Financing Your First Rental, Leases, and High Interest Rates

Ashley:
This is Real Estate Rookie, episode 226.

Tony:
I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn’t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio. So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, “Hey, Tony’s a bankable guy. He doesn’t have the income, but we know the income’s coming, so we feel comfortable giving him that loan.”

Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And we usually like to kick things off with a little shout out to the folks in the rookie audience that are leaving us some reviews on Apple Podcasts so this week’s review comes from Hillary Rose Huffman. And Hillary says, “As someone who quit prematurely with no structure or support, I absolutely loved episode 216. I’ve listened to just about every episode BP has ever put out, but as a newbie real estate investor with only 12 flips and one short term rental under my belt, I thoroughly enjoy learning from Real Estate Rookie. Ashley and Tony, thanks for all the time and energy you put into what is now my favorite BiggerPockets podcast.” I love that. I appreciate that Hillary Rose. Thank you so much for giving us some love. And if you haven’t yet, give us an honest rating and review on whatever podcast platform it is that you’re listening to.

Ashley:
Hillary, thank you so much for that review. You guys, we appreciate it. I appreciate it even more when it is a five star review. If for some reason you don’t think that we deserve five stars, please slide into Tony’s DMs and tell him how he can improve because I could not handle it if you guys tell me. I was actually at the Verizon store today and they gave their spiel of, “Sign here. Also, you’re going to get a survey. Please leave a five star review. Anything less than a five star review is me failing so please let me know if I have failed you in any way so that I can make up for it.” And all I could think about was the podcast when we read out these reviews and I expect you guys to leave a five star review.

Tony:
There you go. Cracking the whip. Five stars only.

Ashley:
So Tony … As you guys are listening to this, BiggerPockets conference has already happened, but Tony and I are getting ready. We head off to BP Con in just four or five days here.

Tony:
Four days. Yeah.

Ashley:
Yeah.

Tony:
It’s super exciting. I think this is honestly going to be the biggest BP Con ever. They actually sold out of tickets. They literally couldn’t fit any more people into this venue. So I think we’re going to have 2,000 investors all getting together for three days in beautiful Southern California so I’m excited. Ash and I are giving a joint presentation together on partnerships, so that’s going to be fun. We’re also moderating a panel on-

Ashley:
Rookie investors. Yeah. Rookie investors.

Tony:
Rookie investors. Yeah. So it’s going to be a fun weekend for sure.

Ashley:
Yeah. I’m really excited to network and to meet with a lot of you guys. And for everyone that we did meet at BP Con, it was wonderful to meet you guys.

Tony:
We appreciate you guys. We love you guys. Cheers to next year.

Ashley:
Yeah. So headed down this weekend and going to spend quite a while there. And yeah, like you said, there’s going to be … They sold over 2,000 tickets. And also with vendors and the BP staff, it’s going to be close to 3,000 people that are actually at the event. So super exciting. And it’s awesome to see it grow so much to the conference because I think the first conference they had had a little under a thousand people maybe in 2019. There was another conference they had maybe 2015 or ’16 or something, and then it was a while before they had another one. But yeah. So if you guys did not go to this year’s BP Con, make sure when they announce it, you guys get your tickets because it sold out so fast and there are people that were scrambling for tickets. So you need a side hustle idea, do what I’m doing. Buy a bulk load of tickets, and then sell them to your friends for an upcharge when they procrastinate. I’m in three group texts with 20 people in each, all scrambling trying to find tickets. And I heard in the BP forums, people who can’t go are transferring them and things like that, but just wild.

Tony:
Yeah, we need a Ticketmaster exchange for BP Con.

Ashley:
Yeah. Okay. So you guys, we have a bit of a change with our rookie reply. Tony and I have felt that the five to 10 minutes to just go over one question wasn’t enough because we love your guys’ questions and we wanted to tackle more questions. So we are going to start adding on some more questions to the rookie reply so it’s going to be a longer episode. So longer time that you have to listen to our boring banter, hear my laugh, and Tony’s monotone voice.

