2023 Risks, The True Cost of Owning Rentals, and Live Q&A

Ashley:
This is Real Estate Rookie episode 250.

Jamil:
Right now, the lenders are all tricking us into thinking that 5% is going to be a blessing. So when we hit 7%, 8% where we’re at right now, and they finally start creeping down towards five, five and a half, do you know what kind of pressure cooker is going to exist in this market? So all the real smart investors, they are buying cheap and they’re holding. They’re buying cheap and they’re holding, they’re just waiting for this 12 to 18-month cycle to do its thing. And then as soon as the rates go back somewhere around 5%, it is going to be bananas.

Ashley:
My name is Ashley Kehr and I am here in person with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone from the rookie audience who goes by the username, KissTheNewbie, which I like name. But anyway, KissTheNewbie gave us a five-star review on Apple Podcast and this person said, “I’ve been researching the wrong way for way too long. YouTube and Google are not always as helpful as it seems. The information is mostly brief and summed up. Listening to other points of view and scenarios helps a lot. The episodes in particular dug into some questions I have been looking for.” So KissTheNewbie, we appreciate the five-star review. And if you haven’t yet, please leave us an honest rating or review on Apple Podcast, Spotify, or whatever it is you’re listening. All right, cool. Well, Ashley Kehr, what’s going on? We’re here in person.

Ashley:
Yeah, we are in Phoenix, Arizona for a meetup tonight.

Tony:
Yeah, it’s actually my first time in Phoenix, and so far so good. I got some Chick-fil-A last night. Actually, you know what? Last night I landed, and I tried to get some food, and it was like a mission trying to find somewhere there was open at 10:30, which I feel like is crazy for a city as big as Phoenix. So Phoenix, help me out, stay open just a little bit later for the food spots.

Ashley:
Someone DoorDash Tony tonight some food.

Tony:
But we did get this place called Insomnia Cookies. We were walking by, and this place was open. And have you heard of Insomnia Cookies before?

Ashley:
No.

Tony:
They’re open until midnight, and it’s a cookies spot that’s open until midnight, but they felt like it was really cool cookie… Anyway, Insomnia Cookies in Phoenix. I appreciate you for being open at 11 o’clock when we were looking for food.

Ashley:
And it was good?

Tony:
It was great.

Ashley:
Yeah? And then this morning we were late because you had to get Chick-fil-A.

Tony:
I had to get Chick-fil-A on the way in. Yeah, so the food escapades have been probably the biggest thing today.

Ashley:
Yeah, yeah. So besides the food, we’re super excited. We are recording a live podcast tonight, so if any of you who are listening to this now are actually there, thank you so much for coming.

Tony:
We appreciate you guys.

Ashley:
And if you guys want us to come to your city next, send a DM to the Bigger Pockets Instagram account or you can send it to Tony or I, or when you leave a podcast review, let us know where you would like us to come. So today on our Rookie Reply, we have four questions. We talk about real estate agents and lenders, as to how to build that relationship or to even break off that relationship. And then we’re talking about closing, going to the closing table, but you’re wholesaling the property, and Tony gives two different examples of how you can actually handle that.

Tony:
Other things we talk about are building long-term relationships with your lenders and your agents, and how to tow that line the right way. And then some other questions we talk about are the differences in expenses on your primary residence versus your investment properties, or some sneaky little things you might not be thinking about. And then the last one is, what is a dual agent, and should you be using one? So we’re excited to get into today’s questions. Guys, you guys, this is the first time ever that we’ve really done something like this. So we just want to say we’re super excited to be here, and welcome to the Real Estate Rookie podcast. We got some special guests for you guys. Pace and Jamil, if you guys can come out?

Ashley:
Bring them out.

Tony:
Yeah. Clap it up for Pace and Jamil. So guys, first, thanks for inviting us to your home state. This is actually my first time in Phoenix, Scottsdale, anywhere. Other than layovers at the airport, this is the first time I’ve ever been here. So I appreciate you guys inviting us out, man.

Jamil:
We’re happy that you’re here.

Tony:
Yeah.

Jamil:
First and foremost, isn’t it cool that Bigger Pockets came all the way to Phoenix, Arizona?

Pace:
Yes!

Jamil:
To film a live podcast? Y’all are incredible.

Ashley:
I do have to say one thing, coming from Buffalo, I’m very disappointed in the weather. I did not pack appropriately.

Jamil:
Did you bring a jacket?

Ashley:
This right here is my jacket.

Jamil:
Oh, you thought you were coming to summer, hot?

Ashley:
I thought like 90 degree dry heat, nice weather-

Jamil:
No, no, no, no, no, no. The desert gets cold in the winter.

