March 2024

Henry Washington:
What’s going on everybody? Welcome to the BiggerPockets Real Estate Podcast. I am your host, Henry Washington, and I am joined today by my good friend, Mr. James Danner, for a show about one of the most relatable universal problems that investors face and that is contractors. James, have you ever had a nightmare contractor?

James Dainard:
Never once. Every job site has gone a hundred percent smooth.

Henry Washington:
Always bating a thousand,

James Dainard:
Bating a thousand. I feel like me and you were talking about construction a lot the last couple of weeks. Definitely one of my favorite topics because I’m a value added investor, so the construction is so important to implement correctly and have the right people on your team. We’re going to cover a lot of things that will help spare our listeners some pain to where they don’t make same mistakes. They can vet their contractors and avoid costly problems. And

Henry Washington:
To do that, we have brought in Mr. Rico. Leon Rico is a contractor who specializes in cleaning up other contractors’ messes. In fact, he’s so good at it. They gave him a show on HGTV called Rico to the Rescue where he does just that. So today he’s going to talk to us about what red flags to look out for when hiring contractors, how to protect yourself with a strong contractor agreement and what property owners can do, even if a contractor project goes way, way out of bounds.

James Dainard:
And I do want to say that not all contractors are bad. We reference that a lot throughout our show. There’s thousands of great ones out there. We’re here to help you protect yourself and make smart decisions. That’s the whole thing that we get. Talk about Ricoh about making smart decisions and protecting your job site.

Henry Washington:
Alright, that sounds great. So let’s bring in Rico. Rico, Leon, welcome to the show.

Speaker 3:
Thanks for having me.

Henry Washington:
So you’ve seen a ton of contractor work gone wrong. What’s the impact of that for these families? What’s at stake for them?

Speaker 3:
So a lot of people that want to do renovation, they always have a budget. They get started, they hire a contractor and then things move forward. In my show, they tried to do that and then unfortunately that contractor would just take the money and run or cause lots of damage that is very expensive to fix and then the contractor runs away and puts it back onto the homeowners. So this is what I’m seeing now more than ever because, and honestly, the pandemic is what threw wrench into things because not only the material costs go up, but then subcontractors were getting smarter with their bidding, but the GCs weren’t. So all of a sudden a GC will say, Hey, I’m going to do this project for 150,000. I have all these subs. We’re going to move forward. During the pandemic, halfway through a project he found out or she found out that they’re making no money, absolutely none. The subs are costing more and material costs more, and then they’re realizing they’re doing a job for free. And the problem is they don’t have that conversation with the homeowner. They just say, I want more money or I’m going to put a lien on your house. So there are better solutions to solve these problems than just screwing over homeowners. That believed what you said to begin with.

James Dainard:
Yeah, the pandemic, it was like this breaking point in construction because I’ve been in construction for a long time 2005 to now. And in 2008 I remember there was contractors everywhere you could get. It didn’t matter what kind of project you had, you had to line out the door. And then as the market improved, resources start tightening up, right? The economy gets better, there’s more work out there. And then when, like you said, it threw a wrench in it and the wrench cost three times more than the trades. And during the pandemic it was we had this massive crunch of bodies and the demand and the boom and so much money got poured in the economy. It really pulled the resources out and the subcontractor prices exploded. And we’ve seen the same thing across the board with these general contractors. They’re bidding things, they come too high, and then there’s a million reasons of why. And there’s something that breaks down with the communication of they just don’t want to sit down and talk about it where it should be like, Hey, I bid this, I have a problem, we got to review this again. And there’s a lack of business etiquette there, and then that’s where it just spins out of control.

Speaker 3:
Well, it’s funny because over here I think too many people are underbidding it, not overbidding it because if a contractor’s not making money, then the priority of your house is going to be last on this person’s list. And then of course problems arise.

Henry Washington:
Ricoh. In my market, what I tend to see is some of the contractors that I work with, especially the smaller mom and pop contractors, are great contractors in terms of quality of work and maybe not so great in terms of operating a business because they got into the business because they enjoy being a contractor, not necessarily because they like running a business. So you lose some of the customer service aspects or some of the communication aspects, like you said, how contractor really just need to sit down with the homeowner and say, Hey, this is what we bid, this is why we bid it, but this is where we are now. Do you find a lot of that sometimes being the cause of contention that maybe they just aren’t great business operators, but they’re better contractors?

Speaker 3:
That happens a lot. That happens so much. I mean, there’s people that just do flooring that homeowners love so much. They’re like, can you please do the rest of the house? And then that person says, well, I got a friend that does tile and I got a friend that does plumbing and I got a friend that does whatever, and that person will bring those guys in but doesn’t know how to manage or market up or communicate or even manage all of it. So there’s so many situations that I’m seeing right now. I know the mom and pops are really good. They could build you the most gorgeous kitchen, not great with communication, not great with their SOP system, operating procedures, not great with their finances because again, pre pandemic robbing Peter to pay. Paul worked out. It worked out back then because people were paying, you could shift money, get things going, and it was kind of a smoother flow.

Speaker 3:
Pre pandemic. During the pandemic robbing Peter Pay, Paul did not work. Homeowners stopped paying because they didn’t trust contractors. So now you have contractors that owe 2, 3, 4, 5 people like subcontractors and you have GCs that owe money. You have GCs that haven’t finished work and then it’s a standstill and then everyone’s like, where’s my money? And everyone’s cool until money’s involved. So that lack of communication is the reason why things blow up because they don’t have those systems in place. Something that a lot of people don’t know, there’s a new Colorado statute, a construction statute that they just passed in Colorado. So now if a contractor in Colorado spends $1 of a homeowner’s money on another project, that person could ask for discovery, get the accounting and sue right away. So they’re trying to prevent contractors from doing that whole robbing Peter to pay Paul thing. So now if you want to stay in construction, spend the $15,000 on a lawyer to make sure your contracts are in place, your systems are in place, you’re protected legally, have the language in place, and then make sure you have someone that manages finances beautifully to make sure everything is in line with milestones on the contract

James Dainard:
That robbing Peter to pay Paul. That’s a big deal. That’s something that we’re always looking for as renovators and we’re hiring contractors and there’s always this little queue that starts happening that what’s going on. Typically they’re start asking for draws a little bit earlier, earlier and earlier. That’s usually my number one red flag, like going, okay, if you’re requesting money too soon, you need the money and you can kind of see it happen through as you hire these contractors out. And to touch on a couple points that you and Henry discussed is during this boom, the subcontractors saw general contractors getting a lot of work and they thought they were making a ton of money and they just jumped right into the space. They went from electrician to general contractor, and it’s kind of unfortunate because you lost a SubT trade, but then B, they just didn’t know how they were getting into it and they didn’t understand all the cost of running a general contracting license like the licensing fees, the insurance, the payroll tax, and it snowballs on ’em. And the snowball can become detrimental to a renovation project whether you’re doing it for yourself or especially for a flipper, because if that construction project goes awry, your deal is dead.

Henry Washington:
So now that we understand what’s underneath some of these contractor issues and why we’re seeing so many lately, what can homeowners do to prevent these problems in the first place? We’ll get Rico’s answer right after the break. Welcome back investors. We’re here with Ricoh Leon of HGTVs, Ricoh to the rescue and he is rescuing all of us we hope from future contractor nightmares. So let’s jump back in.

James Dainard:
So it’s all about prevention as we’re going through things I’ve learned over the years is the more you vet your contractor, the more organized you are as an investor by putting things on construction contracts, having a template, a written down guide, the investor, the homeowner, and the contractor of how that job site’s going to run and the processes that are going to be implemented and how change orders work. It really ties the whole job site together to where everyone’s on the same page. How do you prevent mistakes on your job sites? Because a lot of times we get so excited, we just want to hire the contractor, get going and people skip all these vital steps.

Rico León:
You don’t get paid if you don’t follow the system. You have to force people. You hear about CRMs, right? CRMs organize what you do, but if there’s not a person that’s organizing and constantly touching the crm, then the CRM means nothing. So your processes and systems also mean nothing. If there’s not a person that enforces, Hey, by the way, before you do this, sign a conditional lie waiver. You don’t get a check until then. Make sure that you’re going to do this. Prove to us that you have funds in the bank so we know that the project’s going to get done. These are things that a lot, I’m a systems guy, I’m an SOP guy. I’ve created language that’s used to help homeowners and contractors against insurance companies. I feel like I was an internal lawyer my entire life, right? Because I know a lot of contractors like to complain versus find the solution.

Rico León:
And the solution is creating a system that protects you and the homeowner just get things done. This is the problem. Another pandemic thing, the jobs now when it took three months before it takes six, if it takes six, it takes a year. Now permitting takes longer. All this kind of stuff takes longer. So you have to strategize paying your rent, your mortgage, your car payment, your kids whatever for three months longer. So you have to factor in inflation pricing and then also a level of priority. If you do this proficiently, then you’re fine. If you don’t, you’re going to end up on my show. You know what I mean? You’re just going to end up screwing a homeowner whether you’re a good guy or bad guy, and then I’m going to have to come in and go track everything that you did or wrong, like insurances and everything else. And it always comes down to the process a hundred percent. Or they sell a job just so they could get a check today and then never necessarily prioritize them at all.

