How to Buy Rental #2, #3, or #4 When You’re Out of Funds (Rookie Reply)

0:00Today's Rookie Reply is a great one because it hits three different fears that rookie investors have when they're ready to move on from learning into execution. Yeah, we've got someone worried about how to rinse and repeat after their first rental, another rookie panicking mid-deal because insurance blew up their numbers, and a W-2 investor trying to use short-term rentals for tax savings without getting crushed by regulations.

0:27This is The Real Estate Rookie Podcast, and I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into today's first question. So this question comes from the BiggerPockets forums, and it says, After spending four months reading and listening, I'm close to finally taking that first step. Enough talk, time for execution. But I still find myself questioning what do I do after I purchase my first rental. I'm focused on long-term rentals and cosmetic burrs, but I struggle with grasping creative ways to finance and rinse and repeat. While I'm fine dropping$40 ,70K as a down payment, I feel stuck in a holding pattern, wondering if I need to wait and save another$40 ,70K to do the next deal.

1:03I'm excited about Cleveland, Cincinnati, Pittsburgh, and Dayton. Any nuggets of wisdom would be appreciated. All right, so this question is really about how to scale your portfolio beyond the capital that you currently have access to. And I think there are maybe a few approaches that you can take. The first approach is to do probably the simplest way is just to take the 4070K that you have right now, put that down as a down payment on a deal, and then save up another 4070K and just repeat that process over and over again. It's slower, but it's significantly less work and requires less creativity.

1:43And it's just a really kind of tried and true approach to build a portfolio. The second path is that you find a way to quote unquote recycle that initial set of capital. So you can do things like the burrs that you mentioned, where you're buying a property, you're renovating it, you're rehabbing it, then you're refinancing to get back some or potentially all of the capital that you put back into that deal, right? So the BRRRR strategy is the second way. And then another way is then partnering with other people to help fund your deals. So if you've taken down this first deal, you've got a bit of a track record, you've proven that you know how to find deals, execute, and so on and so forth, maybe then you start leveraging partners and their capital to take down more deals.

2:27And then maybe like the probably the more complicated path is going after something like more creative financing. If you can do like seller financing, where you're finding properties that are, you know, owned free and clear, and then you're negotiating directly with the seller to have them loan you the money is another way to scale beyond your original capital. But in my mind, as those are probably the four big buckets, but curious what your thoughts are. Yeah, I think the last part of this question as to should I wait and save up more money or Or should I go ahead and try and find another creative way to purchase a property without waiting and saving up money?

3:01But I think the answer is really to do this simultaneously. Start saving again, but also looking for deals where you can do some creative financing. So whether that's a burr where you're using hard money and then you're going to refinance out of it and pull your money back out. Whether it's going to be finding a deal where the person will do seller financing. If you go to, I think it's called landwatch.com, I think is what it is. You can literally click a toggle or a filter that is for seller finance deals that are available that people are already saying they'll do seller financing. And you can submit offers and put the offer as seller financing.

3:40One thing that I've always done is when I get to go face-to-face with a seller or I try to have my real estate agent communicate this, if I'm going to submit an offer that's seller financing. I always like to say, have you talked to your accountant or your CPA about the tax advantages of doing seller financing? And that usually piques a little bit of interest and it sounds more reputable to somebody having it come from their own personal CPA rather than from somebody who's trying to buy their property. If I try and tell them like, oh, here's all the advantages and the reasons why it's more likely they'll listen to their CPA than me who's trying to haggle them for a deal.

4:18Last thing I'll say, Asha, I do think that there's value in thinking about deals number two, five, and 10 before deal number one. But I think it's a bit of a fine line because oftentimes I see people get so caught up in, well, how do I scale? And how do I get property number two? And how do I get property number five? That they lose focus on the fact that they don't even have deal number one yet. So I think the majority of your focus right now should be on how do I make deal number one work? And then from there, you can start making pivots and adjustments to go on to deal number two, number five, number 10.

4:51But don't get caught in that loop of thinking so far ahead that you forget to take that first step. That's totally a great point. So we're gonna take a quick break, but when we come back, we're gonna understand when you should walk away from a deal or stick it out. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10 % below market value in the best markets across the country without making real estate your second job?

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7:48I feel stupid backing out, but don't know what to do. Is my earnest money gone? Please help. Ouch. That does hurt. Um, and we, it doesn't say how much the earnest money was, but I will say I've lost earnest money. There was a deal, it was a cabin and I found out some things, um, title issues and all this stuff after my due diligence period was over. And I think it was$2 ,000 and I, they told the sellers keep the money, I'm backing out of the deal. And looking back now, I would have rather have lost that$2 ,000 than be stuck in a deal where I'm losing even more money. And I think that would probably be the case in this situation if, I mean, just$6 ,000 to$8 ,000 per year plus the flood insurance.

8:37I don't think I have a single property right now that is that much in insurance per year. Yeah, that is wild. Six to eight grand plus flood insurance. And flood insurance is not cheap. You have to go out and get special flood insurance. Yeah, I agree with your point, Ashley. Whatever the EMD is, you have to weigh that cost against the ongoing cost of owning this property year after year after year after year to see if it actually makes sense to move forward with purchasing this property. I think a lot of this goes back to what Ash and I talk about a lot is that it's easy to get emotionally attached to a deal and feel like you've already put so much time, effort, and in this case money into a deal.

