BRRRR-ing to 16 Rental Units (WITHOUT a Ton of Money)

Buying sixteen rental unitsEverybody says cashflow is king, but the reality of achieving that in this market is tough.So today we are deep diving into questions from the BiggerPockets rookie investors and one investor in particular is struggling with ways to find an increase in cashflow in his one property.So if you want to increase cashflow, is buying more rentals the right strategy or is it actually something else? I’m Ashley Kehr and this is the Real Estate Rookie podcastAnd welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. So let’s get into our first question for today.So this question says, hi, I’m just starting out on my real estate investing journey and I’m thinking about my first property this year. The thing is, I will be moving out of the current state, leaving myself to either self-manage or hire a property manager for my property. I am leaning towards the self-manage option and got several questions regarding self-managing a property while living out of state. I’ll be buying a multifamily property in a landlord friendly state without any rent control. My questions are how should you handle the showing of the units? How do you conduct the move out inspection? Are there specific tools and any other stuff I should be aware of when self-managing? So Tony, let’s go through those questions kind of one by one. So set the table, set. The scenario here is moving out of state, but is going to have a property in the current state that they’re living in. So they’re moving and they’re going to be an out-of-state investor. The first question is how should you handle showing of the units? So Tony, when you had your out of state investment, what did you do?For me, I did go the route of hiring a PM. So my PM was the person that showed the unit for me. However, I do know that the PM also offered lease up services just like all the cart. So if you just wanted to hire them just to do the leasing for you, which means they’ll do all the showings, they’ll do all that stuff, they’ll get the property leased for you even if they don’t manage it. That was an option that they offered. The realtor that I worked with, I believe she also offered lease up for investors as well. So your PMs in those markets and your agents can potentially be a resource for you if you’re looking for ways to actually get the showing of the units handled remotely. Well, what about you Ash? What other unique strategies?Yeah, even though I’m not an out-of-state investor and all of my rentals are local, I still use a leasing agent. So we actually hired a real estate agent and she does all of our showings and she actually does the move-in now on the properties. So she charges a flat rate of, I think it’s $500 every time she leases a unit. Some agents, we had an agent probably five, six years ago and she used to charge one month’s rent on the properties. So that can definitely vary. So you can get a leasing agent just by contacting. You could actually use biggerpockets.com/agent and I’m sure there’s a ton of investor friendly agents who also do leasing for properties. But I think the harder part than getting somebody to lease it is actually finding a handyman for being your boots on the ground. So we actually did have our maintenance guy do a lot of the move-ins for a while too, is kind of like a boots on the ground, but some states do require for somebody actually showing the apartment and doing the rental application, things like that, that it needs to be a licensed agent. So make sure you check on your leasing laws to see if maybe you could use your boots on the ground handyman or it could just be a friend or what those laws are too. How do you conduct move out inspections and cleaning once a tenant moves out is the next question. So Tony, I’m assuming your property manager handled this for you and move out inspection. Were you involved in any part of the process or was it kind of they notified you, someone’s moving out and then let you know the result of the apartment?That was very hands off and yeah, they sent me a bill for like, Hey, here’s the bid of what we think it’ll cost to get the unit turned. But yeah, it was pretty hands off for me having a pm and I guess one thing that I will call out, and this is for all the Ricky’s that are listening, the way that my PM worked was that I didn’t have to use their company to handle the maintenance, but it was the only bid that they provided to me. If I wanted any other bids, I had to go out there and get that myself. What I found was that they were typically more expensive than other vendors that were out there. So if you do opt to have a pm, do your lease up or walk the property afterwards, just make sure you at least go out and get a couple of quotes on what that scope of work is instead of just committing to whatever the PM is going to give you.Yeah, we found that too with when we used a property management company that it was definitely more expensive. So we eventually started using our own contractors. So you’re definitely paying for that convenience because you don’t have to take a contractor into the property to get the estimate. You don’t have to contact anyone, it’s just everything’s going through the property management company and you’re very hands off. But I will say too is I would’ve thought it would’ve been the opposite that if you’re having the property management company do it that you’d get a discount or a bulk rate because they manage so many properties are doing so many turnovers that they get discounts on their things, but we were charged more than what a typical smoke alarm would cost. So it was actually the opposite of what I thought it would be. So like Tony said, make sure you are getting a specific scope of work.
