Pay Off Your Property or Buy More? + Handling Repairs with Tenants in Place (Rookie Reply)

0:00Tony:Today, we are kicking things off with a question that every landlord eventually faces. What do you actually owe a tenant when a repair turns into a full-blown project and their living space becomes unusable?

0:12Ashley:And this one gets interesting fast. It's not just about fixing a bathroom. It's about what's fair, what's reasonable, and what responsibilities belong to the landlord versus the tenant. We also get into when you should be reviewing your investments and what to do when an opportunity actually comes.

0:32Tony:This is the Real Estate Rookie Podcast. I'm Ashley Kerr.

0:35Ashley:And I'm Tony J. Robinson. And with that, let's get into today's first question. So today's first question comes from Brandon in the BiggerPockets forums. And Brandon says, about a month ago, new tenants moved into one of my rental houses. After they moved in, they discovered a leak in the bathroom. My maintenance guy checked it out and said the entire tub has to be ripped out and most likely the subfloor needs to be replaced as well. it's about a four to six day job. Obviously that means they'll be without a bathroom for a few days so we offer them two options. Number one comp their rent for the days the bathroom is unusable or two let them stay in one of our vacant three-bedroom units for free until the work is done.

1:14Ashley:They chose the temporary unit but then asked if we could also rent a truck to move some of their belongings over there. I personally don't feel like that's something that we're responsible for. The repair is unforeseen and out of our control and we already provided temporary housing or rent relief. For context, our lease also includes a section recommending renter's insurance, but as far as I know, renter's insurance would not cover the cost of a moving truck in this situation. So here's my question. As a landlord or homeowner, what would you do? Do you think covering a moving truck is our responsibility?

1:44Ashley:Are we being fair with the options we offered? And then finally, some people are also saying that maybe giving them a place like an Airbnb or hotel, but in my area, there is not any Airbnbs and hotels are limited. They do have a dog and the hotel would not allow the dog. All right, bit of a sticky situation here. And this is never, I think, a fun time when you got to take a tenant out of their unit. I know when I worked at, again, very briefly after I graduated from college, I worked at this big leasing company. And they actually had, I mean, they had like thousands of units in the town that I work in, or that I live in.

2:18Ashley:And they had, at a few of their larger complexes, units that were fully furnished that they would just keep empty for these kinds of situations. So if a guest had something to prevent them from staying at their own unit, they would say, Hey, we have our, our hotel, uh, at one of our other properties, you can go stay at. So that was, that was kind of their, their way to work around that. But Ash is someone who has a lot of experience in this. What, what is your initial take on whose responsibility it is to cover the cost of this move and getting them from the unit they're in to the, to the vacant unit and then back?

2:47Tony:Well, the first thing I thought of is four to six days It seems like a really long time for them to replace the tub and the subfloor. I had a unit where we had similar situation. The tub needed to be ripped out. The drains all replaced. And this was for an upstairs unit. So there was a tenant living downstairs, tenant living upstairs. Their bathrooms were right on top of each other. And so they did it within 24 hours. So they came one morning. They ripped everything out. They started putting everything together and making all the repairs, and they were done by the next day by 1 p.m. The upstairs tenant was currently being evicted and actually called fair housing on me, saying that I did not give him a place to live, and he couldn't use his toilet, couldn't use his shower, blah, blah, blah, which he could use his toilet.

3:41Tony:The only water that was not working was to the shower. His bathroom sink worked, his toilet worked, and his kitchen sink worked and it was just a shower. And the fair housing agreed with me and said, 24 hours is a completely acceptable time period to go without a shower to make a repair where he was getting a brand new tub and a brand new surround put in and new drainage, which he had been complaining that it wasn't draining properly either. So you're making the repair that he requested. So that would be the first thing is contacting other plumbers and seeing if there is a different time frame than four to six days to actually get that replaced because I feel like it could be done.

4:25Tony:Maybe if it's this huge bathroom, but if you're just replacing where the tub is, I don't see it taking that long. So I would try and find a contractor that can do it in a shorter amount of time. I would have recommended the hotel before he added that section at the bottom. That's what he, there's not a hotel that accepts a pet. So maybe what you could do in that situation is do the hotel, but also set the pet up at a boarding place or a groomers or something like that, where they take in dogs and you could pay for the dog to be boarded for those four to six days. And then you could also pay for their housing.

5:06Tony:If they accepted or not, I feel like that's on them. I definitely agree not to rent the truck for them and take responsibility of moving their belongings. And I think, did it mention in there if this rental was fully furnished or?

5:24Ashley:It doesn't say. It just says our vacant three-bedroom unit.