9:21But sometimes the smartest thing to do is to walk away. And if your deal does not work because of these new finances, then just go back to the settler and be honest. Say, look, I had every intention of purchasing this property, but the flood insurance quotes that came back and the insurance quotes that came back are significantly higher than what I had originally anticipated. So I would ask that you release my EMD because this is not within my control. It's not me trying to back out of the deal. Like, here are the cold, hard facts. Hey, look, if you have an insurance agent that can give me a better price, I would love to talk to them.

9:54But if not, please work with me to make sure that we can walk away amicably. So I'm with you, Ash. I think I'm walking away from this deal. because it's not worth stepping into. But 100%, that should be the first step, is trying to renegotiate with the seller. You might as well ask. They probably don't want to have to start all over in the process of selling the property, so maybe they do have some wiggle room to continue to make it work. But that's where I would start. And kudos to you for being 22 and locking down your first house hack, right? It's a great way to start. We're going to take a quick break, but while we're gone, if you haven't yet, follow the podcast on Instagram at BiggerPocketsRookie.

10:31then you can follow Ashley at Wealth for Rentals and me at Tony J. Robinson. And we'll be right back after a quick break. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they picked the wrong market. Rent to Retirement flips that model. They help investors buy turnkey new construction homes, often 10 % below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details so you don't have to. In some cases, investors even receive 50 to 75 % of their down payment back at closing, and their interest rates as low as 3.75%.

11:11They've been trusted partners with BiggerPockets for over a decade. And if you want to learn more, visit biggerpockets.com slash retirement. Billion-dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors. private credit. Now, the same passive income strategy is available to investors of all sizes, thanks to the Fundrise Income Fund, which is more than$600 million invested and a 7.97 % distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion-dollar asset class in the last few years.

11:50Visit fundrise.com slash pockets to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8 % and the average annual total return since inception is 7.8%. Past performance does not guarantee future results. Current distribution rate as of 12-31-2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. Passive income sounds amazing until it involves 17 apps and active maintenance.

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14:42That's indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. All right, guys, we're back and we're here with our final question. This one's about short-term rentals, taxes, and regulations. So the question is, I currently invest in long-term rentals but cannot take advantage of real estate professional status due to my W-2 job. Using the short-term rental tax loophole to offset my W-2 income would supercharge my investments, but I'm afraid of buying a property and getting denied a short-term rental license. Can anyone recommend beginner-friendly STR markets, preferably within three to four hours of NYC?

15:28All right, so a few things to unpack here. I think the first piece is that we need to break down what the short-term rental tax loophole is. And I'll try and do this in a way that's super clear for everyone to understand. Real estate investing offers the ability to take losses, whether those are real losses, like you actually lost money on that property or paper losses, things like depreciation, which is not a real expense, but it's a paper loss. You can take those losses and apply them against other forms of income that you collect. Now, in order to take those paper losses and apply them against your W-2 income, you have to be what's called a real estate professional or qualify for what's called real estate professional status.

16:06For most people with a day job, it's virtually impossible because you have to show that you put more hours into your real estate business than you do into your day job. Most people can't prove that. But with short-term rentals, because they are classified as a business in the eyes of the IRS, not necessarily passive income like a long-term rental, you don't have to qualify for real estate professional status. There's something called material participation. And as long as you can show that you materially participate in your short-term rental that then unlocks your ability to take the passive losses from your short-term rental and apply them against your W-2 income.

16:40So I know that's a mouthful, but if you just look up the short-term rental tax loophole, you'll get some more insights there. So that's this person's motivation. And I know a lot, a lot of people who invest in short-term rentals primarily for the tax benefits associated with it. And it truly does give you the ability to largely reduce or sometimes even eliminate your tax bill altogether. Okay. So that's the first piece. Now, what this person is worried about is the regulatory landscape of the short-term rental industry. And while it's true that the regulations across the country have changed, shifted, evolved, some have gotten significantly more strict, it doesn't mean that every single market is this huge regulatory risk when it comes to short-term rentals.

17:21There are really a few core things I look at to gauge the regulatory risk in a market. The first thing I look at is what is the current ordinance in that market? Can I legally rent a short-term rental? Is there a cap? Can I only do it in certain parts of town? Does it have to be a certain property? Is there a limit on occupancy? Is there a limit on usage? Just understanding what that current ordinance is to make sure that it allows me today to profitably run this property as a short-term rental. Because there are some markets where you can run it as a short-term rental, but you're capped at only using it for 30 days out of the year.

17:54Who cares if I can use it in any way, shape, or form? If I only get one month from that property, it doesn't make sense as a short-term rental. So just understanding the current ordinance. And then the second element is understanding the risk of that ordinance changing in the future. And the core thing that I focus on when I think about answering that question, Ash, is how economically dependent is that city on the revenue generated by short-term rentals? I'm going to pick on your home state of New York. And in New York City, they effectively banned short-term rentals a few years ago. But if you think about why NYC was able and willing to do that, it's because they didn't care about the money that short-term rentals generated for that city, right?

