This Real Estate “Rule” Is Costing You Wealth! (Rookie Reply)

0:00Tony:You've got cash ready, but can't make the numbers work for a house hack. High interest rates are shaking your BRRRR plans and your tenant wants out of their lease early. What now? Today, we're unpacking three pressing questions that many rookies are facing right now with real solutions that you can apply immediately.

0:23Tony:This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into our first question. So question number one today comes from Ben. Ben says, Hey everyone, I'm 26 years old. My wife is 29. We've been travel nursing for the last two years and have a pretty great cash pile to get started in real estate investing. We were planning on traveling longer, but just found out that we're expecting. Odds are we will need to reel in our wanderlust and settle back down where it all started, which is Akron, Ohio. The main goal for us is to find a two to four unit, preferably turnkey, and live in one side for a year or so before refinancing and scaling.

1:01An issue I'm running into in my market, though, is high listing prices and lower rents not meeting the 1 % rule. Those that do not meet the 1 % rule are value adds that will need more work than I can put in right now. Looking for input, though, on a duplex I found in a great area. It's listed at$285 ,000, and one side is already renting for$1 ,100. It's newly renovated and turnkey. If we live on one side, we'll still be paying$835 per month plus utilities. This seems like a lot for a house hack. Is the asking price outrageous? Is the rent too low? Or are these situations the new normal? All right, so house hacking and what actually makes a house hack a good deal?

1:45So I guess what jumps out at you first, Ashley, as we hear that question?

1:49Tony:Yeah, well, I think bringing up the 1 % rule, I think for several years now, it's been hard in a lot of markets to hit the 1 % rule, but that shouldn't be the only metric that you are looking at. There's other metrics that make you money. And the 1 % rule doesn't always mean that it's a great deal. For example, in Buffalo, New York, I, for a very long time, could very easily hit the 1 % rule, sometimes the 3 % rule, But they were on duplexes that were in lower income areas. They actually, I found out, became the headache properties. And the property taxes were so high on them that they beat the 1 % rule, but they didn't make the 50 % rule where your expenses should be 50 % of the rental income.

2:37Tony:So I would definitely take the 1 % rule just like any other metric with a grain of salt and make sure that you're looking at other metrics of the property instead of just the 1 % rule. I think we should also reframe what makes a house hack successful. And much like the 1 % rule and being able to hit that has changed, I think so too has the perfect house hack where you're getting paid to live somewhere. Living expenses are typically one of the biggest expenses after taxes for the average American. And if you can reduce that, even by some percentage, I think you're still getting ahead. And in this scenario, they said that they're paying$835 a month for their side of that duplex, while the side right next to them is renting out for$1 ,100.

3:25So they're saving close to$400 on their rent every single month, right? Or$300, I guess, in the scenario. Several hundred dollars every single month on what they would be paying in rent elsewhere. So I think in theory, you're still winning on this deal because you're getting reduced housing expenses. You have a tenant already placed on the other side. You have the ability to build equity with this property over the next however long you tend to hold it. And then when you move out, if you're renting both sides, say rent doesn't even increase, you're renting both sides at$1 ,100, that's$2 ,200 total, right?

4:02So now you're netting, Now you're cashflow positive on that deal. So I think there's more to look at than just, are we getting paid to live here? Or are we able to live here rent-free and making sure that you're taking into account all of the other factors?

4:14Tony:Yeah, I couldn't agree more with that. My sister, when she first did her house hack, she was paying$45 to live there in an apartment that was, she could have rented for around$900. And she's owned that property, I think for five years now. and she's been able to increase the rent in the other unit. Her mortgage payment has stayed the same, so she's paying nothing to live in there now. And also it's become a more expensive apartment where if she went and lived in a very similar apartment to that one, that she would be paying a lot more in rent. So I think you have to look at the long-term result of house hacking too is that your mortgage payment stays the same.

5:02Tony:You can increase the rent as time goes on. And if you did rent somebody else, your rent most likely would continue to go up too, where your mortgage payment will go up slightly due to insurance and property taxes. But most landlords raise their rent to cover and still profit above and beyond that. So you're still making out that way. And I think one last thing that I'll comment on is in the question, they say, our main goal is to find a two to four unit, preferably to turnkey, live in one side for a year or so before refinancing and scaling. And that before refinancing, I think is like a very important caveat.

5:44Let me know what you think, Ashley, but I feel like buying a turnkey duplex and being able to refinance in a year is probably going to be tough if it's because there's no value add, right? Like what you bought it a year ago is probably going to be pretty close what it's worth in 12 months from there. So if that is the goal to be able to refinance and scale, you're basically asking about burying. I might almost focus on something that needs a little bit of love where you can do some value add so that way when you do refinance a new year, there's some room there. So just a very important piece to call out.

6:15Tony:I actually just had a refinance done on the property and literally the first question, and it was a very short time period. It was bought the property and within a month was refinancing. And the first thing the appraiser asked was, what did you do? What were the improvements? So even if we didn't do anything and we had bought the property below market value, the appraiser was still wanting to know, obviously she's looking at the purchase price, what we bought it for. She wants to know what those improvements were, where we added the value to the property that she's out here appraising it for. So I think, yeah, definitely going the value add route.

