Afraid to Buy Your First Rental? Here’s How to Finally Start (Rookie Reply)

Ashley:
What if the biggest mistake new investors make is waiting too long to buy their first property?And what if the fastest way to lose money isn’t a bad deal but a bad contractor?Today we’re answering three questions. Every rookie needs to hear how to start when you feel stuck, how to avoid getting ripped off by contractors and how to capitalize when you stumble on a potential cash cow. This is the Real Estate Ricky Podcast. And I’m Ashley Kehr.And I’m Tony j Robinson. And with that, let’s get into today’s first question. So this question comes from Corey in the BiggerPockets forms, and Corey says, I’m completely new to real estate and would like to know if someone could help me and guide me through getting my first deal. Great question, Corey. And that’s the entire reason that the Real Estate Rookie podcast exists is to help guide you through your first deal and beyond, obviously. Now, that said, it is also a very loaded question because there’s a lot that goes into guiding someone through their first deal. So I think the goal for me and Ashley isn’t to give you a super tactical step-by-step for every single thing you need to do, but give you a general overview of the big things you should focus on and some of those more major milestones. I think the first step, and Ash, lemme know if you disagree with this, but I think the first step is just to clarify what is your why and what is your end goal? Because every person who invests in real estate has a slightly different mix of motivations and resources and skills and abilities and goals, and those mixes can lead to slightly different plans in terms of what should you be doing within real estate.And I think oftentimes people aren’t getting niche enough. So you could say, well, my goal is to my why. The reason is because I want to quit my job or I want to build wealth for my family. But what you’re not think about is the actual steps and the lifestyle to get to that. So if you want to quit your job, does that mean because you want to go and you want to live on the beach and you don’t want to work anymore, you want to be retired? Or does it mean you want to work for yourself and you’re going to? So the difference between the two is you’re most likely going to be able to quit your job sooner if you’ve put yourself into a new job where you’re working for yourself. So maybe you’re becoming a co-host, you’re managing all of these short-term rentals, you’re an operator, maybe you are flipping houses, which is a very active income, or maybe you are buying long-term rentals.
We had a guy on not too long ago that was an out-of-state investor and he set up property management and he had his long-term rentals just sitting there accumulating appreciation. They had some cashflow and he was really just banking on them, building wealth, and he was still working his full-time job with no reason to actually quit anytime soon. He liked his job, he wanted to stay into it because the strategy that you pick I think really depends on not only what your why is, but what you want to be doing to actually get to that point, to reach that goal too.And I think once you have clarity around that why and what that end goal is, the next step is to understand, and actually you kind of touched on this, but understand your strategy and your niche. And I think oftentimes we confuse those two things that they’re actually slightly different. The strategy would be long-term, traditional, long-term rentals, midterm rentals, short-term rentals, obviously flipping wholesaling, but within even, let’s talk about flipping because I think when a lot of people think about flipping, they only think about flipping single family homes. And while that’s true that that’s probably the most popular form of flipping, we’ve met and interviewed people who flip raw land and they buy land, they sit on it and they flip it later for some sort of profit. We’ve met people who flip land but improved land. So they’ll buy the land, they’ll do all of the initial work to get it ready to get built on, and they’ll sell it to a builder and the builder can plug and play. We’ve met people who buy small parcels of land. We’ve met people who buy large parcels of land. So even within the strategy of flipping, there are different niches in terms of what you can flip. You can flip apartment complexes big or small. You can flip hotels if you want to. So just understanding both the strategy and the niche that makes the most sense for you given your current resources, abilities, goals, et cetera.Yeah, and I think a big motivation for people to get into real estate is because they want to do something they love. They want to have a passion and designing a house excites them or flipping a house. And there are two ways to take this as to you hate your job, you want to do something that you enjoy, but you actually have more of an opportunity to be successful at first and to make more money if you take advantage of your current resources. And when I first started, I was working as a property manager. I knew everything about property management. I had a mentor that was a long-term investor. So right there I had an advantage because I had those skill sets, I had that network, I had all of that where if I would’ve said, you know what? Doing an Airbnb that actually looks more fun and I would really like that more, designing it, coordinating with the guests, I wouldn’t have even have known where to start with an Airbnb and it would’ve taken me longer to accumulate all of that knowledge.
