\n
Ashley:
This is Real Estate Rookie episode 270.<\/p>\n
Tony:
So, there definitely are I think a lot of positives and the disadvantages. I would oppose that question to the person that\u2019s doing the arbitrage or asking to do the arbitrage and see what their responses are. Right, if you bring up the concerns about maintenance and repairs and they\u2019re just kind of like stumbling, they don\u2019t have a good response for you, then don\u2019t work with them. If you bring your concerns around liability and what they\u2019re doing to minimize that or mitigate that risk, then don\u2019t work with them. So pose your questions to that person, see what their responses are, and if you feel confident with what they\u2019re saying, I think it\u2019s a win-win for both of you guys.<\/p>\n
Ashley:
My name is Ashley Kehr and I\u2019m here with my co-host, Tony Robinson.<\/p>\n
Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, I want to shout out someone by the username of Lukester8891. Lukester left to say five star review on Apple Podcast that says, it\u2019s an encouraging podcast. \u201cTony and Ashley\u2019s podcast is extremely informative and encouraging. Thank you for creating a space to give people like me the knowledge and extra nudge to feel confident about investing in real estate.\u201d Luke, we appreciate you and for all of our Rookies that are listening, if you have not yet taken the two minutes and 27 seconds it takes to log into Apple Podcast and leave us a five star review, please do us a huge favor and do that.
The more reviews we get, more folks we can reach, more folks we can help, which is what we love doing here at the Real Estate Rookie. And if you\u2019re not yet following me and Ashley on Instagram, do yourself a favor and do that also. I\u2019m at @tonyjrobinson, she\u2019s @wealthfromrentals, we\u2019re always posting pretty much nonstop about all things real estate investing. And you could see some fun stuff from my wife, you get to see some fun stuff from Ashley and her kids. And you get to get a glimpse into the world of your two favorite podcast hosts.<\/p>\n
Ashley:
Yeah, I actually had someone comment on one of my Instagram Reels today, and I just had this duplex that was trash. The upstairs and downstairs people were evicted two weeks apart and so, the whole property needed to be redone and I have these great contractors, they redid it and three weeks for me, turned the whole place around. It\u2019s beautiful. So I\u2019ve been using a lot of content from it and the two contractors that did it, I\u2019ll text them and be like, \u201cOkay, who wants to give you the most money? I\u2019ll add you as a collaborator on this\u201d or whatever. And it\u2019s turned into a joke because they\u2019ve been trying to grow their Instagram with showcasing what they do at properties and everything and it\u2019s been great. So I did I think three Reels just off this one property so far in the last week maybe.
And I had someone comment and say, \u201cI follow a lot of investors and it seems like you have a lot of units that are trashed and destroyed by people who are evicted. I\u2019m just really curious, do you highlight that or do you just not screw good or what?\u201d And I really went back through my Instagram and I looked, and there\u2019s two properties, so three units that were trashed and had to be completely redone within this past year. And one was another investor that I do asset management for and not mine. And then there\u2019s the rehab projects I do. We bought a hoarder house this year and we did a bunch of Reels on that, but it was just like all my Reels are just the bad stuff.<\/p>\n
Tony:
Just beat up.<\/p>\n
Ashley:
There\u2019s no Reels of, this is how nice this tenant left this apartment and the next day it\u2019s rented to someone else. And so, it really made me think of, man, maybe I should just show some of the good, not just all the bad. But I honestly responded, I\u2019m like, \u201cThis is what people are entertained by.\u201d So I think I am just posting the bad because here I am crying, but at least people are being entertained because I have to spend $20,000 on a rehab. Might as well make a $100 off of views on a Reel to pay for the rehab.<\/p>\n
Tony:
For whatever reason, I think people just naturally gravitate towards the bad stories also. Like me and Rob, so the co-host for the Real Estate Podcast, we were chatting about YouTube stuff and we were saying the videos that tend to do the best are the ones that have flames in the thumbnails. It\u2019s like if it\u2019s my face and there\u2019s flames around me or Rob\u2019s face and there\u2019s flames around him, those are the videos that people want to watch the most because they just think something bad is going to happen. But if I talk about a video where it\u2019s like, \u201cHey, here\u2019s a really effective strategy to be a great host on Airbnb,\u201d and I\u2019m smiling, no one watches. It\u2019s the weirdest thing. So I don\u2019t know, it is what it is. Well, we had a few good questions lined up for today. We talk a little bit about Airbnb arbitrage at the end.
So if you\u2019re not familiar with that strategy, we break down what that is and how it\u2019s beneficial for both the owner, the landlord, and the person doing the arbitrage, as well as some disadvantages you might want to look out for. We spend a little bit of time talking about HELOCs and when it is a good idea to use a HELOC for investment purposes and when it isn\u2019t. And some of the things you should look out for when you\u2019re pulling one of those lines of credit. We talk about turnkey properties and if in today\u2019s climate, does this still make sense to use turnkey services? And if you do, what are the reasons it does make sense? We also talk a little bit about protecting yourself from liability. So we talk about umbrella policies and insurance, and then we also talk about CPAs and tax strategy. So if you want to save money on your real estate investments, make sure you listen all the way through because we\u2019ve got some good topics coming your way.
All right guys, so let\u2019s jump into the first question here. This one comes from William Craft and he posted this in the Real Estate Rookie Facebook Group. And Williams question is, \u201cI have just one rental property that is in my name and the rental agreement as also in my name. Do I need to hire a CPA or can I file normally? Thanks.\u201d I just want to start by sharing one of the biggest mistakes that I made in my real estate business and that was waiting too long to hire a CPA. William, if your goal is to continue to build your portfolio and hopefully at one day have a sizable number of properties, I think the earlier you can invest into good tax strategy help, the better you will be.