James Dainard:
Yeah, get that funds coming into their account and not saying, one thing I do want to clarify is you guys, there is so many great contractors on this planet that run a professional business. I have contractors I worked with for years. It’s just when it gets out of control, it can become very damaging. And so we have a standardized checklist before we hire a contractor. It’s check references, check their license and bond status every time we hire them because sometimes it lapses in the middle of your job as well. Review the bid, make sure it’s itemized out by line item. Every benchmark needs to have a dollar amount associated with it. Every line item needs to have a dollar associated with it, A construction contract signed to where they know what their payment schedule is, how it works, what they’re responsible for, what we’re responsible for, and just keeping that clarity.

James Dainard:
And the reason we do that not only is to prevent mistakes, but to mistakes early. Because once these jobs snowball and you don’t get on the contractor and it gets out of control, that’s where the fire starts and it is like you can’t control it at that point. Right? What red flags are you looking for from a contractor on a job site? What is that? I know I see a couple cues where I’m like, okay, something’s going on here. What are those red flags that you’re looking for or tell people to watch out for to know your job site and he’s getting a little out of control.

Rico León:
Yeah, unfortunately, everyone tells me what I want to hear. Contractors tell the homeowners what they want to hear also, and I feel like some of them believe it where it’s like, Hey, I’ve been doing this 30 years. My dad’s dad, dad did it, and I have a great reputation. I’m old school. I’m old school. I don’t have the internet, I don’t have websites. I’m just really good. Whatever the thing is, good contractors say the exact same thing as a bad contractor, you have to, when I say references, it’s references in the last year, year and a half. I don’t care if you did Mrs. Jones edition in 2010. I literally don’t give a, because that was a billion years ago. Prices were different. What have you done successfully now in the last year? Because if you could do successful things in the last year, then I know you understand the processes, systems, the pricing, and then I’ll feel a lot better.

Rico León:
So when anyone comes up to me, I look at the most recent projects that they have, and then I definitely do due diligence by calling those homeowners, making sure I was like, Hey, can I stop by? Is that cool? Hey, I want to invade your privacy, but I just want to make sure I’m making a good decision. It’s just that vetting process has to be more, you have to spend more time on that vetting process and definitely follow up with real humans. People could build a gorgeous website now with AI in an hour and a half, and it looks like they’ve done a hundred million dollars worth of work. So you have to do your due diligence a lot more detailed now than before.

James Dainard:
Yeah, part of that due diligence, what we do is we check their license number. When was that established? When was that granted, there’s a date on there. If your general contractor has a year and a half old date, that can be an issue because the next question needs to be like, where were you working prior or did you own another construction business prior? Because in Washington state, it’s a little bit easy to get your contractor’s license. You fill out a form, you send it in, you get a bond, and poof, you are a general contractor, you can go build a house.

Rico León:
Wow,

James Dainard:
It is a joke.

Rico León:
Colorado’s not like that at all.

James Dainard:
I mean, there’s so many things that come awry with that. And so for us, we want to go into l and i website, check their name, see if they’ve had old companies, but it’s such a joke. You have to watch out for it and you have to check those references because one time I hired a fake contractor, he literally had a fake id, fake bank accounts. He had a builder’s license that was real, but it was all fake identity up to it. And I had one reference from someone that referred it over, but if I would’ve gone through and gone back a year or two on his references, I would’ve known it wasn’t a real thing. And so taking that time and checking is so important. And then when you do make your mistake and sometimes you hire the wrong person, I’ve done that countless amount of times having that brick and mortar, so important to keep things going forward. Do you use construction contracts before you hire or when you’re going through the paperwork, the paperwork protects you on your deal? Do you use a construction contract and what do you feel are the most important things there to be included in that agreement?

Rico León:
Yeah, so I have a pretty intense work authorization, very intense, and it definitely protects me from multiple things just because I’ve been screwed over by the homeowners too. It’s not just contractors or all the bad guys or anything like that. There’s homeowners out there kind of doing the same thing. So in my workout, there’s multiple things. I have a pyramid and the pyramid’s a hierarchy. So the hierarchy I send to the homeowner saying, Hey, I’m the owner, but only talk to me when it comes to this is the project manager, this is the plumber, this is the mechanical, mechanical this. These are the people that are in charge of this project. The main point of contact is your gc. If you’re having issues with money that you call grace, you call Jordan, you call whomever. There’s things in my contract that are systematic where it’s like, Hey, you stay in your lane.

Rico León:
I stay in my lane because at the beginning it’s honeymoon period. Homeowners are excited, contractors are pumped, whatever, and then a couple months in, the homeowner can turn and be, I want this, this. And then a contractor can be like, oh, I’m not making money this. So what I do is I have my systems in place where the homeowner knows what to do if this person’s happy, not happy, whatever the homeowner’s responsibilities are on one sheet. So it’s like this is your job to pick this. It’s his job to do this at this timeline. It’s just getting things into systems and then enforcing it. And that’s how I do pretty much any job moving forward. I do my due diligence on the other end where I make sure the homeowner understands how it’s going to go. This is a problem with contractors right now, and the investors do this a lot.

Rico León:
When contractors start working on a job, the homeowner’s like, well, how much are you making off of this? What’s your percentage? What’s your cut? How much are you taking? Half of it, are you doing this? And then when that happens, it’s just a standstill contractor, stop talking. They’re like, I don’t want to work with this person. They want to know the money because the second that homeowner knows how much you’re making, they’re going to start cutting that down. So there has to be ways where it’s just like we’re doing this system. This involves all of our profit in there. If we agree to do something different, we’re going to have an agreed upon change order that we will both read and sign and then we could issue another check for that and then move forward. You got to go slow the first three months to make sure everyone knows what’s up. Then go gungho.

Henry Washington:
Ricoh as a homeowner is writing a contract. What are some of the things they need to do due diligence on?

Rico León:
It’s like you as a contractor have to have, if it’s not like W nine employees, they’ll two employees. Then if it’s a 10 99 world, then you may have to make sure that they are bonded insured, like he was saying earlier, like James was saying earlier. But then on top of that, making sure their insurances are up to date. Because I’ve seen insurances that they say they’re insured and they stopped paying like a year and a half ago. So there are these things that you have to do certain levels of due diligence. Also, as a GC to protect yourself, you have to have a subcontractor agreement with every single sub that you have. Also, because if they mess up their insurances get hit first, their insurance will pay for it. You as the GC don’t lose 10, $20,000. You could get that money back, hire a different contractor for that specific trade and then move forward. But if you don’t know this stuff, when I started, I didn’t know this, right? So when I started and these guys mess up, I wrote a check for my account to just move forward and get it over with. But I know a lot of people can’t do that. So having the subcontractor agreement, understanding the processes and all that kind of stuff, really streamline things and then you start getting the profits that you want.

Henry Washington:
Rico, when I do contracts, the way I typically organize things is we’ll give some sort of an upfront payment, typically no more than 25%, and then we will tier out a schedule in terms of in tier one, these are the things we expect to be completed. And then we’ll do a review and if they meet those things, then we’ll pay them and then they move on to tier two. And then we do that maybe for three or four tiers or depending on how large the project is. Do you recommend everyone have some sort of tiered payment system in their contract?

Rico León:
Absolutely. I love the tier. I love that as well. And then also just put in the contract stating like, Hey, we know things arise and material costs go up. Or maybe you want to hire a subcontractor that’s better, that’s more available and that person’s more expensive. Have that conversation with the homeowner, proof to that homeowner that this is an actual situation. Then you can move forward. I tell people to not get emotionally involved because homeowners and contractors, they just fight internally. So I always say, put it into a bank, have it in escrow. Give the bank all this information of the tier system. That way you could put it on the bank and the bank’s like, Hey, we’re not going to release another 50 K unless we get proof and boom, boom, boom. So now a homeowner can take it off of their chest. They don’t have to be the Karen that’s like always blah, blah, blah, blah, blah, blah, blah. They could be like, Hey, you know what? You want more money, it’s going to cost more. So why don’t we do this? Show me the proof of why and who you’re going to do this, who you’re going to hire. Just do the simple thing for me. I’ll give it to the bank. Someone can do an inspection and then they can release the money. So now when you put things into an escrow into a bank, now your hands are free and the bank’s got to go off of the written contract.

Henry Washington:
Man, first of all, that was worth the value of the episode alone. That’s a great tip to put it in escrow and blame the bank. Last night I was doing a class with James and he was given some contractor tips and he said, and he told me something similar that I should just blame him for every time something goes wrong. Oh, that’s funny. But yeah, no, that’s a great idea to put it in escrow with the bank and then that bank can help you release those funds and obviously they’re going to protect that the best way that they know how.