I didn’t know a single person that was doing a short-term rental at the time. I would’ve had to learn everything from the ground up. So eventually I did pivot. Eventually I built my foundation of long-term rentals and I was able to pivot to try some short-term rentals. The first one, I went $40,000 over budget. If that would’ve been my first deal, that would’ve bankrupt to me. So as much as you want to pursue your passion and do something that excites you and love, see if there actually is an opportunity and you have an advantage doing one of the strategies that will actually propel you to reach success even faster.I think the other piece of getting started is building out your team and for Ricky Investors, the people you should focus on initially, a good lender, and I say lender maybe even first because I think before you can focus on markets or properties, you need to understand what can you actually afford? What is your purchasing power? So you know how much cash you have to deploy for a down payment, closing cost, renovation, set up, whatever it may be. But you need a good lender to tell you what loan amount can you get approved for. So talking to a great lender, working with a great agent, someone who knows the market or can expose you to different markets. And luckily BP has the resources to help you find both of those folks. We’ve got the agent finder biggerpockets.com/agent finder. We also have the lender finder. So go in there, go talk to some folks and get a sense of what can I afford? How much can I actually buy? And then once you’ve got that idea, then go start talking to agents who fit within your purchasing power.So I think if you start to think about all these things and actually take the time to write them down, there’s actually a really great journal. What is it called that Brandon Turner had created the intention journal. It’s on the BiggerPockets Bookstore, and it is just like a great resource to actually build out why is what your goals are, but also action items that you can do every single day to move the needle. Highly recommend checking that out at the BiggerPockets bookstore.The next thing that we will touch on is, and this is more so mindset, but it’s that momentum beats perfection and we can get so caught up in analysis paralysis, waiting for the absolute, and I’m using air quotes here, perfect deal that we end up waiting forever. And now you looked up and it’s been a decade and you still haven’t gotten started and I think in action has killed more real estate investing dreams than slightly misaligned action, right? More people just not doing anything has stopped more investors from becoming investors than maybe buying a deal that didn’t pencil out exactly how they wanted it to. So momentum, momentum is what we want to focus on, and that’s how we get from no deals to one deal, from one deal to five deals, from five deals to 10 deals and so on.We need to take a short break here. But the last thing I’ll add to this is building confidence. And that can be with just making very small moves, low risk moves and networking, analyzing deals, shadowing someone, finding a mentor. Those can all help you get to the next step. So coming up, if you’re worried your contractor is overcharging, how would you actually know? For sure. We’ll break it down right after this with a quick word from our sponsor. Okay, welcome back. Our next question comes from Matthew in the BP forums, newer to house flipping and also just moved to Charleston, South Carolina. I’ve got a 2 1 900 square foot house that needs a full rehab including new roof, all new drywall flooring, adding plumbing for washer dryer and dishwasher, getting electrical up to code, full kitchen and bathroom remodel, et cetera. My general contractor is estimating 90 K in rehab. This is about $100 per square foot. Is this reasonable for the area or is he pricing this way too much? Even for a heavy rehab, I was expecting closer to $65 per square foot totaling a 60 K rehab. So this is roughly 30 k more than what I was expecting. Would appreciate a fellow investor familiar with the region’s opinion on pricing. Are you familiar with the region’s pricing in Charleston, South Carolina?I actually know nothing about pricing for rehabs in Charleston, South Carolina.I am going to say don’t think, I think you’ll agree with me. I don’t think that we need to answer this question as in a full gut rehab. So new roof, let’s say it’s 900 square foot house. So let’s break this down. Tony, if you were doing a 900 square foot house in, we’ll say Tennessee because that’s closer than Joshua Tree to South Carolina, what would the cost of a new roof be about?I actually haven’t had to do a new roof in Tennessee, but we got quoted on a new roof for a property in California and it was like five or six grand I want to say.Yeah, that’s exactly what it was for here. I did a duplex not too long ago and it was 5,000. Okay, so then flooring, my flooring guy charges, I think it’s four 50 per square foot, but that’s including the flooring plus labor. So if we got 900 square feet at four 50 a square foot, what does that come out to? My math genius,Oh, you’re pushing me right here. Nine times four, 360. It’s like a little over 5,000 bucks, give or take.We’re just going to assume the whole place is getting LVP flooring, okay, adding plumbing for washer, dryer and dishwasher that I probably could say we have a really good relationship with our plumber and do a lot of work. So sometimes things are ridiculously cheap because they’re already at another property or something like that. But I would say to add that probably around 500, $600,It was reasonable.Okay, so open another 500. I did skip the drywall, all new drywall. I’m trying to think of what, I did a property recently that we did a bunch of drywall. We had to rip it all out because we did some structural improvements to the property, but it wasn’t a full house that we did at all. But I don’t know, what do you think for the drywall on this?I don’t even have a good sense of that because anytime that we’ve done drywall, it’s been within the context of a larger rehab. So I don’t even have a good context if I just wanted to replace a drywall and a property.Okay, we’re going to put, for drywall mudding, we’re