Rookie Reply: Buying Your First Rental

Ashley :
Okay you guys, let’s get your questions answered. I’m Ashley Care and I’m here with Tony j Robinson

Tony:
And 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 invest journey. Today we’re diving back into the BiggerPockets forms to get your questions answered. Now guys, the forms are the absolute best place to quickly get all of your real estate investing questions answered by tons of real estate investing experts. So today we’re going to discuss cash out, refinance versus selling. What’s most effective, what property type will yield the best appreciation and where to find your. Alright Ash, so what question do you got pulled up for us?

Ashley :
So I’m actually looking one about tapping into the equity in your property. So this question is, I’m considering two options for my property and would appreciate some advice. So the first option is to do a cash out refinance on the property and then sell, so the cash out refinance to access some of the equity, then sell the property to get the remaining equity. Number two option is sell the property directly, skip the refinance and sell the property outright. My main concerns are fees. Are there more fees involved with doing a cash out refi and then selling compared to just selling directly. Next is taxes. Could this strategy help in saving on taxes or would it just complicate things next, overall cost effectiveness, is there really any financial benefit to taking this route or is it essentially the same as just selling? Has anyone gone through this process? Any insights or experiences would be greatly appreciated. Tony, do you want to start off with kind of describing what a cashout refinance is?

Tony:
Yeah, absolutely. And I guess just first, I don’t think we’ve answered a lot of questions on the rookie reply and a lot of ’em tend to be kind of the same flavor, but I don’t think we’ve ever heard one just like this before, so I’m excited to dive into this. But so cash out, refinance versus selling, right? So when you have a home, you build up equity over time your loan balance goes down, the value of the property may increase, and the difference between what the property is worth and what your mortgage amount is, what your debt balance is, is the equity that you have in that property. Now, there are a few different ways to access that equity. The first way is just to sell it, right? So you sell the home and whatever amount is left over after you pay your closing costs, your agents and all those things, you get to keep whatever’s there, right?

Tony:
So you sell it, pay off your mortgage, pay off your agents at their closing costs. You get, that’s one way. Another way is to do a cash out. So a cash out refinance is where you replace your existing mortgage with a new mortgage for sometimes a higher balance or maybe you’re spreading it out over a longer time period, but usually if you want to get cash out, it’s going to be a slightly higher balance. And then you get to keep the difference between what the home is worth and that loan balance. So the benefit of the cash out refinance is that you still retain ownership in the property, but you get to tap into some of that equity. So that’s what a cash out refinance is. And I guess the third option that he didn’t mention in this question is just a home equity line of credit and that almost operates like think of a big credit card, but it’s secured by the equity that’s inside of your home and rates are variable and you only pay for it if you’re actually using it. So those are kind of the three buckets. Sell refi, heloc.

Ashley :
And I think to kind of state, one of the big differences between these paths besides maintaining ownership or selling it is that with the cash out refinance, you’re tapping into that equity and pulling that cash and you’re not taxed on that cash because it’s a loan technically where if you sell the property, you are going to be taxed on the sale proceeds unless you’ve owned the property and lived in it as your primary residence for two out of the last five years, then it’s tax free, huge benefit to sell the property then not paying taxes on

Tony:
That. I was just going to add one other thing on the tax side ash, you could also 10 31 exchange where you’re not necessarily avoiding the taxes, but you’re somewhat deferring those taxes to some later point in time, right?

Ashley :
Unless it’s your primary. Unless

Tony:
It’s your primary.

Ashley :
Okay, so let’s start with the first option here, doing the cash out refinance, taking that equity. So when you do a cash out refinance, you’re going to have an appraisal done or the bank is going to determine what the value of your property is and then they’re going to loan you a certain percentage. So say they’re willing to do 80%, whatever your home is appraised at. Well maybe let’s easy for math for me, let’s say that property is valued at a hundred thousand dollars, okay? And you have a mortgage of $50,000 on it currently, and you want to tap into that extra equity, the bank says that we will lend you 80%, so that’s 80,000 of a hundred thousand. You currently have 50,000 mortgage, so the bank’s going to give you that 80,000. 50,000 will go off to pay off your current mortgage. Now you have this new mortgage and you will pocket that 30,000 that remains minus closing costs and the fees exactly as he had put into his question that that will occur if you do do a cash out refinance, if you go and sell the property, you sell it for a hundred thousand when it’s valued at you have the 50,000 when you go and sell it, you’re going to maintain 50,000 and pay off your existing mortgage of the 50,000 and you’ll pay realtor fees and you’ll pay some if you’re in a state that uses attorneys and then you pay title fees and different costs like that no matter which route will pop up for you.