Tony:
So both of you guys are super experienced investors and I just want to tap into that knowledge a little bit. I know one of the questions I get asked super often about I invest in short-term rentals. That’s what we do. That’s all of our portfolio right now. And a lot of questions come up around, Tony, with where the economy is going, with where everything’s headed, do you think short-term rentals are still a good investment? And I know what the risks are that short-term rentals present. The economy softens, and people travel less, people spend less on vacations. So we know what we’re doing in our business, trying to mitigate those risks. But you guys have unique strategies as well, wholesaling everything with creative finance. What are some of the risks that you guys see with those strategies going into next year, and how do we mitigate those?

Jamil:
So risks with respect to wholesaling, or risks with respect to Airbnb?

Ashley:
I would say-

Jamil:
Or short-term rentals?

Ashley:
Specific to the Phoenix market.

Tony:
Yeah. With wholesaling, and with creative finance.

Jamil:
Okay. So right now I think that the greatest risk that people have in the wholesaling space, I’ll let Pace speak to creative financing, for would-be wholesalers or people embarking on a wholesaler journey, or doing it right now, if you have not made adjustments to your numbers, you’re spinning your tires. You’re literally wasting your time. The market has shifted and buyers are baking in the depreciation, they’re baking in where they’re expecting the market to land. Because the fact is that we know where it’s going here in Phoenix, we overshot and so we saw about a 20% uptick, and we’re going to hit that 20, we’re going to come down about 20%. So all the buyers that I’m working with right now, their volume has picked up dramatically. The last 30 days, the number of deals that we’ve turned is as much as we had in the peak.

Tony:
That’s so crazy. I would think the opposite would be true almost, right? As the economy’s starting to shift, that things would slow down, but you’re saying-

Jamil:
No, because we’re buying deals so cheap right now that… And let’s just think about what’s happening, okay? As soon as the market started to shift, interest rates went up. What did builders start doing? Stop building, okay? We were already short on inventory. You also have all these people that have all this cheap debt at 2% and 3%, and they’re looking at the market thinking, “When am I ever going to get a loan like this?” So what are they going to do with their property? They’re going to hold it, which is going to remove that inventory from the market. You’ve got builders depressing building, you’ve got inventory shortages already.
We’re already walking in with inventory shortages, and right now the lenders are all tricking us into thinking that 5% is going to be a blessing. So when we hit 7%, 8% where we’re at right now, and they finally start creeping down towards five, five and a half, do you know what kind of pressure cooker is going to exist in this market? It’s going to be insane. So all the real smart investors, they are buying cheap and they’re holding. They’re buying cheap and they’re holding, they’re just waiting for this 12 to 18 month cycle to do its thing. And then as soon as the rates go back somewhere around 5%, it is going to be bananas. That’s my thought process.

Tony:
All right, so what about you from… Yeah, first clap it up for Jamil. That was a great answer.

Pace:
As far as creative finance is concerned, creative finance is so diverse, in the sense that I look at real estate as a pile of logs in a fireplace. Creative finance is the gasoline you pour on top of it. It doesn’t matter what you guys want to do on acquisition or in disposition, creative finance amplifies everything you do. So if you’re acquiring deals, I can buy sub two seller finance, lease options. I can buy on innovation agreements, MOR B method, all sorts of things. I can dispo 10 different other ways that don’t exist in traditional real estate. So right now, everything is amplified. So last week I closed my biggest seller finance deal, 264 units.

Ashley:
Congrats.

Pace:
And yesterday I put in my largest offer, I think we’ll go under contract tonight, $52 million, 600 units, seller finance deal. And then today we closed another big deal, 192 units in North Carolina. So in two weeks I bought 500 units, and I have literally not a dollar out of my pocket. Follow me on YouTube. So I’m being overwhelmed right now. We did really well the last five, six years with creative finance. But right now people are, I’ve got agents texting me and going, “My seller’s willing to let this house go.” I mean, in what other market do you see sellers just saying, “Get rid of this house. I just can’t take care of the payments anymore.” So in Arizona, Phoenix specifically, we are just going for houses that are 90 days on the market or longer and saying, “Hey, if I can get your commissions paid, can I just take over the payments?”
I could buy two houses every single week if I wanted to. Now what is amazing about that, the amplification process, is not only can I hold those, and we do Airbnb as well, but the way we’re mitigating a lot of that is we’re diverting to sober living right now, a lot of sober living, because it’s government money coming in rather than tourist money. But the other way I’m amplifying what I’m doing is I don’t just buy and hold, creative finance deals. What happened to buyers? The buyers got priced out of the market because of the interest rate. So I can assign my sub two and seller finance deals to an end user, or I can wrap them and sell them at a higher interest rate or whatever. A little bit more strategic, but it is like rocket fuel right now. Everything for us is rocket fuel. Who’s the sub two student in here? Okay, so we have people who are being overwhelmed with creative finance. It’s the perfect storm for us.

