\n<\/p>\n
As a new investor,\u00a0financing can come with a lot of questions<\/strong>.\u00a0Financing your first property<\/a>\u00a0itself seems like a steep\u00a0learning curve<\/strong>, but once you find a method that works for you, it makes investing a lot easier. Welcome back to this week\u2019s\u00a0Rookie Reply<\/strong>. But, instead of just answering one question, we\u2019ll be going over multiple to get you on the fastest path to investing in real estate. Today, we\u2019re touching on topics like\u00a0how much money<\/strong> you\u2019ll need\u00a0to invest in your first property<\/strong>, how to\u00a0build a lease,\u00a0<\/strong>recommendations for\u00a0financing without a W2,\u00a0<\/strong>and how\u00a0rising interest rates\u00a0<\/strong>affect investors.<\/p>\n Before you invest,\u00a0understanding the market\u00a0<\/strong>you want to invest in is essential. You also have to\u00a0understand the expenses<\/strong>\u00a0that come with your property. Once you know these two things, you\u2019ll have a more accurate estimate of your costs. A perk that comes with investing is that the\u00a0money doesn\u2019t have to be yours.<\/strong>\u00a0Whether you decide to take out a\u00a0conventional mortgage loan<\/a>\u00a0or partner with another investor, you can\u00a0creatively finance your deal\u00a0<\/strong>to have\u00a0less money come out of your pocket!<\/strong><\/p>\n If you want Ashley and Tony to answer a real estate question, you can post in the\u00a0Real Estate Rookie Facebook Group<\/a>! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).<\/p>\n Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rookie, episode 226.<\/p>\n
I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn\u2019t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio. So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, \u201cHey, Tony\u2019s a bankable guy. He doesn\u2019t have the income, but we know the income\u2019s coming, so we feel comfortable giving him that loan.\u201d<\/p>\n
My name is Ashley Kehr and I\u2019m here with my co-host Tony Robinson.<\/p>\n
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And we usually like to kick things off with a little shout out to the folks in the rookie audience that are leaving us some reviews on Apple Podcasts so this week\u2019s review comes from Hillary Rose Huffman. And Hillary says, \u201cAs someone who quit prematurely with no structure or support, I absolutely loved episode 216. I\u2019ve listened to just about every episode BP has ever put out, but as a newbie real estate investor with only 12 flips and one short term rental under my belt, I thoroughly enjoy learning from Real Estate Rookie. Ashley and Tony, thanks for all the time and energy you put into what is now my favorite BiggerPockets podcast.\u201d I love that. I appreciate that Hillary Rose. Thank you so much for giving us some love. And if you haven\u2019t yet, give us an honest rating and review on whatever podcast platform it is that you\u2019re listening to.<\/p>\n
Hillary, thank you so much for that review. You guys, we appreciate it. I appreciate it even more when it is a five star review. If for some reason you don\u2019t think that we deserve five stars, please slide into Tony\u2019s DMs and tell him how he can improve because I could not handle it if you guys tell me. I was actually at the Verizon store today and they gave their spiel of, \u201cSign here. Also, you\u2019re going to get a survey. Please leave a five star review. Anything less than a five star review is me failing so please let me know if I have failed you in any way so that I can make up for it.\u201d And all I could think about was the podcast when we read out these reviews and I expect you guys to leave a five star review.<\/p>\n
There you go. Cracking the whip. Five stars only.<\/p>\n
So Tony \u2026 As you guys are listening to this, BiggerPockets conference has already happened, but Tony and I are getting ready. We head off to BP Con in just four or five days here.<\/p>\n
Four days. Yeah.<\/p>\n
Yeah.<\/p>\n
It\u2019s super exciting. I think this is honestly going to be the biggest BP Con ever. They actually sold out of tickets. They literally couldn\u2019t fit any more people into this venue. So I think we\u2019re going to have 2,000 investors all getting together for three days in beautiful Southern California so I\u2019m excited. Ash and I are giving a joint presentation together on partnerships, so that\u2019s going to be fun. We\u2019re also moderating a panel on-<\/p>\n
Rookie investors. Yeah. Rookie investors.<\/p>\n
Rookie investors. Yeah. So it\u2019s going to be a fun weekend for sure.<\/p>\n
Yeah. I\u2019m really excited to network and to meet with a lot of you guys. And for everyone that we did meet at BP Con, it was wonderful to meet you guys.<\/p>\n
We appreciate you guys. We love you guys. Cheers to next year.<\/p>\n