Rico León:
First of all, they want the money in the bank. They make money off the interest of holding onto the money. Cool, whatever. We’re not going to talk about how banks make money, but they’re going to do 10 times more due diligence. Let’s just say maybe intentionally a little bit slower, maybe intentionally a little bit slower, but guess what? They’re going to do more due diligence. Then the contractor could be mad with the bank versus you the homeowner, and it makes things go a little bit slower, but you’re safer. You don’t get screwed.

Henry Washington:
Man, there is so much gold here already. But what I want to get into is how to write smart project milestones and if things do go wrong, what options do property owners have? Rico has some genius tips for that after One more quick break.

James Dainard:
Hey everyone. Welcome back to our conversation with contractor Rico. Leon, let’s pick up where we left off.

Henry Washington:
One thing that I have done before to RICO is working with contractors that allow me to pay with a credit card because in some of these situations, what I found is if they go off and they say they want more money or they say that they did something that they didn’t do, I can then file a dispute with a credit card company. Oh, interesting. And get my money back. Have you seen contractors that a won’t work with people with credit cards, or are you open to working with people who are going to pay with the credit cards?

Rico León:
You know what, that’s literally never come across. I’ve never really had a situation with the whole credit card thing. I think if that’s true, then that’s amazing. I think homeowners should do that to protect themselves, but I’ve never gone through a situation where they’ve done that. I think one time a homeowner bought the materials, so then they didn’t have to pay the cost plus and they bought the materials with their credit card, the materials were on site, and then I think half the materials disappeared and it was like this weird shady thing that happened, and I’m not necessarily sure that they filed a claim saying that the person stole it. I don’t know what the process is after, right? It’s like does a credit card file an insurance claim against the contractor’s insured or do they just do a little investigation and then pay out? So I’ve never been in that scenario because I could also see how people would abuse that scenario also. So for me, it’s never been a situation I’ve ever been in.

James Dainard:
Yeah. One thing you have to watch out for on that credit card is you got to look at, like Rico said earlier in the show, is you have to check your local laws. Every state has different lien rights. They have different contractor laws. I know like in Oregon, from what I understand, a subcontractor can actually get in front of the bank by filing paperwork. They have all the rights in that state from what I’ve heard. And so you just want to make sure that it’s also not fail safe because if you dispute it and let’s say the credit card turns it over, they can still lien your property. And that’s what the construction contracts are there to do, is to kind of guide when they can lien for what services, and then also in these benchmark schedules, clarify when they’re going to get paid because nothing’s worse than a homeowner, than the contractor going, Hey, I need a check.

James Dainard:
I need a check, I need a check. And you’re going, okay, do I just give ’em the money? And those benchmarks are very important to have in there when I’m given a draw out, typically, we actually like to do 10% down just through demo, then give ’em another 15% to get going because the most dangerous part of your renovation is that first 10% because you are diminishing the value of that property the day you get in and you rip all those cabinets out, you rip all that flooring out, your house is not financeable anymore, and that’s where the value is going to come down. So when you’re doing these contracts, how much clarity do you have in your draw schedule? We have benchmarks going, Hey, you get through demo. Then we go through our construction bid, tie it in with the contract, and we highlight sections like this must be completed before the next payment.

James Dainard:
And we usually break it up in four to five payments across the board and we have ’em sign it because when they start asking us for money, we can meet with them in person, go, Hey, look, we all agreed to this schedule. I want to pay you, but you just got to get this done and I will give you a check tomorrow. Or that’s usually that red flag in that sign where I’m going. You’re asking a little bit earlier, and that’s where as an investor, a homeowner, I can kind of step in and go, okay, is there an issue here? What can we do to resolve this? Do you want me to go buy the materials for you and then you can install it and then I’ll get you a check. There’s so many solutions because what happens is they get in this conflict, they go to the contract and people start fighting, whereas they need to get together and have go, how do we fix this situation? What are common things that you’ve done to mediate those? It’s so important to get everyone on the same page.

Rico León:
So this is the thing, even marriages, right? We are all in love. We start this some years in, maybe it’s a little rocky. It’s the same with almost everyone, right? They have a perception of what it was going to be like. It’s not exactly to what they wanted. Now everyone’s not feeling good. So in the middle of projects, let’s just say a homeowner’s getting iffy, but I know as a fact I need a certain amount of money to get to the next milestone. Even if I prove it, what I do say, Hey, I’m willing to sign a conditional lien waiver, not just myself, but my subcontractors as well. So this is showing good faith on my end that I can never lien your house. I can’t lien it because when you send a conditional lien waiver, it says you’re going to hand me a check for 20 5K, and I’m going to hand you a thing that says, I will not put a lien on your house.

Rico León:
I’m never going to put a lien on your house under the condition that I take this money and work on your project. So if there’s ever a weird people don’t have a problem with me, but let’s just say a contractor that they may not know, I always say in the middle of a project, Hey, you know what? I’m going to show good faith on my end. I’m not that type of guy that’s going to be like lean, lean, lean, money, money, money, but my subs need this, this, this to do whatever. I proved it. Let’s do a conditional lien waiver. That means they won’t, won’t put liens, and I won’t put liens either. Okay, we meet in the middle, yes or no. So then in middle of projects, when things go a little array, which happens naturally, sometimes it doesn’t. Those are those things that I do to put the homeowner at peace so that we can move forward. Because my thing is this, we could argue about this for two, three months, and then those two, three months, I’m paying rent, mortgage, my car, whatever, and I’m losing money. So I try to solve things as quickly as possible and then put ’em at ease.

Henry Washington:
Even in the most perfect world, Rico, when you have a contract, everything’s lined out, you’re all in the grants and you’re ready to rock and roll, there’s still going to be those moments where there’s miscommunications. Can you give us maybe two to three of the most common miscommunications or misunderstandings between contractors and homeowners and then how we can potentially help people avoid those situations,

Rico León:
Have the conversation before signing the dotted line, say, Hey, by the way, I’m a contractor. I’m in charge of this and I control this. There’s five things over here that I do not control how fast permits get done, the speed of materials getting to the house, the inflation rate of this. So I have a list of things that I do not control, and what I do is I show them that list and say, Hey, there’s a scenario that it might be asbestos and not just drywall and installation. In that case, when we start doing demo or we test it and we find out there’s asbestos, that demo is going to be abatement. It’s going to be three times more. These are situations that may happen before we swing a hammer. So these are scenarios that I’ve gone through he and back 20 times that I list upfront, and then I let them sign a paper saying that I had the conversation with them.

Rico León:
So then when they say, well, you didn’t tell me that this was going to happen, I was like, actually, yes. Now if it’s the things I can’t control, then I’m free and clear and we’ll figure out things together. If it’s the things that I can’t control. I tell homeowners all the time, throw a scenario my way to see how I handle it. So throw me a scenario where my plumber steals $10,000, and then I’ll answer those things. So I tell homeowners, throw it at me, throw me the good, bad, ugly. And these are conversations that have to happen at the beginning, but then just let the homeowner know when this horrible thing happens, I’m going to stay here. We’re going to solve it together. Let’s both be logical and then move forward.

James Dainard:
Yeah. It’s all in the communication. And once that breaks down, the job site gets out of control, trust is gone. You get this pull, right? And that’s where you want to meet people on site, walk it together, find out a common solution, because what you just said can really happen for investors, homeowners, the contractor starts leaning the property and sometimes they’re leaning it because they’re supposed to be paid and they should be leaning the property the other times. Sometimes they’re trying to bully the person into getting the payment, right? They’re clouding the title. So you can’t sell it, you can’t refinance it. I know there’s some things you can do as an investor or homeowner that we’ve had to do in the past too, where we have a dispute, we have a construction contract, we have a quality issue. We had to bring in other people to come fix the work, and we’re not making that final payment.

James Dainard:
And a lien goes on and we’re trying to sell that property or refinance that property. I know for a homeowner, there’s things that you can do. You can work with your title company, you can get a bond for that lien. Typically you have to deposit one and a half times the lien amount and title will actually bond around that lien, and then it has to go through mediation. And then at that point, they’ll actually release it. And so you can kind of keep moving with your day because I have had times where you’re in 12% interest, the contractor’s leaning your property. You don’t get stuck in that debt for sure. And that doesn’t mean you’re going to get the money, but it does mean that you can keep going on just like that contractor because at the end you still got to get to that resolution. What other things do you suggest homeowners and investors should look for? And again, there’s so many great contractors out there, it’s that 10% that cause some issues and you can get bullied. Your job site can get messed up. What other recourses do homeowners have against a contractor?

Rico León:
So I think, again, it’s by state and the whole conditional lead waiver thing is going to protect you a lot. And unfortunately, a lot of contractors are really good at telling you what you want to hear and just to get that job going, just to get the check. And then they go, we were to figure it out later. And what’s hard is honestly, you got to go old school. You got to talk to people that have had phenomenal situations with a contractor from beginning to end, and again, in the last year, two years. So I was just saying earlier, I was like, Hey, I know the guy that stole, he stole 600 K total, but he stole specifically from my jobs like two, 300,000, my gc, he stole that money from me. So whenever that happens, I’m like, all right, cool. How do you prevent all these things from happening?