going to assume every single wall, every single ceiling, we’re going to put 10 grand and then electrical up to code. So this can vary a breaker box to replace the panel. That can be about a thousand bucks.I was going to say like two grand maybe in my market.But you’re updating the electric too, so it’s not just the panel most likely that you’re going to be doing. So let’s do two grand full kitchen. So full kitchen cabinets, countertops, it’s small kitchen. If it’s a 900 square foot house,I was going to say 900 square feet, it can’t be that large.So some cabinets, a new sink, assuming new appliances, I’m throwing in 20,000 for the kitchenEven that feels like a heavy amount. But yeah, I guess 20 grand for being a little bit more, or not optimistic, but giving a little bit more room here.And I mean, I guess it depends on the quality too. I am done with Lowe’s cabinets. I actually go to a cabinet place now, have them do the design order from them, so a better quality that’s going to last longer cabinet, I mean appliances, you’re looking at $5,000 just for appliances in a property. Really. This is a flip. We have to remember it’s not a rental. And then the bathroom remodel andHe said it’s a two one bathroom as well.Yeah, one bathroom. Okay, so let’s say small bathroom, five grand.So what total does that get us to you right now, Ash?That gives us 5, 10, 20, 40, 45, 46, 46 50, 46 50.And correction on my math earlier, 900 square feet at 4.5 is actually just over 4,000, not 5,000. So we can knock that down to call it 45 grand.We’ll say 45,000. Okay,45. Significantly less than the, what did you get quoted? You said 90 K, but I think even before we go on, just the thought process that Ash and I just went through, you can do that even if you’re remote, even if you don’t step foot into the market that you’re flipping in, you can still look at the pictures, get an idea of the changes and improvements you want to make. Call around to subcontractors or companies that specialize in installing kitchen cabinets like Ashley just talked about. And you can get a ballpark quote on what that total renovation would be without even having to walk into the property. But I think Ashton, let me know if you disagree here. I think the absolute best way to know if 90 K in that market is reasonable is to go talk to three other contractors and see what the ranges are in those bids. And if everyone comes back at 90 grand, either they’ve all colluded to try and make sure that you spend as much money as possible in this rehab. Or maybe for whatever reason, just the cost of labor in Charleston, South Carolina is higher.The most recent flip that I did was $30,000 just for the labor. It was bigger. It was a three bed, one bath, but we also finished off the basement too and added a bathroom into the basement also. And that rehab altogether was I think 80,000 with materials and labor, but it was way bigger than this two one. And we did really nice tile all throughout the kitchen on the backsplash on the floor, we did tile surround in the bathroom, tile on the floor. We did really nice finishes in this property too, and that was still less than that 90,000. And there’s a lot of things that aren’t even included that he didn’t write out because you can get even more niche. So maybe in this it is closer to 90. I mean, you still got trim work, you still have paint light fixtures. Maybe it could get there depending on how rough of shape this property is. InOur last flip that we did, it was just over 1000 square feet and we spent about 65 can the rehab. So we’re at about 60 bucks a square foot on this renovation that included fully redoing the kitchen, new flooring all the way throughout. We didn’t do any electrical work. We redid the bathrooms, we redid a lot of the decking and yeah, we were all in for about 60 bucks a square foot on that property. And that’s in California, one of the more expensive higher cost living areas to rehab in. So I think my gut is telling me that 90 K is a little high. What’s your take ash?Yeah, I think you can go back to the basics of estimating out the rehab materials at first. So make a list of every single thing that you would need as a material, a toilet, a vanity, a tub, a surround, everything you need, go room by room and then go on Lowe’s. This is going to take forever. It’s super time consuming. But if you really want to learn your numbers and learn estimating and learn what prices are in your market, you can at least get really, really close to the materials and knowing how much the materials are. So if this contractor is saying 90 K, but you go and see the materials are only 30,000, okay, that’s a lot of labor costs that you have. And just go down your spreadsheet and put in, okay, at Lowe’s a toilet, is this cost a vanity? Is this cost?
And even if you don’t even know what toilet to pick, you want an oval one. Do you want a round one? Do you want one that’s low? That one said high. Once that’s heated, just pick the average price of them and put that in there. So that’s one thing that I did for a very long time, and that’s how I learned the cost of materials. Now I have somebody that runs all of this that for me, that rehab stuff, so it’s not as familiar with me, but at first, every apartment, turnover, rehab, that’s how I was doing it. I was building out a spreadsheet of materials and then I was buying the materials and hiring someone just to do the labor.So you’ve got a few options here, I think, to identify what should the correct price be, but even more so for the rickeys that are listening, hopefully now you’ve got a framework on how you guys can validate prices for rehab work in whatever market it’s that you guys land in. So we’re going to take a quick break before we hit our last question, but while we’re gone, be sure to subscribe to the Real Estate Ricky YouTube channel. If you guys are listening to this on audio, you can find us at realestate Ricky and we’ll be back with more right after this. Alright, we’re back with our last question and this one comes from Chris. Chris says, I managed properties for my father for 20 years, a long time, and I’m prepared to do what it takes to renovate, manage, and maintain my own portfolio. I have $100,000 in cash saved up to begin investing.