Ashley :
But that kind of compares those two scenarios. So just looking at this first option is if you’re going to go and do that cash out refinance. Now when you go and sell the property, you have a mortgage of 80,000, you’re going to get that 20,000 and you’re just going to have to pay off that 80,000. So you’re only going to be able to take that $20,000 because you’re going to have to pay back that 80,000 that you just borrowed from there. So I would say, in my opinion, not worth doing, paying the closing costs, anything like that, not doing both of those methods, those strategies at once.

Tony:
Yeah, I couldn’t agree with you more, Ashley. I think you did a phenomenal job explaining kind of the pros and cons. I guess maybe if there was some sort of immediate cash crunch where it’s like, hey, I really need to get this cash and the cash out refinance is going to take 21 days where a selling might take 60 to 90 days, whatever it may be, and I need the cash now, then maybe you take the hit. But unless barring some immediate time crisis, I couldn’t see a benefit in doing the cash out refinance and then selling either. And I guess it also goes back to the initial point that we made ash of like, Hey, what is your motivation for doing this and how much capital do you actually need, right? Because if you can get the capital that you need by doing a refi or heloc, then maybe you don’t even need to sell and you can keep the property, still get the capital that’s coming from it and still get access to enough capital to go buy your next one. So don’t think that you have to sell the property to get all the equity. There are other options there as well.

Ashley :
And you can stack the cash out, refinance and a line of credit. So as long as your debt to income allows it, you can actually go and do your refinance, cash out, refinance, get that $80,000 and then some banks will lend you up to 90% or 95% I’ve seen even with a line of credit. So you’d have your $80,000 mortgage and then that remaining, say they’ll do up to 90,000, you could get a $10,000 line of credit as a second lien on your property. So now you’ve got that 30,000 from doing the cash out refinances cash, and then you have that 10,000 line of credit available to use too. And the line of credit is nice because if you’re not using it, you don’t have an immediate property, you’re not paying any interest on it. Where if you do the cash out refinance, you are paying monthly payments on it whether you are using that capital or not. So it’s definitely some things to think about there.

Tony:
So guys, there are some options for you in terms of tapping into the equity of a real estate property that you own. But guys, stay tuned because we’re going to find out what property type you should be focusing on for best appreciation right after a word from today’s show sponsors. Alright guys, welcome back. So we got another question pulled up for you here, Ash, what are you looking at?

Ashley :
So this one says Hi. I am actively looking and putting offers for my first rental property. I just saw a townhome that I like from the seventies that needs some rehab and a few blocks from it. There’s new development offering, same type of units, a bit bigger though, 10% more expensive with delivery lead times of six months. My strategy is long-term appreciation with break even cashflow for now at least. So the question is what do you guys think is a better investment long-term? So going into the seventies unit and doing some rehab, getting rid of those shag carpets or is it going and purchasing the new build and having that property for a long-term investment?

Tony:
So a couple things to I think call out here, right? And it is always good I think to try and get as much context as we can. And sometimes I wish we could have the people who ask these questions come onto the show so we could get the context. But I think a lot of it is going to come down to what is the acquisition cost for each type of property in relation to what it’s actually worth. Because say you’re able to get this, let’s use round numbers here, say that the seventies home, once it’s all fixed up, you’ve done all the repairs, it’s worth $100,000, but say your cost to purchase it and to rehab is only $50,000. So now you’ve got $50,000 in equity built into that home on the new build, say maybe that your initial purchase price is the same a hundred thousand bucks and you’re buying it for a hundred thousand bucks where you’re stepping into this with no equity and how much time will it take for you to kind of meet that 50 can equity that you started with the seventies build? So I think that’s probably the first question I want to know, Ash is hey, what is it going to cost you to buy and rehab that home that’s built in the seventies? What are your thoughts?

Ashley :
I agree, and I think a great starting point is looking at those two different options and literally just mapping it out what it looks like for you today. So like Tony said, how much capital do you actually need to get started into each of these properties? And then what does it look like one year down the road? What does it look like five years down the road? What does it look like 10 years down the road for these properties? And see what’s going to actually meet your goal. And it’s great that your goal is long-term appreciation and you can break even with cashflow that is wonderful that you’ve already discovered what your why is and you can use that to make your decision based off of these. And we have in the parentheses it says for now, so I’m assuming later on down the road you would like to have some cashflow into the property because you can increase the rental rates and your mortgage is being paid down and maybe you can refinance your mortgage to a longer term later on where your monthly payment is less.