Rico León:
There was a honeymoon period and that was pre pandemic. He was awesome 5, 6, 7, 8 years ago, and now he’s obviously the opposite. So I think what you need to do is obviously talk to inspectors, realtors, people that do all those people that have just recently done a project, that word of mouth is be more powerful than a hundred reviews, which you could pay for now, right? A sick website that you could pay for a hundred dollars AI could build you a sick website. I think you’ve got to go a little bit old school to see that type of reputation that the contractor has. And it’s a risk, right? It’s always going to be a risk, even if you have all your systems in place, contracts in place, you never know because human nature, you know what I mean? What happens if two the subcontractors die and then the sons take over as a priority on their business and all of a sudden sue you for whatever, not going to, it’s like all this kind of crazy could happen. So it’s the thing what James and I have said to prevent it. Those are it. There’s nothing else except for the certain laws in your state that could protect you anymore. Like the Colorado construction statute that just appeared here. That’s brand new to help the homeowners from going through and prevent contractors from playing games.

James Dainard:
Well, Rico, this has been amazing. To kind of wrap up, what are your top three tips that a homeowner investors should do before hiring that contractor to make sure that they can kind of protect their job site? We want to hear Rico’s top three.

Rico León:
Number one would definitely be the references, but the references have to be recent. So what have you done for me lately? That’s number one. Because again, like I was saying earlier, someone that was awesome 10 years ago means nothing today. It means absolutely nothing today. So references that are recent and then proof. So you got to say, Hey, what’s the address? Can I see before and afters? You got to dig deeper. You got to assume everyone’s a liar and dig deeper. Number two, I would definitely say ask a contractor the good, bad, ugly. Ask the contractor what’s going to happen if the worst things happen and how that person’s going to delegate it. Just be like, Hey, I know things happen. Tell me how you would solve it. And then number three, get another third party contractor, just the GC to look over everything. I know a big mistake people make is they get architect first and they say, Hey, I want to build a house, an addition for 300 K. The architect builds it. It must be for Mark Anthony in Miami because when a GC looks at it, he’s like, this is six 20,000.

Rico León:
So it’s like that happens all the time. It happens all the time. So if you’re going to mess with an architect, have a GC look at things first, and then also talk with the architect, because this is a big issue out here. People go architect first. I get it. I get it. Then they show to four GCs and all four GCs say it’s 500 K, and the architect was told 300 budget. So make sure you involve a GC that’s third party that you say, Hey, this job isn’t for you. I’m going to give you a couple hundred dollars to just consult me. Look over this stuff and show me the red flags, the best couple hundred dollars you’ll ever spend. Because now what do you think That lady that just spent $12,000 for the architect has to redo everything now because she didn’t involve someone that knew. So my third tip would definitely be get a third party contractor or estimator, someone that knows how to put these things together and pay them for their time.

Henry Washington:
Man, these are fantastic tips. I couldn’t agree more. I’ve had architects give me amazing drawings, and I already knew off Jump Street. I’m like, this is 10 times the budget that I gave you. Yeah.

Rico León:
Oh, we’re building Mark Wahlberg’s house, I guess.

Henry Washington:
Cool. Yeah. So if I could sum everything up here, what it sounds like to me is you guys, we have to be human beings. We have to understand that contractors are in this business to make money, so let’s not be surprised that they want to make money or else they wouldn’t be here. But we have to have communication from all parties throughout all aspects of your project because without the communication, you’re going to lose the trust. And if you lose the trust, then now we’re talking about liens and lawyers and things that can get really expensive and cause families to lose sleep. So everybody must protect themselves. We’ve got to get contracts in place. We have to have honest conversations about what can get done. And I loved your tip about saying ask people what happens if in a scenario where something goes wrong, because you’re absolutely right.

Henry Washington:
What I would be looking for in that same conversation is somebody who’s giving me an honest answer to say, Hey, yeah, we’ve screwed up before. Here’s how we handled that situation. And I’m always going to pick the contractor who seems like they’re being honest with me. I don’t want to pick the guy that’s like, look, no, we don’t screw up like that. We don’t make those kinds of mistakes. Everybody makes mistakes. It’s about how do we pick ourselves up and handle the mistakes going forward? How do we communicate with each other? A lot like a marriage man. You just have to have that communication upfront. Rico, thank you so much for coming on the show and sharing your wisdom with people. This is very helpful information that people can actually take away and hopefully save themselves a lot of trouble. We also want to say thank you for the work that you do for getting out there and helping families. I don’t think people realize how stressful it can be on a relationship when you are trying to renovate your home and someone is taking advantage of you. And so you’re really, really doing things that are helping people. And these tips are also going to help people make sure that they don’t end up in that same situation. I do

Rico León:
Have one more tip. I do have one more tip that’s so good and I forgot to tell, but it’s so good. The homeowner that I was saving season two, episode one, she put herself as named on the contractor’s insurance. So when he messed up and did all this damage, the insurance companies were ready to ignore everything until we found that out. And since she’s named on the insured, she’s technically a client and because of that, she got $45,000 back. That was something I learned this last year. So that’s another tip

Henry Washington:
For sure. Additional insured. Yep. Before we get out of here, Rico, please let everybody know what night or day they can see your TV show on H GT

Rico León:
V. Awesome. So yeah, my show Rico to the rescues on Wednesday nights. It’s like nine Eastern, eighth Central, something like that. I’m in Mountain Time, so it’s like never lined up. But yeah, every Wednesday. And then I just finished doing Battle on the Mountain, just finished last week, which I was on as well. And then next month I’m on the celebrity season of House Hunters, and then I got more shows that I can’t even announce yet. So anyone that supports, I do appreciate it.

Henry Washington:
Thank you so much, Rico. This was extremely helpful.

Rico León:
Thank you guys.

Henry Washington:
Hopefully we’ll get to talk to you again soon.

Rico León:
Yeah, that’d be awesome.

UBS analyst John Lovallo joins ‘The Exchange’ to discuss his outlook for homebuilders, the advantages public builders have in the space, and more.

Ashley:
This is Real Estate rookie episode 380. Are you wondering where to start as a rookie investor? Should you pay for a course or should you self-educate? We’re going to talk about that and so much more today. My name is Ashley Care and I am here with my co-host, Tony Jay Robinson,

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’re going to be discussing a few topics, one of which being how do you structure a partnership split based on the amount of capital and sweat equity that someone’s bringing? When should you walk away from a deal versus doubling down? And we’ll also be joined live with rookie guest Nicole Rutherford, who you might remember from episode 3 73 to hear what questions to ask if you want to manage someone else’s Airbnb as a co-host. And just general tips for getting into a new short-term rental market and more. But our first question up is about where to even start as a real estate rookie.

Ashley:
Okay, so our first question today is from Spain. mk, super rookie question, highly interested in real estate investing. Where do I even want to start to learn? The last two years I’ve immersed myself in the BiggerPockets of Money podcast plus others to get my money mindset straight. And this worked. First of all, congratulations. That’s awesome. And if you haven’t checked out the Money podcast yet, you can check that out on your favorite podcast platform. It’s under a BiggerPockets umbrella. Okay, so to continue with our question, we have improved our family’s net worth significantly. We started investing in index funds, that’s pretty cool. That’s also what I invest in outside of real estate. Now we are ready to take it up a notch and real estate investing makes sense to us primarily to buy and hold and take advantage of appreciation and tax benefits. However, where do I begin?

Ashley:
I’m a methodical person who wishes that I could just take a class. However, I know a lot of people are self-taught. Is paying for a course worth it? If it is, which course would you recommend? I need to learn terms, how to know I’m getting a good property, where to get capital apart from saving a down payment, et cetera. Shell, I just start listening to all BP real estate podcasts. Would that be enough? Thanks so much. So what a great rookie question, and I think there’s probably a lot of other people wondering the same exact thing as to how do I get started and is paying for education the right way to go. Tony, what are your thoughts on that? The first thing that comes to mind for me is that you can find everything free online. It’s just the organization of it and kind of piecing it together that is the benefit of a paid course.

Tony:
Yeah, I think like you said, Spain, there’s so many different ways to go about this. You definitely can trudge through it yourself and learn from your own mistakes, and there’s a lot of people who started off that way. When I bought my first long-term rental, when I bought my first short-term rental, I didn’t go through any courses or anything. I just learned the ropes and did it that way. But like Ashley said, there’s a benefit to having that kind of community behind you as well, because you can usually move a little bit faster, right? You’re not wasting as much time searching for the information because the information is there in front of you and you’re able to spend a little bit more time executing and then B, hopefully you’re following a proven roadmap of what already works. So there’s pluses and minuses to both approaches there. But I think the biggest thing Spain is because the bigger question here is where do I even start to learn? You’ve already started that journey, right? You’ve already started the learning process. I think what’s most important now is deciding on the actual path you want to take because I think that, and actually ary thoughts on this, but I feel like that’s where a lot of rookies get caught up is that they just never decide what exactly is that they want to do. So then they’re just spinning their wheels forever.