Yeah. So headed down this weekend and going to spend quite a while there. And yeah, like you said, there\u2019s going to be \u2026 They sold over 2,000 tickets. And also with vendors and the BP staff, it\u2019s going to be close to 3,000 people that are actually at the event. So super exciting. And it\u2019s awesome to see it grow so much to the conference because I think the first conference they had had a little under a thousand people maybe in 2019. There was another conference they had maybe 2015 or \u201916 or something, and then it was a while before they had another one. But yeah. So if you guys did not go to this year\u2019s BP Con, make sure when they announce it, you guys get your tickets because it sold out so fast and there are people that were scrambling for tickets. So you need a side hustle idea, do what I\u2019m doing. Buy a bulk load of tickets, and then sell them to your friends for an upcharge when they procrastinate. I\u2019m in three group texts with 20 people in each, all scrambling trying to find tickets. And I heard in the BP forums, people who can\u2019t go are transferring them and things like that, but just wild.<\/p>\n
Yeah, we need a Ticketmaster exchange for BP Con.<\/p>\n
Yeah. Okay. So you guys, we have a bit of a change with our rookie reply. Tony and I have felt that the five to 10 minutes to just go over one question wasn\u2019t enough because we love your guys\u2019 questions and we wanted to tackle more questions. So we are going to start adding on some more questions to the rookie reply so it\u2019s going to be a longer episode. So longer time that you have to listen to our boring banter, hear my laugh, and Tony\u2019s monotone voice.<\/p>\n
All the things you guys love about us.<\/p>\n
So this week, in this episode, we are going to be doing three questions.<\/p>\n
Yeah. The first question is going to be how to determine how much cash you need for your first investment. The second one is going to be some sneaky ways to get a loan when you may not otherwise be able to get approved. And the third question is about ways to protect yourself as a landlord when you have tenants staying at your property.<\/p>\n
Yeah. All great questions. And we have lots of time to actually go into detail on these questions. A lease agreement, we literally break down as much information as we can about a lease agreement and what should be included and how you can get a copy of a lease agreement. So make sure you guys listen to the full episode because at the end Tony and I give a little bonus content on boring banter over the interest rates in today\u2019s market. Let\u2019s get to question number one.
The first question we have today is from Naeem Malik. And the question is, how much money should you have on hand to invest in your first property? What a great question, but also a loaded question. And the answer we have to give you, it depends. I would start by looking at, in the market that you\u2019re going to invest in, how much does a house cost? What are the expenses going to be? Somebody who\u2019s investing in my area, you could have $50,000 saved up and that could pretty much be able to pay a house off in cash if something were to happen. If you\u2019re in a market like Tony is in Joshua Tree, $50,000 may pay a year\u2019s of expenses maybe. I\u2019m not sure. So I think it really depends on the market that you are investing in and what the range of expenses you are going to have for the property, such as your mortgage payment, any utilities you\u2019re paying, your property taxes, your insurance.
So I think a good rule of thumb is having three to six months reserves after you\u2019ve purchased the property still on hand. So that means you have enough cash to put down your down payment, you have enough to pay closing costs. If you are doing this as a no money down deal and you are not putting any of your own money in, that\u2019s awesome. That\u2019s great. You don\u2019t need to save for that down payment and closing costs. But when you close on that property, no matter how you purchase it, I recommend having three to six months of reserves. For the reserves, how I calculate them is your principal and interest payment for your mortgage, your insurance on the property, and then also your property taxes for the property. And I encourage you to go six months instead of just three months. So that would mean you could cover your property for six months if the property was vacant or your flip wasn\u2019t selling, things like that.<\/p>\n
Yeah. You hit on a lot of great points, Ashley, already. And I do think it is a loaded question. We probably need some more information from Naeem to give a really thorough response. But yeah, your point on reserves and having that set aside when you close is important. The fact that the market that they\u2019re operating in makes a big difference. But I think also that the type of investing that they\u2019re doing makes a big difference as well. If you\u2019re house hacking, you can get into a property for three and a half percent down. If you\u2019re flipping, maybe you\u2019re going to need 20% of your total project costs to get into a flip. So depending on what type of real estate investing you\u2019re doing, the startup costs are going to vary. And even within those niches, the way that you do it can make a big difference. Obviously we do Airbnb investing and we buy all of our properties, but I know other investors that do rental arbitrage and they\u2019re able to get a short term rental for a fraction of the cost.
