Inheriting Tenants: Instant Cash Flow or Huge Headache? (Rookie Reply)

0:00Let's be honest, figuring out how to partner with a contractor, navigating tenant leases, or scaling a short-term rental portfolio isn't something you learn from a textbook. I mean, these are real-life curveballs that rookie investors are facing right now. And today, we're answering three questions straight from the BiggerPockets forum to help you avoid these common pitfalls.

0:27This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into today's first question. All right, so question one comes from Steve in the BiggerPockets forums. And Steve says, I found a partner that I like to start flipping houses with. He's very well qualified and he actually reached out to me to partner up. Our goal is the same, started flipping business. He used to own his own contracting business for six years and is now the on-site manager of a construction company that builds apartments and subdivisions. I'm bringing the capital. He's doing some of the labor himself and charging me nothing for labor.

1:00Anything he can't do, he will charge me book costs for a specialist labor and costs for materials. He offered me a 70-30 partnership. I figured instead of a private loan, 70 % sounded pretty appealing. I'll also get to help out and learn some trades with him. My main concern is he doesn't have enough cash now to have any skin in the game or cover any upfront fees. I asked if he'd give me a personal guarantee on a private asset around$10K. He said he doesn't own anything outright that's worth$10K. Does anyone have protection recommendations so I can sleep a little easier? I'm getting cold feet since I'll have the skin in the game financially.

1:33if something goes south on the flip and he doesn't have enough to pay me back or we lose the money, how will he pay me? All right. This is a great question. I think first, Ashley, it might be beneficial just to discuss the different types of partnerships. So there's a debt partnership and then there's an equity partnership. Steve, for you, it sounds like what you guys are pursuing is an equity partnership. If you really want to make sure that you're protecting yourself, then maybe a better scenario here is for you just to be this person's private money lender, where you give them a loan. And with that loan, now you get a lien against the property, you get a promissory note that outlines how much he's supposed to pay you back.

2:16And if for whatever reason, he doesn't repay you, well, now you've got a means to go after the property and try and recoup some of what was invested. That is the way that a debt partnership works. The equity partnership, on the other hand, is like you guys going into this deal together. So there really isn't. I mean, and again, you can set up the partnership in a way that you want, but typically an equity partnership, you guys are sharing in both the upside potential of that deal and the downside potential of that deal. So if things do go sideways, there is no he's paying me back. It's, hey, I brought in the capital.

2:52He's bringing in his time. and this is kind of the risks that we're taking is that, hey, maybe he doesn't finish or maybe this does go wrong. So I think in an equity partnership, you get more of the upside, but part of what you're accepting is that downside risk as well. I think one of the things that I noticed at the end of the question as to, you know, he's asking if he can do, you know, have a lien on some personal property that the contractor has or how will he make sure that he's paid back if the flip goes south? And that's one really important thing about being an equity partner is they have no obligation to pay you back just because they're the other partner in the deal.

3:34You are partners on this. If it goes south, you guys eat the loss. Your partner has no liability to have to pay you back for what went south on the deal. So I agree with Tony. Maybe being a debt partner is actually better for you, or you could do both. My very first deal, I had a partner who was an equity partner and the debt partner. So he actually got monthly payments every month, 5.5 % he was making on his money, and he was also 50 % owner of the property. Now, this was a very good deal for him. I probably wouldn't recommend doing that for your first deal. It's like giving up that much equity, but also you're on the side that my partner was where you're getting all of these benefits.

4:18So maybe instead of 70, 30, you actually do the 50 and then you do, you know, you're making five and a half percent interest and you get monthly payments to yourself, or, you know, you wait until the end of the deal and actually pay yourself interest or pay yourself off at the end of the deal. So when you sell the flip, your balance is repaid to you. The capital is repaid to you. Then maybe you're even making, even if it's a small amount of 3 % interest or something like that. So I think be very confident in the difference between the responsibility of being a debt partner compared to being an equity partner.

