Should I Use My Home Equity to Buy My Next Rental Property? (Rookie Reply)

0:00What if the hardest part of real estate isn't finding that first deal, but knowing what to do after you get it. Today, we're answering three real questions from the BiggerPockets forums that hit the exact pain points that rookies like you are running into. Scaling the right way, pricing rentals correctly, and setting up a short-term rental without all of those costly mistakes.

0:24This 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. So our first question, again, comes from the BiggerPockets forums, and it says, I currently own a property that has around$110 ,000 in equity. While I do not have a renter in this property yet, my plan is to have one by the end of the year, currently still renovating parts of the house. With the amount of equity that I have, I've been thinking a lot about investing in a second property. I've always had the dream of owning vacation rentals. However, I don't have that much capital and I worry about the feast or famine aspect of short-term rentals.

0:58I guess my main questions are, what's the best next investment for someone who is relatively new to real estate investing? Is the BRRRR method smart for me? And should I do a cash out refi to help fund the next investment? All right. So basically this person is just asking, hey, they've got some equity built up. What's the best way for them to deploy that? I think first, let's just define for the rookies that are out there like equity and what does that actually mean, right? So when we talk about equity, we're talking about the value of the home. What is the home currently worth? And what is the loan balance on that house?

1:28And the difference between those two numbers is your equity. So I think my first question back to the person who asked this question is, how did you come up with that$110 ,000 of equity? Was that based on like the Zillow's estimate where it said that your house is worth X amount and you know what your loan balance is or that your neighbor's house sell for a certain amount? But I think getting some clarity first on how you came to that equity figure would be important because that'll give you a better gauge on how accurate and how much equity you actually have to work with. Um, so that's the first part is just defining that.

2:02But for you, Ash, I think before we even get into, uh, what strategy or maybe what move makes the most sense, this person also asked, like, what's the best way to tap into that equity? Is it a cash out, uh, refinance or is it a HELOC? What, what's your recommendation? Yeah. So I would say for this one, they own the property, but it's going to be a rental. So you would have to do, you couldn't do a, you know, a refinance or you couldn't get a, a home equity line of credit or do a residential refinance. You would have to go and get a commercial line of credit on the property. So look for a local lender that will do these commercial lines of credit.

2:40You want to talk to the commercial lender at the small local bank and see what options they have available for you. The two lines of credits that I have are commercial are first liens. So that means that there's no mortgage and no other debt on the property. So that is something you want to clarify and verify with the commercial department that the line of credit will actually be a second lien, which is traditional for most home equity lines of credit. So you have your mortgage as your first lien, and then the line of credit is the second lien on the property, meaning you don't pay your bills, goes into foreclosure, the mortgage getting paid first, then the line of credit.

3:20So it's that positioning. And some banks don't offer a second position for a rental property. So that's where I would ask and get that clarification on that before you go ahead and start the whole process to get a line of credit. If you do refinance on the property and it's going to be a rental, you have a couple options there. You can go to the commercial side of lending for a small local lender, usually you're going to have to do different amortization and fixed rate periods than you would see on the residential side. So for example, you're maybe looking at a 15-year amortization or a 20-year amortization instead of the 30-year amortization.

4:04Then you're going to see a fixed rate, not for 30 years, but maybe for 5, 10. I've seen it for 7 years. and then it goes into variable or you can refinance again to get another fixed rate. You can do a DSCR loan where this is looking at the debt you are going to put on the property and can the income, so when you rent it out, actually support the property and you don't have to rely on your own income to support the property. And so if you have a high debt to income on the personal side, this is always a great option where they're looking at the value of the property and the income potential of the property instead of you to making sure it can support itself.

4:45And a DSCR loan, they do have that nice 30-year option amortization and 30-year fix to look at. So something to take into consideration when you're looking at two of these options is what is the current interest rate on the mortgage that you have right now on the property? If it's like a 2.9%, then we're probably not going to want to refinance. The only reason I would refinance out of this property, if you have a really low rate and you're going to refinance into a higher rate, is if there is extreme value in that equity where you can put that money into something else and make such a large return that that interest rate and that increase in interest rate means nothing to you because it is very, very minimal compared to the amount of money that you're making in the new deal that you're putting that equity into.

5:36So look at that upside potential and kind of evaluate that. And it goes back to running the numbers in each scenario. So that's where I would start is looking at those options that you have available for just doing a line of credit or for doing the refinance on the property. Yeah, all great points, Ashley. And the next part of that question is what is the best next investment for someone in their position? And I really think that depends on you as an individual investor. First, I think if you have$110 ,000 in equity, let's just assume that aside from selling, you won't be able to access all of that.

6:09So maybe somewhere in the like 80-ish thousand,$70 ,000,$80 ,000 range, which you'll actually be able to access through a line of credit or potentially refinance. And with that amount of capital, you've got to ask yourself, okay, what is the best way for me to actually go deploy that? I think just generally speaking, I'm a fan of the BRRRR strategy because it allows you to recycle a portion of that capital. But obviously that does require you finding a deal significantly below market value, which is a skill set in and of itself. It requires you to manage your rehab, which is another skill set in and of itself.