Tony:
All the things you guys love about us.

Ashley:
So this week, in this episode, we are going to be doing three questions.

Tony:
Yeah. The first question is going to be how to determine how much cash you need for your first investment. The second one is going to be some sneaky ways to get a loan when you may not otherwise be able to get approved. And the third question is about ways to protect yourself as a landlord when you have tenants staying at your property.

Ashley:
Yeah. All great questions. And we have lots of time to actually go into detail on these questions. A lease agreement, we literally break down as much information as we can about a lease agreement and what should be included and how you can get a copy of a lease agreement. So make sure you guys listen to the full episode because at the end Tony and I give a little bonus content on boring banter over the interest rates in today’s market. Let’s get to question number one.
The first question we have today is from Naeem Malik. And the question is, how much money should you have on hand to invest in your first property? What a great question, but also a loaded question. And the answer we have to give you, it depends. I would start by looking at, in the market that you’re going to invest in, how much does a house cost? What are the expenses going to be? Somebody who’s investing in my area, you could have $50,000 saved up and that could pretty much be able to pay a house off in cash if something were to happen. If you’re in a market like Tony is in Joshua Tree, $50,000 may pay a year’s of expenses maybe. I’m not sure. So I think it really depends on the market that you are investing in and what the range of expenses you are going to have for the property, such as your mortgage payment, any utilities you’re paying, your property taxes, your insurance.
So I think a good rule of thumb is having three to six months reserves after you’ve purchased the property still on hand. So that means you have enough cash to put down your down payment, you have enough to pay closing costs. If you are doing this as a no money down deal and you are not putting any of your own money in, that’s awesome. That’s great. You don’t need to save for that down payment and closing costs. But when you close on that property, no matter how you purchase it, I recommend having three to six months of reserves. For the reserves, how I calculate them is your principal and interest payment for your mortgage, your insurance on the property, and then also your property taxes for the property. And I encourage you to go six months instead of just three months. So that would mean you could cover your property for six months if the property was vacant or your flip wasn’t selling, things like that.

Tony:
Yeah. You hit on a lot of great points, Ashley, already. And I do think it is a loaded question. We probably need some more information from Naeem to give a really thorough response. But yeah, your point on reserves and having that set aside when you close is important. The fact that the market that they’re operating in makes a big difference. But I think also that the type of investing that they’re doing makes a big difference as well. If you’re house hacking, you can get into a property for three and a half percent down. If you’re flipping, maybe you’re going to need 20% of your total project costs to get into a flip. So depending on what type of real estate investing you’re doing, the startup costs are going to vary. And even within those niches, the way that you do it can make a big difference. Obviously we do Airbnb investing and we buy all of our properties, but I know other investors that do rental arbitrage and they’re able to get a short term rental for a fraction of the cost.
So I think that the type of investment that you’re going to do will make a big difference in how much money you’ll need to put up, Naeem. But I think something that’s important for us to talk about is that real estate investing definitely needs capital to get started, but it doesn’t necessarily have to be your capital, Naeem. So say that you have a partner who maybe is bringing the majority or all of the money to the closing table and you’re just going to do the work, and that’s how you earn your keep in that deal. Then maybe you don’t need any money and maybe that person’s covering all of the acquisition costs and they have the reserves cost so now you don’t need to worry about that. So your strategy and the kind of partners you bring in, all of those will play a factor in how much money you should have.

Ashley:
Tony, let’s break down an example. So let’s say that somebody is looking in a market where the average cost of the home is $100,000. So if they’re going to go and purchase that, how do they find out what those expenses are going to be before they actually go and start pursuing purchasing a property? I think to start off-

Tony:
[inaudible 00:10:13].