Ashley :
Or maybe interest rates will go down so many different scenarios, but also you can play that into a factor when you’re running your numbers on each property. For me personally, I like doing the seventies and adding some rehab, but since these are town homes that you’re looking at, there’s more involved that I would say. So you want to look at the HOA of each of these properties. Okay, so when was the last time any kind of capital improvements were done on the property? Will you be having a huge expense at the seventies townhome? Because the HOA needs to have everybody put in money to replace the roof, things like that. What does it say about renting out the unit as a long-term rental if you decide to move out or as a short-term rental if you decide to move out. So I think looking at the fact this is a townhome, there’s other variables you should look at too besides just the type of property and use that as a factor in your decision. Also,

Tony:
One other thing that comes to mind with the new build, and Ashley, we did a podcast episode and I wish I could think of the guest name off the top of my mind, but maybe we can find him put in the show notes for you guys. But there was a guest that we had on, and if you remember, his entire investment strategy was buying new construction as a primary residence, but buying in that first phase and then waiting for the rest of the development to be done, and then he would just go buy in the first phase somewhere else. And the reason it worked guys, is because when big subdivisions are being built, they don’t release all the homes at one time. They build them in small groups of whatever, call it 10 to 15 homes, and they’ll release ’em in multiple phases. But each time they release a new phase, typically they also slightly increase the purchase price. So by the time you actually get to the end of that subdivision, you could see prices 100, $200,000 more expensive than what you bought. So that is a possibility if you were to maybe buy in that early phase, hold it for a little while, you could just get appreciation just by building out. But again, that’d be very market dependent. Not every subdivision, not every new construction buildout will operate the same way.

Ashley :
We love talking about real estate, we love answering questions like this with you all, and we’d love it if you’d hit the follow button on your podcast app. Wherever you’re listening, we are going to take a short ad break and when we come back in our next question, we are going to discuss how to find your first deal. Okay, so welcome back from our ad break. Thank you so much for taking out the time to check out our show sponsors. So Tony, what question did you find?

Tony:
Alright, so here’s a question I’ve been looking at and making offers on duplexes in single family homes for about six months now. This will be my first property and I’m looking to do a house hack or find a single family that needs some work in a good area of my city. Now I’ve made about 10 offers in almost every time I’ve been beaten by an all cash offer or someone foregoing an inspection and closing faster than I’m willing to. Now, I know 10 offers in six months isn’t a crazy amount, but since this is my first property, I’m being a little bit cautious. I’ve also pretty much exclusively found these properties through the MLS. For those of you who have done one or multiple deals, how did you find your first one? Is this just par for the course? Do I need to lower my standards or tried to find alternative ways to source deals? Alright, there’s a bit to unpack there. Let’s maybe first chunk it down here, Ash, right? Like 10 offers in six months. What are your thoughts on that?

Ashley :
I mean, I guess the first thing to look at is what market are you in? If you are in a market where there’s 10 or more houses coming up for sale every single day and there’s just a lot of properties you should be offering and more if you’re investing super rural where there’s not a lot of properties that fit your buy box. So that’s the first thing I would look at is how many properties are you actually analyzing? How many properties are you looking at that fit your buy box? I would say 10 offers in six months is not a crazy amount that you actually should be doing more to get your first deal. Because remember that an asking price doesn’t mean that that’s the purchase price. So are there properties being listed that even though the purchase price is a crazy amount, that doesn’t mean that you can put in a low ball offer, which you should be doing?

Tony:
Yeah, I couldn’t agree with you more, Ashley. And I would say challenge yourself as the person that wrote this question. And really to every rookie that’s listening, challenge yourself where every day for 30 days submit an offer. And like Ashley said, it doesn’t matter what the asking price is, just focus on what number actually makes the most sense for you and put that offer in. Do that every single day for 30 days. And I think you would be surprised at how many people are actually willing to negotiate on some of those prices that you see. But we can’t be afraid of rejection on our offers as real estate investors because that is par for the course is getting your offers rejected, right?

