Making $92,000 (Tax-Free) from One Real Estate Deal

19:06Tony J. Robinson:So I just want to break down the math here for the rookies that are listening. So Tony bought this house at$292 ,000. He then invested another$40 ,000, or he said$47 ,000 into the rehab, right? So you're all in for$339 on this deal, and it appraises for$500 ,000, okay? So now the difference between Tony's all-in costs, the 339, and the 500, what is that? $161 ,000 spread between those two figures, right? So Tony, the bank was willing to give you the 400K. Your initial mortgage balance was somewhere south of 300, and that's how we landed on that$92 ,000 tax-free. And guys, for all of our Rickies that are listening, when we talk about the BRRRR strategy, this is the BRRRR.

19:58Tony J. Robinson:You buy a property undervalued, you put money in to increase the value, and then you get to keep the difference tax-free because it's a loan. It's not income, it's a loan. You get to keep that difference tax-free. And we've seen many, many people build their portfolio time and time and time again. Tony, last question for me on the refi piece. oftentimes there's what's called a seasoning period where after you purchase a property, a bank wants you to wait a certain time period before you do the refinance. Were you subject to that seasoning period? And if so, how long was it? Not that I am aware of, probably because it was our primary, but we did purchase this property with the intent of selling after the two years so we could avoid capital gains.

20:46So we had waited that long. But at that point, loved the house so much, decided we were going to stay and just do the refi instead.

20:54Tony J. Robinson:Okay. So you had waited two years before you did the refinance. Yeah. Right. Gotcha. Gotcha. Ash, I think most banks, at least what I saw was like a six month minimum.

21:03Ashley Kehr:Yeah. Six to 12 months. Okay. So now that that money has hit, did you feel like freedom or was this like a$90 ,000 weight on you? And what kind of stopped you from adding any lifestyle creeping? Great question. I think it just comes down to what your goals are and what you're working towards. Super important to, you know, whether you're doing this on your own or with your spouse, in my case, my wife and I do this together. And, you know, we do annual meetings together to talk about kind of what we're working towards, where we're going. And I think just that alignment of understanding we're working towards something bigger.

21:48It's not about this$90 ,000. Let's go spend it. This is, you know, so it wasn't money we felt like we now had. It was like, okay, here's for the next one.

21:58Ashley Kehr:Well, congratulations on not feeding into that lifestyle creep. I guess now that you've done this deal, what was kind of next for you after that when you decided to stay in this property and not sell it? At this point, we're really ready to get into kind of purely an investment property. You know, up to this point, we're doing kind of quasi live and flip kind of thing. So really wanted to get into more of just an investment property, wanted to start building a rental portfolio. So, you know, our next step from getting this $90 ,000 windfall was looking for a rental property.

22:39Tony J. Robinson:And where did you guys go, Tony, to find that deal? So just about 45 minutes away from where we live is a little bit of a, more of a BC class area, working class, and just a lot more affordable prices and numbers that worked for rentals. And for all of our listeners, Tony, what market are you in? Yeah, so I am in St. Augustine, Florida, which is kind of part of the greater Jacksonville area. So I'm in St. Augustine, and then our rental is in Palatka, Florida. So on this Palatka rental, you take the funds from this refinance. How much did you put down, and how did your initial underwriting compare to what actually happened?

23:28Yeah. So we did a traditional investment loan on this. So they wanted 25 % down. So we did 25 % down. I think the purchase price on this one was$165 ,000. And we also did some repairs on this property. You know, one quick tip I would say in that regard is, you know, looking back on how I managed that, it was definitely a very inefficient use of cash. Combining the 25 % down and a property that needs work, that's just a lot of cash to use on a single property. Had I done it again, I probably would have just bought turnkey rentals maybe, for example. I could have bought a few of those. So definitely a learning lesson there.

24:21But in terms of how the numbers worked out, this one penciled out to where we were expecting about$200 in cash flow a month. This rents for$1 ,550.

24:39after accounting for repair expenses, property management taxes, we were expecting about$200 in cash flow. The curveball that got hit with us here on this one, though, was the tax increase on the property that got assessed after we purchased it. So I'm not looking at the numbers right now, but the original tax amount that I had projected based on the county records was, call it$150 a month. And it, I think, almost tripled per month. So it essentially wiped out that cash flow that we had. Yeah.