Ashley:
Yeah. With the principal and interest payment, the mortgage payment. Just Google amortization calculator. Mortgage calculator. There’s also an app that I use. I think it’s just called calculators. If you search that. And it has all these different mortgage calculators. Got calculators for different types of loans included in that. So that’s a quick, easy way to calculate what your mortgage payment would be for a property. As far as knowing what the interest rate is right now, you can also Google that, or if you are working for the bank already, just get an idea. They won’t be able to tell you exactly what your interest rate is going to be, but it can give you an idea. Tony, have you gotten any loans lately, like a 30 year fixed rate?

Tony:
Yeah. We’re getting quoted high sixes, low sevens on some of the stuff that we’re buying right now.

Ashley:
Yeah. And then, as Tony had mentioned too, if it’s going to be your primary residence or your house hacking three and a half percent down, your interest rate will probably be a little bit lower than that right now, just because it is your primary. But you guys can go ahead and use that as a range, that six to 7% and see what the outcome is. What is your monthly payment amortized over 30 years and that will give you your payment. So you know okay, I need to have $532 a month to make the mortgage payment, so I want to save that times six. Then we can look at the cost of the property insurance. I think property insurance is really hard to estimate when purchasing your first property and you have no idea what that could cost. Once you start purchasing properties, you get a better idea of it.
But there’s Policygenius, which has been an ad sponsor for us before, and I’ve used them. Actually, you can go on and you can input information about a property and they can give you a general estimate too of what your insurance rate would be or talk to another investor or even another homeowner in that area. It’s not going to be the same because a homeowner is covering the contents in the building, where as the landlord, you’re just covering the building itself, the structure, and then a tenant would come in and do their own insurance on that. Or if you’re rehabbing the property, if you’re doing it as a flip, your insurance may be way more because the property is considered vacant and it’s under construction. More of a risk. So if you work with an insurance agent right now who does your home and auto, give them a call, send them an email and just say, “Hey, this is what I’m looking at, this type of property. Have you written insurance on any type of property like this in our area where you could give me a general idea of what you think it would be?” Or maybe they’ll even just quote it out real quick to you for a couple companies and just get a general estimate.
And then for property taxes, you can search those online as to what the property taxes are for properties like that. You’ll want to look at what the assessed value is of the property. So if you’re looking at a property that is listed at 100,000 and it says the assessed value is 20,000 because maybe somebody went in, fixed it all up and there hasn’t been a reassessment yet by the town. So when that reassessment does come up, most likely that assessed value is going to increase and your property taxes will increase also too. So I always like to overestimate that amount. Then when you take the property taxes … So in my area we have town and county taxes. If you live in the town in a village, we call it, that’s another set of taxes and then school taxes that come around for your property.

Tony:
Yeah. Honestly, I don’t even know what’s built into our taxes. We just pay them. But I like your point about trying to add some buffer because we have made that mistake in the past. And what we’ll do now is a lot of the counties by us, or at least where we’re investing, sometimes you can call them. The cities or the counties. And they’ll tell you, “Hey, here’s the formula that you need to use to understand what your new tax amount will be.” So they’ll tell you at this purchase price, multiply by this number, add this percentage, or whatever it is, and you can get a pretty fairly close estimate of what your new taxes will be. So we’ve tried to do that moving forward.

Ashley:
That’s a great tip there. I think in our county too, they have on the county website is an actual Excel spreadsheet where it gives you an example if each town, what the tax rate is. So if you bought a $100,000 house in each of those towns, what your property taxes would end up being. And it’s super cool because you can see the large difference in some of the towns as to the property taxes where, oh wow, this is the great school district, this is the town everyone wants to be in. But if I buy right on the border, the next town over is actually the cheapest in property taxes. So being able to look at that too is definitely an advantage.
So property taxes, insurance, and then your mortgage and interest payment. Figure out what those are going to be monthly. So your insurance premium, you’ll probably get a quote for a year. Your property taxes. Add up the two to three bills that you get per the year, and what’s that total? And then just divide them by 12, and that would be the monthly amount that you’d be paying. And then you want to times set by six to save up that six month reserves before you go and invest. And I think Tony, you gave great points about if you don’t have that and that’s going to take you a long time, taking on that money partner or different ways to get creative.