So I think that the type of investment that you\u2019re going to do will make a big difference in how much money you\u2019ll need to put up, Naeem. But I think something that\u2019s important for us to talk about is that real estate investing definitely needs capital to get started, but it doesn\u2019t necessarily have to be your capital, Naeem. So say that you have a partner who maybe is bringing the majority or all of the money to the closing table and you\u2019re just going to do the work, and that\u2019s how you earn your keep in that deal. Then maybe you don\u2019t need any money and maybe that person\u2019s covering all of the acquisition costs and they have the reserves cost so now you don\u2019t need to worry about that. So your strategy and the kind of partners you bring in, all of those will play a factor in how much money you should have.<\/p>\n
Tony, let\u2019s break down an example. So let\u2019s say that somebody is looking in a market where the average cost of the home is $100,000. So if they\u2019re going to go and purchase that, how do they find out what those expenses are going to be before they actually go and start pursuing purchasing a property? I think to start off-<\/p>\n
[inaudible 00:10:13].<\/p>\n
Yeah. With the principal and interest payment, the mortgage payment. Just Google amortization calculator. Mortgage calculator. There\u2019s also an app that I use. I think it\u2019s just called calculators. If you search that. And it has all these different mortgage calculators. Got calculators for different types of loans included in that. So that\u2019s a quick, easy way to calculate what your mortgage payment would be for a property. As far as knowing what the interest rate is right now, you can also Google that, or if you are working for the bank already, just get an idea. They won\u2019t be able to tell you exactly what your interest rate is going to be, but it can give you an idea. Tony, have you gotten any loans lately, like a 30 year fixed rate?<\/p>\n
Yeah. We\u2019re getting quoted high sixes, low sevens on some of the stuff that we\u2019re buying right now.<\/p>\n
Yeah. And then, as Tony had mentioned too, if it\u2019s going to be your primary residence or your house hacking three and a half percent down, your interest rate will probably be a little bit lower than that right now, just because it is your primary. But you guys can go ahead and use that as a range, that six to 7% and see what the outcome is. What is your monthly payment amortized over 30 years and that will give you your payment. So you know okay, I need to have $532 a month to make the mortgage payment, so I want to save that times six. Then we can look at the cost of the property insurance. I think property insurance is really hard to estimate when purchasing your first property and you have no idea what that could cost. Once you start purchasing properties, you get a better idea of it.
But there\u2019s Policygenius, which has been an ad sponsor for us before, and I\u2019ve used them. Actually, you can go on and you can input information about a property and they can give you a general estimate too of what your insurance rate would be or talk to another investor or even another homeowner in that area. It\u2019s not going to be the same because a homeowner is covering the contents in the building, where as the landlord, you\u2019re just covering the building itself, the structure, and then a tenant would come in and do their own insurance on that. Or if you\u2019re rehabbing the property, if you\u2019re doing it as a flip, your insurance may be way more because the property is considered vacant and it\u2019s under construction. More of a risk. So if you work with an insurance agent right now who does your home and auto, give them a call, send them an email and just say, \u201cHey, this is what I\u2019m looking at, this type of property. Have you written insurance on any type of property like this in our area where you could give me a general idea of what you think it would be?\u201d Or maybe they\u2019ll even just quote it out real quick to you for a couple companies and just get a general estimate.
And then for property taxes, you can search those online as to what the property taxes are for properties like that. You\u2019ll want to look at what the assessed value is of the property. So if you\u2019re looking at a property that is listed at 100,000 and it says the assessed value is 20,000 because maybe somebody went in, fixed it all up and there hasn\u2019t been a reassessment yet by the town. So when that reassessment does come up, most likely that assessed value is going to increase and your property taxes will increase also too. So I always like to overestimate that amount. Then when you take the property taxes \u2026 So in my area we have town and county taxes. If you live in the town in a village, we call it, that\u2019s another set of taxes and then school taxes that come around for your property.<\/p>\n
Yeah. Honestly, I don\u2019t even know what\u2019s built into our taxes. We just pay them. But I like your point about trying to add some buffer because we have made that mistake in the past. And what we\u2019ll do now is a lot of the counties by us, or at least where we\u2019re investing, sometimes you can call them. The cities or the counties. And they\u2019ll tell you, \u201cHey, here\u2019s the formula that you need to use to understand what your new tax amount will be.\u201d So they\u2019ll tell you at this purchase price, multiply by this number, add this percentage, or whatever it is, and you can get a pretty fairly close estimate of what your new taxes will be. So we\u2019ve tried to do that moving forward.<\/p>\n
That\u2019s a great tip there. I think in our county too, they have on the county website is an actual Excel spreadsheet where it gives you an example if each town, what the tax rate is. So if you bought a $100,000 house in each of those towns, what your property taxes would end up being. And it\u2019s super cool because you can see the large difference in some of the towns as to the property taxes where, oh wow, this is the great school district, this is the town everyone wants to be in. But if I buy right on the border, the next town over is actually the cheapest in property taxes. So being able to look at that too is definitely an advantage.