Ashley:
So that’s how you’re mitigating and taking advantage of the market right now. But for a new investor, what are some of those risks that you’re seeing, that that’s the reason they should be using creative financing and doing seller financing and subject two? So what risk in the market, being that [inaudible 00:10:37]?

Pace:
Okay, so I’ll give you on our cash stuff. So this year we had a couple of houses we thought the ARV was about 500,000. And we’ve got people offering now those houses are fixed up, ready, on the market, I can’t sell them for 390. That’s happening. That’s been happening this whole year. So the risk is I got to refinance some of these deals. I got to bur into some deals that I didn’t want to bur into. Instead of me stroking a check for those, I’m going to hold onto them and I’m going to wait until the market comes back.

Jamil:
But the smartest thing that he’s doing is, because he’s got the capacity… See a lot of fix and flippers, they have to sell. Pace has money, so he can refinance these and hold them, but continue holding right now is the key. If you are in a bad fix and flip that you can’t disposition, hold that sucker.

Pace:
Yeah. So if I’m new, one of my risks is being in that situation, I would not want to be in that situation without a good partner. So if I’m brand new and I’m looking to do my first deal, I would look for somebody that’s done 10, 15, 20 deals, and partner up with them. So when the market does its little thing, you can go, what are we doing partner? And the partner goes, oh, this is no big deal. We’re going to refinance and hold it.

Ashley:
Okay. What’s the best way to find a real estate investing partner?

Jamil:
So for me, I found my partners in places I would never be, never hang out at. I needed people in my life that weren’t like me, that didn’t listen to the same music as I did, that don’t like the same things that I do, that don’t have the same skills and qualities that I have. I wanted people that were very much opposite. In fact, one of my previous business partners and still a very good friend is in the audience here, Patrick. And Patrick and I couldn’t be more different from each other.

Ashley:
Because of your strengths and weakness.

Jamil:
Because we have different strengths and different weaknesses. And I’m always looking for people that can compliment my shortcomings, which we all have them. Every one of us have strengths, things that we’re phenomenally good at, and there’s things that we just couldn’t care to do. And so what a lot of us do is we make business partnerships with our friends and we have these incredible campfire conversations with people, and we share our dreams and our aspirations, and then all of a sudden we find that there’s an alignment between what they want in life and what we want in life. And we say, “Should we do it together?” But we’re both the same person, and then what ends up happening is disastrous. So find places where you don’t necessarily hang out, business situations where you wouldn’t normally go, and go and find your counterparts that have the strengths that you don’t have.

Ashley:
What’s an example of, where are places you have found your partners?

Pace:
COO Alliance, Chief Operating Officer Alliance. Because visionary, visionary, visionary, visionary. We should not be operating, managing, onboarding, doing any of the SOPs. Zero. Do you know that Jamil and I are not partners in any business whatsoever?

Ashley:
Actually I did know that. Yeah.

Pace:
Is that surprising?

Jamil:
We 100% compete on everything.

Pace:
We compete on everything.

Jamil:
In fact, get the hell out of here.

Pace:
So we collaborate, but he’s right. I mean the best man at my wedding, I don’t talk to anymore. My very best friend I brought into my business because that’s who was in my circumference, and I was like-

Ashley:
It’s easy, it’s comfortable.

Pace:
Oh yeah. And the funny thing is you see eye to eye on all your ideas, but when it comes down to rubber hitting the pavement, a visionary is not going to do any of the actual nitty gritty.

Tony:
Can you, just for folks that aren’t familiar with that phrase, define what visionary is?

Pace:
In my opinion, the best book you can ever read in business is called Rocket Fuel. And it talks about all the greatest business partners in the world all had a visionary and an integrator. And so Jamil and I combined have about 1000 employees. And the reason being is because we have integrator partners that actually manage the office. The only time I go to my office is when there’s a Christmas party. And so because of that, because we have integrators doing all the things, hiring, onboarding, managing the books, paying the payroll, looking out for the problems, it allows us to go out and raise capital, find the deals, recruit opportunities, and recruit people.

Tony:
How did you guys find your COOs, your integrators?

Pace:
COO Alliance.

Tony:
Oh, so that’s a real thing.