5:27Tony:So like if there's no furniture in there, then yes, I could understand why they want to move some of their stuff if there's no furniture in there. So maybe you should provide some kind of assistance in moving for that period of time. But I think I would rather not have them in one of my units and I'd rather put them up at a hotel. I mean, what if they cause damage to this unit? You don't have a lease with them on this property. Their dog, you know, rips a hole in the carpet, chews a hole in the carpet or something while they're there. I think of liability reasons. They don't have a lease agreement with you for that other property.

6:12Tony:It's a different property. Their security deposit is on a different property and not that property. I would try to reimburse them for a hotel stay somewhere else. When I used to work for an investor who had a 40-unit complex, we had to do this a couple of times where we would actually call the hotel and we would make the reservation for them in their name and we would pay it, but they would still have to put their credit card for incidentals when they arrived at the hotel. So we did it that way to set up. And like a couple of times people wouldn't even show up to the hotel and wouldn't even stay there.

6:51Tony:So I don't know, like wouldn't tell us anything. It would just be like, we'd get the email from the hotel and saying, here's your one night fee for no show for your, you know, one week's day or whatever it was. But I think try and eliminate yourself from the equation as much as possible and use third party resources to kind of take that away. But I think that the dog issue in the hotel, not accepting dogs is maybe looking for a place to offer to pay for the dog to be boarded. And then it can be up to them if they choose to do that or not.

7:24Ashley:Yeah. I mean, but you bring up a really good point, Ash, about, um, it sounds like the tub is all that needs to be ripped out. Uh, and he said like most likely the sub floor. So I guess the question is what the rest of the restroom still be usable during that timeframe. Um, and if so, you know, maybe you get them a gym pass so they can go shower at the gym if they need to for, you know, the, whatever, 72 hours while this is happening. Um, because the, the toilet it and the sink and everything else still still works i think that's that might honestly be the best approach is like hey i'll pay for you to go to the ymca if you need to you know to shower while the the tub's being replaced but everything else in your restroom is still usable um and i i

8:04Tony:love your call out of the time frame i mean unless they're gonna like tile it and things like that but like if you're just doing a standard tub with a surround like it shouldn't be that big of a job So hopefully that helps Brandon.

8:20Ashley:Yeah. It seems like he might be in a smaller town too. So maybe he's limited on, on labor. You know, the fact that there are no Airbnbs and it seems like only one hotel could maybe just be a smaller town. Don't have a lot of options for plumbing work, which, you know, we've run into in some of our cities as well.

8:34Tony:Well, I'm in a small town and I got actually really just, I think it was on Monday. I get a tenant put in a maintenance request for their hot water tank wasn't working. The plumbers showed up. They, and I didn't even know, Daryl handled all this. So I didn't even know until I got the invoice, but they called, they were there. We needed to put in a new hot water tank and the, from it leaking, the hot water tank was leaking. The subfloor needs to replace it. It had been slowly leaking for a while and the tenant never noticed. And so the subfloor was starting to rot. So they actually went to the local Ace Hardware, got materials, replaced the subfloor for me, replaced the hot water tank all in that same day in their laundry room or their utility room of their apartment.

9:23Tony:So definitely things can be done a lot faster than four to six days. We're going to take a short break and we will have two more questions from the rookie listeners after word from our show sponsors. We'll be right back.

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12:28Tony:Curious how often property owners here evaluate equity positions as part of their long-term management strategy. I think this is a pretty good question that we don't often get all the time as far as assessing your portfolio and understanding when to exit, when to keep, or how to become more strategic or how to leverage the property for more opportunities. I know, Tony, you have a five-year exit plan with a lot of your partners. In that plan, is it just to sell or do you have a plan that maybe you guys decide to refinance at that point?

13:10Ashley:That five-year plan is really more so geared towards unhappiness in the partnerships. Like if any of us were unhappy, it would just be an easy way for us to break without there needing to be an argument over what should we do. But it is an option for us as well to refinance if we find that it makes sense. Now, we did buy a lot of our properties when rates were relatively low, so I can't see a scenario where us refinancing any of these properties in the near term would make sense for us. But I do like the idea or just the question itself of at what point do you evaluate how much equity you have in a home to see if it makes sense to go redeploy that capital elsewhere?

13:51Ashley:Dave Meyer's book, Start With Strategy. I know he kind of touches on like portfolio strategy a bit as well. But I think a lot of it comes down to the person and their risk profile, their risk appetite, and what kind of portfolio actually makes them sleep easy at night. Because there are some folks who are of the mind that I'd rather have eight fully paid off properties, even if that means that my return is less than what I could get because I've got a lot of equity trapped in these. They just like the idea of not having a mortgage on any of their real estate. And for them, that makes sense. And there are others who are maybe a little bit more mathematical.