So property taxes, insurance, and then your mortgage and interest payment. Figure out what those are going to be monthly. So your insurance premium, you\u2019ll probably get a quote for a year. Your property taxes. Add up the two to three bills that you get per the year, and what\u2019s that total? And then just divide them by 12, and that would be the monthly amount that you\u2019d be paying. And then you want to times set by six to save up that six month reserves before you go and invest. And I think Tony, you gave great points about if you don\u2019t have that and that\u2019s going to take you a long time, taking on that money partner or different ways to get creative.<\/p>\n
Ashley, you mentioned a lot of good things that folks should be including when they\u2019re trying to estimate what those costs are. And I know for me, when I was first getting started, I would forget things. Oh shoot, I forgot about this, or, oh shoot, I forgot about that. And just a quick plug for the BP calculator. So if you go to biggerpockets.com\/calculators, BiggerPockets has these resources that have already built out all of the things that you should be including when you\u2019re analyzing a deal. So that way if you, \u201cOh, I forgot about insurance.\u201d, insurance is a line item on that calculator. So just one plug for the BP calculators.
And I guess the last thing I\u2019ll add is that you\u2019ll probably get it wrong. You won\u2019t be perfect the first couple of times that you do this. When we first started trying to figure out how much money we needed for our Airbnbs, we were way off. The deal that we were doing together right? It was five grand is what we thought we were going to spend. Now we budget $30,000, right?<\/p>\n
Oh my god. That\u2019s a big difference. Yeah.<\/p>\n
It\u2019s a tremendous difference. Tremendous difference. And obviously we\u2019ve changed what we do and we\u2019ve added some more stuff to the property, but the first couple of times you do this, you\u2019re probably going to get it wrong. So give yourself some cushion. Whatever number you think, maybe add another 20, 30% on top of that, just that way you\u2019re not shocked if you end up going over. Because your first time doing anything, you\u2019re not going to do it perfectly so the same thing comes when it comes to trying to understand how much money you need for that first investment.<\/p>\n
Yeah, that\u2019s a great point. Even today, my first property that I purchased, I forgot to add in snowplowing. Come on, it\u2019s Buffalo. You need to cover snow plowing. Well thank you so much, Naeem, for that question and let\u2019s move on to another one.<\/p>\n
All right. Rolling in into question number two and this question comes from Zach Rubin. So Zach\u2019s question is, \u201cDoes anyone have recommendations for getting financing without a W2 job? I have a W2 starting this summer, and I have heard I can still get traditional financing just by presenting my job offer letter. I would love to hear if anyone has experience with this.\u201d Well, Zach, you came to the right place because this exact same thing happened to me when I got my very first investment property. I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn\u2019t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio.
So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, \u201cHey, Tony\u2019s a bankable guy. He just doesn\u2019t have the income, but we know the income\u2019s coming, so we feel comfortable giving him that loan.\u201d Now, I will say that it wasn\u2019t that I didn\u2019t have a W2. I had a W2, my income just wasn\u2019t there enough. So I can\u2019t say for sure how banks will view someone that doesn\u2019t have a W2 at all. But if you can maybe show some way of proving that you have consistent income or other things like that, it might be beneficial.
And then the last thing I\u2019ll say, Zach, is that it might be beneficial to try and go with a smaller local regional bank credit union. They tend to have a little bit more flexibility than a Bank of America or Wells Fargo or something like that. The bank I was working with was a very small credit union in the city that had their branches in the city that I was investing in. So they knew the area, they knew the properties, they had a little bit more flexibility in terms of what they had to offer. So that was my experience. Ash, I don\u2019t know. What have you seen on your side?<\/p>\n
Yeah. I think that\u2019s a great tip going with a small local bank. And we really don\u2019t talk about this a lot, but also mortgage brokers. So where you actually come to them with your property, what you want to do, and then they actually shop it out for you as to what loan product would be best for you, what bank to go with for the loan. So finding a mortgage broker too and explaining, I don\u2019t have a job now, but here\u2019s my job letter and then them going out and trying to find a bank that will finance that deal. That\u2019s what my sister did. I think it was 2019 she bought her duplex. Maybe even 2018. And she had just graduated college. She didn\u2019t have a job yet, but she had a letter stating that she had a job accepted and it wouldn\u2019t start for I think three more months and it was actually just part-time. But it did show that she would be making enough income if she worked those part-time hours to qualify for the loan. And they did accept that even though she hadn\u2019t actually started the job yet.