So they used to send theirs through Buildertrend and I would actually go through it and look at what are the material costs, what are the labor costs, things like that too. So make sure you’re actually getting provided of what’s being done when a turnover is happening. As far as the move out inspection, what we do right now is the maintenance guy actually does the move out inspection. So he meets the resident, he walks through the property with them, indicates anything, and actually in New York State you have to give your residents the option to do a pre-move out inspection two weeks, at least two weeks before they move out they can opt out of it. So we send them a form, they select they want it or they sign that they’re opting out of it. And what the purpose of this move out inspection is, the pre-move out is that you notify them of things that are wrong in the apartment that they would be charged for.
So this gives them time to rectify the issue before they’re charged. So I mean kind of take it with a grain of salt because sometimes you don’t want your tenant making the repairs of things that need to be done. For example, I have this video of this wall where the person tried to patch the wall and it’s like you push on it and the patch goes in and out like this. So sometimes you don’t want that to happen, but per your state law, you may have to give them the option to do that, but we have the maintenance guy do that. Then once that is done, it’s uploaded into our property management software and then that’s where it’s decided as to the maintenance guy makes the recommendation, we actually do need to make repairs. I’m going to make these repairs. This is going to happen.
And then he’s the one that actually notifies the cleaner that it’s ready to be cleaned and then he notifies leasing that it’s ready to be leased again. So you could have a handyman or a maintenance person do this whole process. You could also have a cleaner that comes in and does it. You could also ask the leasing agent if they would do move outs and maybe you work that in and negotiate it as part of their leasing fee as to you move the person out, you’re my eyes and ears of the person that’s actually turning over the apartment, the cleaner, the handyman so that it gets the work done and then you get to lease it out sooner and you get to make your money and move on. So there’s a bunch of different ways that you can do that, but the move out inspection should be emailed to you, sent to you so you can look it over to and determine the security deposit amount that’s being refunded since you are self-managing.And you touched on this a little bit, but it leads into the next part of the question, but is there a specific tool software that you use in order to manage your property in regards to rent collection, maintenance issues, et cetera?Yeah, so I actually went into the real estate rookie Facebook group and so there is a post in there about recommendations for property management software. So I actually learned of one that I have never heard of before because I only use one and more and more are becoming so conveniently available, but there’s rent ready and that if you’re a BiggerPockets Pro member, you actually get it for free. So make sure you go to your pro resources and look for that. Then there’s Turbo Tenant, which I’m currently using, and then there’s ones like Avail. Zillow is starting to build out one apartments.com has one, but one of the new ones I learned from one of the rookies in the Facebook group was in a go into when you are searching property management software, first of all look at the features. You want to be able to have a tenant portal so your tenant can pay online so they can submit maintenance requests online.
You want to be able to maybe do your bookkeeping through there, at least get rent collection through their sign lease agreements electronically, collect rental applications, do the whole screening process. And then another thing that I had learned of is maintenance companies that you can attach to some of these property management software. So there’s Al and Lula are two that I learned about I haven’t used either, but basically they’re a maintenance dispatch service where your tenant submits a maintenance request and they actually take care of it, contact a vendor and send a vendor out to take care of the maintenance.So many good software tools that are out there and that are available. So I think a lot of it comes down to picking the one that’s easiest for you to use, easiest to get started with. I think the last part of the question here says, is there anything else that I should be aware of in trying to self-manage a property? I think in general, self-managing is possible. People do it all the time and whether it’s short-term, long-term, medium term, whatever it may be, I think good self-management comes down to a couple of things. Number one, I think it’s setting the right expectations for your tenants or for your guest or whoever is living or using your property because when the expectations are clear to begin with, I believe the management becomes easier because if your tenants know when to submit a maintenance request and when not to, then you’re only being notified of the things that are actual issues you need to focus on.