Ashley:
So I’ve done a couple masterminds, I’ve done a bunch of courses, I’ve done a wholesaling course, I’ve done all these different things that some of the things I’ve never actually implemented, but the course was a reason for me to realize this actually isn’t for me. So I think that’s also a big benefit of taking a course is to understand if that specific niche is for you. So figure out, like Tony said, figure out what exactly you want to do and if you have time to do all the research, you can 100% figure it out yourself. So time is another variable. If you don’t have a lot of time to listen to podcasts, to read books, to scroll Zillow and look at what prices are and what houses are going for and tracking all of that and doing your own research, then maybe that’s where you do pay for a course to kind of fast track all of that.

Ashley:
So one thing to look at is the cost comparison. If the cost is instead of going out that month for dinner a couple times or not door dashing for a month, then yes, that’s probably worth it. But if this is your maxing out your credit card to pay for this course, I’m going to say no, it’s not worth it. Figure it out on your own and join some of the free Facebook groups because another great benefit of doing a course is the community, but you can get free community on BiggerPockets. You can get free community on Instagram, just follow other investor accounts, especially new people who are just starting out. Search the hashtag real estate rookie and connect with them, send them a dm. The first ever mastermind I was in was created off of Instagram and it was one girl messaged 10 of us and said, Hey, I’d like to start a mastermind. It’s just free. It’s just to get together. And we got together I think once every six weeks or something on a Zoom call and there up maybe being eight of the 10 people that did it. But putting yourself out there, building that community, that accountability, that’s a huge benefit when people pay for those courses is meeting the like-minded people. But you can do that other ways too without paying for a course.

Tony:
Yeah, I think a lot of golden legacy, you definitely want to make sure you’re coming from a place of financial stability before you take that plunge into maybe committing more to education. Quick side story from my own personal journey. The first mastermind I ever joined, it was a $20,000 apartment syndication mastermind and asked me how many apartments I’ve syndicated since then. The answer is zero, but I still do think I learned a lot from that because like you said, Ashley, when you kind of make that financial commitment, it does, I think take it depends on the person, but I think when you make that financial commitment, it does make it a little bit more real for you. Like, hey, this is something I’m committed to, and you kind of put your money where your mouth is. So I think there is an element of that, but Spain said that you do just want to go about this without investing into an actual course.

Tony:
Like Ashley said, there’s a lot of different ways to get active and get involved. I personally think you can get a PhD of real estate investing just by going through the forums on BiggerPockets. I first found BP by doing a search on Google, which led me to the forums, and I was blown away by the amount of information that’s in there because there are timeless truths of real estate investing. So even if you find a post from 10 years ago, there’s probably still a lot of truth in that post that still resonates today. So I’d say take the time, really drill down where you want to go, but I think what’s most important in Spain is choosing the strategy, choosing your niche, and then really getting focused on just consuming content around that strategy. Because when you first start, it’s all about awareness and you just want to learn as much as you can about so many different things.

Tony:
But when it comes time to take action, you want to narrow your focus. And I heard this phrase, it was on a marketing podcast a long time ago, but it was called just in time learning. Just in time learning. And it comes from the production world of just in time production. But anyway, it’s about only consuming content that’s needed for your next action. So if you decide span that you want to become a house flipper, then your very next step, the only content you should be consuming is about how do I find deals as a flipper? And then once you find the deals, okay, how do I create my scope of work and estimate my rehab costs? Okay, how do I fund it now that I’ve figured out what the rehab costs and each piece of content should help you take that next step? So that’s my advice.

Ashley:
Yeah, the last thing I would add is how do you learn? How do you educate yourself? What’s the best learning environment for you? So if you need to look back to high school to college, did you hate sitting in class watching videos? So maybe a lot of courses won’t even be for you because you won’t actually sit and watch the videos. I’ve started the real estate exam probably four times and it’s been like five years since I actually started it, but I just can’t stand sitting and watching videos of someone instructing me. So I would just start it. I would never finish. And now I realize I don’t even need my license or want it, but I know that about myself is that if I’m paying for a course, it needs to be more interactive than just watching videos where someone else, they may prefer a more self-paced where at any time they can choose which videos they want to watch.

Ashley:
So also look at what kind of course you’re signing up for and how you’re going to learn from it. What is the learning environment? Is it live or is it even in-person events? Not even on Zoom. Are they doing in-person events? Which that is actually the most beneficial to me and hands-on. Is it hands-on where it’s workshops? That’s even more beneficial to me. So also think about what your style of learning is and how you will learn the best, but I also learn really well from just Google searching and like Tony said, going on the BiggerPockets forums and I know exactly what I need to know to get to the next step and going and doing that research. But if you don’t even know what those steps are, that’s where shameless plug here, you can join the Real Estate Rookie Bootcamp and you can learn what those steps are to get your first deal and then from there you can go on to find your niche and take different courses like that. But I’m going to recommend a course. It’s going to be checking out the BiggerPockets bootcamps. You can go to biggerpockets.com/bootcamps. There’s a whole bunch of different ones that you can actually choose from

Tony:
Guys. The bootcamps really can be life-changing. Ash and I have both had the pleasure of hosting these and we were together a couple of weeks ago in Denver Ash, we had this big meetup and someone came up to me and he said, 10, I just want to thank you because I took your short-term rental bootcamp and a few months after that I closed on my first Airbnb and I’m under contract on my second right now. And guys, when I hear those stories, it just goes to show the, and it’s not because of me, right? I did my best to provide the value, but it’s because that person came in and they executed on what they learned. They made the most of that opportunity. So just to put a bow on this, it doesn’t matter what course you pay for, it doesn’t matter what coaching program you sign up for. It doesn’t matter what books you read if you never take action, there are people out there who are just course junkies who just jump from course to course event to event, but never take action. Don’t be that person, be the person who takes action and who implements, and that’s how we get the highest chances of success. Fan

Ashley:
Tony dropping bombs. And with that explosion, we’re going to go to our short break, but when we come back, we have a video submitted by Baker in North Carolina who is asking about investor payout strategies. So make sure you stick around. Okay, we are back from our break and we have a video question today from Baker McGinness and Charlotte, North Carolina. If you want to submit a question on the show, be sure to do it at biggerpockets.com/reply. Now let’s hear what Baker has to say.

Baker:
Hey, Ashley and Tony. My name is Baker McGinnis. I’m in Charlotte, North Carolina and me and two very close long-term friends. We plan on investing in a short-term rental property in Boone, North Carolina, so that’s the mountains of North Carolina. So I’ll be providing sweat equity in a small down payment around $8,000, and I was curious as to what a ideal payout would be, whether that’s a percentage of what we charge for rent or just wondering what you guys would recommend. Also, I want to thank you guys so much for all your fantastic information you provide on the podcast. Have an awesome day, guys.

Tony:
So Baker first, kudos you man on leveraging partnerships, and obviously this is my time to plug our real estate partnerships book. So if you head over to biggerpockets.com/partnerships, you guys can pick that up. We’ve had a lot of questions since that book released about how to structure partnerships, right? Ash, and I think you and I always say the same thing. There is no right or wrong way to do this. Bigger really comes down to what you and your potential partners feel is fair for that partnership. Now, the common mistake I think that we see from Ricky Investors is that they devalue. They undervalue the person who’s putting in the sweat equity and they overvalue the person that’s bringing the capital. Yes, the capital is necessary, yes, getting the mortgages is necessary. However, that is a one-time event, right? You’re going to sign those loan docs one time.

Tony:
You’re going to wire in the money for down payment and closing costs one time. And it sounds like Bick, you’re also going to be contributing at least something towards that down payment and closing costs as well. So you’re putting financial resources into this deal, but you’re also going to be putting your time resources into the deal, and that’s what equity, that’s something that’s going to be going on day after day, week after week, month, month after month. So I think my recommendation is always to start with just a 50 50 and see how your partner responds to that because I do think it’s fair, right? If someone’s going to be doing all of the work and the other person’s just going to be cashing a check, you got to balance that out over the life of that deal. So for me, 50 50 seems pretty fair. What do you think, Ash?

Ashley:
Yeah, I agree with checking into what is each person responsible for, what are the roles and responsibilities and putting some weight to it? And one other thing they can do is actually pay yourself for those job responsibilities that you’re doing and then go ahead and do your equity percentage. There’s a lot of different ways you can do it, but think about what is your goal, your outcome first, what do you want out of this deal? Is it cashflow? Is it equity so that you can cash out down the road? Is it you want to make more money now? So maybe you want to get paid directly for your sweat and your labor on the property. Then you can tailor it through the negotiation and figure out what your partner wants. What is the reason that they’re investing capital of those same things that I listed?

Ashley:
What is important to them? Then you can kind of structure it to make sure that it’s a good deal for both of you, because really you could say we’re going to be just 50 50 partners on it, but that may not be enough cashflow for you for the actual work that you’re going to be doing on the property. So I think defining roles and responsibilities is the first step, setting your goals, what you guys each want out of the property, and then from there negotiating how much equity is given up, and then if you’re going to be paid separate for any kind of task, and you can be paid as the property manager overseeing it, but also the other partner could be paid a percentage every month of the capital they put into the deal too. So that’s what I did with my first partner was he was given equity, but also he was paid back a percentage. Maybe he gets less equity but gets percentage back, a guaranteed percentage back on his money now too, almost as if he was part private money lenders too.