Ashley :
And think about your buy box too, of maybe there is something that you don’t want to deal with in your buy box because you know that it would be expensive. The first thing that comes to mind is you want a property with a garage. Okay, well what if you started looking at properties without a garage and added in the rehab of adding a garage to the property, or maybe you want a property with two bathrooms. What would it cost you to add a second bathroom to a one bedroom property? And just creating your offer so that you are able to make the deal work, even if you’re going to have to put in more capital or if you are going to have to make this change, if you can get a huge discount on the property and be able to have extra capital to now add that bathroom, then that deal could work for you. So start thinking about making offers that way as to how can you make a property fit your buy box too? Yeah,

Tony:
And actually it reminds me of the episode we just did with the Awesomes, right? And they talked about buying single family properties in the Pacific Northwest where they would take a three bedroom and turn it into a nine bedroom and that was the steps they needed to take to really get the juice out of those deals. So yeah, I think more offers is going to be important for you over these next six months. Now the second part of this question is for those of you who have done at least one deal, how did you find that first one, right? Do I need to lower my standards or try and find alternative ways to source deals? I think I’ll answer that first piece and we’ll go back maybe Ashley, to how we found our first deals. But do I need to lower my standards? I don’t necessarily want anyone listening to this podcast to lower their standards, but there is a bit of a balancing act between being realistic and being too conservative.

Tony:
And we don’t want you to swing the pendulum so far that you are going to assume that everything goes right and that all the stars are going to align. This is going to be a home run deal, and that’s the only way that it’s profitable for you. But we also don’t want to swing the pendulum so far the other way where it’s like you’re only thinking worst case scenario every single time because then almost no deal is going to pencil out. So you have to make some level of educated guess around what is actually the most likely scenario.

Ashley :
Another part of this question that we didn’t answer yet is how did you find your first deal? So Tony, where did you find yours first? Your first love?

Tony:
My very first one was right off the MLS. It was a property that, yeah, it had been listed for a while. It was like a 1950s build and literally had not been renovated or touched since the fifties. And we went in there, we got it a discount, and we were able to renovate it and put a tenant in there in about six months or so. So it was a really cool and solid first deal.

Ashley :
How many properties do you think you analyzed or put offers in before you got this first one?

Tony:
I couldn’t tell you, but I know that I had analyzed enough to where as soon as I saw that deal pop online, I was like, oh, this is a good one. Before I’d even analyze it, right? I was really hyper-focused on one zip code. I knew what the going rents were in that zip code. I knew the average kind of price ranges that I was seeing. So I don’t know what the exact number was, but it was enough for me to know that zip code very intimately.

Ashley :
I’m going to go against everything Tony just said. And my first property was the first property I looked at, the first property I analyzed, and it was also on the MLS. It was the first one I looked at and we put an offer in and I think they countered and we counter back and there was a little bit of negotiating there and that was that first property. But how you talked about you knew right away this was a great deal. I did not. I was very nervous, I was very scared when I analyzed it. I forgot to add on snowplowing for the property and definitely was a huge learning experience for me. I ended up working out, we ended up selling it a couple of years ago and made a great profit on it. But I think there’s so many ways that your first deal can happen, but if it’s not happening yet, start tracking your offers, start tracking what’s working, what’s not working as far as getting deals.

Ashley :
And part of it could be look at your agent too. Are you getting deals right when they’re coming on the market? Is your agent offering you pocket listings at all where you’re knowing about deals before they’re actually going live on the MOS? So for example, my agent, I’m selling a triplex that I bought in 2018 and before my agent had even pushed live on it, she told me just you guys know I already have two people interested in looking at it as to she went to her contacts and kind of put out these pocket listings, I guess, and telling people here, I have this property if you want for St. Dibs at it because I’m about to put it live. So look at who’s on your team, your connections to and see how they can better help you find deals too.

Tony:
I don’t think it’s a matter of lowering your standards, but I do think it’s a matter of making sure that you’re not being too conservative when you’re running your numbers and trying to really back up what you feel is a fair offer based on data and not necessarily just the fear one other deal source. And Ash and I are actually going to be doing an episode here in the future about all the different ways to source deals as a new real estate investor. But one thing I want to share with you guys right now is if you’re sourcing a deal or you’re trying to find deals off market, I think one of the best places to go is it’s like a local Facebook group for real estate buying and selling in your market. Because there are tons, and I’m in California, so we’re a bigger market, but there are some groups with over a hundred thousand people in it all about off market deals.