25:27Tony J. Robinson:And I want to talk about that because we've heard that multiple times on the podcast here where the property taxes end up changing significantly from, hey, when you underwrote it and then what it actually is when you take ownership of the property. and I'm no property tax expert, right? So take this with a grain of salt, but typically the way that it works is that counties will assess, like if you look up a property's address and like your county assessor's website, there's like an assessed value of that property. Typically not directly related to the market value, like they have their own assessment process, but they'll have an assessed value.

26:09Tony J. Robinson:And sometimes they'll assess that on some regular cadence. It could be annually. It could be every five years, whatever that cadence is. It varies from place to place. But it also often gets re-triggered on the sale of the property. So if the part property hadn't been assessed in quite some time, maybe it hadn't changed hands in quite some time, that assessed value might have been incredibly low. And then once the sale happened, it triggered a reassessment, which increases those property taxes. So one of the things that I like to do when I'm looking at properties is try and understand when was the last year that was assessed.

26:49Tony J. Robinson:And that'll give you a better sense of, okay, well, what should I expect going into next year? And sometimes you can call the county and say, hey, what is your calculation for property taxes? Like when we bought our hotel, that's what we did. Like we weren't sure how the property taxes were going to change. We just called them and said, hey, we're looking at buying this property. Walk us through the math behind what the property tax will be if we buy at X price. And we were able to back into it in that way. So I've heard it many, many times that the taxes have hit folks. Ash, have you ever had like a similar jump like that in your portfolio?

27:21Ashley Kehr:Not anything crazy like that. Not huge, significant, just like small increases, but you get the letter ahead of time, letting you know what, you know, your current assessment is and what it's going to change to. I've actually had it where the tax rate changes. So even though my assessment went up a little bit, the tax rate decreased. So like I actually was paying a little bit less in taxes. So like it could go the other way. I have to say that's probably pretty, pretty rare. And it was a very insignificant amount of money. But even though it was assessed more, because I'm always looking like, should I dispute this?

28:02Ashley Kehr:And but then I looked and I was like, oh, it's actually less I'm going to be paying this year. Another thing I would mention just while we're on that topic is to make sure you look out for any kind of like homestead exemptions as well. If, you know, the current owner has a homestead exemption, you're not going to have that exemption when you turn it into a rental. That is such a great point. There's also like in New York, we have like a star savings. We have a VA discount, which is probably across the country. And then there's also like a senior citizen discount, too. I don't know what they call that, but that could be on there, too.

28:35Ashley Kehr:And you're right. That is you have to actually read the tax bills. Just don't go what it says on Zillow or what the owner is telling you. actually look up the physical tax bill, which would be on the county website. Sometimes if you're paying school taxes, they're on the school website and get those physical copies or just ask the seller of the property for the physical copies of them.

28:56Tony J. Robinson:So Tony, if you were underwriting that same deal today, I guess what line items would you look at? And just as you think about your next deal, what is the one thing that you're like, okay, I'm always going to check for this. Now, I'll give you a quick example in our portfolio because we had a rehab that we did that we turn into a short-term rental and we have the sewage smell that we couldn't fix in one of the bathrooms. And we did all this stuff and turns out that my contractor, when they did the rehab, didn't put a P-trap. And now, anytime we do a rehab, we say, it's a P-trap there. Did you do the P-trap?

29:29Tony J. Robinson:There's a million other things that are happening in the rehab that we're obviously checking. But one of the questions we always ask now is, is there a P-trap? So what is your P-trap for property taxes as you look at your next deals? Yeah, I mean, I think it comes down to being conservative. You don't want to, you know, I think we all get into, you know, can get into a place of where you kind of number yourself out of a deal. So you don't want to get too conservative, but you always want to be conservative with your numbers. certainly obviously in my case next rental I buy in Palatka, Florida, I'm literally just going to triple the rate.

30:09And, you know, the reality is worst case scenario, it doesn't go up that much and I've just got that much more cash flow, right? The other thing is something I don't hear a lot of people do when they're starting out is the whole, you know, going with property management. That's something I would definitely recommend and do again myself. But from a budgeting standpoint, I think that that also gives you a little bit of a cushion. I'm still using property manager on that property. I think it's worth it to me. But in the event that cash flow goes down even more, I still have kind of a break glass option of doing the property management myself and getting that cash flow back.