I found a property. This is the opportunity. It’s a 10 unit. Each unit is one bedroom and the purchase price is $550,000. The exterior needs a lot of work, but the interior is finished and ready to go with less than a week’s worth of renovation. Each unit has historically rented for 800 to $950 and is in a desirable area. There are no active tenants, but this appears to be the opportunity I’ve been waiting a long time for. I promised my wife I would not purchase any rentals with a personal guarantee to protect our house and our livelihood, but I cannot see a path toward getting the loan for this property that gives me a couple of months to get it renovated and occupied. My personal credit is over 800, but the LLC is only a few months old and I have no collateral beyond the 100 k. I do have experience managing and renting for others, but this would be my first personal company owned acquisition. What is the smart,I like this question. It’s one we really haven’t gotten before. This is a new one, refreshing, and pretty much on every loan that I’ve done, whether the property is owned by me personally or an LLC, I still have been a personal guarantor on the loan. Even if the LLC is on the mortgage, you’re getting a way better interest rate and it’s a lot easier to actually get the mortgage too on the property. What about in your case?Yeah, I don’t think I’ve done any loans that don’t have some sort of personal guarantee. Actually, the hotel, there’s no personal guarantee on that note. It is just for the hotel.And that’s seller financing, right?That was seller financing. Yeah, yeah, yeah. So thatAn option, that’s a good negotiation technique.Yeah, maybe that is an option, right? It’s like instead of going to the bank, if you go the seller financing route, they’re not going to be checking for things in the same way that a large publicly traded corporation is going to be checking for things. So maybe that is the right move here is you go to the seller offer seller financing, it’s going to be your LLC that’s going to be carrying this debt and see what they say. You can draw up your own promissory note, your own mortgage security document that would protect you and make sure that if there is any default that they would only be able to go after the property. So I guess that is one option I didn’t even think of. But I think another option there is non-recourse debt. And I get that the LLC is somewhat newer, but I would imagine there are some lenders out there who work with newer entities and specialize in non-recourse debt. So I think the question is how many lenders have you actually spoken with specifically about non-recourse debt and what is the feedback that you’re getting? Are you assuming here that maybe you wouldn’t be able to get approved or have you actually knocked on the door of a hundred different lenders? And they all said the same thing of like, Hey, you’re, your LLC isn’t seasoned enough.Whenever I open a new LLC, one thing I do within the first three months is I get a credit card so I can get the signup bonus so I can get travel points. It is not that hard to get credit for your LLCI think there’s this big misconception that you have to build credit in your LLC, but if you open one and you open your LLC whatever and it’s tied to your name on the application for the credit card, you’re putting your information on it. Also, if you want to start building credit, you can open a credit card for your LLC. It’s very easy to do to get that. But I think question is, and this is when I first started, I always had this big fear that if something went wrong, I would get sued and my house would be taken away and all of these horrible things would happen.
And I guess really think about what is your wife’s worst case scenario? So she said she doesn’t want to affect your house or your livelihood. So what does that mean? Is that more like she doesn’t want to get sued and somebody comes after your house, comes after your savings? Is it because she’s afraid that you’re going to foreclose on the property and you’re not going to be able to pay and the bank’s going to come and take that property? And then do you think there’s not going to be enough equity in that property that they’re going to come and take your house too? So I guess really, is there a way that you could address her concern? So if it’s a liability thing, whether you’re a personal guarantor or not, if you have the LLC, as long as you’re following the LLC rules, you still have that LLC protection.
You can go and get an umbrella policy, an umbrella policy on the LLC and umbrella PLC on your house. So you can have those multiple layers of insurance protection, but the LLC is still going to do its thing whether you are a personal guarantor on the loan or not. Reliability four, if she is worried about the bank coming in, taking the property because you didn’t make the payments or couldn’t make the payments, is there some kind of plan that you could put into place for her to actually show her what it would look like if he missed a payment on the property? In New York state, it takes two years to foreclose on a property. So you could have two years to kind of figure out what to do. Okay, so obviously you don’t want to start going into foreclosure and getting behind on your property, but I think maybe if you explain to her what the risk actually are of being a personal guarantor, and I think ask the lender because honestly I don’t even know, do they start coming after your savings account first before they foreclose on the property?
