodity than a single-family house that’s in a great neighborhood. And so they are susceptible to downturns in value.
If you can hang onto it under a worst-case scenario in a recession with a rental that’s still cashflows or breaks even, I would still pull the trigger on it, which leads us to the second point, which is a long-term rental. You correctly point out that this strategy depends on the rules of your HOA or condo board. And it’s crucial to know that you can even rent the unit out in the first place. Most condos will let you do that, but sometimes they do put restrictions on how many units in the building can be rented compared to owner occupied at a single time. You want to know that number, you want to know where the condo is at that point and how close they are to that threshold.
You also want to know the fees, we’re turning the unit over. I manage a one-bedroom property for my parents in Washington, DC, and we have a new tenant moving in this week. And the condo board took a $200 move-out fee and a $250 move-in fee just to turn that unit over because of wear and tear on the building, I guess, but we don’t really get any value for that. So by the same token, I own a different condo where there’s no move-in fee, so it really just depends. And your agent won’t be able to get you this info as you’re looking at places. The third one, Airbnb, or short-term rental.
Here you flagged that the condo board might be an issue, and I have to say, most condo boards will not allow short-term rentals, you just won’t be able to get away with it. People in these buildings talk, and it’s pretty obvious when you’re Airbnb and you place out. And even if your guests are quiet and respectful, if they’ve got suitcases and they’re going in and out, most of the other owners just will have a general feeling that they didn’t sign up for living in a place where tourists and travelers were going in and out of units. So I have personal experience with this, I doubled my cashflow with my condo in 2016, until the condo board informed me that this was not allowed and told me to stop. And I was actually on the condo board at the time, and still am. So that was a little awkward, but we worked through it.
Now, it’s a long-term rental for me and I make just a bit of cashflow, but it’s really easy to manage, and not paying down the loan, it’s in a great area where I can always find tenants. Other things to watch for with condos, it is a huge advantage not to have to deal with roof repairs, snow removal, basically all the common elements that are paid for in your monthly condo fee. Look for buildings without elevators if possible. I know if you live in downtown, it’s going to be hard, but those tend to be a cheaper condo fee because elevators are very expensive to maintain. One last thing is lenders sometimes require more down on the property if a certain percentage of the units are rentals, or if one owner owns say, 50% of the units in that building.
And the reason is they just see condos as more vulnerable to market conditions and they want to protect their investment so they may require 20, 25% down in certain cases. You want to be sure about that going in, especially as an investment. So set up keyword alerts on biggerpockets.com for Chicago and condo, would be my advice and see if other people in your area have done it successfully, connect with them. Maybe you can even find the same building that they’re in and verify that the rules are the same. So good luck to you, buddy. Thanks for the question. See you.

Tony:
All right. I’ve never purchased a condo myself so glad that we were able to get Kevin’s input there. I guess your question is like, should you BRRRR a condo? And for me, it sounds like you’ve got multiple exit strategies. If you’re not able to sell it, then you can turn into a short term rental. For me, obviously I love short-term rentals, I’m going to all in on that strategy. So for me, as long as… The market you’re in, Chicago is a big major metropolitan area, it should be able to support it. So that will be my strategy, turn it into a short term rental, assuming that your HOA is conducive or supportive of that. And I think you could really kill it in a market like that. What are your thoughts, Ashley?

Ashley:
Yeah. I really don’t have anything to add to that. I don’t have a condo experience, but anything I would have thought of, I think you and Kevin pretty much touched on that.

Tony:
Sorry, one last thing that if you do go the short-term rental route, just really do make sure that you’re vetting the HOA properly. I was actually just talking with an investor yesterday and she bought two condos in the same complex without really understanding what all the HOA regulations are. And she said it was like one of the worst decisions that she made and she’s looking to offload both of them now. So just make sure that you understand what those regulations are before you go that route.