5:01But I think in this scenario that you have the opportunity to be both. So you could put the lien on the property as the debt partner so that when the property goes to sell, you're getting paid first before you and your partner get a capital distribution from any profit that is paid out. So I would try this way out for your first deal together. And then maybe if it goes well and you down the line, you can just say, you know what, I don't need to do the debt partnership part. Let's just do full on equity. Yeah. I think, yeah, you bring up a really good point, Ash. And again, it goes back to what we say often is that there's no right or wrong way to structure a partnership.

5:42It's really more about what the two of you feel most comfortable with. But I think that maybe one of the questions that you guys should answer amongst yourselves is, well, what happens if your contracting partner doesn't fulfill his duties? Like what happens if he misses a lot of deadlines, or maybe just isn't showing up to the job site, or the work that he promised to do isn't being done? What then can you do as a money partner to kind of course correct this deal? And maybe it's like, okay, if you miss deadline by X number of weeks or certain milestones aren't met within a certain timeframe, then maybe you as the person who brought the capital has the ability to swap him out with someone else.

6:19Or maybe he loses his 30 % equity in that deal and now there's something else. So it feels like maybe there's some solutions here, but honestly, I feel like the best solution, if you've already asked some question marks, is just to be a straight up debt partner. That'll simplify this in a way that I think allows you to sleep a little bit easier at night. You get more of a quote unquote guaranteed return because there's that note there. And you don't necessarily have to worry about like, hey, what happens if the deal doesn't go according to plan? Because if it doesn't, you're still obligated to kind of get that return.

6:46Now, where you actually get it is a different story, but at least you have that obligation there that he's supposed to pay you back. We're going to take a short break, but when we're going to come back, we're going to go over a scenario where someone's purchasing a duplex that has a tenant in place, but they also want to live in the property. We'll be right back. Okay, we're going to shift gears for a minute to cover something important, especially for new landlords. The shows often talk about getting stuck doing everything ourselves and the cost of sweat equity. The key question is simple. Is my time better spent elsewhere?

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8:54Stop searching for tenants and start choosing them. Start today at avail.co slash biggerpockets. That's A-V-A-I-L dot C-O slash biggerpockets. Okay, welcome back. Our next question is from Isaiah in the BiggerPockets forums. I'm planning to make an offer on a duplex listed around$455 ,000 here in Raleigh. I'm planning to live in one unit and rent out the other so owner occupancy is a must for my FHA loan. One side is vacant. The only wrinkle is that the tenant on the other side has a lease that runs until July, 2026, about eight months from now. My goal is to have vacant possession at closing or as soon as reasonably possible after without putting pressure on the tenant or making the seller's life difficult.

9:39For those who've been in similar situations, what's the best way to structure this in the offer so it's fair for everyone, seller, tenant, and myself. Should I ask for the seller to provide notice to the tenant right after due diligence ends? Request delayed possession until lease end and possibly negotiate a rent credit or reduced purchase price to offset holding costs? Include a vacant possession clause contingent upon lease termination before closing. Any examples of how you worded this in your own offers or leases would really help. My goal is to keep this deal smooth and respectful but still align with the FHA owner occupancy rules.

10:15From what I've learned on the BP podcast, inheriting tenants can sometimes be more trouble than it's worth because they're used to the previous owner's way of doing things. I want to make this transition as smooth as possible and avoid stepping in as the bad guy trying to change rules or expectations. So one thing I want to clarify here, Tony, and tell me if you understood it the same way. Is he thinking that he needs to have the whole property vacant upon possession or he just wants to have it? Yeah, my my understanding is that he just wants to have a clean slate when he steps in because one side is already vacant for for him to move into.

10:52But yeah, it sounds the bottom down there right from what I've learned. Inheriting tenants can sometimes be more trouble than what it's worth. I want to make this transition as smooth as possible and avoid stepping in as a bad guy. So it sounds like he's he's just got maybe some fear and hesitation around inheriting tenants and just wants like a clean break. Yeah, because he said, my goal is to keep this deal smooth and respectful, but still align with the FHA owner occupancy rules. So just to be clear, if anyone did think that you can have one unit rented out, you just need to have at least one unit for you to live in.

11:26So like this property, as is, does comply with FHA rules. You don't need to have the whole thing vacant for you to move into when you close on the property. So inheriting tenants. I've had the good and I've had the bad. I've had one lady that I inherited and when I inherited her, she lived there for 30 years and it's been eight years and she's still living there. Wonderful, wonderful tenant. We also had people where we've evicted them within the first six months of taking over the property. So definitely is difficult because you aren't the one that screened the person. So you don't have the background.