Tony:
Ashley, you mentioned a lot of good things that folks should be including when they’re trying to estimate what those costs are. And I know for me, when I was first getting started, I would forget things. Oh shoot, I forgot about this, or, oh shoot, I forgot about that. And just a quick plug for the BP calculator. So if you go to biggerpockets.com/calculators, BiggerPockets has these resources that have already built out all of the things that you should be including when you’re analyzing a deal. So that way if you, “Oh, I forgot about insurance.”, insurance is a line item on that calculator. So just one plug for the BP calculators.
And I guess the last thing I’ll add is that you’ll probably get it wrong. You won’t be perfect the first couple of times that you do this. When we first started trying to figure out how much money we needed for our Airbnbs, we were way off. The deal that we were doing together right? It was five grand is what we thought we were going to spend. Now we budget $30,000, right?

Ashley:
Oh my god. That’s a big difference. Yeah.

Tony:
It’s a tremendous difference. Tremendous difference. And obviously we’ve changed what we do and we’ve added some more stuff to the property, but the first couple of times you do this, you’re probably going to get it wrong. So give yourself some cushion. Whatever number you think, maybe add another 20, 30% on top of that, just that way you’re not shocked if you end up going over. Because your first time doing anything, you’re not going to do it perfectly so the same thing comes when it comes to trying to understand how much money you need for that first investment.

Ashley:
Yeah, that’s a great point. Even today, my first property that I purchased, I forgot to add in snowplowing. Come on, it’s Buffalo. You need to cover snow plowing. Well thank you so much, Naeem, for that question and let’s move on to another one.

Tony:
All right. Rolling in into question number two and this question comes from Zach Rubin. So Zach’s question is, “Does anyone have recommendations for getting financing without a W2 job? I have a W2 starting this summer, and I have heard I can still get traditional financing just by presenting my job offer letter. I would love to hear if anyone has experience with this.” Well, Zach, you came to the right place because this exact same thing happened to me when I got my very first investment property. I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn’t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio.
So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, “Hey, Tony’s a bankable guy. He just doesn’t have the income, but we know the income’s coming, so we feel comfortable giving him that loan.” Now, I will say that it wasn’t that I didn’t have a W2. I had a W2, my income just wasn’t there enough. So I can’t say for sure how banks will view someone that doesn’t have a W2 at all. But if you can maybe show some way of proving that you have consistent income or other things like that, it might be beneficial.
And then the last thing I’ll say, Zach, is that it might be beneficial to try and go with a smaller local regional bank credit union. They tend to have a little bit more flexibility than a Bank of America or Wells Fargo or something like that. The bank I was working with was a very small credit union in the city that had their branches in the city that I was investing in. So they knew the area, they knew the properties, they had a little bit more flexibility in terms of what they had to offer. So that was my experience. Ash, I don’t know. What have you seen on your side?

Ashley:
Yeah. I think that’s a great tip going with a small local bank. And we really don’t talk about this a lot, but also mortgage brokers. So where you actually come to them with your property, what you want to do, and then they actually shop it out for you as to what loan product would be best for you, what bank to go with for the loan. So finding a mortgage broker too and explaining, I don’t have a job now, but here’s my job letter and then them going out and trying to find a bank that will finance that deal. That’s what my sister did. I think it was 2019 she bought her duplex. Maybe even 2018. And she had just graduated college. She didn’t have a job yet, but she had a letter stating that she had a job accepted and it wouldn’t start for I think three more months and it was actually just part-time. But it did show that she would be making enough income if she worked those part-time hours to qualify for the loan. And they did accept that even though she hadn’t actually started the job yet.
And I do remember the mortgage company wanting to do some verification just like they were if you were employed. She showed her job offer letter, but also they contacted the HR department of that job too and asked for a verification. Something signed from them that yes, she was intending to start working there and things like that. So I don’t know for sure today if you can do that, but it definitely has happened. But the mortgage industry is always changing. The different options that were available are no longer available. But I think the best way is to talk to small local banks and then also go into a mortgage broker who can help shop those out for you.
I think the one my sister used worked with the company First Priority Mortgage, I think. So maybe you could give them a try. I have used them for one loan before too, and it was a nice easy process to go about that. Also, another thing you could do if they won’t accept the letter is think about getting someone to co-sign for you too. And then after you have purchased the property and you do start that job, you could go and request for the person to be removed off the loan and no longer need the co-signer.