And I do remember the mortgage company wanting to do some verification just like they were if you were employed. She showed her job offer letter, but also they contacted the HR department of that job too and asked for a verification. Something signed from them that yes, she was intending to start working there and things like that. So I don\u2019t know for sure today if you can do that, but it definitely has happened. But the mortgage industry is always changing. The different options that were available are no longer available. But I think the best way is to talk to small local banks and then also go into a mortgage broker who can help shop those out for you.
I think the one my sister used worked with the company First Priority Mortgage, I think. So maybe you could give them a try. I have used them for one loan before too, and it was a nice easy process to go about that. Also, another thing you could do if they won\u2019t accept the letter is think about getting someone to co-sign for you too. And then after you have purchased the property and you do start that job, you could go and request for the person to be removed off the loan and no longer need the co-signer.<\/p>\n
That\u2019s a great point on the co-sign. Actually, it makes me think of maybe another strategy. So if you were to purchase maybe a small multi-family property where you lived in one of the units and say you rented out the other two or three, assuming that there\u2019s stable rent history at that property, a lot of times you can use the projected income from that property to help offset whatever debt to income limitations that you\u2019re having. So say that you\u2019re short by, I don\u2019t know, 200 bucks to be able to clear this mortgage and you go out and you buy a property that has three additional units and those bring in a net profit of $800 a month. Now you\u2019ve got a difference there to offset your own debt to income limitations. So there\u2019s been a lot of folks that I\u2019ve met who maybe wouldn\u2019t have qualified for a traditional single family house, but lo and behold, they qualify for a small multi-family because of that additional rental revenue.<\/p>\n
Yeah. I think using it as a house hack is definitely \u2026 You\u2019re going to be able to get that rental income to show as proven. That was my sister too is that she showed that the other unit was currently rented out at this X amount and she just showed the lease agreement that was already in place. And having that extra income count towards it was great. I have heard people talk about sometimes where they\u2019ll only take a percentage of the rental income though. They won\u2019t calculate the full amount. So do ask the lenders about that too, if they do take into account the full amount or if they only take in a percentage of that. And I don\u2019t know why that is done. Maybe to account for some vacancy or things like that in case there is a period of time where that rental income isn\u2019t coming out. But yeah, that\u2019s something to ask about too is if they take the full 100% or only a percentage of it too.<\/p>\n
Cool. I think that\u2019s everything I got for that one.<\/p>\n
Yeah. Well thank you so much for asking that question, Zach, and let\u2019s go on to our third one. Question number three is from Travis Bokhold and this is from the Real Estate Rookie Facebook group. So if you guys are not a member, make sure you check that out. And Travis\u2019 question is, \u201cHey, how do you guys build leases?\u201d So this question I love because we have an amazing resource for you guys. If you are a BiggerPockets Pro member, you actually have access to full lease agreements plus addendums and other supporting documents that are state specific. So these were actually created by attorneys in each state, and they\u2019re available on biggerpockets.com where you can go and you can actually download it and it becomes \u2026 You can download it as a PDF and fill in the blanks, or you can download it as a Word doc and change it and add things to it too.
What I do advise is if you are going to use these documents, or maybe you\u2019re going to create your own, is that if you do make changes to these ones that are provided to you, that you do have your own attorney review them. But do you want to just break down some of the options that are in a lease agreement? Like things that you should have in there?<\/p>\n
Yeah. I\u2019ve actually never made my own lease agreement. So all of my long-term rentals I had my property manager create for me. And I\u2019m sure I\u2019ll probably look at them at some point, but honestly don\u2019t even remember what he had in there Ashley. So you might be a better resource for folks in this one than I am.<\/p>\n
Okay. So as far as doing a standard residential lease agreement, you want to put in the owner\u2019s information. So who owns the property? The landlord. A mailing address for them, and then also the name of the tenant and contact information for them. Then you want to put in the terms of the lease agreement. So when does the lease start? When does the lease end? You want to put in the amount of the rent that is going to be included in there along with any other fees. And also how the rent is paid I think is very important too. So if you just put in there the rent is $1,000 per month, you want to specify how that rent is to be paid so that tenant isn\u2019t calling you like, \u201cHey, I put the thousand dollars cash in an envelope in my mailbox today. Come get it.\u201d So I think being specific about how they are to pay. And the best place to do that is to set up some kind of online payment system where it\u2019s no longer considered mailbox money. It\u2019s basically direct deposit money where it\u2019s direct deposited into your account. Then you don\u2019t have to worry about getting it from the mail, depositing it, and your tenant just pays right online.