12:05You don't know what their credit score was. You don't know their background check. And you didn't get to decide who's moving in or into the property. So I can understand where this person is coming from is wanting a clean slate. So when you're negotiating with the sellers on this, understand that I don't know North Carolina laws, but in there anything like New York, it's very, very hard to get a tenant out for just because you want them to move out with no significant reason. So usually that's non-payment of rent or if the lease is up for renewal. But if they do have a lease in place, it's very, very hard to get someone out.

12:45The thing that I could offer you to suggest is to do like a cash for keys situation where you ask the sellers, you could ask them first if they would be willing to have the property vacant. Maybe the sellers already know a way to make that happen by offering cash for keys or they know some way to get the tenant out of the property. You could put that in. If they say no, they're not going to do that, then see if they would be willing to have you offer cash to the tenant to vacate before they move out of the property. So the only problem is with this is if I was the seller of the property, I would be very cautious of getting the property completely vacant because what if we don't close on the property?

13:31And now I'm stuck with a vacant building with no tenant in place and we didn't close on the property. Now I have to start the whole sales process all over again and who knows how long that could take and now I'm sitting vacant. So also think about the seller side of things. But another thing you could do is just wait until you have ownership of the property and you could serve notice that you are going to terminate their lease at the end of their lease and it's not up for renewal. And again, this is dependent on state laws. I'm pretty sure California can't even do that. You have to offer renewal unless it's like something crazy like you're demoing the property or you're moving a family member in something like that so make sure you know your state laws but worst case scenario you put something in place so the day you take ownership you're working towards making sure they know that their lease is terminated at the the end of the eight months but so step one just ask the sellers ask if they would be willing to have it vacant the next step is to offer a cash for keys you know see if they would be okay with that that you offer cash for keys to the tenant that's in the property to move out by the time you close on the property and then third is have a plan in place for when you take ownership for when that lease does expire that they are vacating the property ash let me ask you a follow-up question i think in my mind it part of it comes down to how good of a deal this actually is because if you're getting like a really killer deal even if this tenant doesn't pay for eight months like if you plan to hold this thing for the next 5 10 15 20 30 years eight months out of that time frame is a relatively small percentage so i i guess the question that i want to ask you ash is let's say that the maybe the the current owner tells the the this new buyer man these tenants have been a real pain in the butt actually hate being their landlord like they complain about everything they pay on time but they're just like hard to deal with.

15:34Would you, if it was like a really killer deal, still buy that and knowing that it's an eight month lease? Yeah, I would because I also look at it as like, okay, here's one of the other things he said was, what if I do delayed possession where we wait for closing and then they're getting a credit for holding costs or whatever during that time. But you as the buyer of the property, if they know this property is sold, but you're taking delayed possession of the property until that person is moved out, are they going to care about the property? Are they going to – I'm buying a house right now where I saw it in the spring.

16:15We just went under contract, so this is like almost six months later. The gutters are falling off. I was looking at pictures from the spring compared to how it looks now. And just from it sitting for six months of them, like just knowing they're going to sell the property and not really, they're not, they didn't put it on the MLS, anything like that. It's like, I cannot believe how dilapidated it looks just through the six months from nobody living there, nobody taking care of it. and that's what I would worry about too is that delayed possession as in you know they're not going to take care of the property and just like as a seller too I wouldn't I would just want to offload the property like there's a reason I'm selling it and I don't want to wait eight more months um for the the buyer to take possession of it too yeah sure it's uh you know my oldest son is a senior in high school right now so we're having a lot of talks about senioritis and it's almost the same thing it's like when you can see the finish line is so close you kind of take your foot off the gas.

17:14So yeah, I didn't, I didn't think about that from the seller's perspective, but I mean, yeah, I think if it's, if it's a good deal, Isaiah, I would say, so move forward with it. Don't, don't let a good deal slip through your fingers because there's a tenant there and you don't even know how great of a tenant it is. And like, again, in a worst case scenario, maybe just underwrite, like, Hey, what happens if they didn't pay for the next eight months or even the next 12 months, right? You've added some additional time to evict them if you need to. But if they didn't pay for 12 months, what does this deal look like?