30:57Tony J. Robinson:All right, guys, stick around because up next is the$2 ,000 tuition flip. There are ghosts of contractors, flea bombs, and a nine-day fire sale exit. So we'll hear what happened right after a quick word from today's show sponsors. If I had to hire someone to join the BiggerPockets team, I wouldn't just go looking for someone who checks a few boxes on a resume. I'd want someone who understands real estate, can move fast, communicates well, and can jump into a fast-paced environment without missing a beat. When you need that kind of person, this is a job for sponsored jobs. Sponsored jobs posted directly on Indeed are 95 % more likely to report a hire than non-sponsored jobs.

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32:44Ashley Kehr:Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at indeed.com slash podcast. That's indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. This episode is brought to you by Facebook. So you were scrolling on marketplace and there it was the bike you'd been searching for. You sent a message and it turned out the seller was super chatty, kind of funny, and an avid cyclist. The next thing you know, you're in a cycling crew. Well, a community cycling group.

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34:27Tony J. Robinson:Together, let's drive. All right, Tony. Up next, you got a$60 ,000 house that looked like a steal, but I guess it kind of quickly went off the rails. So give us the kind of quick and dirty. What were the kind of blinking red signs that maybe you missed before you signed the deal? Yeah. So now we're coming into like this past year. So obviously with interest rates, the rental market isn't as great or buying rentals. The numbers aren't as great. So I was looking into more of a flip in the meantime to kind of generate some funds. So I've been getting deals from wholesalers. This is one I got from a wholesaler.

35:09Went and looked through it. I actually ended up originally going under contract on it at 80 ,000 and got cold feet after kind of walking the property some more and kind of as it set in to me of how much work this place really needed. So we actually fell out of contract originally. And then the seller contacted me again a few weeks later and said, do you want it for 60? And at that point, having already kind of gone through the motions and trying to make it work at 80, I was like, oh, at 60, I can definitely do this. Let's let's do it. So, yeah, I mean, just to kind of paint a picture, this is a, you know, 1940s concrete block house.

35:59You walk into the house and there's no ceilings, no drywall, no floor, no electric. I mean, it's about as far gone of a place as you can get.

36:12Tony J. Robinson:So, Tony, let me ask, right? Because you had done a few rehabs already with the live-in flips, some minor cosmetic improvements on the rental property. As you walked this one, what gave you the confidence, whether justified or unjustified, what gave you the confidence to walk into a house in such disrepair and say, I think this is a good next step for us. And let me ask some consequences. The reason why I ask that is because I do think that it's important for investors to maybe challenge themselves to take on projects that are a little bit more challenging than what they've done before, because I think that's how you get better as a real estate investor.

36:55Tony J. Robinson:But I also think that maybe there's a point where you step too far outside of your existing skillset and knowledge base, where you end up jumping into maybe a deal that could be dangerous for you. So how do you gauge when you're in that growth opportunity versus a dangerous opportunity? So as you were walking the deal, what was going through your mind to say, okay, I think this is a good next step for us? Yeah, I think my big blunder, to be honest with you, is that I did not, as far gone as the property was, the whole structure was still there. and so I was originally thinking that it was still work that I could do myself which I was used to doing I know I'll put in the hours it'll get done as fast as I can do it kind of thing but after getting into the nitty-gritty walking with a couple contractors realized that it needed some significant structural work, which needed a licensed contractor, permits, the whole shebang.

38:01So that was really the big hiccup was all of a sudden my reliance on an outside contractor to get the work done.

38:11Ashley Kehr:When did you start to realize that you're going to lose money and you need to exit this property? It was really kind of just as the timeline kept getting pushed out. Just kind of based on my W-2 work, I've done a lot of project management. So from a, you know, rehab project management, I'm really organized. I have a whole timeline out. So as I continued to struggle with contractor after contractor and the house was sitting, you know, I'm now projecting a finished date out into the fall, you know, getting into the holidays when you don't want to be trying to sell a house. So that's when I really started to think I might want to get a different exit here.