6:56Tony:Also, they're saying Akron, Ohio is look at what the appreciation is in that area. If you've watched the news, you've seen that the market is shifting. It's becoming more of a buyer's market than a seller's market, which could lower the sales prices of properties in that area and appraisers appraise the property based on comparable sales in the area. So a year from now, that house could potentially be worth less. So that's always like a risk. So one thing I always like to be cautious of, if you are not putting in any value, you either have to buy the property below market value, get a deep discount on it.

7:41Tony:And maybe the way the market is changing, that will happen. or you have to be okay that in a year you might not be able to refinance the property and pull out more money. Two other considerations is looking at the closing costs on these properties for doing two mortgages back to back. So if you did one mortgage, what are your closing costs going to be when you purchase it? And then what are the closing costs? What amount does that equal to? And does it offset what you'd actually get back in the refinance to use? So I think weigh out those two scenarios and run the numbers on it. So house hacking might have changed, but what about refinancing your BRRRR at today's higher rates?

8:22Tony:Up next, let's unpack if waiting is worth it. But first, we'll take a quick break to hear a word from today's show sponsors. You know that thing where you discover a feature you wish your software had, and it turns out it already exists, just on a different platform. Like, oh, you want rent payments processed in two days. RentReady does it. Oh, you want to block tenants from making partial payments mid-eviction. RentReady does that too. Oh, you want full accounting and tax-ready reports without paying for a second tier. RentReady does it. And oh, you want tenant screening that doesn't overcharge your applicants.

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10:47Tony:Okay, welcome back. So we got our second question today and this question comes from Amos. My partner and I have successfully used the BRRRR method gaining us five doors in the last five years. Congratulations. However, this last project has posed a dilemma. In short, we went over budget on the rehab and the proposed interest rate is 8.75 % if we move forward with financing. We used our own cash to buy it and fully renovate as the property required going down to the studs. Our forecasted rental income of$2 ,145 per month will cash flow us about$200 per month based on the interest rate as high as 8%.

11:31Tony:Additionally, going over budget with a higher interest rate at 8.75 % made us pause to reconsider other options. We are totally against analysis paralysis, so we need your help. Could or should we consider delaying the refinance for at least another year? If we can likely get cash from other sources for the next rehab, which is currently in the demo stage, what would be the implications, good or bad, in regards to taxes, cash on cash return, or anything else? Mind you, my partner and I have decided against personal financing at 7.65 % as we prefer to not risk our other assets. I think this is actually a dilemma a lot of people have run into over the last year or so, or maybe even a little bit longer, as rates have shifted as to having that interest rate shock of, oh my gosh, this is not what I expected.

12:26Yeah, I think there's a few options, right? One, you've got, I guess they didn't say how much they purchased it for, but however much they bought it for, all of that is just cash, right, that's sitting in that deal. So you've got a good amount of equity right now tied up into this single property. So I think you have to ask yourself, what kind of return on equity are you getting, right? Like what kind of return on investment are you getting with all of your cash sitting in this deal? Rents is going to be 2145. You know, maybe you're netting after expenses a little less than 2 ,000 bucks, you know, 1 ,500, somewhere in that ballpark after you pay all of your expenses.

13:06So is that$1 ,500 per month, is that a good enough return for you and your partner to say, yeah, we can write it out for another year? If it's a 50 % return, yeah, obviously it's a no-brainer. If it's like a 2 % return, well, now you've got to ask, okay, can we actually go out and get a better return on that capital even with the eight and three-quarter interest rate? Can we go and get that cash back and redeploy it elsewhere to get a better return? So I think there's something to be said about how much cash do you have stuck in that deal right now and what does that return look like?

13:36Tony:Yeah, I'm seeing two other options. One is you look at selling the property. What would you make if you sold the property? Would that be a large amount of money that it's actually worth it to unload? And then you're just adding to your capital pile. The second thing is to refinance, but don't pull all of your money out. Maybe do half. So your mortgage payment is lower. you're still recouping some of your funds and you still have some of that money to for the next rehab. So that's honestly probably the route I would take if you, you know, bought this property to have it as a buy and hold. I would look at refinancing, but not taking all of my money out.

14:18Tony:And then at a future date, you could refinance, which stinks having to pay the closing costs twice. But you could also look at a commercial line of credit too. So you could do the commercial line of credit now even, or you could do the commercial line of credit in the future and still have the mortgage on the property too. So I think there are certain options. The biggest recommendation right now is what you're going to do is talk to other lenders and figure out what other options do they have, like the commercial line of credit, things like that. And then I would run the numbers on if you didn't pull all of your money out, but you just took some of it back out.

14:56Yeah, that's a great point, Ashley, on talking to more lenders. I wonder how many folks Amos actually talked to. And is 8.75 the best rate or is that the only rate that you've seen so far? Because to Ashley's point, every lender could look at this same exact deal and give you a completely different menu of options in terms of what financing looks like. So actually, that should be the very first step is go shop this deal to 50 other lenders and see who can maybe give you better terms based on what you've done. Because you're cash flow positive, newly renovated. I'm assuming maybe it's stabilized already.