17:39If I had to float this by myself. Since it's a house hack, there's a chance that maybe whatever you're paying for your new mortgage is the same that you've been paying in rent anyway, right? So I think that there's maybe some other elements to consider about whether or not you should or should move forward with this deal. Let me ask, right, because you did say that you had one tenant you inherited, lived there for however many years, others that you wanted to evict on day one. Were there any maybe red flags during the closing, you know, your due diligence period that you maybe overlooked where now you're like, okay, I know I'm always going to look for this to see if I get another batch in it?

18:15Yeah, there actually was one and it was a four, actually a five unit before residential. And the first red flag was when we went to see the property, we couldn't get into that unit. The person was working. The next red flag was that while we were like, during the closing process and under contract, one person was already evicted from that property. Then the third red flag is in my final walkthrough inspection, the morning of closing, we still can't get into that other unit. And my real estate agent said, yeah, you're not getting into it. He's not allowing access. The seller isn't pushing it. You're not getting into it.

18:59And it was that circumstance where it was a good enough deal that it didn't matter. Like we had already baked into our numbers. We were rehabbing every single unit in there. We, you know, one thing too was we were under the impression it was a one bedroom, but it's actually a studio, but it gets crazy amount in rent. So like it wouldn't matter, I guess. But they paid for a while and then they stopped paying and then we had to go through the whole eviction process with them. But I think the fact that they were giving trouble to like get into the unit and like that was like another red flag. I think that and then just like the owner didn't even really know like that that wasn't a one bedroom like I guess so it was it was just like all of those little things and like somebody else in that property was already like this was pretty like run down when we bought it so like I guess there was like the red flags of like this isn't the greatest building to live in so like why would a really good quality tenant want to live here, I guess.

20:11So I think as long as you're setting yourself up for the expectation that you may need to clear house and get other people in there, or if you are not knowing the condition of units, like making sure that you're baking it into your numbers, that this could be a full rehab of that apartment too, not knowing the condition of it so um there's there were those little red flags um so i mean at least as a you know what to look out for and hopefully it still works out for you you know and then we'll bring you on to the podcast as a guest and you can talk about how great this story was or maybe we'll bring you on as a guest you can talk about how horrible it was and the advice we gave you was uh was not great advice so either way it'll uh it'll make for a good story all right guys we've got one question left and we'll hit that right after a quick word from today's show sponsors but while we're gone If you're not yet following us on YouTube, there is a Real Estate Ricky YouTube channel.

21:03You can find us at Real Estate Ricky. You can see mine and Ashley's smiling faces. But you guys can be a part of the community on YouTube as well. So we'll be right back after a word from today's show sponsors. The rise of the tech savvy investors here. You don't need a huge team or tons of overhead to manage rental properties. Just the right tools. So I want to tell you about how I use RentReady to get ahead. For landlords who treat their time like capital and recognize the cost of sweat equity, This tool gives you everything you need to scale. Rent collection, tenant screening, maintenance accounting, so that you're organized come tax season, and you can run numbers in preparation for future deals.

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25:29And Jacob says, is anyone successful in scaling a short-term rental portfolio? If yes, how many properties do you have? And are you still growing? Or is the current market too unfavorable? It seems that being so much more hands-on that they are a little bit harder to scale, but I'm curious what people who actually built portfolios think. That's a great question, Jacob. So 1 ,000%, it is true that managing one single-family short-term rental is going to take more time, effort, and energy than one single-family long-term rental. With a long-term rental, you're signing a lease for 12 months. To Ashley's point on the last question, you might get someone who saves here for decades.

26:13With a short-term rental, your average date of ration is probably between two to three to four days depending on the size of the property and the market, and you could have multiple people coming through on a monthly basis typically. So just that sheer increased volume of foot traffic through the property, the different personalities you're dealing with, the expectations that people have, you know, when they're booking a place for their vacation, it just in and of itself is going to require more work. Now, I think that, and I don't know if you saw this actually, Ash, yesterday, but there's a short-term rental company called Sonder.