18:33Like NYC is one of the, if not the most populous city in the United States. It generates revenues from literally every single industry. It has no economic dependency on Ashley and Tony's little Airbnb. be. But if you think about true vacation destinations, places where people only go to vacation, those are cities that are truly dependent on the money generated by short-term rentals in the form of transient occupancy taxes, in the form of property taxes, in the form of people coming in, saying a few nights and spending money in the local businesses, where if those short-term rentals were to shut down, that local economy would be severely impacted, maybe even collapse.

19:12So we want to look for cities that have that element of economic dependency and not so much the big cities that have a lot of things driving that economy. So that is my brief masterclass on the short-term tax food poll and regulations and how to avoid them. Ash, any questions or what do you have to add to that? Any value that I can provide as I know the New York area and destination. nation. So I can add two places that I think would be a good short-term rental areas to invest in. I did a quick Google search and tried to look real quickly if they're short-term rental friendly, and it really depends on the specific area.

19:53But within that three to four hours of New York City is the Poconos. Tons of things, skiing in the winter, lakes in the summer, and then also Lake George. It's like one of the cleanest lakes across the U.S. I think and a great destination area. It's like close to I think like Saratoga where they have like horse racing and different things like that. But yeah, so those would be the two markets I would look into. And just searching real quick, like there you have like you have to get permits, things like that. And the laws like vary depending on the specific area that you're in and things like that.

20:30But those would be the two places that I would go and stay in a short-term rental. And I think the other thing I'd add to that question to your question, and this is not true for short-term rentals, but for all strategies is ask yourself what your motivation is for staying within three to four hours of New York city. Is it because, uh, there's just this comfort factor of being able to go and check in on the property yourself. And, you know, in case something happens, you're there to kind of be present or, or is it because maybe you want to use it yourself? If it's more so the personal use, that makes sense.

21:00But if you're leaning towards this tighter radius simply for comfort reasons, I would encourage you to understand that whether the property is four hours away or, you know, eight hours away, you're probably not going to be the person cleaning the Airbnb. You're probably not going to be the person fixing maintenance issues. You're not going to be the person restocking supplies. You're going to hire all of those things out anyway. So if you can find a deal in a property that's in Bozeman, Montana, or Des Moines, Iowa, or name the city in the random place on the West Coast, if that is a better deal for your specific situation, I wouldn't say that you should necessarily avoid that just because it's not as close as you want it to be.

21:45There are tons and tons of people every single day who are buying properties remotely and are successfully managing them as long as they have the right systems and processes in place. And likely for you, you're already listening to this podcast. And we share a lot of the different ways you can do that remotely. And one thing I would add to is like, if you want to use it for yourself personally, like make sure you're aware of like what the rule is for that. Like, isn't it a pretty like gray area though, Tony, as to like how many days you can actually use it if you're writing it off as a short-term rental?

22:16Yeah, there's a lot of like discussion on this, but yeah, I mean, usually what most lenders say is that somewhere around seven to 14 days, like a good baseline of personal use. So there's actually two different things we're talking about here. One is like a lending requirement. And then the other is how the IRS views it. So from the IRS perspective, your average stay duration for the year has to be seven days or less. So as long as your average guests stay, when you look at all your reservations is seven days or less, then you're still able to quantify this as a business. Once you get over seven days, they start to treat it more like a traditional long-term rental and you lose that ability to qualify for material participation.

22:57But if you're seven days or less, you get that ability. So like midterm rentals wouldn't qualify for material participation because most of your sales are 30 days or more. On the lending side, the only real requirement is if you're using a second home loan to purchase the property. And if you're using the second home loan, there's a personal use carve out where you have to use a property yourself in order to qualify for that specific loan. And I've heard different figures from different lenders, but seven to 14 days is like a usual good benchmark. But you've just got to have the intention to use it yourself at some point during the year.

23:32So luckily, those two things are not connected. So I can get whatever kind of debt I want. I can get hard money, private money, conventional debt, not FHA because you got to live there, right? But I can do any kind of debt that I want. And as long as I'm seven days or less, I can still qualify for material participation. Yeah. I think another point I wanted to make on that too, is just like, if their motivation is three to four hours is because they want to use it for personal use, like knowing that, that like they can't spend, you know, depending which way they go, they can't spend their whole summer staying there, you know, going every single week out there for the whole summer, if they are going to use it for, you know, the, the short-term rental tax loophole or whatever too.

24:13So like, I, I thought I would use my A-frame all the time. Like the day I was so sad to rent it out the day I rented it. I was like, oh, don't worry, kids are going to come here all the time. We haven't stayed the night once, maybe one time we went since we started booking it out. But it's like, yeah. So don't, don't make that like a huge deciding factor, I would say as to, you know, deciding on a market, if you don't know for sure if you'll actually use it or not. Anyways, thank you guys so much for listening to this episode of Real Estate Rookie. I'm Ashley. He's Tony. And we'll see you guys on the next episode.