Pace:
That’s a real thing. The funny thing is all of us visionaries all go to these really fun and charismatic, beautiful meetups and masterminds. The integrators don’t go to anywhere where we go, so they go to something called the COO Alliance. It’s where all the cool people that are actually going to run the business, they go to those masterminds.

Jamil:
That’s a phenomenal resource. For me, it was a little different. We were looking for a C-suite that could handle our franchise growth. And so we actually ended up getting a very high level individual that was in the franchise department at IHOP that ended up coming and helping us with structuring our franchise, and creating the growth that we’ve had over there. And it’s been an incredible, incredible run with him.

Ashley:
Awesome you guys. Thank you so much for sharing. I think Pace actually had somebody write this question specifically for him. What is a good way to invest in multi-family for the first time safely?

Pace:
Okay. Two easy ways. Either A, become an LP on somebody else’s deal, like the 264 unit deal I closed last week, I had zero partners so I didn’t raise money, seller financed. But the one I closed today, we brought on LPs, or limited partners. So that’s the easiest way. The second easiest way to get into multifamily is through something called the fund of funds. Very few people actually know what that is, and if you knew what it was, you’d write it down. Fund of funds. And you’d go research it, and you’d go, that was worth a million dollars right there. Fund of funds is the easiest way to get into multi-family investing.

Ashley:
Can you elaborate more?

Pace:
Do you want me to?

Ashley:
Yes, go ahead. We’ll give you more time.

Pace:
Okay. So let’s say Cara has a multi-family deal and she has to raise $20 million for a $100 million purchase, hypothetically. And Cara goes, “I can only raise $10 million on my own. I need somebody else to help me raise some money.” So she goes and finds 10 other people to do what we call a fund of funds.

Ashley:
So basically other syndicators who are used to raising money, they build their own fund that’s going to invest in her fund.

Pace:
Right, it’s a fund underneath your funds. So it’s a fund of funds. And so instead of having to find the deal, operate the deal, manage the deal, raise all the capital, I could go leverage Cara’s credibility, and just literally the first fund of funds I ever did was five years ago, I raised 100 grand for somebody’s deal that needed 20 million and I got all the credibility and experience of actually going through the deal as if it was mine.

Ashley:
Super interesting. I was at a multi-family meetup in Philadelphia a couple weeks ago, and that’s what they were pitching at the meetup, is that’s how they were pivoting their strategy. They were building a fund to invest into other deals.

Pace:
Would you rather raise $20 million all by yourself or find 20 people to raise a million dollars each?

Ashley:
Oh yeah. And you have less people to have responsibility to. Okay, so we have our last question here that we have time for. Where do you like to find data? So where are you going to find information on properties?

Pace:
The data deli.

Jamil:
Data deli is obviously the number one choice, but if I’m looking for market information to try to understand where are buyers buying at right now, where are deals selling at right now? There’s a software called Privy that has been a game changer for Pace, myself, our entire community. I mean this algorithm runs comps, it’ll identify what deals are on the market right now that are an actual value. And it also shows you what percentage of ARV fix and flippers are buying at in this specific pocket. It’ll tell you what percentage of ARV buy and hold buyers are buying at, and it’ll even tell you if this buyer is buying on market deals or off market deals only. And so it really just gives you all of the information that you could possibly want to understand, whether or not… If you guys want to know more about it, go to runprivy.com. Runprivy.com, runprivy.com.

Pace:
For me, I go to these two websites every morning. Same two websites. Landwatch.com.

Ashley:
I do love that one.

Pace:
It’s so good. Hey, do you know how many owner finance listings are on there right now?

Ashley:
Yeah, there’s even a button to push to see all of them, too.

Pace:
There are currently 12,644 listings on landwatch.com, all on owner financed. Just owner financed. And then for multi-family or commercial is, I love crexi.com. I used to love LoopNet but I feel like they just haven’t innovated, and Crexi just has kicked their butt. And then also Dave Meyer.

Ashley:
Well thank you guys so much for coming on to the Q&A.

Pace:
Thank you guys.

Ashley:
And thank you so much for having Tony and I.

Jamil:
Love you all.

Pace:
Give it up for these guys!

Jamil:
Let’s go!

Pace:
You guys are the best!

Tony:
Guys, pop it up one more time for Pace and Jamil.

Ashley:
Yes. Okay. So our first question today is from Dimitri Andre. And his question is, “I’m curious how the wholesaling process works. Does the seller know that the initial person they go under contract with is not the end of buyer? Do they show up at closing and find someone else, and feel like something shady happened in the process?”