I honestly don’t know. And I would think ask that, find out what does a personal guarantor mean if I stop making payments default on this loan, do they foreclose on the house? And then if it’s not enough equity to cover the loan, they go and come after my life savings, my personal house, do they come and garnish my wages? What does that actually mean? And I think to some extent, if your wife is this worried about this and maybe you need to have the conversation of how does she become more comfortable? Because I think if she’s worried about this risk, you need to find a way to kind of ease her mind and make her more comfortable because potentially it could cause more issues down the road that she’s already nervous about you doing this and setting these kind of limitations on doing the deal too.Yeah, so I just quickly did a search on, hey, what happens if I were to default on a loan where I’m the personal guarantor? And again, go fact check all of this. This is just a quick search on my side. I’m not an attorney. But basically what we said, Ash, if the equity in the deal satisfies the loan, then potentially there’s no liability left for you. If there’s not, say there’s a balance of a hundred k and they would have to go through, get a judgment against you. So there’s some court proceedings involved in that, and if they win that judgment, then they would have the ability to go after potentially bank account, other investments, other real estate, you own personal property, future income through garnishments. So it does get pretty dicey if they are able to win that judgment. But that would be the worst case scenario. So is there some risk there? Possibly, but what it get to that point, maybe, maybe not. Do you guys have the cash just to pay it off if things go awryOr just the W2 income to cover the mortgage payments, if all of a sudden, what was it, a 10 unit property, all 10 units become vacant and you can’t pay the mortgage anymore. So I think showing your wife too, the deal analysis and actually laying it out in this scenario is what it would look like and that I can’t afford the mortgage payment. That means that half of the property is vacant, so I have to have five vacant units for me to have to take money from my W2 to pay for the property and then kind of go through, here’s what the risk is of that, the chances of that, here’s my reserves I have in place, here’s my contingency plan. You’re doing a pitch, do the presentation, and we haven’t talked about this in a long time, but in our partnership book we actually wrote out how a visual presentation or just putting it down on paper can really help a partner, a spouse, really visualize what this can do for your life and what this can do for your family.
So say, hey, worst case scenario five, vacant and I can’t make the mortgage payment. Best case scenario, we’re cashflowing $2,000 a month. So I think if you can write all that out and explain that, and a visual thing gives people more time to absorb it and it becomes more real actually visually seeing the numbers on paper than just hearing you and the numbers going in and out. One ear when I tell Tony to do math real quick for me, that’s how it’s coming in and out of me, but he’s absorbing it and he is calculating.I think one last way to mitigate risk on this type of deal, or at least maybe make your spouse feel more comfortable, is to bring a partner. Because if you’ve already found the deal, if you’ve got the cash, but you just don’t want to be on the hook for the mortgage, there might be someone out there who says, yeah, dude, I just got to sign on these loan docs and you’re fine bringing the cash and you already found the deal and I’m going to get X percentage just for putting my name on the loan numbers look pretty good. We’re probably not going to have to go to that point anyway. Sure, I’ll do that. And that could be a way for you to still acquire this deal, giving up a percentage of the equity in exchange for someone else to actually carry the debt that comes along with that. That’s one way.Real quick on that one, don’t some syndications do that where they take a partner that actually has a very high net worth to actually sign on the loan and be the personal guarantor and that’s what they bring to the table for the partnership.Hundred percent your key principle, right? So say I’m a new syndicator and even if you’re going out and get commercial debt, they usually want to see someone with the net worth to be able to kind of guarantee this loan. And a lot of times you’ll get a percentage of the deal just for signing on the loan docs and you don’t have to do anything else. So yeah, it’s definitely somethingWhich to me it’s scary,But if you know the operator and you underwrite the deal, but there’s always some risk. But that’s why if you’ve got the net worth, maybe it’s not as scary, right? But I think the final piece on just mitigating the risk is maybe it’s the right call to start on something smaller. Maybe 10 units is too big of a leap for your wife to say, yeah, that actually feels good. Maybe start with a very inexpensive burr somewhere in the Midwest where you can buy it for less than a hundred grand, put in 20 grand into the renovations and you can either flip it, bur it, whatever, with the cash that you actually have. That way there is no worry about guarantees or loans or anything to that extent. So if the type of deal that you’re going after is causing the friction, then maybe just a shift in what you guys are going after could be the solution you need to actually get that first deal done.Thank you guys so much for joining us on today’s rookie reply. I’m Ashley. He’s Tony, and we’ll see you guys on the next episode.