There\u2019s lots of free or really cheap software, property management software or rent collection software that you can use. And I would put that right into your lease. So BiggerPockets actually recently partnered with RentRedi, so if you\u2019re a pro member, I think you get it for a dollar a year, or it might even be free. But with RentRedi, you can go ahead and you can have them make their payments online and set that up and it just goes directly into your bank account each month, which makes it pretty easy. So specifying that in the lease. And then you can also put a clause in there, or as changes are made to be determined and notified by landlord. Something in there in case you do switch software that it\u2019s not just you\u2019re stuck with RentRedi, but saying the software provided by the landlord through the tenant portal. Something like that.
So after that, along with the rent, when we state the additional fees or charges in there. So this could be for a pet fee, garage fee. You want to state in there what those fees are for. So if they are renting a garage, what the garage number is. Do they have a remote? Do they have to return the remote? Things like that I would include in. So just talk about what the additional fees are. The pet fees. So if they decide they no longer want a pet, they have to notify you in writing, letting you know they no longer have the pet on the property. Or if they want to add on an additional pet, they have to notify you and the rent would increase an additional amount.
And then the security deposit. Also super important to include in there. If you are including a security deposit, put it as a certain amount, what that\u2019s going to be. In New York State, the law is that you can only have one month\u2019s rent for your security deposit. So whatever your monthly rent is, you cannot charge over and above that for the security deposit. So that had changed a couple years ago where someone had bad credit, a landlord would say, \u201cYou know what, I\u2019ll go ahead and rent to you, but you\u2019re going to put down a $2,000 deposit even though your rent is only $575 a month.\u201d Then you\u2019re going to put into the lease agreement how the security deposit is held and how the tenant can receive the security deposit back.
Next we go through utilities. Who\u2019s responsible for what utilities? Who\u2019s paying the electric? who\u2019s paying the gas? Specify this as much as possible because you don\u2019t want to get into a situation where all of a sudden you are paying a utility that you didn\u2019t account for because you forgot to include it in your lease that it\u2019s their responsibility. Things like common areas, lawn care, snow plowing, things like that. How those are taken care of too. So if there is a common area, make sure and put note in there that it will be cleaned by somebody or it\u2019s actually the tenant\u2019s responsibility to take care of it and you can\u2019t leave any debris or garbage in the common areas. And then just if you\u2019re including any appliances, what those appliances are. Maybe what\u2019s the maintenance protocol for appliances if they need to be fixed. I\u2019ve seen it be a lot more common that appliances are not included unless you\u2019re in a super high end or luxury area that landlords don\u2019t want to deal with having to fix or replace appliances. So that\u2019s up to you as the landlord if you want to include them. Then after that you got \u2026 That\u2019s a lot of-<\/p>\n
The meaty stuff.<\/p>\n
The meaty stuff. Yeah, that\u2019s the word I was thinking of. Then after that, go through general rules. What happens if they don\u2019t pay? What\u2019s the eviction process? The use of the premises. So if they\u2019re renting this house, they can\u2019t operate a auto repair shop out of the attached garage, things like that. And then go through the lease. But take a look at the BiggerPockets leases or even just Google a lease to see the meat of it. But don\u2019t recreate the wheel. Find a lease and start from there. Don\u2019t start typing out a lease from scratch. So the BiggerPockets ones, they\u2019re about 10, 11 pages long. You don\u2019t want to waste your time going through and sitting down and writing out this full lease agreement. Start from somewhere else and then read the whole way through and highlight it, mark it up because there will be stuff that\u2019s not applicable to your property or maybe things you know want to add in there that you\u2019ve heard other landlords talk about or you know is maybe market specific to you too.<\/p>\n
Yeah. You named so many great things, Ashley. I love that. I love that breakdown. And as you were talking a few other things came to mind for me as well. So renter\u2019s insurance. Do you require your tenants to have renter\u2019s insurance?<\/p>\n
Yeah. My property management company does. Yeah.<\/p>\n
Yeah. I know that that was something we required for ours as well. What\u2019s the process for non-renewal? So what does a tenant have to do? Or if they do these XYZ things, what are those things that would allow you to not renew their lease? And then you mentioned this already, but the eviction process. I worked for a property management company after college briefly, and I think their process was you got your notice of late payment on the fifth and then the evictions were always filed on the 15th. So it was a pretty quick process in California to try and get that ball rolling.