Tony:
Yeah, so this is a great question, Dimitri. And I think it depends on the wholesaler, depending on who you talk to, every person kind of handles it in a different route. So I’ll give you the two options that I’m familiar with, and let you make the determination of what makes the most sense for you. So option one is you be very clear with the seller upfront to say, “Hey, my job is to help you find an end buyer for this property. And when we get to the closing table, there will be another party that’s actually going to be purchasing this property for you. I’m just here to help play the middle man, and connect you with that person. In exchange for me doing the service for you, I will collect a small assignment fee.” And typically when you do that process you’re at the closing table, it’s a single closing, and you just get cut a check for being that person in the middle. So that’s one way to do it. You’re just open and honest with that person at the outset.
The other way to do it is to say, “Yeah, I’m going to buy this property from you. And then when you go to the closing table, instead of it being one closing, it’s a double closing. So say at 10:05 AM you buy the property from the seller, that closing closes, and then at 10:10 AM you turn around and have a second closing where you’re selling that property to another buyer. Now there are benefits and cons to each one of those approaches. If you do a single close, you don’t have to come out with any cash out of your pocket because you’re not actually purchasing the property, you’re just getting a fee for connecting the seller with the end buyer. If you do the double closing, typically you will have to come up with the funds to actually purchase the property. Even if it’s just for that hour timeframe in between those two closings, you have to actually pay that person up front, and you immediately get repaid shortly thereafter, when you get that second closing. So those are the two options I’m familiar with on the wholesaling side.

Ashley:
And Tony, have you ever shown up to a closing table with the seller? Because I don’t think that I’ve ever actually been in a room with the seller.

Tony:
I was going to… The very first real estate investment that I purchased, this was one of those properties in Shreveport, Louisiana, that one I actually… Just because I was so excited, I literally flew to Louisiana, sat at the closing table, and the sellers were there. I shook their hands. Outside of that, I haven’t seen any in person. Usually, Dimitri, when you close on a property, you’re either going to a notary’s office or they’re sending a mobile notary to you.

Ashley:
And even if you’re going to, so when you use a mortgage on the properties, it’s more likely you have to be in person. So when you’re doing a cash deal, which a lot of times a wholesale deal is, you can sign ahead of time, like Tony said, with a notary at mayor, maybe at your attorney’s office, something like that. So you don’t even see the seller. But if you’re doing, I did a closing at the city hall so that we could file it, and the sellers were there but they were at a completely different table buying the property that they were closing on, once I signed that I was buying their other property. But we didn’t even see each other really at that point. So I don’t think that’s something really to worry about. I think the big, as long as that property does close, the people aren’t going to care who is actually the end buyer on it.

Tony:
Yeah, and again, it’s up to you. You’ve seen wholesalers do it both ways. So you think about what makes you more comfortable, and what you feel might help you to get the deal closed and go with it.

Ashley:
This next question is from Elisa Serrano. “I’d love some advice about business relationship etiquette. I’ve been reaching out and starting to create relationships with real estate agents and lenders. I’m 100% the type of person to compare several different options to get the best choice for me. Although I know it is part of their job, I’m struggling with taking up their time, knowing I’ll have to go with one agent lender and I might not use them. What’s a professional, respectful way to say thank you so much for your time, however I’m going to go with someone else, but I’d still like to keep this connection with you in hopes we can work together in the future. And at what point do you say this? Do you wait until the very end to see what they can do and tell them, or try to save their time?
“I just don’t want to burn bridges and make anyone feel like they have wasted their time. Having worked in sales commission before, I know that there is a tasteful and not tasteful way of going about this. And this is my first deal, beginning of my real estate journey, so I don’t want to make any bad impressions. Any advice is very welcome.” So the first thing I think of after reading this is it is great to get to know who you’re going to be working with, and maintaining those relationships. It is going to be somebody that’s helping you build your team, build your rental portfolio. So you do want to know more about them and what they’re willing to offer you. I definitely think on the real estate agent side, there is some etiquette as to if that person is bringing you the deal. If they bring you the deal, they take you to the showing, then I think it’s proper etiquette to go with that person to purchase the deal.
As far as mortgage lenders, whenever I have a deal I am reaching out to any of the mortgage lenders I’ve worked with, any that I have wanted to work with, and I ask them what options they have. And I don’t waste a lot of their time because I ask them right away, “If I close today, what would the terms be? What can you offer me?” And then I also look at who actually responded to me in a timely manner, because I want a mortgage officer who’s going to be able to close on the property quickly and timely. So what are your thoughts on that, Tony? As far as getting to know agents and lenders, as to how to not waste their time, but get to know them and make sure they’re the right person for your team?