Tony:
That’s a great point on the co-sign. Actually, it makes me think of maybe another strategy. So if you were to purchase maybe a small multi-family property where you lived in one of the units and say you rented out the other two or three, assuming that there’s stable rent history at that property, a lot of times you can use the projected income from that property to help offset whatever debt to income limitations that you’re having. So say that you’re short by, I don’t know, 200 bucks to be able to clear this mortgage and you go out and you buy a property that has three additional units and those bring in a net profit of $800 a month. Now you’ve got a difference there to offset your own debt to income limitations. So there’s been a lot of folks that I’ve met who maybe wouldn’t have qualified for a traditional single family house, but lo and behold, they qualify for a small multi-family because of that additional rental revenue.

Ashley:
Yeah. I think using it as a house hack is definitely … You’re going to be able to get that rental income to show as proven. That was my sister too is that she showed that the other unit was currently rented out at this X amount and she just showed the lease agreement that was already in place. And having that extra income count towards it was great. I have heard people talk about sometimes where they’ll only take a percentage of the rental income though. They won’t calculate the full amount. So do ask the lenders about that too, if they do take into account the full amount or if they only take in a percentage of that. And I don’t know why that is done. Maybe to account for some vacancy or things like that in case there is a period of time where that rental income isn’t coming out. But yeah, that’s something to ask about too is if they take the full 100% or only a percentage of it too.

Tony:
Cool. I think that’s everything I got for that one.

Ashley:
Yeah. Well thank you so much for asking that question, Zach, and let’s go on to our third one. Question number three is from Travis Bokhold and this is from the Real Estate Rookie Facebook group. So if you guys are not a member, make sure you check that out. And Travis’ question is, “Hey, how do you guys build leases?” So this question I love because we have an amazing resource for you guys. If you are a BiggerPockets Pro member, you actually have access to full lease agreements plus addendums and other supporting documents that are state specific. So these were actually created by attorneys in each state, and they’re available on biggerpockets.com where you can go and you can actually download it and it becomes … You can download it as a PDF and fill in the blanks, or you can download it as a Word doc and change it and add things to it too.
What I do advise is if you are going to use these documents, or maybe you’re going to create your own, is that if you do make changes to these ones that are provided to you, that you do have your own attorney review them. But do you want to just break down some of the options that are in a lease agreement? Like things that you should have in there?

Tony:
Yeah. I’ve actually never made my own lease agreement. So all of my long-term rentals I had my property manager create for me. And I’m sure I’ll probably look at them at some point, but honestly don’t even remember what he had in there Ashley. So you might be a better resource for folks in this one than I am.