38:52Tony J. Robinson:Can you tell us really quickly, Tony, about, I guess, some of those challenges? I know that there was like a Mercedes driving pit bull breeder. Yeah. GCs, ghosts and you, you know, flea infested inspections. I guess, how did each of those obstacles impact and adjust both the budget and the calendar? Yeah. You know, from a contractor perspective, it's rough out there. And I think we've all heard that, but I didn't realize quite how rough. So, um, yeah, one of, one of the examples that had a contractor out, um, you know, showed up in a nice Mercedes, kind of said the right things, um, you know, got down to the nitty gritty of, you know, asking what paint colors I wanted in the finish, um, ended up sending me a formal bid online asking for a deposit.

39:41Um, but I, you know, one of the things you can obviously do, and I would recommend is to look these people up on social media. So this guy, for example, you go to his Facebook page and it says he's a dog breeder. Nothing about contracting. There's no pictures of work he's done. So I got a bad vibe from him and just told him I was going to go a different route. A couple months later, I saw in our local investing Facebook group that somebody had in fact paid him a deposit and he disappeared. So I dodged a bullet on that one. But I went through, I think, seven different contractors on this house.

40:24None of them actually ended up swinging a hammer.

40:26Tony J. Robinson:So Tony, let me ask, right, because that's a lot, you know, and I think that there's a lesson in there. So what do you think was is the common denominator amongst all seven of those folks that you now know to look out for before you hire someone else? I think part of the challenge with the sourcing a contractor is the reality is the good contractors don't need work, right? So when you kind of, you know, put a post on Facebook in the investment group or whatever the case may be, you're trying to find a contractor on your job, the guys that are, you know, coming out and saying, yeah, I'll be right there.

41:13You know, there's probably a reason that they don't already have work going on. At least in our market, from what I see, the good contractors are just going from job to job and they don't need to market or look for new work. Um, so, um, you know, ideally I think the best way to get a good contractor is through word of mouth. Um, somebody, you know, use them and, you know, hopefully just doesn't happen to need them right at this time. So you can use them kind of thing. But, um, I would say once you do find the good contractor, make sure you take care of them.

41:51Tony J. Robinson:So let's talk through how you eventually walked away from this deal, right? Because, I mean, honestly, Tony, you had two, really three successful deals, right? You had the first live and flip net at 50K. The second live and flip, you refinance and get almost 100 grand. You get the long-term rental, which even though it's not giving the cash flow you want, there's still some upside there in terms of equity and depreciation and all those different aspects. And then you kind of get your face punched in on this last deal. So how did you walk away from it? Did you see it all the way through? What was your actual exit strategy?

42:25Like I said, kind of as I kept looking at the schedule and it getting pushed out and, you know, another contractor falling out, I decided it was time to at least try to sell it just for sale by owner, put a sign out front, put a QR code on there with some information sheet and just put it up for cash. I listed it for$85 ,000 cash. And my thought there was, I can still work towards what I'm doing. I can still try to get this property done. But in the meantime, if somebody's willing to just take it off my hands for$80 ,000,$85 ,000, then maybe it's better for me to just walk away at this point. Um, you know, and I'll say it's one, um, you know, positive about the whole kind of working in W2 and doing investing on the side.

43:17I didn't need to make money from this flip. Um, I wasn't dependent on it. It wasn't paying my bills or anything. Um, and so I was perfectly okay with this just being a learning lesson in the end.

43:29Tony J. Robinson:But Tony, I think it also illustrates how critical it was that you didn't buy that deal originally at the 80K and that you got it at the 60K. Because had you bought at 80, instead of losing two grand on the deal, you would have lost$22 ,000 on the deal. So I think it goes back to if you can buy at a really good price, that oftentimes can offset other things that go wrong on the deal. And this is like a perfect example of that. Absolutely. Yeah, I agree.

44:06Ashley Kehr:Well, Tony, thank you so much for joining us today. Can you let everyone know where they can reach out to you and find out more information? Yeah, absolutely. Instagram is probably the best spot. You can just look Tony Borman, my name, and feel free to reach out if you're in the area or you're investing from out of state. I'm happy to connect. Well, thank you so much. We really appreciate you taking the time to share your story with us today and to give some lessons learned. I'm Ashley. He's Tony. And we'll see you guys on the next episode of Real Estate Rookie. That refresh you've been putting off until the right deal came along?

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