Tony:
I mean, I think Elisa here said it the exact correct way. She said, “What’s a professional/respectful way to say thank you so much for your time, however, I’m going to go with someone else, but I still like to keep this connection open,” that is a perfect way to say it, right? I think as you said, most people in this industry understand that a lot of their customers are going to be shopping around looking for the best person for them. So I think they do understand that.
I think your point though about the agent is super important to point out, because it’s like, if this agent brought you the deal, it would be shady for you to then go out and bring in another agent to close on that same property. However, I do think it’s fine to work with multiple agents at once, and if one agent brings you this deal, another agent brings you this deal, I think that’s fine. And I have different agents in the markets that we work in, and different ones are sending me different deals, and I think that’s fine. But to Ashley’s point, it’s like if one agent brings you that deal, you should close that deal with that person.

Ashley:
And also too, if you happen to be scanning Zillow and you find a deal, and now it’s your turn to pick which agent you’re going to ask to take you to the showing, start thinking about what are those agents’ strong suits? Maybe you want to do creative financing, does your agent have experience helping you structure that if you need help with things like that? So look at the deal and think about, what will I need help with through this deal? Is it maybe just getting to see a showing? That’s it, you don’t need any help with anything else, no market research analysis, then it’s probably the first agent that can get you into the property, and then that’s the agent to go with because you can do everything else on your own. So think about that, too, as you’re deciding which agent to use for a deal, as to what value they’re bringing, and what you need from them.

Tony:
And on the lender side, I think it’s very reasonable when you start that conversation to say, “Hey, you are lender one that I’m talking to, but I just want to be super clear that I’m also working on getting pre-approval from this other lender.” And when you get those initial term sheets back, I think that’s when you can make a more educated decision around which lender you actually want to move the process with. Because a lot of lenders, just by giving you that initial pre-qualification, they can give you a ballpark on what your final terms might look like. And I think that should probably be enough information for you. I probably wouldn’t get to the point where you have two closing disclosures out with the same lender, because at that point they’ve done a lot of work to get you to that point. But I think that initial pre-qualification is totally fine to be shopping around.

Ashley:
Yeah, I actually had one of my business partners on a deal, him and his wife did actually burn a bridge with a lender, where they waited until the morning of closing on their line of credit on a property to call the bank and say they could no longer go through with it, because they’d found out this business they were purchasing wanted to use that house as collateral for their SBA loan to purchase the business, so they could no longer get this line of credit. And they completely burned that bridge with that bank. That loan officer, he actually retired this year, but I’m pretty sure it’s a very small bank, that they would not be able to go there and get a loan. Okay, let’s move on to our next one.

Tony:
Let’s take the next one.

Ashley:
This question is from Bill Ackeridge. “Hello fellow rookies. I don’t own any properties yet besides my primary residence. I’m wanting to know if there are any additional costs of ownership for rental properties that I wouldn’t necessarily experience at a primary residence. How do things like insurance on the property differ between a primary residence and an investment property? Thanks.” Ah, insurance. I love it and hate it. So I actually got my insurance license and I dreaded every single part of it. I did it just to help somebody open an insurance company.

Tony:
So if you need insurance claims, Ashley Kehr is your girl, hit her up.

Ashley:
This was, I think maybe three years ago, maybe four years ago now that I went and did that, and I can’t even tell you one thing anymore. I don’t know. So now I just send referrals. But so with the insurance we’ll address that first, and we can go over some of the other differences. But the insurance is very different because you’re not covering the contents, like the personal items of the tenant that is renting the property. So if you were doing a short-term rental, then that would be different because you do own the furnishings in the property. But as far as a long-term rental property, you are just going to be covering the structure, the building of the property, and then you want to have some liability on the property. And then if there’s any outbuildings, like a shed on the property, you want that covered too. So in my experience, it is usually cheaper to get insurance on an investment property than your primary residence, because you’re not covering all of the contents and other things inside of the property, too.

Tony:
From a short-term rental perspective, the opposite is actually true. Insurance companies I think see more risk with a short-term rental, because the number of people coming through that property on a regular basis is higher. You have people that are on vacation, sometimes they’re maybe having a good time, they’re drinking and other things. So I think the risk for short-term rentals are probably a little bit higher. So we do see our insurance rates and our STR is higher than our long-term rentals typically. But to go back to Bill’s, the initial part of his question is what are some of those other expenses? I think this is a great question for rookies, and one that a lot of people are probably thinking. And my first piece of advice, Bill, is that when you go to analyze a property, use one of the Bigger Pockets calculators because I think the calculators force you to think through all of those expenses that come along with your rental properties you don’t really think about.
So a lot of times you analyze a property yourself, you’re just going to think about the expenses that come to your mind, but the BP calculators actually force you to say, okay, put a line out in for this, put an amount in for this, put an amount in for this. So some of the other things that might come up when you own a rental property. I’ve seen, and it depends on the property, but I’ve seen some owners where they bake in the cost of utilities. If you have multi-family where things aren’t separately metered, sometimes it’s hard to account for the utilities costs. If you’re doing a house hack where you’re renting out the rooms, most people just bake in the utilities for the flat, or they’re as far as a flat rate for utilities. So utilities is one thing to me that you might want to consider, depending on what kind of rental property you’re going with.