6:39So there's some more complexity there. But I think if you have the desire to learn those skills or the ability to do that already, a BRRRR could be a great way to build your portfolio. And I've met so many investors who have taken one HELOC, combined that with the BRRRR strategy and built a decently sized portfolio by just recycling that same capital deal after deal after deal. So it is a good way to build that momentum. So I think if you have the ability or the desire, a BRRRR would be a great way to move forward. And also too, like the BRRRR doesn't just mean a long-term buy and hold rental.

7:13Like it could be your dream of doing a short-term rental too. So that can give you an extra layer of protection by doing a BRRRR for a short-term rental property, you can really have, you know, increase the value of the property. So you have more equity in the property when you go ahead and finish the rehab on it and pull your money back out. And you have this equity sitting in there to give you like a little bit of cushion and security that, okay, that feast and famine and mindset that you had. One little tip on that, like if you are worried about that, what are going to be your other strategies that you can pivot to with this property.

7:50So for example, could you easily pivot to a midterm rental? Can you easily pivot to a long-term rental with this property? So if that does happen, I had a property listed before as a short-term rental and a midterm rental, and I would leave the midterm rental booking open and I would just change it. And I would keep my short-term rental window, you know, very minimal, I think like only 30 to 60 days to keep it open. So that way someone booked, you know, 60 plus days out for a midterm rental, I could go ahead and close off the short-term rental bookings for that period because I would have rather have had the midterm rental bookings than the short-term rental.

8:28So think about different ways that you can incorporate other strategies if just doing the short-term rental route doesn't make sense. Maybe it's seasonality or you just have periods of time where there's a lull that you're able to pivot when necessary. Coming up, even the best strategy falls apart if your rent numbers are wrong. We're going to break down which rent tools you can trust and which ones get investors in trouble. After a quick word from our sponsors. Have you ever lost a DSCR deal because the financing just took too long? Red flags popped up late. The lender needed more time. The deal fell apart.

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11:30That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. Vacancy isn't just lost rent. It's a silent profit killer. Every empty day compounds the damage. Mortgage strain, rising insurance, wasted marketing spend. Most landlords wait way too long to respond. But savvy investors, they use Avail. Avail's rent analysis report helps you price your unit competitively with real-time local comps, market trends, and predictive pricing insights. And once you've priced it right, Avail also offers promoted listings. So your rental gets priority placement on Realtor.com and Zumper.

12:12So you'll fill your unit faster and stop the cash from bleeding. Plus, get access to full tools for tenant screening, automated rent collection, lease management, and maintenance tracking all in one place. Take the guesswork out, cut your vacancy gap, and start landlording like a pro. Go to avail.co slash biggerpockets to sign up for free today. Okay, today's second question is between BiggerPockets estimator and PropStream, which rent estimator do you find most accurate? Or are they pulling from the same data source? I saw a two-year-old post on this. I almost read that as I saw a two-year-old post about this, but no.

12:52He said, I saw a post that was two years old on this, but wondering what's the most accurate today. Okay, this is a great question as to where are these rent estimators getting their data from? And I'm going to be honest, I do not like rent estimators. every time I tried to use them, not enough data, not enough data in my small, little, tiny rural towns that I invested. So I have to say, I do like I use TurboTenant. And when you go ahead and list it, they have a rent estimator for you that you can go ahead and plug it in. So I always just do it and check. And sometimes it will work for me and there will be enough data and some of the areas I invest in.

13:38But I think looking at where their data is coming from and when it was last updated. So if this data is from two years ago that they're pulling, how are they getting their most recent data? This is a very old school way of doing it, but I really do believe it is accurate. And this is how I estimated rents for a very, very long time was I had a spreadsheet. I would go in and look at the listings every single day for that market. I would put them into the spreadsheet and then I would update them every day. So if a listing was gone, I would assume that that property was rented. That property was rented.

14:21And if it was rented within a 30-day period, I would assume that it was rented for the price that they were asking for. Very rarely have I, in my over 10 years of investing in the markets I choose, seen like price drops or decreases on rents. So usually you're getting what those people are asking for, or if it's continuously sitting and sitting and sitting, I know that's not a good comp and I'm not going to use that property. And then I would just track it. I would track it and see what was going on. Then I would call property management companies. I would call, like if I saw a for rent sign in someone's yard, I would call that number and I would ask, what are you charging and rent.

15:04You know, I, most of the time I would just say, Hey, I'm just interested in that apartment. What are, what are charging and rent for it? And okay, thanks. Have a good day. You know, or maybe ask a little bit more like how many bedrooms, things like that. And I could use that as a comp. Um, so you can always do that, but I think, especially if you really want to niche down on an area, you can go ahead and do this heavy lifting or have a VA do it for you too. too. But BiggerPockets, Rent Estimator, PropStream. I've never used PropStream. I love PropStream for a lot of things. I've never used their Rent Estimator, though.