If your tenants know that they can’t park in front of the other side of the duplexes driveway, then that alleviates potential conflict between your tenants. So I think the better job we can do during the onboarding, during the initial phases makes management a lot easier. The second thing, aside from expectations are your own internal systems and processes. So if a maintenance request does come in, what happens in on your side of the business to make sure that it gets recorded, that it gets completed and it’s communicated back to your tenant. Just all of the different things that go into running your business, start focusing today on building out those systems and those processes. So those are the two things that come to for me, Ashley. But I guess any other final thoughts on just self-managing? You obviously have it at a much larger scale on the long-term side than I ever did. What are your thoughts?Yeah, the last piece I would say is just asset management. Make sure that you’re managing your asset and not just a property manager. So you’re quoting out your insurance, you’re going over your financials, things like that. But we’re going to take a quick break and when we come back, let’s go over how you can purchase your second rental or even if you should. So we’ll be right back. Okay, Ricks, before we jump into our second question, follow us at BiggerPockets rookie on Instagram and BiggerPockets real estate rookie podcast on Facebook. Get all the extra tips and insider advice to help you succeed this year on your real estate journey. Both are linked in the show notes for you. Okay, so we got our second question here today. It says, I am an older investor seeking help. I own a two bed, one bath property in the Fort Worth Texas area.
When I purchased the property, the previous owners updated the plumbing, adding HVAC and updated electrical. It has rented well over the years. Currently I have about 20,000 left on the mortgage and the estimated value is 175,000. This is the only property that I own other than my own house. I am wanting to purchase another rental property but don’t have the funds other than the equity and the current rental. Should I leverage the current property that I have to purchase another. Right now, the rental has a cashflow of $250 per month. The rental should be paid off in about three years. Thank you in advance. Okay, so Tony, what do you want to start with? Do you want to discuss if he should tap into that equity or how he can tap into that equity?I think let’s get into the if first because I feel like that’ll kind of dictate everything else. So if we’re asking about, if, I think that it comes down to a couple of things first, again, I keep going back to this. What is your motivation for wanting another rental? Are you doing it for appreciation long-term? Are you doing it because you want some additional cashflow today? Are you doing it because you need the tax benefits? What is actually driving the desire to add that next property? Because I think depending on how you land, that’ll somewhat dictate what steps maybe make the most sense. If your goal is, Hey, I just need to buy something else because I just sold my business and I need another tax write off, okay, then yeah, maybe it does make sense to potentially 10 31 this property and to something else that you can do bonus appreciation on and create a bunch of passive losses. But if it’s cashflow, then maybe there’s some more math that goes into it. So those I think are the questions that I would be asking Ashley first about the if, what do you think, what might be missing thereAnd maybe to diversify. So maybe you just don’t want to rely on having one rental, you want two rentals in case maybe one is vacant. The cashflow from one can help cover the other one. So there’s reasons like that too that you should consider. But I think one thing that really intrigues me is this property is almost paid off. So what is the mortgage payment on this property right now after the mortgage is paid off in three years, what will the cashflow increase to say that the mortgage payment is $500 per month, that would increase your not including escrow, no taxes and property, no taxes in insurance because those would still stay there, but just say it’s 500 for principal and interest, that would increase your cashflow to seven 50 per month. So if you go and you pull equity and you put a line of credit or you refinance this property, what will that new monthly payment be and what would the cashflow be on that new property?
So which one has higher cashflow? Which option, but also what does the equity look like in both properties, 2, 3, 5 years down the road? So that’s where I’d look at as to this property is almost paid off. I’m going to have in three years X amount more cashflow just by doing what I’m already doing. I would see what the benefit of purchasing another one would be, what kind of cashflow you can get. Maybe if you’re buying a property that’s way below value and you’re already getting $50,000 baked into equity because you’re getting such a good deal on it, then yeah, that’s where it makes sense to maybe go and grab that deal because in five years time, maybe when you’re ready to retire and you want to sell these properties, you’re going to have way more equity with the two of the properties than one. So like Tony said, you got to look at what you want.