14:28Ashley:And if they get more than X percent equity in a deal, then they're like, hey, we need to go redeploy some of that equity into something else. And we're going to push back up to what our max LTV is. So let's say that someone's max LTV is 75 percent and they've got a deal where they're sitting at 50 percent. Well, they've now got 25 percent equity that they can go leverage to go buy their next deal. So I think a lot of it does come down to you as an individual and what's more important to you. Is it the growth and the scale and getting the next deal to keep the portfolio growing, you know, kind of keep putting fuel in that engine?

15:01Ashley:Or is it I just want a very small portfolio that produces some some heavy cash flow, even if even if it's not like maximized in the best way. And I don't think there is a right or wrong answer to that. It's really like a personal choice.

15:14Tony:I'm actually refinancing a property right now and I'm doing a cash out refinance. This is the first time I've ever done a cash out refinance on a property that I bought a long time ago. Usually the only time I'm doing it is I purchased the property, rehabbed it, doing the BRRRR strategy. Then I'm refinancing to pull the cash back out. This property I bought in 2014, it was the second duplex I ever purchased, second property I ever purchased. and we bought it for, I think like 70, 80 ,000 and we actually put a 15 year note on it. And there's about 30 ,000 left right now on the note. And we're going to pull out another 50 ,000 to bring the note up to 80 ,000.

16:01Tony:The property is worth about 150 ,000. The bank, I asked them, what would be the amount that I could refinance that you don't need to go in and do an appraisal. So I don't have to pay 800 bucks for an appraisal. I don't have to coordinate with my tenants to get an appraiser in there. And so as of right now, they asked me, well, what's the amount that you want? And I said, I'd like 50 ,000. So as of right now, they're gonna do a kind of a desktop appraisal, I guess, where they're looking at comparals and things like that and not actually paying for an appraiser to go out to the property, which if that happens, that's fine.

16:40Tony:I'm just trying to make things easier on myself. But that $50 ,000 is going to be used for another property that we own in that same LLC to do a bunch of improvements and upgrades. Until this point in time, any time a property has needed a big capital improvement or renovation, my partner and I have always put in the money for that, whatever we would need beyond our reserves and things like that, or to replenish our reserve. So this is the first time I'm actually doing that, tapping into a property that has a lot of equity to actually take this other property and turn it into a better property and really maximize the potential of this other property.

17:20Tony:but I think it's a great strategy to do. And I think it's been a really big mindset shift for me is like the longer you hold the property, like the more opportunities and the different options you have moving forward. So a lot of my properties, I don't want to play around. I don't want to refinance. Like I want those paid off. Like I want that peace of mind on some of those properties, but like some of them, especially the ones I have with like partnerships, I'm okay with like playing around with the money to see how I can deploy it in different places and in things like that.

18:00Ashley:Yeah. I mean, I think the other benefit too, is that refinancing and tapping into your capital that way is more advantageous from a tax perspective as well. Because if I sell a property to tap into it, that's like a capital gains event, right? Like you're going to pay on what you earned on that sale. But if you refinance, you're just getting more debt, right? And you're not taxed on new debt that you get. So there's also something to be said about leveraging that equity as like a tax advantageous way to scale your portfolio as well. So just something else to consider. But I think that's the beauty of investing in real estate is that you can talk to 100 different people who have 100 different strategies, and each one of those strategies could be correct.

18:51Ashley:Because the right strategy is very much dependent on you as an individual person, what your goals are, what your risk appetite is, and all these different elements that go into why you decided to invest in real estate in the first place. So I think a lot of it comes down to that. But to Ash's point, I think if you do want to tap into, there's probably like some math that you can look into to see, okay, well, what amount actually makes sense for me to pull out? Am I actually going to increase my cash flow by doing this? Or am I going to decrease my cash flow if I take a 3 % interest rate and refinance into a 6%, but I get$100 ,000 in capital to go buy another deal?

19:24Ashley:Am I actually ending out on top at the end? Or am I maybe making less in cash flow on an annual basis? But then you can factor in the appreciation of the other deal. So there's a lot of different ways you can look at it. I think my strong recommendation would just be to evaluate all of those levers that you're pulling to make sure that at the end, you're still getting closer to the goal that you have of why you're investing in real estate to begin with.

19:45Tony:Yeah. And I think that's a great point too, is to like looking at what works for you. And I definitely don't like being over leveraged. So like this property, you know, the comparable show that it's probably worth 150 ,000, but I'm at the 30 ,000 balance that's due on the loan plus another 50, that's still leaving me like 70 ,000 in equity left in the property where someone else would say, why would you leave that in there if you're going to refinance, like pull out the full amount and use that money to build your portfolio scale, things like that. But it's actually more important for me, even if I have slower, slower growth, to be under leveraged and to have more equity in my property so that if anything ever did happen, I have options available to me with that equity.

20:32Ashley:All right, guys, we're going to take our final break here. But when we come back, we're going to talk about how to take down a really solid deal when you maybe don't have enough funds to do it. So we'll be right back after we're from today's show sponsors.

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