15:39TurboTenant has a Rent Estimator. I think there's a website called Rentometer that is out there, too. And honestly, I would just use them all. I think they all are free to use. I couldn't agree more. I think a lot of these estimating tools are good for a general baseline. But when it comes to actually sharpening the pencil on your underwriting, I do think that that level of manual work that you just talked through is beneficial. But I think the one point that I will disagree with you on is that I think your lack of trust or maybe the lack of usefulness that you get from the estimator tools is probably because the market that you're in, but I pulled up the bigger pockets rental estimator tool for Shreveport, Louisiana, where I started my investing career back in 2018.

16:30And I typed in the address for the very first property that I bought. And at the time in 2018, it was renting for about 1500 bucks per month. And I typed in that same address. And right now it's showing that it would rent for about 1600 bucks per month, which feels about right. You know, it was 2018, right? So what is that, uh, I can do that math fast enough eight years ago, give or take that, that we, we did that. Right. So it kind of makes sense now that the rents have gone up a little bit. And I remember doing this when I first bought that property as well. And it was almost spot on to what I was actually charging in rent.

17:00So I think depending on how big of a market you are, the bigger pockets, uh, uh, rental estimator could be a good starting point, but still to Ashley's point, go back, do a lot of that manual underwriting yourself to validate, um, what you're seeing in these estimating tools. All right, we're going to take a quick break before our last question, but while we're gone, be sure to subscribe to the Real Estate Ricky YouTube channel. You can find us at Real Estate Ricky, and we'll be back with more right after this. Billion-dollar investors don't typically park their cash in high-yield savings accounts.

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18:09Past 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. That's where the Gemini credit card comes in. It earns you Bitcoin back on everyday purchases automatically. You use it like a normal credit card for lunch or gas or groceries. And every time you swipe, you earn up to 4 % back instantly in Bitcoin or one of over 50 other cryptos sent straight to your Gemini account.

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19:18Check Gemini's website for more details on rates and fees. Wouldn't it be great if your houseplants paid rent while you were out of town? I mean, they've got the whole place to themselves. Lots of sunlight, zero responsibilities. But no, they just sit there waiting for someone to spray them with some cool mist, like a bunch of leafy loafers. But guess what? Your home actually could be earning you money while you're not there. Airbnb has a great feature called the Co-Host Network, which makes hosting your home so easy. If you live far from your property or are away for extended periods, you can hire a local co-host to take care of the hosting for you.

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21:43Could you walk me through an example of your interview and hiring process for short-term rental specific crews in your area? For example, what questions are you asking when interviewing? What qualifications slash traits are must-haves? Do you pay by the job or each visit or by the hour? Do you issue W-9s? What accounting software do you use? And do you use your cleaning crews to do laundry? Or is that a separate service that you all have? Thanks so much. All right, lots of really good questions here. And this is like a pretty tactical question. And I don't think one that we've hit before out of all the Ricky reply questions that we've had.

22:18But it is a super important question because your cleaners for your short-term rental business are probably the most important people that you hire because they are the last eyes to see the property once a guest, before a guest checks in. and they're usually the first ones to see the property once a guest checks out, right? So they're the only people that have access to your property in between a guest checking in and checking out. So it's on them to really be your eyes and ears and boots on the ground to make sure that everything's flowing smoothly. And if they aren't doing a good job, it usually has a pretty big impact on you as the host, right?

22:49You'll see that show up in your cleaning fees. Or if they're not telling you about deferred maintenance issues, you'll see that show up in your reviews. So there's a lot that your cleaner does that's really, really important. So I appreciate this question. So let's kind of break it down. First, he asked about the hiring process. What questions do we ask? What are some of the must-haves? How do you pay? And then what services should you expect? So on the interviewing side, I'll kind of walk through my process and ask them to hear what George looks like. But for me, I usually want to get a sense of how big their operation is.

23:22I strongly, strongly advise against hiring a person who is a one woman or one man show. Because if you do that, you are now subject to all of the ebbs and flows of that person's life. If they get sick, if they get a flat tire, if they have a kid who gets sick, if they need to go on vacation, if they have a death in the family and they need to take some time, whatever it may be, all the things that happen in their life that would prevent them from getting to your property now becomes a fire that you have to put out. So my strong recommendation is to hire cleaners who have at least a few people that work together.

23:54That way, if one person's out, there's someone else who can step in and kind of fill in the gaps here. So that's the first piece for me is like, we got to have someone that's got a team. Second, I do strongly prefer someone with cleaning experience already, right? Someone who's already cleaned short-term rentals, They know the process. They have everything kind of dialed in. That will be a little trickier depending on what market you go into. If you're in a super small market, that might be tough to find someone who has that experience already. But if you're in a market that's decently sized, I would prioritize someone who has that experience.