Ashley:
Yeah. And that actually reminds me of a story. During COVID, there was this guy on Instagram who does a lot of short-term rentals and he had permission to do his short-term rental, but during COVID, they did not allow any guests on to the property. So that meant he could not rent out his Airbnb. And actually, I believe it went into a lawsuit because he could not rent it out and he had prior permission, but they shut the building down to protect the residents from guests coming in, possibly having COVID and spreading it throughout the building there. But yeah, so that was like something even a year ago, you wouldn’t have expected that to happen to you. So just with COVID, everything has changed. So something else to look out for. The next question.

Alex:
Hey guys, my name is Alex, I’m a Rookie investor from LA. And my question here is around traditional financing in partnerships. So I’m a little bit curious about what kind of communication a potential partnerships should be having with their lender upfront and whether or not the lender needs to know the details of the partnership in order to clear that partnership for a loan. For example, if a 50/50 partner and I are each planning to put $20,000 down on a $200,000 term fee, buy and hold property, let’s say I make $100,000 a year, my partner makes, just to be extreme, $25,000 a year.
Does the lender care about my partners and my operating agreement and how we structure who exactly will be covering out of pocket costs, how the mortgage will get paid if we go several months without a renter, etc., or does the lender just need to see that my partner and I together are qualified to own this property and shouldn’t worry too much about each of our own individual incomes and financial positions? Thank you so much again for taking my call. Appreciate it.

Ashley:
Okay. The first thing on this is, are you going to be putting it into an LLC or are you guys getting the mortgage in your personal names? The lender will care who is the owner and who’s going to be on the mortgage. So if you’re doing an LLC, they’ll want to look at both of you, unless for some reason your partner is only… I think usually they want to see 20% or more ownership in the property. If it’s the residential side and you both are going to be on the mortgage, then they will approve you guys together jointly. So it won’t, let say, “Oh, well he’s only 25, he’s not approved.” They will take basically your combined income in my experience and then pre-approve you guys together.
But if the property is going to be in both of your names, but you are just going to be the one on the mortgage, then they will just look at you, it’s in your individual names. And then how do we pay for the mortgage if we don’t get a renter? That is where it is so important to have reserves in place. I recommend six months of reserves to cover your mortgage, your property taxes, and your insurance. Some people do three months, some people do a full year. It’s what you’re comfortable with, but I highly recommend having at least some reserves in place because that can happen. You can also have a furnace go out right after closing, anything like that. Definitely have your reserves in place to cover if you don’t have a renter in place.

Tony:
Yeah. And I think Alex is also asking, does the lender care what percentage of these costs are coming from each partner? And I’ve never had a lender ask me and my… although one of my investment properties with my partner, and I’ve never had the lender ask like, “Tony, how much are you going to cover the down payment and how much is the other partner” They just want the money, as long as the money’s there and everything’s covered, then they’re fine. So they don’t need to see your operating agreement or anything like that as long as you guys can produce the funds that’s all that matters.

Ashley:
Unless you are doing the commercial side. If you’re doing commercial lending, they’ll want to see your operating agreement for an LLC.

Tony:
And you hit the nail on the head, I was going to say that, you see that a lot on the multifamily side, when you’re buying these big apartment complexes, because those are almost always bought with LLCs and those situations, they’ll do some deep diving into how things are set up. Cool. All right.

Ashley:
Okay. Let’s take the next one.

Maggie:
Hi, this is Maggie from St. Louis Missouri. I’m recently new to real estate investing and I’m currently house hacking my single family home and renting out one of the bedrooms in my house. I was wondering if I should use my money towards another rental property, or I have student debt that I could pay down and I wanted an expert opinion on what I should do next. Thanks. I love the podcast.

Tony:
Not yet. I think it really depends, and this is my personal preference. Everyone’s got their own decisions on personal debt and how they want to manage that, but for me, if the debt that you’re worried about, your student loans is really low interests, those kinds of government backed loans, I would say, go for the investment, because if you’re, say, the interest on your student loan is 3% or something like that, you’re probably going to earn more than 3% if you go invest that money somewhere. If you’re getting 10% cash on cash return, 10% is better than 3%, you still get a 7% difference there. So that’s how I use or gauge whether or not I should invest this money, or if I should use it to pay down debt.
High interest credit card debt, you almost always want to pay that down because you’re paying extreme amounts of money to borrow that money, but student loans, things like cars… For example, my wife and I just recently bought a new car and we were thinking, should we pay cash for this car or should we get a monthly car payment? And when we looked at the cost of borrowing the money to purchase the car, it made way more sense to invest that money than it did to pay cash for the car because we know that we’re going to earn through our short-term rentals 10, 15, 20% perhaps cash on cash return, whereas the interest rate in the car loan is like 3%.
So I think for me, it depends on the cost of that money that you’re looking borrow. What about you, Ashley?