Tony:
Yeah, it’s a really good point. Ash should say, define those roles and responsibilities upfront. One of the very first partnerships that I ever did, it was a similar situation where I brought 25% of the capital needed for to acquire the property, right down payment, closing costs, furniture set up, et cetera. The partner brought together 75%. So because I contributed 25, the partner contributed 75, I kept 25% equity in that property, and the partner kept 75%, right? So our equity stakes matched our capital contributions. However, since I was going to be the person managing the property every day, I also got a 15% management fee for doing that work, which was slightly lower than market rates at the time. If we would’ve hired someone else, it would’ve been 20, 25, maybe 30, 40%. So I gave a break on the management fee, but I was renting the property myself. So you’re absolutely right, Ashley, in saying that, maybe separate that a little bit, your equity from the work you’re doing daily inside the property,

Ashley:
And really to take it even further, really notate and document what is the role of the property manager too. So if you guys need to go and refinance, does that mean you as the property manager are in charge of talking to the loan officer, quoting rates, filling out all the documents because you actually hired a property management company? They most likely would not do that for you. They’ll send you your profit and loss statement and your rent roll and things you need, but they’re not going to do that for you. Who’s going to get the taxes ready to collect all your W nine or not your W nines, but yeah, even your W nines and your 10 90 nines get your 10 90 nines. So all of those things, who’s going to do all this stuff at tax time? Even if you’re having somebody do it for you, somebody still has to hire a person to do it, gather all the information to give to them to take care of it.

Ashley:
So really define as deep as you can, how many roles and responsibilities that property manager is actually going to have too. Okay, if you guys are enjoying this episode, if you’re watching on YouTube, we’d love for you to give it a thumbs up or if you’re watching on your favorite podcast platform, make sure to leave us an honest reading and review. So we actually have Tony asking some co-hosting questions coming up, but before we get into that, we have one more question about walking away. So this question is from Chantel. When do you walk away super excited about first property under contract set to close in a week? Tentatively inspection showed end of life for roof insurance is having hard time getting an underwriter due to roof of age. My issue number one, my agent asked if I wanted to keep tenants month to month. I said yes, get response that, oops, they went to a 12 month lease that’s under market. My issue number two, I will not cashflow, I’ll need to put in about $300 per month to pay off my home equity line of credit payment each month, stay the course or say I’m out.

Tony:
There’s a lot to unpack here,

Ashley:
Right? We’ve been in situations like this before.

Tony:
Yeah, lots to unpack here. I think maybe let’s take a, okay, first, I think the first thing that we need to clarify Ash is like Chantal, what are your motivations when it comes to investing in real estate? Again, you’ve got cashflow, you’ve got appreciation, you’ve got the tax benefits, and if you’re doing short-term, you’ve got the vacation rental piece, right? When you’re buy and hold real estate. So I think Chantal, the first question for you is what are your motivations? Is it maybe you’re trying to get rep status, like real estate professional status and you want to be able to write off this cost segregation and apply that towards your W2 income or whatever it may be? Or do you want appreciation, right? Is this an appreciating market where maybe you’re not super concerned about the cash flow and it’s going to appreciate 5% a year for the next decade or whatever it is, but if it’s just cashflow, then I think that kind of changes things. So I think that’s the first piece, Ash, but maybe if we take it step by step and just kind of break down each issue, so what do you think about the roof issue? Would the roof by itself make you walk away from the property?

Ashley:
Well, that was my number one question as to what do the numbers show? So she had issue number two of I will not cashflow. Is that with her paying for the roof expense or does that not even include the cost of adding a new roof on and now you have to come up with another $12,000 or whatever it may be to pay for the new roof? So first question is do you have money to cover the roof cost? Is that going to cut into your negative cashflow even more because maybe you have to take more money off your HELOC to cover that, and now you’re paying $400 per month out of pocket for the heloc. So that is my first understanding is how does the cost of that roof factor into the numbers on the property? And the next thing would be can you still negotiate? Are you still in that due diligence period where the inspection showed end of life for roof, where you can actually negotiate a decrease in price to help cover the cost of the roof or ask the sellers to replace the roof before you close on the property and then you’re not coming out of pocket for any money at all?

Tony:
Yeah, I’d agree with you on that piece. I think my first objective would be like, Hey, let’s have the sellers fix the roof before I even take possession of this thing. That way I can make sure it’s done correctly, even if you have to push out closing a little bit. The motel that we just closed on, we had to push out closing because they had to fumigate the motel because we found some issues like, Hey, you guys need to take care of this and show us that it’s done before we’re willing to close on it. So you’ve got a little bit of leverage there, Chantal, I think, to hopefully get that roof completed or that roof issue completed by the owners. So moving on to the next issue here. We’ve got this Oopsie 12 month lease that’s below market rents. What are you doing in that situation? Ash? You’re the long-term rental queen here. What would you do in that situation?

Ashley:
Well, that was part of the negative 300. Is that negative 300 cashflow only because they’re in below market rents and after 12 months are you able to increase the rents and you’re actually cash flowing on the property? Because at that time, I may consider it as to yes, I can afford that $300 per month payment. So think about that first. Can you actually afford to make that $300 per month payment and still have your reserves in place for 12 months and after that 12 months will you be able to cashflow on the property? So making sure it’s not a financial burden on you and also what happens in 12 months, what can you increase it to and what does your cashflow actually become after their leases are up? Also, I would want to kind of look more into who the actual tenants are since you are inheriting them for a month, asking the seller for just to show that they have actually paid for the last year that they’ve been living in the property, that they’re good tenants and you’re not going to be stuck in a 12 month lease with a tenant that hasn’t actually paid in the last three months anyways, and a seller can tell you they’re up to date on the rent rider part of the sales contract, but sometimes it’s necessary to ask for proof, and that’s okay to do is literally ask for the bank deposit showing that that person paid each month, or if they’re using some kind of property management software or property management company, you can easily print off that report to send to you as the buyer that this person has consistently paid on too for the last 12 months.

Tony:
Yeah, I think you bring up a good point, Ash. It’s how under market rents, are they right? If you brought it to market rent, are you going to be breaking even at that point, right? Or if you got to market rents, does it become a juicy deal, right? Our market rents at 2,500 and they’re paying a thousand. Okay, cool. Then there’s a lot of room there, but our market rents 1750 and they’re paying 1550. Then it sounds like you might still have a bad deal in your hands either way. I think based on what I’ve seen, Ash, I’m curious what your take is. I think based on what I’m seeing here, assuming that long-term cashflow is somewhat important to you, Chantal, I’m probably going to be walking away from this deal.

Ashley:
My first thing to do, and I think you would agree, Tony, is to try to negotiate first. I mean, now that they have the 12 month leases, if they put this property back on the market, they’re going to have a really hard time selling it. Nobody’s going to want to be locked into a 12 month lease that’s below market rent. They’re going to completely eliminate anybody that wants to house hack because nobody can move into it to house hack. So their buyer pool has just diminished, and I think there’s a lot of room for negotiation on this to decrease the purchase price with the roof and it being locked into 12 month lease agreements that are under market too. So I’m going to say negotiate until the numbers work. If not, then I’m out. Maybe we should make that into a new show segment where people bring us their deals and we say whether we’re out or we’re in,

Tony:
We’re in bringing the capital. It’s like Shark Tank, huh? Yeah, I’m with that. I’m out.

Tony:
Alright guys, so coming up after this outbreak, we’re going to be joined by Nicole Rutherford. You guys might remember from episode 3 73, but her and I are going to talk a little bit of insider tips for creating a co-hosting business. So Nicole, welcome back. Super excited to be chatting with you again. You and I were on episode 373 together where we talked about transitioning from Airbnb arbitrage to building out this co-hosting business and the producers, and I thought it’d be cool to bring you back to ask a few more questions about Airbnb co-hosting. So welcome back to the Real Estate Rookie podcast.

Nicole:
Thank you so much, Tony. Pleasure to be here again with you.

Tony:
Alright, Nicole, so first question I want to ask you is, if I’m looking to hire a co-host, right? Say I own a property that I’m thinking of renting out as a vacation rental as an Airbnb, or maybe I already have one and I’m not happy with my current property manager, what should I be asking this new potential co-host?