Ashley:
Okay. So as far as doing a standard residential lease agreement, you want to put in the owner’s information. So who owns the property? The landlord. A mailing address for them, and then also the name of the tenant and contact information for them. Then you want to put in the terms of the lease agreement. So when does the lease start? When does the lease end? You want to put in the amount of the rent that is going to be included in there along with any other fees. And also how the rent is paid I think is very important too. So if you just put in there the rent is $1,000 per month, you want to specify how that rent is to be paid so that tenant isn’t calling you like, “Hey, I put the thousand dollars cash in an envelope in my mailbox today. Come get it.” So I think being specific about how they are to pay. And the best place to do that is to set up some kind of online payment system where it’s no longer considered mailbox money. It’s basically direct deposit money where it’s direct deposited into your account. Then you don’t have to worry about getting it from the mail, depositing it, and your tenant just pays right online.
There’s lots of free or really cheap software, property management software or rent collection software that you can use. And I would put that right into your lease. So BiggerPockets actually recently partnered with RentRedi, so if you’re a pro member, I think you get it for a dollar a year, or it might even be free. But with RentRedi, you can go ahead and you can have them make their payments online and set that up and it just goes directly into your bank account each month, which makes it pretty easy. So specifying that in the lease. And then you can also put a clause in there, or as changes are made to be determined and notified by landlord. Something in there in case you do switch software that it’s not just you’re stuck with RentRedi, but saying the software provided by the landlord through the tenant portal. Something like that.
So after that, along with the rent, when we state the additional fees or charges in there. So this could be for a pet fee, garage fee. You want to state in there what those fees are for. So if they are renting a garage, what the garage number is. Do they have a remote? Do they have to return the remote? Things like that I would include in. So just talk about what the additional fees are. The pet fees. So if they decide they no longer want a pet, they have to notify you in writing, letting you know they no longer have the pet on the property. Or if they want to add on an additional pet, they have to notify you and the rent would increase an additional amount.
And then the security deposit. Also super important to include in there. If you are including a security deposit, put it as a certain amount, what that’s going to be. In New York State, the law is that you can only have one month’s rent for your security deposit. So whatever your monthly rent is, you cannot charge over and above that for the security deposit. So that had changed a couple years ago where someone had bad credit, a landlord would say, “You know what, I’ll go ahead and rent to you, but you’re going to put down a $2,000 deposit even though your rent is only $575 a month.” Then you’re going to put into the lease agreement how the security deposit is held and how the tenant can receive the security deposit back.
Next we go through utilities. Who’s responsible for what utilities? Who’s paying the electric? who’s paying the gas? Specify this as much as possible because you don’t want to get into a situation where all of a sudden you are paying a utility that you didn’t account for because you forgot to include it in your lease that it’s their responsibility. Things like common areas, lawn care, snow plowing, things like that. How those are taken care of too. So if there is a common area, make sure and put note in there that it will be cleaned by somebody or it’s actually the tenant’s responsibility to take care of it and you can’t leave any debris or garbage in the common areas. And then just if you’re including any appliances, what those appliances are. Maybe what’s the maintenance protocol for appliances if they need to be fixed. I’ve seen it be a lot more common that appliances are not included unless you’re in a super high end or luxury area that landlords don’t want to deal with having to fix or replace appliances. So that’s up to you as the landlord if you want to include them. Then after that you got … That’s a lot of-

Tony:
The meaty stuff.

Ashley:
The meaty stuff. Yeah, that’s the word I was thinking of. Then after that, go through general rules. What happens if they don’t pay? What’s the eviction process? The use of the premises. So if they’re renting this house, they can’t operate a auto repair shop out of the attached garage, things like that. And then go through the lease. But take a look at the BiggerPockets leases or even just Google a lease to see the meat of it. But don’t recreate the wheel. Find a lease and start from there. Don’t start typing out a lease from scratch. So the BiggerPockets ones, they’re about 10, 11 pages long. You don’t want to waste your time going through and sitting down and writing out this full lease agreement. Start from somewhere else and then read the whole way through and highlight it, mark it up because there will be stuff that’s not applicable to your property or maybe things you know want to add in there that you’ve heard other landlords talk about or you know is maybe market specific to you too.

Tony:
Yeah. You named so many great things, Ashley. I love that. I love that breakdown. And as you were talking a few other things came to mind for me as well. So renter’s insurance. Do you require your tenants to have renter’s insurance?

Ashley:
Yeah. My property management company does. Yeah.