Ashley:
Well, I think it really depends too on the type of person you are, so is this an emotional, mental decision or is this an investment-type decision? So for me, my primary residence, very low interests, easily bankable to refinance, take more money on my house, but it is an emotional, mental decision that I want to have, my primary residence mortgage paid off. Investment wise, it probably would make more sense to pay off a rental because I’m getting a return on that and also my interest rate is higher on those and just not as great terms, but for me mentally, it’s like pay off my home mortgage.
That’s just a big factor to take into play too, is what’s going to make you sleep at night? What are you comfortable with? If you don’t like that student loan debt lingering over you, go ahead and pay it off, but as Tony touched on, look at the numbers too. So it doesn’t make sense, say your interest rate on your loans are 5% and you can make an 8% return on an investment property, definitely look at that. And then you could also use that cashflow to accelerate your student loan payments. That’s what I did, I used cash flow to pay off pretty much all of our personal debt and that worked out great for us, but we were also very conscious about making sure that cashflow was only used for debt pay down for at least a year. We did that.
Another thing touch on is, first, I want to say congratulations on house hacking your first single family home, that’s awesome. That’s great. But look at the long-term too, look, break down the numbers and if you pay off your student loans, how much money is that going to free up each month for you to put towards another investment property? Also, look at the cashflow, how much are you bringing in if you were to put that money towards an investment? And just play out those scenarios, what does it look like three years down the road, if you were to pay off your student loans, how much cash would you have available at the end of three years? How much cash would you have available after purchasing that investment property?
I don’t know if I’m explaining that well enough, but look at, if you used all your money to pay down your student loans, would they be paid off in two years? And then you have those extra payments or that extra money that you would’ve been paying to the loans to save for one year, what’s that number? If you’re going to purchase that investment property and pay off your student loans, what does that look like at the end of the three years for that? So that’s how I always like to analyze things, I look down the road and what is the outcome of it? What gives me the better return?
We have one last question, and I don’t know how I got so lucky, but this question came in before Tony was actually put on the voicemail emails. So this is what Tony first started and I’ve been saving it because it is from a very, very special listener.

Sean:
Hi, my name is Sean. I’m 12 years old and I’m from East Side, California. I’m a big fan I really like Tony as a new cohost. My question is, what advice would you give younger self knowing what you know now as a real estate investor? I’m a young entrepreneur with goals of becoming a successful real estate investor when I grow up. I would love to know the keys to success. Good Job, dad, keep the great work.

Ashley:
First of all, Sean, I want to say that I love our new cohost too, he’s doing great. Tony, me why don’t you go ahead and take this time and then I’ll just follow up with it.

Tony:
Listeners, Sean, that’s my son. I didn’t even know that he had submitted a voice mail. This is super cool. We talk real estate all the time at home, we just spent the last three days in Joshua Tree. We were getting one of our properties set up and we brought our son out there with him, he’s in the virtual learning thing. So I’m working during the day, he’s doing school during the day, and then when we’re done, we’re all working on getting the property set up. So we do our best to include him, so I appreciate him calling in too. Ashley, why don’t you take it first, he hears my advice all the time. I’m curious what you’d have for him.