Nicole:
The first thing would be just checking the rates that they’re going to be charging. There are co-hosts that will charge a flat management fee or there’s going to be host that will do a percentage. We opt to do a percentage for our business. You’ll see most co-hosts charging from 15 to anywhere up to 30% of the gross nightly rates is typically what you’ll see most people charging and knowing their communication, what they’re going to be abled to do if overnight emergencies happen, seeing if they have a team or if it’s just them. Are they going to be available 24 7 to communicate with guests and making sure that everything is very transparent of who’s going to be responsible for ordering supplies, who’s going to be responsible for leaving guest reviews, making every single detail announced and known to both parties, who’s responsible for what aspects of running the business and making sure that as a co-host that your property is something that they’re comfortable doing. We have turned down properties of, we’re not familiar with condos and not working with the HOA regulations, so making sure that your co-host is comfortable with doing that. If you have extra amenities at your property, such as pools, hot tubs, grills, who’s going to be changing out the propane in between guest stay or when a propane tank runs low in the middle of a guest stay. All those little details asking who’s going to be responsible for what aspect of running the business?

Tony:
Love that, Nicole. And I guess the inverse of that question is what questions should a potential co-host be asking a new client

Nicole:
For us? We have a whole list written out when we are potentially going to be bringing on a new client onto our, we always say team, and we have it listed out at first. We need to know the property address if there are short-term rental regulations in that area because most people aren’t familiar with those if they’re brand new to real estate investing and going from there of seeing what the bedroom count is, what the bathroom count is, and we take a look before we even say yes or no to this client, we take a look and see if that property is something that fits our portfolio. We tend to work with larger homes, not that we’re not able to work with smaller homes, but just for ourselves and the time that we dedicate to each property, we’ve set it out to match what our profit goals are and we make that clear to owners of after we do an analysis on our end of what we think their property can bring in, we let them know, honestly, if we think that it might do better as a long-term rental than a short-term rental because some owners don’t have the budget to really furnish their home as it might need to be in their particular market area.

Nicole:
And so talking to them and being very transparent at all times of how much do you have to put into furnishings? Are you willing to add these amenities to your home? If it doesn’t have these amenities, we’re not sure if it’s going to be able to meet your overall profit goals and seeing what owners are willing to do for their properties if it needs a hot tub to be able to pull in any sort of profit from doing your own market research, making sure that it fits your portfolio of what you want to be adding into it.

Tony:
Alright, next question I have for you, Nicole, is what are your need to knows when helping a new co-host move into a new market?

Nicole:
The first one is going to be really analyzing that particular property that they’re looking for. So looking at the market analysis and seeing if they have amenities at the property, what their monthly payments of including insurance and taxes and their estimated monthly utilities to make sure it makes sense. As a short-term rental. Most people aren’t doing co-hosting for long-term rentals. And when you are taking that percentage, we like to make sure that the owners are at least going to be breaking even or profiting on their rent. And from there, knowing exactly what the owners are willing to put into their property for furnishings, if it’s not currently a functioning short-term rental. And then you can start building out your team if it does seem like it’s something that’s going to be mutually beneficial for yourself and for the owner. From there, you start the ball rolling with finding your cleaners, your handyman, your full team, and everyone else that you need to be running a successful short-term rental

Tony:
And qua. I love that process, and I guess what’s the timeframe I should be expecting to be able to complete something like that?

Nicole:
A lot of people do take a month to get their properties ready, but the longest it’s ever taken us is two weeks time. So from day one of talking to the owners, and that’s been even with a renovation going on, our last property we just set up, we were able to design the property in usually less than a week. We take a few days to really get the design knocked down and have everything ordered and ready in our cart and take one week from start to finish of when we go into the property and to when it’s ready for its first guest, which is usually eight to 12 hour days of being at the property. We set up all the furniture ourselves, install closet racks if needed, hang up the TVs. We’re extremely hands-on, and we will, during that same week, we are meeting cleaners and interviewing cleaners because a lot of these markets we go into, we’ve maybe visited before the area, but we don’t have connections in a lot of these areas.

Nicole:
So we’ll at least interview three cleaners to come by the house for them to see the property. Same thing with handyman and pool teams if needed, having long guys come by and provide quotes for the owners. So it is a very hectic week usually that we’re getting properties set up, but a lot of people, the owners will connect with us and say, what is it going to take about a month time to get ready? Which for people working full-time jobs, understandably, it will take a lot more time to get it set up, but with the proper team in place, we’ve been able to get things usually set up in a week time at most two

Tony:
Weeks. That is incredible. I’m super impressed by that. For us, usually when we’re launching a new property, if it’s starting from zero, somewhere in that four-ish week range is good for us, but two weeks you guys are crushing it. So Nicole, appreciate you coming back on to the Ricky Podcast to answer these questions. For our audience here and for everyone that’s listening, if you want to get in touch with Nicole, check the, if you’re on YouTube, check the description of the video here. If you’re listening on your favorite podcast app, check the show notes down below the player and you can find all of Nicole’s contact information there.

Ashley:
Thank you everyone for joining us for this week’s rookie reply and we will see you next time.

In late 2022 and early 2023, private equity real estate investors sharply pulled back on funding. They caught on—in some cases, too late—that rising interest rates were going to annihilate deals funded by floating interest debt and drive cap rates higher (pushing prices lower). 

In our own passive real estate investing club at SparkRental, our members (myself included) have become more cautious. When we first started going in on group real estate investments together, we focused on potential returns. Today, when we meet to vet deals together, we focus far more on risk. 

Anecdotally, I’ve also heard a lot of active real estate investors pull back over the last 18 months, and I hear a lot of hemming and hawing and hand-wringing about interest rates. When will the Federal Reserve start cutting rates? How quickly will they fall? How will they impact cap rates?

You’re asking the wrong questions. 

Why Everyone in Real Estate Frets Over Interest Rates

At the risk of stating the obvious, higher interest rates make properties more expensive to buy and own since most buyers (residential and commercial) finance them with debt. 

That puts negative pressure on prices, especially in commercial real estate. Cap rates typically rise in tandem with interest rates, meaning that buyers pay less for the same net operating income (NOI). 

In residential real estate, the sudden leap in interest rates has caused many would-be sellers to sit tight. No one wants to give up their fixed 2.5% interest 30-year mortgage to buy a new home with a 7% rate. So, housing inventory has been extremely tight.

Residential investors want to know when financing will become affordable again, at least compared to the low rates we’ve all grown accustomed to. Commercial investors holding properties want to see lower rates drive cap rates back down so they can sell at a profit, or refinance properties currently losing money to high variable interest loans.

So yes, I get it: Interest rates matter in real estate. 

Why You Should Stop Fixating on Rates

First and foremost, you and I don’t have any control over when and if the Fed cuts interest rates. 

I don’t believe in timing the market. Every time I’ve tried, I’ve lost. The best-informed economists and professional investors get this wrong all the time, so it’s sheer hubris to think you can do it when they can’t. 

Instead, I invest in new real estate projects every single month as a form of dollar-cost averaging. Our Co-Investing Club meets twice a month to discuss passive group investments, and members who want to invest small amounts can do so. 

Is it a harder market to make money in today than it was five years ago? Probably. But two years ago, everyone was euphoric about real estate investments because they performed so well for the previous decade. Every syndicator rushed to show off their sparkling track record. So, investors flooded their money into real estate projects without properly accounting for risk. 

In retrospect, the real estate projects from two years ago are the ones most in trouble today. Superstar investor Warren Buffett’s quote comes to mind: “Be fearful when others are greedy, and be greedy only when others are fearful.” 

Over the last year, investors have felt far more fear. And from the dozens of passive real estate deals I’ve looked at over the last two years, I can tell you firsthand that syndicators are underwriting much more conservatively today than they were two years ago. 

What Investors Should Focus On Right Now

Investors should focus first on risk mitigation in today’s market. 

I don’t know when interest rates will drop again. It could take years. I also don’t know where inflation will go or the economy at large. 

In late 2022, many economists forecast a 100% chance of recession in 2023. That didn’t happen, and now investors seem to assume a 100% chance of a soft landing with no recession. That seems equally presumptuous. 

The good news is that I don’t need to foresee the future. I just need to identify the largest risks facing real estate investments right now—and invest to mitigate them. 

Mitigating interest rate risk

After all that talk about interest rates, how do you invest in real estate to avoid rate-related risks?

First, beware of variable interest debt. Although, to be frank, it’s a lot safer now than it was two years ago. 

Second, beware of bridge loans and other shorter-term debts of two or three years. Don’t assume that interest rates will be lower in three years from now than they are today.

Instead, look for deals with longer-term financing. That could mean deals that come with assumable older debt. 

For example, I invested in a deal a few months ago with a 5.1% fixed interest rate with nine years remaining on the loan. I don’t know if there will be a good time to sell within the next three years, but I’m pretty sure there will be a good time to sell within the next nine. 

Longer-term financing could also mean fixed-interest agency debt. Sure, these often come with prepayment penalties, but I’d rather have the flexibility to hold properties longer, unable to sell without a fee, than be forced to sell or refinance within the next three years. 

Mitigating insurance cost risk

Over the last two years, insurance premiums have skyrocketed, in some cases doubling or even tripling. That’s pinched cash flow and set up some investments that previously generated income to start losing money. 