Ashley:
And you know what’s really funny, did you ever hear the saying the shoemakers kids never have shoes because he is so busy making other people’s shoes?

Tony:
I’ve actually never heard that.

Ashley:
Okay, well my dad, he owns a mechanic shop and that was the big joke when we were growing up, is we all had these cars he gave us, but our cars never got fixed. It’d be like, “Oh, it’s leaking oil, just dump more in. I’ll get to it sometime.” And even my sister, just recently, she said she made an appointment with my dad on November 7th and it just got in four weeks later. So I think about that a lot from my rental properties. My dishwasher at my primary residence has not worked in over a year, and I just will not spend the money. It’s just not that big of a deal to me yet. Or the hassle of having somebody come in and replace it, and to find the matching piece to the rest of my set. I can’t go through the company that we usually use for appliance maintenance, things like that. But a rental property, it’s like-

Tony:
You got to do-

Ashley:
Oh, it’s done that day, get a new dishwasher in there.

Tony:
It’s so funny. So even for us, our short-term rentals, from a design standpoint, are so much nicer than our own house. And me and Sarah keeps saying, “Why do we have these nightstands from college still?” We’re in our thirties now, why do we still have these? But same, it’s just something about spending money on your own house, I don’t know.

Ashley:
Yeah, so when I read that question, that’s what I thought about is that there will be expenses that could be in both sets of houses, but you will choose to put them into your investment properties to keep them a good investment. And then other things to think of is just seasonal maintenance that may happen. So if you own your own residence and you live where there’s snow, you could snow blow it yourself, have your kids shovel it, whatever it is. But if it’s a rental property, you may have to pay for somebody to come and do that, or even cut the grass, or maintain the pool. Things like that too, that maybe you could do yourself since you’re the primary owner.

Tony:
Other things are big capital expenses. So we’re looking at a property right now, we have to replace the roof, the septic system we have to replace on a few of our properties. We have to install new HVAC systems on some other properties. So some of those bigger capital expenses that aren’t going to happen every single year, but you know they have some type of shelf life, those are things you want to set aside money for as well to replace as you own that property.

Ashley:
Hey, our fourth and final question is from Christina Haws. “I am considering buying a six-plex. I never bought multi-family before, just single family. What are your thoughts on using the same realtor who is representing the seller, so the realtor would represent both buyer and seller?” So this is called being a dual agent where the agent represents both of you, and in New York state, at least, you as the buyer, and the seller, have to sign stating that it’s full disclosure that this is a dual agent working for both. So I don’t think that I’ve ever used a dual agent before. Have you?

Tony:
I love doing that. Yeah. So for me, and it depends on where you’re at in your investing career. When I first started investing, one of the things that was super important to me was to have an agent that could educate me on the market, that could really advocate for my best interest because I wasn’t super familiar with what I was looking for. I wasn’t familiar with what some of the pitfalls were. Now typically, if I’m looking in a new market, I will go directly to the listing agent and say, “Hey, it’s just me. I’m the investor. Here’s my offer, let’s work together.”
I think the benefits of that are, A, the agent is, I think, maybe a little more incentivized to work with you, because now they’re not splitting that commission with a buyer’s agent and B, it’s going to be an easier transaction, because they don’t have to worry about this telephone game between the buyer, themselves, or the sellers agent and all these different people. So I typically do do that, and I think in California you have to sign that document as well. Some agents though won’t do that. I’ve reached out to some agents, and they’re like, “Hey, I don’t do the dual agent thing, but I have someone in my office that I can recommend to you.” But I honestly have done that. And my agent at Joshua Tree, I found that way, and multiple agents I’ve found have been just by going directly to that listing.