Ashley:
Okay. Well, first of all, I would take full advantage of your dad and using all of his resources as possible, and I would look at, okay, so what are your goals? Write them down and then see how you can convince and manipulate your dad to help you with those goals. But really, there are so many different ways to help your kids get invested in real estate at such a young age. The first thing is putting them on the payroll so you can actually pay them and they can earn an earned income at whatever age they are. There’s not really an age limit, it’s just when it’s acceptable for them to do that type of work when it’s your family paying you.
For example, you could hire him to clean an Airbnb, you could hire him to do data entry for you. So with this earned income, he’s learning part of the business, he’s getting paid for it, but you can also open up an IRA for him and you can start saving for his retirement because he does have earned income. Just he has like two great, I don’t even know what the word is, just like two great returns from him doing that as he’s getting the experience, and you’re also able to put that earned income into retirement. Think about it, if you started, he’s age 12, you started saving for your retirement when you were 12, I’ve run the numbers on my own kids and it was great return.
That’s just one thing is just getting involved, especially with Sean, having his dad already an investor, getting involved in the day-to-day and it seems like he’s already doing that. The next thing is something I did with my kids where the property is still in my name, but they each have their own duplex. So right now, the tenants pay the mortgage, but it’s their property. So anything that happens with that property, they are informed. My three-year-old is just like, oh, okay in one ear out the other, but my seven-year-old, he’s grasping, like, “Oh, mom, there’s my house. Mom did my tenants pay their money?” And we’ll look at stuff.
And yeah, he doesn’t understand income expenses and he just can’t wait to use all of that money to buy Beyblades or whatever, but I think having someone, even if your parents don’t any other younger listeners, even if your parents don’t invest, each out and talk to other people who are investing, because I’m sure you can find someone in your network, even if it’s not real estate investing, and getting that solid understanding about personal finances. You don’t really learn a lot about not having credit card debt, trying to minimize student loans and saving for money, you don’t learn that stuff in school. So hopefully, Tony, you’re doing a great job homeschooling him and adding onto his virtual learning with this stuff.

Tony:
So much good advice there, Ashley. I’ve heard Brandon Turner talk about it, I think he bought his daughter a house as well. So I really love that, I love that strategy. But I guess more so for the parents that are listening, it’s never too early to start talking to your kids about investing. Like Ashley said, your younger son is three, that’s amazing, to make sure that it’s like a very normal part of the conversation and that you as a family, you guys all talk about those things and you start teaching those lessons. I think we started off playing the Cashflow Board Game is where we started. And he loves Monopoly, so that was a natural progression.
And then always talking to him about, “Here, we’re closing on this other property.” Or, “Here’s what’s happening over there.” Really just making him feel included. And it was so cool, Ashley, and this will be my last point, he just turned 13 last Friday. And one of the things that he asked for was stock in a company. So we opened him up like a custodial ETRADE account, and on his birthday, we showed him his account with some stocks we had put in there for him. So we just really want to make sure that he understands the power of investing both in real estate and elsewhere. So it’s been a really cool process.

Ashley:
That is so awesome. And oh man, we just missed my birthday, I wish I would have asked for the same thing. But you have to tell him about index funds now so that he’s started investing in that with his portfolio.

Tony:
There you go. That’s the next lesson. That’s the next lesson.

Ashley:
Oh, that’s so awesome that he asked for that. I would love for my kids to want something like that for their birthday or holidays. Well, that is our last Rookie request fly-in question today. Thank you to everyone who submitted your voicemails, and I think we’ll do another one of these in a couple of months, this was fun. We do love having guests on the show too. If you want to apply to be on our show, you think you’d be a good fit, you are a rookie yourself, and you want to inspire others and give some great advice, you can go to biggerpockets.com/guest and fill out an application.
And then make sure you guys send us your voicemails too, and then we could play them on an episode at 1-88-5-ROOKIE. Anything else you want to add on to today’s show, Tony, since we get to do whatever we want?

Tony:
No, this was fun. I love hearing the direct questions from the guests and I’m sure, Ashley, you get it, but there’s a lot of folks that message on social media, trying to ask a lot of questions, and we definitely do our best to get to you, but if you want it, this is the best one to do. Send them in and we would love to answer them for you guys.

Ashley:
Well, thank you guys so much for listening. And I am Ashley Kehr @wealthfromrentals. And he’s Tony Robinson @tonyjrobinson. And we will see you guys next week for another episode of Real Estate Rookie.