“Between 2023 and 2024, my insurance premiums climbed more than 30%, which has been a huge strain on my portfolio,” laments Andrew Helling of HellingHomes.com. Higher insurance and labor costs have wreaked such havoc on his rental portfolio that he may pause acquisitions entirely. “I’m considering exclusively wholesaling my leads until we get some clarity on what the Fed will do with interest rates later this year.” 

This brings us back to square one: giving the Fed too much power over your portfolio. 

But suspending all acquisitions is far from your only option. Another way to protect against unpredictable insurance costs is to buy properties that don’t need much insurance. For example, I interviewed Shannon Robnett a few weeks ago about his industrial real estate strategy, and while he does insure the bones of his buildings, his tenants insure their own units. 

Likewise, our Co-Investing Club has invested in mobile home parks. The park does need to maintain a basic insurance policy for any shared infrastructure, but each mobile homeowner insures their own home. The same logic applies to retail and some other types of commercial real estate. 

Residential real estate, including everything from single-family homes to 200-unit apartment complexes, need to carry expensive insurance policies. But that doesn’t mean every type of real estate does. 

Mitigating rising labor cost risk

In many markets, labor costs have risen faster than rents over the past two years. Again, that pinches cash flow and can drive some properties to lose money each year rather than generating it.

“Labor expenses and average rents aren’t rising uniformly across markets, and in some, labor costs have risen faster than rents over the past two years,” observes Soren Godbersen of EquityMultiple. “Both factors contribute to which markets we are targeting in 2024.”

That’s one solution: Analyze the local market rent and labor trajectories before investing. But how else can you mitigate the risk of labor costs outpacing revenue growth?

Invest in properties with little labor required. In particular, look for properties that don’t require much maintenance or management. Examples include self-storage, mobile home parks, and some types of industrial properties. 

For instance, many self-storage facilities can be nearly 100% automated, eliminating management costs. The buildings are simple, with little or no plumbing or HVAC and only the most basic electrical wiring. They need almost no maintenance beyond a new roof every few decades. 

Alternatively, you could come at this problem from the other side: revenue. Our Co-Investing Club recently vetted a deal with a syndicator in a specific niche: buying Low Income Housing Tax Credit (LIHTC) apartment complexes and refilling them with Section 8 tenants. 

The short version: The loophole is that LIHTC restricts how much the tenant can pay in rent but not the total amount of the rent collected by the owner. By renting to Section 8 residents—in which the tenant pays only a portion of the rent—the syndicator can, in this case, double the rents they’re collecting over the next few years. This means they don’t have to worry about expense growth exceeding rent growth. 

My Outlook on 2024 and Beyond

I appreciated Scott Trench’s cautious, even gloomy analysis of real estate’s trajectory in 2024 and J Scott’s upbeat rebuttal.

Scott Trench isn’t wrong about the headwinds and risk factors, some of which we just covered. And J Scott isn’t wrong that plenty of tailwinds could cause real estate to perform well this year. 

My view on all this: You should invest consistently and conservatively. You can’t time the market, but you can analyze the greatest risks in any given market—and protect against them. 

I don’t need a crystal ball. By passively investing a few thousand dollars every month as a member of an investment club, I know the law of averages will protect me in the long run. 

I remember the mood in 2010-2012 in the real estate industry: bleak. No one had glowing things to say about real estate investing. Don’t you wish you could go back and invest in real estate, then? 

Stop assuming you know what will happen. You don’t. Stop worrying about what the Fed will do because you can’t control it. Invest instead to mitigate risk, and you’ll make money in both stormy and sunny markets. 

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The National Association of Realtors (NAR) announced Friday that it finally reached a settlement with homeowner groups that had been embroiled in lawsuits with the association since 2019. The $418 million settlement effectively ends the current NAR broker commission model, which the homeowners’ claimants alleged forced them to pay excessive commission fees. 

If a federal court approves the landmark case’s outcome, as expected, it could give the housing market its biggest shake-up yet. The commission rule changes the NAR has agreed to could restructure the entire process of buying and selling real estate and could also deliver potential home price declines across the country. 

Here are the changes at a glance and what they could mean for investors and agents alike.

The End of the 6% Commission-Sharing Structure

The most sweeping change introduced by the settlement is the elimination of the current NAR commission-sharing structure. 

Here’s how it’s always worked: Real estate agents who are Realtors are required to offer a share of commission with the buyer’s agent in a transaction, if present. Given the NAR’s dominance on agent designations throughout the United States, this effectively created an industry-standard commission, thus violating antitrust laws, as the plaintiffs alleged. 

NAR guidelines clearly state that the commission rate is negotiable and that “commission rates are set by the market.” But in practice, commission rates are always set by listing agents and almost always at a rate of 5% to 6%. For homes selling for $400,000, this can amount to a commission payout of $24,000.

Because the sellers pay the commissions, the key argument is that it inflates the prices of homes to make up for it. Seemingly, now that the settlement has gone through, we could very well see a reduction in home prices.

Ultimately, listing agents will no longer be required to offer commission to buyer agents, which will bring more competition amongst agents as sellers search for the lowest commission offerings.

It’s anyone’s guess how much commission real estate agents will now charge, but some economists think that we will see a reduction of up to 30%.

The End of the MLS Subscription Requirement 

This brings us to the second sweeping change introduced by the ruling: Real estate agents will no longer be required to sign up for their regional Multiple Listing Service (MLS). The MLS itself will no longer include any information about the commission offered on a sale. This change would end the practice of “steering,” where buyer agents select properties that are more expensive and pay a higher commission. In addition, the new rules abolish the requirement that Realtors subscribe to an MLS in order to perform their services.

This doesn’t mean that real estate investors will no longer need to have relationships with local agents. Agents will compile their own databases of homes for sale—which still will be an important resource for investors, and which agents will likely still charge for. But with the element of open competition thrown into the process, it’s also likely that agents will work harder to scout out properties they know buyers and investors will want to buy.  

One question that remains unanswered is how all these new broker-buyer relationships will be regulated, if at all. The NAR settlement will require any MLS-subscribing broker to enter into a written agreement with a buyer so that they “understand exactly what services and value will be provided, and for how much.” We can only speculate whether buyer-broker agreements will become the norm where there is no MLS access involved.

Kevin Sears, NAR president, said in a statement: “NAR exists to serve our members and American consumers, and while the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.” 

These changes, if approved by the federal court, will come into effect in July 2024.

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There are many reasons property values have ballooned over the last decade: favorable demographics, monetary policy (low interest rates), stimulus, and migration patterns, just to name a few.

But one of the most powerful and enduring variables that has pushed up pricing over the last decade is a shortage of housing units. Estimates vary on the size of this shortage, but they generally vary from about 1.5 million to 7 million units. And according to Realtor.com, the shortage is actually getting worse. 

A Look Back

To truly understand the housing shortage, we need to look back to the lead-up to the great financial crisis and its ensuing fallout. 

As seen in the graph, housing starts (new construction projects begun) accelerated in the housing bubble era of 2000-2007, then promptly fell off a cliff. Housing construction did bottom in 2009, but it took until 2020 for construction levels to return to where they were in the “normal” 1990s. 

There are several reasons why this recovery was so slow, but the primary reason is that many construction companies closed up shop when housing prices crashed—and it takes a while for an industry to recover from such an event. 

Of course, construction continued during this recovery, and according to Realtor.com, an estimated 13.4 million units were built from 2012 to 2023. Of those, 9.5 million were single-family homes, and 3.9 million were multifamily units. Although this may sound like a lot of units, this number needs to be considered in the context of rising demand. 

In the housing market, the best way to measure macro-level demand is through a metric called household formation. A household in this context is any independent person or group of people who live on their own. 

So a family living together is a household. A group of unrelated roommates living together is a household. An individual living alone, also a household. Thus, to understand how demand for housing is changing, we need to see how many new households are formed (or dissolved). 

From 2012 to 2023, 17.2 million households were formed. This means that even though 13.4 million housing units were constructed, there was a deficit of nearly 3.8 million units, according to Realtor.com’s research.

If we zoom in to just the last year, we can see that this problem is not improving. In 2023, 1.5 million units were completed, but 1.7 million households formed, growing the deficit by 200,000 units.

Implications of the Trend 

This has big implications for investors and the broader housing market: A housing shortage will provide sustained upward pressure on housing prices. To me, this seems clear, but I want to offer two caveats.  

First, as mentioned, there are many variables that impact the housing market, and the supply of homes is only one of them. I believe supply-side forces will help support housing prices for years (decades?) to come—but that doesn’t mean housing prices cannot fall, nor does it mean they will grow rapidly. There are other forces in the housing market, like affordability or the labor market, that could provide downward pressure and counteract the impact of low supply. 

Secondly, as with all real estate, the impact of this trend will be regional. Some markets will have sufficient supply or even an excess, but most will not. According to Realtor, 73 of the top 100 markets face a deficit, with some high-growth markets in Texas and Florida facing the largest shortage.

So just remember that this trend won’t be felt equally everywhere. For investors, I recommend that you research the relationship between housing construction and household formation in any market that you’re investing in. Understanding supply dynamics is super important.

Once you’ve done that analysis, let me know what you find in the comments below.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.