Is it cashflow that you want? Because maybe just keeping that rental is the best. Is it equity that you want so you can sell off in 10 years and just take your cash and run? Is that better with having your one property paid off or is that better with having two properties? There’s even some investors that like to keep their properties leveraged for liability reasons, so they’re less likely to get sued or if they get sued, there’s not as much to take because the properties are leveraged so much. So I would say kind of look into those scenarios to see, and I wish we could give a concrete answer on that part, but really these are questions that everyone should be asking themselves before they go on to the next deal, especially if you are this close to increasing your cashflow by X amount because the mortgage is being eliminated on the property. So Tony, let’s get into what are some ways that he actually can tap into that equity and use the equity to purchase another property?And I think we can kind of break it down access, I guess how easy it will be to access that, right? So the first way is just to sell the property. You sell the property, you’ll be able to tap into virtually all of the equity that you built up minus any closing costs associated with that sale. So if you really wanted to get the most, you could sell that and then maybe you get it sounds like you got 175 is a value, you owe 20,000, so you got 155,000, maybe you walk away with 145 somewhere in that ballpark after your closing costs. It’s a good chunk of cash to maybe go put down on potentially one or two other properties where maybe you get more than the two 50 per month in cash that you’re getting right now. So that’s one optionFor that option too, Tony, is there’s the 10 31 exchange. So you don’t have to pay taxes on that gain too, but if you just go ahead and outright and sell it, you will have to pay whatever that gain is. You are going to have to pay taxes on that. So if you are going to do that option and use the funds to actually go and purchase another property, I would look into doing a 10 31 exchange to avoid or not avoid, but to defer paying taxes on that income.I think the second option would be refinancing the property. That’s where you’re basically going to replace this mortgage that has $20,000 left on it and you’re going to install the new mortgage at whatever value you want. Maybe it’s 60% of the value that you have at 1 75. Maybe it’s 75% of the value that you have at 1 75, but you’re going to replace that with the new mortgage and you get the difference between the new mortgage and the 20,000 bucks that you owe, which you can then go deploy into the purchase of another property. So selling and refinancing are two ways that you can use this existing property to get more capital.And with the refinancing piece too, you look at what your payment is. So we’ve used the example for 500 a month, so let’s just keep it at that. So compare, so what your new payment would be. Maybe you bought this property when interest rates were super, super, super high and maybe you have a 8% interest rate and you go and refinance and you could get a 6% interest rate or whatever it may be. Maybe when you look at this, there isn’t that huge of a difference in what your monthly payment is going to be. So really take a look at that too. This was 2021 and we were back to 3% interest rates. I would say probably this is a great time to refinance and your mortgage payment probably isn’t going to go up that much because it’s going to be amortized over 30 years and it’s going to have that lower interest rate. So it also depends on what type of loan he had on the property too. So maybe when he purchased it, it was only a 15 year amortization, his monthly payment would be bigger than if he did a 30 year. So if he does a 30 year this time around, then maybe the mortgage payment would be close to what he comparatively has on the property, which would not impact his cashflow that much on the current property where it could make sense to tap into that equity and go and purchase another property with it.So Ash, we talked about selling, we talked about refinancing. What other options would this person have to tap into some of that equity?So another thing would be to do a line of credit. It may have to be on the commercial side of lending since this isn’t a primary residence, but you could get a commercial line of credit and you could use that tap into that money, pull it off when you need to use it. So for example, I use my line of credits to purchase properties or to fund rehabs, but it’s always for a short period of time. So there are investors that use the lines of credit for down payments. I don’t specifically do that. I do it to make purchases of the property in cash and then I pay my line of credit back when I go and actually refinance the property. But you have the option to use a line of credit that way you’re only paying interest on the money when you’re actually using the money and then you can go ahead and recycle the money.