Tony:
Yeah. I know that that was something we required for ours as well. What’s the process for non-renewal? So what does a tenant have to do? Or if they do these XYZ things, what are those things that would allow you to not renew their lease? And then you mentioned this already, but the eviction process. I worked for a property management company after college briefly, and I think their process was you got your notice of late payment on the fifth and then the evictions were always filed on the 15th. So it was a pretty quick process in California to try and get that ball rolling.
And then last thing, me just being an Airbnb guy, is sub-leasing. Are you okay if this tenant takes this unit they’ve rented from you and then turns around and rents that unit out to somebody else making some additional profit? So just some additional things to think about. But just like we talked about in the other question about using the calculator to make sure you’re not forgetting anything when you’re analyzing a deal, use the lease to make sure you’re not for forgetting anything when you’re putting your own lease together because BiggerPockets has already done the work of making it easier for you guys.

Ashley:
Yeah. That’s such a great point. If someone was to tell me to rattle off all the things, there’s no way I would remember everything that you needed.

Tony:
Everything.

Ashley:
But it’s a lease agreement. You don’t have to. Don’t waste your brain space with that information. There’s way better things that you could be memorizing than stuff that’s literally put together for you. And even if you’re not a pro member, using the BiggerPockets ones, there’s tons of other lease agreements out there that you can look at and use and use it as a starting point at least. And then just addendums that go with your lease too. These are easier to build out because if you’re charging them a pet fee, you may have a separate addendum stating information about the pet that they have in there. So the dog that they’re paying $25 an extra a month for, his name is this, type of breed and he has his rabies vaccination. Things like that. And the tenant signs it along with the rules of owning a dog. They’ll clean up after the dog. Things like that. They’re responsible for wear and tear caused by the dog. Things like that.
Okay. Well also if you guys want to learn more about being a landlord and leases, I do host a landlord bootcamp through BiggerPockets. You can go to biggerpockets.com/classes and we currently have the bootcamp going on, but you can check back there for more information when a new class is released.
Tony and I are going to give you guys a little bonus content today. And this is just because I’ve wanted to talk to Tony about this and pick his brain and just see what’s going on. So as you guys know … You’ve probably all been watching the news and watching the market that interest rates have significantly increased, especially in the last nine months or so. Tony, how is this affecting your investing strategy? I hosted my bootcamp call last night for rookie investors and we were overloaded with questions about how do you still find a deal with high interest rates? I think the answer I came up with is, well you have to make lower offers. You have to get that purchase price down to make it worthwhile. But I’m very curious to hear how that has changed your investing strategy or maybe it hasn’t.

Tony:
Yeah. No. I think you hit the nail on the head, Ashley, around making sure that the deals still make sense. So I think everyone automatically assumes that just because interest rates are high that it means you should stop buying real estate. And I don’t think that’s true at all. But I do think it means that maybe deals that you were buying six months to nine months or definitely 12 months ago that weren’t as meaty, you probably are going to have to skip out on those ones moving forward. But for me, I’m indifferent to the actual interest rate. What’s more important to me is the projected cash on cash return. And if I’m able to hit my cash on cash return targets at a 6% interest rate, then that’s a good sign because it means if in the future I’m able to refinance and get that even lower now I’ve got a smoking hot deal.
So for us, the things that we’ve changed honestly isn’t a whole heck of a lot. I think the only thing that we’re probably a little bit more flexible on is the cash on cash return that we’re targeting. It was pretty crazy when we first started.

Ashley:
Infinite.