Ashley:
Yeah, I feel like I’ve had more trouble, and this is more on the commercial side. So recently we looked at, it was an old welding warehouse and we’re going to use it for self storage for boats and RVs, and just trying to contact the listing agent was… Look, we showed up twice and she was a no show. And I’m sure that can happen with all kinds of agents, but then we ended up just contacting an agent we had worked with before and he was like, “I’ll get you a showing.” And then he ended up taking us to go see it. But I think especially on the commercial side, if you built that kind of relationship with that broker, it’s going to go a lot easier, and you’re going to be more of a priority instead of just, “This person just reached out to me for the first time ever. I don’t really know if they’re a serious investor.”
Things like that. But as far as in this circumstance, if you think it will be easier for you, and Tony has obviously had a good experience, there’s not a lot of reasons not to. The only thing that I can think of would be if negotiations start to come up during the due diligence period, where the agent becomes the middleman and now it’s like who is the agent really representing and fighting for? Especially if you are a new investor, which Christina, it seems like you’re a pretty experienced, you’re a single family, but if you’re a new investor, I think it’s beneficial to have an agent that’s on your side, and going to be fighting for you if it does get to that circumstance where during the inspection period, things come up, and they’re on your side. Where maybe if you’re there’s a dual agent, they might lean towards more of, oh, the higher price, the higher commission. I’m on the seller’s side.

Tony:
That’s a great point. And I think the way that you can combat that, Christina, is by really sticking to your numbers. When you analyze that deal, there was some number where that deal made sense. And if you get to that negotiation phase doing your due diligence, and the seller’s agent is really playing hardball and doesn’t want to give you what you want, that’s true. You want to walk away and say, “All right, hey Mr. Seller’s agent or Mrs. Seller’s agent, great working with you, but I know what my numbers are. Unfortunately this deal doesn’t make sense so I’m going to walk away.” And at that point, either the agent is going to work with you and compromise, or they’re going to say, “Hey, wish you the best of luck,” and that’s the end of the deal. So I think for us, that’s what we’ve leaned on is to say, “Hey, we know what our drop dead number is,” and use that as our backstop.

Ashley:
And I think you have to look at what type of person you are too. Because I would say early on in my investing career, an agent probably could have persuaded me that, “Oh this is the way to do it, you should do this, you’re getting a great deal,” where now I know better. So think about if you’re easily persuaded, or I know I struggled with low ball offers when I first started out. I felt like I was offending someone if you get into the circumstance where the agent’s almost making you feel guilty for asking for those things. So think about how tough you are, and how much you can stand your ground if you are going to hold yourself up, and not give in to just being influenced by an agent, I guess.

Tony:
You talked about low ball offers, so I just want to mention this really quickly. So I submit multiple low ball offers on a regular basis.

Ashley:
Yes.

Tony:
Just because you have to try and find deals, especially for our rehab properties. I’m just trying to pull up because we just got a… I was just telling you yesterday, we have a property under contract with a pool. So this, it’s a probate property hasn’t been taken care of in the best condition. There’s a swamp cooler on the roof that pretty much caused a mat, like the roof almost-

Ashley:
What a swamp cooler?

Tony:
You haven’t heard of a swamp cooler?

Ashley:
No. I feel like this is when I tell you about a well.

Tony:
So a swamp cooler, it’s an old school HVAC system and it’s super popular in the desert. I don’t really know the inner workings of it, but it’s significantly cheaper than a traditional HVAC system. However, if they’re not maintained properly, because something about water running through the system, they can leak.

Ashley:
Okay.

Tony:
So you see a lot of properties in the desert where these swamp coolers are placed on the roof, when ideally they should have been placed off to the size somewhere. But anyways, they’re placed on the roof and if they weren’t maintained they start to drip and drip and drip.

Ashley:
Oh, and leak through.

Tony:
So we walked into one of the restrooms here and you could literally see skylight coming through the restroom because of all the damage that had happened. So anyway, I just want to pull it up, because I can’t find the property. Anyway, the property was listed for something like, I don’t know, 370 or something like that. I offered 312.5, and they accepted that offer, and now it’s under contract, we walked the property, got the inspection report, I’m probably going to ask for another 12 to $15,000 in price reduction. So anyway, my point is, sometimes just because a property is listed as a certain price, that doesn’t even necessarily mean that the sellers believe the property’s worth that price. They just want to see what they can get. And we were one of the only people that offered on that property because it didn’t need so much work. But for us, we’re not afraid of the work because we know we have the crew, as long as we can get it for the right price. So that’s a big thing.

Ashley:
And they didn’t even counter at all, they just accepted?

Tony:
They accepted it. Our very first offer they accepted. So it gives me the indication that there’s probably some wiggle room there as well, which is why we’re going to go back with what we found from the inspection report.

Ashley:
Right. And you put in that inspection contingency too.

Tony:
Totally. Yeah.

Ashley:
So that’s safety net, having that too. Okay, well thank you guys so much for joining us for this Rookie Reply. I’m Ashley at Wealth Firm Rentals and he’s Tony at Tony J. Robinson, and we will be back next week with a guest.