And then last thing, me just being an Airbnb guy, is sub-leasing. Are you okay if this tenant takes this unit they\u2019ve rented from you and then turns around and rents that unit out to somebody else making some additional profit? So just some additional things to think about. But just like we talked about in the other question about using the calculator to make sure you\u2019re not forgetting anything when you\u2019re analyzing a deal, use the lease to make sure you\u2019re not for forgetting anything when you\u2019re putting your own lease together because BiggerPockets has already done the work of making it easier for you guys.<\/p>\n
Yeah. That\u2019s such a great point. If someone was to tell me to rattle off all the things, there\u2019s no way I would remember everything that you needed.<\/p>\n
Everything.<\/p>\n
But it\u2019s a lease agreement. You don\u2019t have to. Don\u2019t waste your brain space with that information. There\u2019s way better things that you could be memorizing than stuff that\u2019s literally put together for you. And even if you\u2019re not a pro member, using the BiggerPockets ones, there\u2019s tons of other lease agreements out there that you can look at and use and use it as a starting point at least. And then just addendums that go with your lease too. These are easier to build out because if you\u2019re charging them a pet fee, you may have a separate addendum stating information about the pet that they have in there. So the dog that they\u2019re paying $25 an extra a month for, his name is this, type of breed and he has his rabies vaccination. Things like that. And the tenant signs it along with the rules of owning a dog. They\u2019ll clean up after the dog. Things like that. They\u2019re responsible for wear and tear caused by the dog. Things like that.
Okay. Well also if you guys want to learn more about being a landlord and leases, I do host a landlord bootcamp through BiggerPockets. You can go to biggerpockets.com\/classes and we currently have the bootcamp going on, but you can check back there for more information when a new class is released.
Tony and I are going to give you guys a little bonus content today. And this is just because I\u2019ve wanted to talk to Tony about this and pick his brain and just see what\u2019s going on. So as you guys know \u2026 You\u2019ve probably all been watching the news and watching the market that interest rates have significantly increased, especially in the last nine months or so. Tony, how is this affecting your investing strategy? I hosted my bootcamp call last night for rookie investors and we were overloaded with questions about how do you still find a deal with high interest rates? I think the answer I came up with is, well you have to make lower offers. You have to get that purchase price down to make it worthwhile. But I\u2019m very curious to hear how that has changed your investing strategy or maybe it hasn\u2019t.<\/p>\n
Yeah. No. I think you hit the nail on the head, Ashley, around making sure that the deals still make sense. So I think everyone automatically assumes that just because interest rates are high that it means you should stop buying real estate. And I don\u2019t think that\u2019s true at all. But I do think it means that maybe deals that you were buying six months to nine months or definitely 12 months ago that weren\u2019t as meaty, you probably are going to have to skip out on those ones moving forward. But for me, I\u2019m indifferent to the actual interest rate. What\u2019s more important to me is the projected cash on cash return. And if I\u2019m able to hit my cash on cash return targets at a 6% interest rate, then that\u2019s a good sign because it means if in the future I\u2019m able to refinance and get that even lower now I\u2019ve got a smoking hot deal.
So for us, the things that we\u2019ve changed honestly isn\u2019t a whole heck of a lot. I think the only thing that we\u2019re probably a little bit more flexible on is the cash on cash return that we\u2019re targeting. It was pretty crazy when we first started.<\/p>\n
Infinite.<\/p>\n
Yeah. It was pretty crazy when we first started. But I still think that, at least in the space that we\u2019re in, going out and getting a 30% cash on cash return for your money is still very, very, very doable. So we\u2019re opening ourselves up to some of those deals. And then we\u2019re also looking to markets that maybe we weren\u2019t before. I think a lot of maybe the primary markets that everyone knows and everyone loves and everyone talks about, those are probably going to become a little bit more competitive, a little bit more difficult to find good deals. So now we\u2019re starting to look at more secondary and tertiary markets that maybe offer less money on the revenue side, but the cash on cash returns are still super strong because the prices haven\u2019t been pushed up as much as some of these other more popular markets.