Also, if this is on your commercial property, your interest could be tax deductible if it’s on your investment property. And then kind of the last piece is that you could actually get A-D-S-E-R loan, and this could be maybe because you don’t have the income to support another property, but you could do A-D-S-E-R loan to refinance it and it would be based off the performance of the property. So another option there to go ahead and refinance. And then just the last thing I’ll say is talk to small local lenders in your area about what you’re trying to do and see what kind of options they have available for you. We have to take one final ad break, but we’ll be back with more after this to discuss what happens if a repair needs to be made on your property right before you close on it. All right, let’s jump back in. Tony, what’s our last question today?Alright, the last question says I’m set to close on a property soon, but we found through the inspection process that the property will need a new roof along with closing off previous skylights that have begun to leak and the seller is okay with taking care of this and has already contracted a contractor to get it fixed. We are considering escrowing the funds to get this taken care of as I had locked in my interest rate. And if we waited the total estimated time to get the roof done, I would end up paying $1,400 in the rate lock extension fees by pushing back the closing date. Do you have any recommendations when it comes to escrowing funds to ensure that their work is successfully completed? Should these sellers agents be primarily setting this up with a title company? I also want to be sure that I’m approaching this in a way that doesn’t throw a red flag for my lender to be concerned about the condition of the property.
So I’m reading this, I just want to make sure that I’m tracking. Maybe you can help me understand a little bit more clearly too here, Ashley, but it sounds like they found a property under contract, things came up in the inspection and this question says the seller is okay with taking care of this and already has a contractor lined up, but it sounds like the buyer doesn’t necessarily want to wait to have the seller take care of it because then they’ll have to pay for this rate lock extension. That’s how I’m interpreting this question. Are you hearing it the same way, Ashley?Yeah, so it must be a very quick closing period where they don’t have time to get the contractor in or the contractor doesn’t have time to put them on their schedule before they’re set to close. So if they don’t close by the rate lock date, so he’d have to pay an extra $1,400 to extend the rate lock. So depending on what current rates are right now, keeping that rate lock could be very important if they have a better rate than what they would get right now. So some recommendations as to kind of handle this scenario. First of all, I’ll give you an example because I’m going through something very similar right now with a septic. So with a septic you have to have the county inspect it every time it sells. And when there’s snow on the ground, they cannot inspect the septic or they will not inspect it if it has been vacant.
I think it’s for 90 days because there’s nobody using the septic, so they’re not getting accurate testing or something like that. So this property has been vacant for over a year and it’s wintertime. So typically you hold funds and escrow and then the septic inspection is done by the county health department in the spring. If it passes inspection, then those funds are released to the seller, they get the rest of the purchase price. So say it was 10 grand, they didn’t get 10 of the purchase price, so they get that 10 grand back. At that point, if it doesn’t pass inspection and it needs work, the purchaser can use those funds to pay for the work that needs to be completed. So in New York State we use attorneys. So the attorneys handle all of this. Tony in California, have you come into this situation where you’ve had to hold funds in escrow for repair and how is it handled? Not using attorneys for closing already?No, I haven’t purchased any properties where we would need to escrow funds post-close or have anything like an escrow account after closing. And I think even hearing this question, I guess I’m trying to understand the logic behind why they feel they would need to escrow funds. Because if the seller is the person, that is fine covering the cost of the repairs, but it really is just a timing issue in my mind. There are kind of two options. Either one, have the seller give you a credit and that equals your rate extension cost, which was 1400 bucks. So just have them give you an additional credit for $1,400. That way you bring $1,400 less to closing table, you can apply that to the rate lock and then everything’s fine. Or second, have them give you a credit for the amount that the repairs would actually come to.
So if they have a contractor lined up, maybe they have a bid and just say, okay, cool, if it’s going to cost whatever, $12,000 to get this fixed, give me a credit for 12,000 so then I can reduce my cash out of pocket at closing by 12,000 and then apply that to those repairs. So in my mind, those are the kind of probably the approach that I would take, but I would prefer just have the seller do it before closing. And in my mind I would almost rather pay the 400 bucks to get it done with certainty before I actually take control of this property.Yeah, so I’m so torn on this and I’ve done escrow a couple times over different repairs and things like that. And one was for roof on a duplex and we had the seller take care of it and everything like that. And after we closed, we found out the contract they used, I mean he was licensed everything, but he did a horrible job. We actually had to have them come back several times where looking back on it now, I wish we would’ve also taken the credit and we would’ve fixed it ourselves. So in this example, first of all, are you sure you want to use a contractor that they have lined up? Second of all, do you have time to actually go and get your own contractors or other contractors to come in and give you book quotes to see if, okay, if this contractor doesn’t work out, are you able to have enough money and escrow to cover those funds for another contractor to do it?