Tony:
And just go in there, post your buy box. You know what your buy box is, right? You said, Hey, I, I’m looking for, you said either duplexes or single family homes in this part of town. Here’s kind of the price range that I’m looking to stay within. I want something that maybe has the ability to force some appreciation and just posting those groups and say, Hey, email me here, text me here. If you got something that’s like that, and that’s maybe how you can start finding some of these other properties that on the MLS that you can maybe get a better shot at actually closing.

Ashley :
And also too, if you’re not working with an agent where you’re getting the emails all the time, or maybe still you are, but looking at different listing websites like landwatch.com. So on there you’ll find properties that aren’t on Zillow or realtor.com, they’re just listed on there. And also on Zillow, if you go to the filters and you scroll down and ask you how many bedrooms, things like that, there’s actually two buttons. And one is by agent maybe and one is by owner. And you can hit the by owner button and it will show you all the people who paid to sell their house by owner to have it listed on Zillow because you will not see those unless you go and specifically hit that filter and you can’t see both at the same time. At least I haven’t found out how. So go in and check and look in your area as to those ones that are being sold by owner too. And then the Penny Saver, I don’t know if that’s a local thing, is that nationwide like a Penny Saver, but there’s prop people will put their properties in the Penny Saver and Facebook marketplace, even look on Craigslist. All these things is just these different websites and kind of build from there. I guess,

Tony:
By the way, I’ve not heard Penny Saver probably since 1999, so that was like a blast in the past right? Now,

Ashley :
Here’s a pen saver right

Tony:
Here that is hilarious.

Ashley :
I literally just pulled this out of the garbage behind me, but I knew I had just thrown it out. So there is two homes for sale under the real estate section and one is a three bed, two bath, the other one is a remodeled two bedroom and it gives all the information on it. So there’s two properties right

Tony:
There. And you got to imagine that the level of competition for the Penny Saver listings is probably a little less than the Zillows or the Redfin. So there’s some ways to get properties with a little less competition. So going back to the question here, again, six months, 10 offers volume is a little bit low. So focus on increasing the number of deals that you’re analyzing. Focus on increasing the number of offers you’re putting out and put the offer out regardless of what the asking price is, offer in at what number makes the most sense for you, expect a lot of rejection, but at least to that process, you’re going to get more confident in running your numbers and submitting these offers. And who knows, maybe there’s a seller out there that’s willing to negotiate and maybe meet you in the middle.

Ashley :
And here’s something that I think could be a concern as to why you’re not putting in more offers is you don’t want to waste your agent’s time. And I completely get that as to having them fill out the contract, sending it to sign, and then they send it to the listing agent. But you could ask your agent to just do a verbal offer. And that’s what I do a lot of the times is say, you know what? I know this is a low ball offer. Don’t waste your time filling out the contract. Feel out the other agent how they feel about that. And sometimes the agent will say, we’re not taking any offers until you put it in the contract. So then we go ahead and do it. Or they’ll say, Nope, they don’t even want to counter you. They’re insulted. Or they’ll say, you know what? They’re going to talk about it and we’ll get back to you. So there’s so many different things and you don’t know until you actually ask. So having your agents submit verbal offers too is a great way to feel it out as if you should waste your time and your agents’ time putting a contract together too. I

Tony:
Think the other thing too is when you’re shopping for agents, just let them know that you’re going to submit a high volume of offers where the majority will probably get rejected. I’ll send some of my agents, especially like in the markets where we do a lot of acquisition. I’ll send ’em 10 offers and I’ll say, Hey, here are the offers, here are the terms. Lemme know what they say. And they’ll come back and say, Hey, Tony, these three got rejected, these three no responses. Two of ’em countered. One of ’em said, never talk to me again. Right? Whatever the response is. But I think if you set that expectation up front, it makes it easier to follow through on getting those offers out. Okay.

Ashley :
If you guys want to get more involved in the real estate rookie community and find deals and connect with other investors, make sure you head over to the BiggerPockets forums. You can also submit questions that may be played here on the real estate rookie reply episode, or you can get them answered by expert investors, or also you can relate to other rookie investors in the forums. So make sure you go check it out. Thank you guys so much for joining us. I’m Ashley. And he’s Tony. And we’ll see you guys next time on the next episode of Real Estate Rookie Reply.

Tony:
This BiggerPockets podcast is produced by Daniel ti, edited by Exodus Media Copywriting by Calico Content.

Ashley :
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony:
And if you want your questions answered on the show, go to biggerpockets.com/reply.