Tony:
Yeah. It was pretty crazy when we first started. But I still think that, at least in the space that we’re in, going out and getting a 30% cash on cash return for your money is still very, very, very doable. So we’re opening ourselves up to some of those deals. And then we’re also looking to markets that maybe we weren’t before. I think a lot of maybe the primary markets that everyone knows and everyone loves and everyone talks about, those are probably going to become a little bit more competitive, a little bit more difficult to find good deals. So now we’re starting to look at more secondary and tertiary markets that maybe offer less money on the revenue side, but the cash on cash returns are still super strong because the prices haven’t been pushed up as much as some of these other more popular markets.
So yeah. Market selection and I think just a little bit more discipline in our underwriting is probably the biggest changes that we’ve made. But just to give you guys some concepts before I pass it off. We’re closing on deals now. I think I mentioned this already. High sixes, low sevens. Our best deal from an interest rate perspective is at 2.6. So that’s an astronomical difference in a really, really short period of time. But we were buying a 2.6, we’re still buying at six and we’re going to continue to buy as long as these deals make sense for us.

Ashley:
Well, I remember even too when interest rates were super low and people would say, “Well, why use hard money? Oh my gosh, you’re paying 8% for hard money?” And it’s like, well the deal still works. It works in paying that 8% to get into the deal, then rehab it, go refinance. And the same applies right now. The deal can still work if the interest rate is that percentage. And yeah, it stinks that if you would’ve done this a year ago, you could’ve gotten that. But also if you look back, people who were buying last year were looking back like, “Ugh, if I would’ve bought this property three years ago, it was so much cheaper.” So people were doing the same thing with housing prices last year as we’re doing now with interest rates.

Tony:
I was writing that down. I literally wrote that down right now.

Ashley:
So it’s just goes to show there’s never any … Okay, yeah, maybe the perfect time to time the market was last December, January, maybe even a little into February where if you were selling a property that was a perfect time to sell for that high purchase price from a seller. Don’t try and time the market. Don’t wait for a perfect opportunity to come up because getting that first property done, that’s what’s going to propel you to find those better and better deals. And we talked about that a little bit in one of the questions today is that you’re going to make mistakes so you might as well make mistakes on these okay deals than on the perfect home run deals that you’re going to get later on as you build up experience and knowledge. So yeah, thanks for sharing that, Tony. Super interesting to hear.
We had a situation where badly timing the market, I guess because I don’t try and time the market. I just buy when it’s a good deal. And so we got a property under contract in June. So interest rates had started to come up a little bit. The market was slowing down a little bit. But we still haven’t closed on that property because, hello, New York State. And we’re expecting to close within the next two weeks and the interest rate that we’re getting now compared to June is going to be a lot higher. We’re using hard money, so we didn’t lock in a rate with a bank for a 30 year fixed rate loan, but that does change our numbers significantly with the different interest rate that we are now closing on the deal. Luckily it still makes sense and still works very well because I do run my numbers so conservative.
But I was talking to another investor at an event and they put in an offer two months ago and they’re in their due diligence period and the interest rate has changed so much that they have to … They went to the sellers and said, “You know what? We need to talk about this because I’m not going to be able to get that interest rate I was two months ago.” And the seller said, “Nope. We’re not even going to talk to you. Your due diligence period is up. Your down payment is going hard. You can back out, take your down payment or can we continue on.” And I actually don’t know what he ended up deciding on doing. But I think that’s going to be more and more common coming up.
People that got properties under contract doing their due diligence stuff and then coming time and the in interest rate has increased that it completely changes their numbers. This was a really big deal and it would make a $3 million difference a year in the interest rate increasing. So that’s a huge amount of money to change the numbers on a deal and the sellers wouldn’t even talk to him. So the guy said that if they were to go and sell the property at the cap rate they got it under contract, they were going to go sell to somebody else, it would be $40 million less they would be able to sell it for because of this increase in interest rates. So I’m interested to talk to them at BP Con and find out what actually ended up happening with this deal.

Tony:
How’s things ended up.

Ashley:
Yeah.

Tony:
I had one other thing to add, but I got so blown away shocked by the $3 million that I can’t even remember what it was so I don’t know. I think we said enough. That was all good stuff.

Ashley:
Yeah. Well thank you guys so much for listening to this week’s rookie reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson, and we will see you guys on Wednesday with a guest.
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