Because I think that’s why the funds are being held in escrow in the first place is because the seller is saying, this is how much it costs. Here’s the contractor that will do it. And so they’re putting those funds in escrow, but also the seller is saying, I want to make sure it’s done. So they’re keeping that money in there where, so I think there’s some kind of negotiating that could happen and there’s different ways to handle this. I think there’s a security on both sides of it’s set in stone as to what it’s going to be paid for. And the purchaser doesn’t have to line up a contractor, they know it’s already going to get done. They know that it’s already going to be paid for in that sense. So I would think the best thing is to have an attorney hold in an escrow.
But also agents have escrows too, so they keep your earnest money deposit in an escrow account. So you could always ask your agent for some guidance on this too and what they can provide as far as holding the money. But a really big thing I would do is when you are deciding on this payment, how much it should be and that you’re going to hold it in escrow is set a timeframe. So set a timeframe saying that this work has to be done by ex date. So whether that’s 30 days, because if that contractor doesn’t show that the work doesn’t get done, you don’t want that money sitting there forever and them being like, well, you agree to this contractor just sitting there waiting, waiting, waiting. And you don’t have your roof that way. At least at 30 days, the funds can be released to you because the work was not completed and you can go ahead and have your own contractor come and do the work. And one thing too is with the seller credits is sometimes people already max out their seller credits too. So maybe that’s something that happened in this scenario, but also you could just go and change the purchase price too and just decrease the actual purchase price.Yeah, you make a fantastic point, Ashley, about putting a time limit on those repairs as well. But I think just in general, the last part of the question was like, Hey, who can help facilitate this? I don’t live in an attorney state. I had never had to close to an attorney. We typically go through our escrow and our title companies that handle that, and I know they also offer services to facilitate these things post transaction. The hotel that we bought actually, and this was in Utah, the title and escrow company that we used out there because it was a seller financed deal, they offered to basically be like the intermediary to kind of help settle the payments between us and the seller. So just depending on what stage you’re in, your escrow or title company could also help facilitate this and get the paperwork drawn up, make sure everything’s done to the letter of the law to kind of protect both sides.I’m going to give you guys an example of how my septic negotiation is going. So my attorney is handling it and the seller’s attorney, so we got actual quotes. This has been going back and forth and negotiating on it because the septic is actually underneath a porch. So if the septic needs to be repaired, the porch has to be ripped off the house and rebuilt. So we got a quote on the septic if it had to be replaced, we got a quote and we submitted it and it ended up being, I dunno, like 27,000. And so we said, you know what, we’ll take 25,000 because originally they said no at 28,000, so we said 25,000. So this is the email the attorney sent back to my attorney, 25,000 is simply not acceptable. Let’s just cancel the contract. There’s no down payment to return. So my attorney said, how would you like to handle this?
And I said, let’s just say nothing. And three days later they sent a letter renegotiating with this. So I think this was just the attorney acting out of outrage. I don’t know. But first of all, down payment is the wrong word, it’s earnest money deposit. So just a funny example of this attorney that doesn’t seem to know what he’s doing, and this property has been under contract for a year and a half where I’ve documented where it’s been 30 days before the attorney even respond to my attorney. And I’ve sent this as a seller, just want you to know none of this is my fault. This is your attorney. But the seller did not even know that his attorney tried to cancel the contract.And it just got to show nothing is sacred in a real estate negotiation. There’s so many different levers you can pull. So try and fight for what makes the most sense for you. I love that.Okay, well thank you guys so much for joining us for this episode of Real Estate Rookie. As you may know, we air every episode of this podcast on YouTube as well as the original content, like my new series, rookie Resource. We really want to hit 100,000 subscribers and we need your help. If you aren’t already subscribed, please head over to our YouTube channel, youtube.com/at realestate rookie and subscribe. I’m Ashley and he’s Tony. And we’ll see you on the next Realestate Rookie Podcast.