15:30So you've got a good asset. So can you get someone else to maybe give you better terms? The last thing that I would call out is maybe also look into an adjustable rate mortgage. I've personally never done one before. but if you can get the rate down to somewhere below eight for the next three to five years, like does that give you enough to say, okay, cool, now we can refinance, get our capital back. And to Ashley's point, if you need to refinance again later or sell later, that's an option, but at least you've freed up some of that cashflow in the short term. So I think maybe even exploring some different loan products, which again, you'll have those brought to you as you start talking to different lenders.

16:09Tony:Yeah, we actually had Dave Meyer on recently on an episode and he's doing an adjustable rate mortgage right now on a property. And he ended up getting like another interest point off because he already had a relationship. He had a brokerage account, I believe, with this bank. And they actually gave him like another percentage point off of the interest rate because of that relationship. So I think that's another avenue to look into, too. If you already have, you know, even just money sitting in a savings account, you know, banks want those deposits. They want your money. So if you have something like that, talk to that bank and see if they do have options for you.

16:48Tony:Or consider moving your money to a bank that does do something like that, where they give you a discount on lending because of your current relationship already with having money with them. So talk to more lenders feels like the big solution here to get more insight. There's actually one part, though, actually, this question that we didn't really address. And it was the fact that they actually already have another demo going on. So they said, get cash from other sources for the next rehab, which is currently in the demo stage. So they've already committed to this next deal. And if you are able to get sources, cash from other sources, then maybe that gives you some more time to figure this out.

17:27But if time is ticking and you guys are out of cash, now you've got another deal that maybe is going to end up sitting. Maybe you've got hard money on that. Who knows where you guys are at with that? So maybe you're almost forced into some sort of refinancing this deal to free up that cash and get into the next one. So I wouldn't look at it in a vacuum and make sure that you're taking into account this deal that's already started the demo stage as well.

17:48Tony:Yeah, and I think the commercial line of credit would be a great option for that too, is having the line of credit to use towards at least getting that on the property and using those funds towards the rehab until you decide what to do with this other property or wait till rates go down. I saw an article the other day stating that it's projected there might be two more interest rate cuts this year. So wouldn't that be nice? But we'll see. All right, guys, 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 Rookie YouTube channel.

18:19You can find us at Real Estate Rookie. And if you're listening to this in podcast form, be sure to follow us on your favorite podcast player. Subscribe. That way you guys are notified anytime we drop a new episode. So we'll be back with more right after this. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS-compliant strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal.

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20:57That's promo code B-P-R-E at mod.com. See their website for important safety information and we thank Mod for sponsoring the pod. I just booked a trip to the coast and I cannot stop thinking about it. Waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings. A few days to explore, try new restaurants, smell the salt and citrus in the air, and remember why we left to travel in the first place. That feeling of being somewhere completely new, that's what keeps me chasing the next trip. But here's what makes it even better. While I'm away, my place doesn't have to just sit there.

21:31I can list my space on Airbnb and bring in a little extra cash while I'm off exploring. And with the co-host network, I don't have to think twice about it. A co-host is a vetted local expert who can handle everything from creating your listing to managing reservations, managing guests, and even styling the space. So I get to fully be in the moment on my trip and my places not only taken care of, but working for me while I'm gone. Find a co-host at Airbnb.com slash host. Quick note before we dive back in. This episode is brought to you by Cash App. I've been using Cash App for years to send and receive money.

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22:49Download Cash App today. Visit our link in bio. Bitcoin services by Block Inc. See the Bitcoin disclosures at Cash App slash legal slash podcast. All right, guys, let's jump back in. So our next question comes from Garrett. All right, Garrett says, I have a tenant who wants to break her year lease five months early. She has offered to pay three of the five months, but keep her deposit and last month's rent. If we let her go, having some buffer to find a new tenant would be nice, but the fact that we need to find one during the holidays and leading into winter does still not sit well with me. Plus, she's breaking her lease.

23:28Should I negotiate the amount with her and let her go and hoping we can find someone for Jan 1? Or do I play hardball and hold her to the lease? Now, there's some additional context here, which I think is important for how we answer this question. So they go on to say, some backstory, she paid her first six months upfront because she sold her house to get out of debt. She did not have a job, but paid upfront to build trust and assured us that she would have a job in six months time. Last week, she sent a picture of a small hole in the linoleum floor and crack in the trim, which looks like she dropped some heavy piece of furniture.

24:06She said it happened while she was out of town, and now she does not feel safe in the house. December was the first month she was supposed to pay after her six-month prepayment, but I knew right away she was going to use this strange hole in the floor to get out of her lease now that she needs to start paying. She did pay December's rent and then waited a week before she said she wants to leave. Any suggestions on how to handle this? The house in North Carolina. So just to like recap here, because I know there was a lot, but basically this tenant is unemployed, has a big chunk of cash. They move into, uh, into Garrett's unit, pay several months upfront, six months upfront.