So yeah. Market selection and I think just a little bit more discipline in our underwriting is probably the biggest changes that we\u2019ve made. But just to give you guys some concepts before I pass it off. We\u2019re closing on deals now. I think I mentioned this already. High sixes, low sevens. Our best deal from an interest rate perspective is at 2.6. So that\u2019s an astronomical difference in a really, really short period of time. But we were buying a 2.6, we\u2019re still buying at six and we\u2019re going to continue to buy as long as these deals make sense for us.<\/p>\n
Well, I remember even too when interest rates were super low and people would say, \u201cWell, why use hard money? Oh my gosh, you\u2019re paying 8% for hard money?\u201d And it\u2019s like, well the deal still works. It works in paying that 8% to get into the deal, then rehab it, go refinance. And the same applies right now. The deal can still work if the interest rate is that percentage. And yeah, it stinks that if you would\u2019ve done this a year ago, you could\u2019ve gotten that. But also if you look back, people who were buying last year were looking back like, \u201cUgh, if I would\u2019ve bought this property three years ago, it was so much cheaper.\u201d So people were doing the same thing with housing prices last year as we\u2019re doing now with interest rates.<\/p>\n
I was writing that down. I literally wrote that down right now.<\/p>\n
So it\u2019s just goes to show there\u2019s never any \u2026 Okay, yeah, maybe the perfect time to time the market was last December, January, maybe even a little into February where if you were selling a property that was a perfect time to sell for that high purchase price from a seller. Don\u2019t try and time the market. Don\u2019t wait for a perfect opportunity to come up because getting that first property done, that\u2019s what\u2019s going to propel you to find those better and better deals. And we talked about that a little bit in one of the questions today is that you\u2019re going to make mistakes so you might as well make mistakes on these okay deals than on the perfect home run deals that you\u2019re going to get later on as you build up experience and knowledge. So yeah, thanks for sharing that, Tony. Super interesting to hear.
We had a situation where badly timing the market, I guess because I don\u2019t try and time the market. I just buy when it\u2019s a good deal. And so we got a property under contract in June. So interest rates had started to come up a little bit. The market was slowing down a little bit. But we still haven\u2019t closed on that property because, hello, New York State. And we\u2019re expecting to close within the next two weeks and the interest rate that we\u2019re getting now compared to June is going to be a lot higher. We\u2019re using hard money, so we didn\u2019t lock in a rate with a bank for a 30 year fixed rate loan, but that does change our numbers significantly with the different interest rate that we are now closing on the deal. Luckily it still makes sense and still works very well because I do run my numbers so conservative.
But I was talking to another investor at an event and they put in an offer two months ago and they\u2019re in their due diligence period and the interest rate has changed so much that they have to \u2026 They went to the sellers and said, \u201cYou know what? We need to talk about this because I\u2019m not going to be able to get that interest rate I was two months ago.\u201d And the seller said, \u201cNope. We\u2019re not even going to talk to you. Your due diligence period is up. Your down payment is going hard. You can back out, take your down payment or can we continue on.\u201d And I actually don\u2019t know what he ended up deciding on doing. But I think that\u2019s going to be more and more common coming up.
People that got properties under contract doing their due diligence stuff and then coming time and the in interest rate has increased that it completely changes their numbers. This was a really big deal and it would make a $3 million difference a year in the interest rate increasing. So that\u2019s a huge amount of money to change the numbers on a deal and the sellers wouldn\u2019t even talk to him. So the guy said that if they were to go and sell the property at the cap rate they got it under contract, they were going to go sell to somebody else, it would be $40 million less they would be able to sell it for because of this increase in interest rates. So I\u2019m interested to talk to them at BP Con and find out what actually ended up happening with this deal.<\/p>\n
How\u2019s things ended up.<\/p>\n
Yeah.<\/p>\n
I had one other thing to add, but I got so blown away shocked by the $3 million that I can\u2019t even remember what it was so I don\u2019t know. I think we said enough. That was all good stuff.<\/p>\n
Yeah. Well thank you guys so much for listening to this week\u2019s rookie reply. I\u2019m Ashley, @wealthfromrentals, and he\u2019s Tony, @tonyjrobinson, and we will see you guys on Wednesday with a guest.
(singing)<\/p>\n