Because a big part of real estate investing is not just the cashflow that you produce, but it\u2019s all of the tax benefits that come along with being a real estate investor. And so, often if you don\u2019t have the right advice from a CPA, sometimes you make decisions that can hurt your ability to maximize your tax deduction. So even if you have one property, honestly, even if you have zero properties and you\u2019re just thinking about buying your first property, I would probably engage with some sort of CPA so that you can start building the right roadmap for yourself to help minimize your taxable income.<\/p>\n
Ashley:
And I think a big thing to point out is that you\u2019re not just hiring a CPA, you\u2019re hiring a CPA that\u2019s knowledgeable in real estate investing, but also is going to give you tax planning. And that\u2019s kind of like the crucial key there as to you can find a CPA who knows how to file a tax return for real estate, for your rental properties, knows how to take your bookkeeping or maybe even do your bookkeeping for you and then put it onto a tax return. The crucial key is finding one that is actually going to map out or plan out and help you strategize as to these are the moves you should or shouldn\u2019t be making before you actually make them or before the tax year ends.
So a lot of times when you have a CPA, okay, it\u2019s January right now, about a time this airs is probably February, maybe even March, but you\u2019re getting your tax stuff together, you\u2019re getting your 1099s in the mail, maybe you\u2019re getting your W-2, you\u2019re collecting your reports, then you\u2019re sending it off to your CPA, your accountant. When they receive it, if there is something that they notice that you\u2019re going to be paying this amount in taxes, there\u2019s nothing that can be done. The tax year for that tax return has ended. I remember this one year, we got a tax bill, it was like the day before taxes were due, I think it was. And we just always send in our stuff to our accountant. She would let us know a couple of days before as to what our tax was due and if we could just stop in and sign. It was the day before the payment was due and our tax return was due.
And I just emailed her and was like, \u201cHey,\u201d she emailed me right back and she was like, \u201cOh, you guys owe like $2,000\u201d or something. I was like, \u201cOh my God.\u201d I was kind of worried this year about what our taxes would be and stuff. And then I was like, \u201cWow, this is great.\u201d I called my mom, I\u2019m like, \u201cOh, can you believe it? I\u2019m so excited.\u201d A minute later I get another email, \u201cOh my gosh, I\u2019m so sorry. That was for somebody else, you owe $30,000.\u201d I immediately burst into tears, I\u2019m like, \u201cNo. Oh my god, this can\u2019t be happening.\u201d And so, I called David, I was like, \u201cThis is how [inaudible 00:09:02].\u201d He\u2019s like, \u201cIt\u2019s okay, we\u2019ll like figure it out\u201d and stuff like that. And that was where it hit us like, \u201cOkay, we need to do some tax planning.\u201d That was ridiculous. So going forward, that is something like the sooner you can implement that actual tax planning piece from a CPA is going to be so crucial instead of just hiring a CPA to file your tax returns.<\/p>\n
Tony:
So much good advice there, Ashley, about just the idea of actually planning for your taxes and not letting your taxes take you by surprise. And that\u2019s really something we\u2019re trying to focus on this year as well, is more regular communication with our tax strategists around, \u201cHey, what does a P&L and the business look like so far year to date?\u201d And if we think we\u2019re going to have a lot of taxable income, what should we be doing to offset that? And we did some cost segregations at the end of last year to try and help reduce our taxable income and we\u2019ve got some more properties that we\u2019re looking at purchasing to help reduce some of that taxable income as well. I guess, one question for you, Ashley, do you do quarterly tax payments, like your estimate payments or do you just do one payment at the end of the year?<\/p>\n
Ashley:
I don\u2019t have to because I have farm income and farmers are not required to make estimated tax payments.<\/p>\n
Tony:
Awesome. I mean, it is nicer if you can wait till the end of the year. That way you can keep all that money throughout the year and just make one big payment at the end.<\/p>\n
Ashley:
Right. Because you\u2019re giving the government interest free money.<\/p>\n
Tony:
Interest free money.<\/p>\n
Ashley:
They\u2019re getting the loan from you. It\u2019s not due until April 15th, but you\u2019re loaning it to them for free early interest free. So I always have this debate with some of my friends as to if you\u2019re a W-2 employee, you have contributions, they have money withdrawn from your paycheck to pay towards your taxes throughout the year. So I always think it\u2019s best to zero that out. You hear people talking about, \u201cOh, I got a $5,000 tax to refund this year, super happy.\u201d That\u2019s like, no, you paid the government $5,000 extra and gave them-<\/p>\n
Tony:
Too much.<\/p>\n
Ashley:
\u2026 that money ahead of time. So I think that\u2019s a huge misconception is that, you\u2019re overpaying your taxes and you\u2019re getting that money back and then might be great to get that lump sum. But think about if you had that money throughout the year and you could invest it a little bit or things like that. I bet you could see a bigger return on your money than giving it to the government interest free.<\/p>\n
Tony:
Yeah, I always played with my deductions on my whatever. What was that for? You had to fill out as a W-2 employee or W-9?<\/p>\n
Ashley:
No, W-9 is to show your social security number. I think it\u2019s W\u2026 No, W-3 is what the\u2026<\/p>\n
Tony:
W-4.<\/p>\n
Ashley:
Yeah, W-3 is what the employer has and they issued W-2.<\/p>\n
Tony:
Yeah, so the W-4, you put your deductions and stuff. I was like always bumping mine up and down trying to figure out what that sweet spot was. Because same, I didn\u2019t really want to get a return. I just wanted all that money throughout the year. So anyway, William, hopefully that helps you. If we didn\u2019t say it loudly and clearly enough, hire the CPA, like Ashley said, specifically someone that has I think experience working with real estate investors and if you want a better kind of breakdown on what you should be looking for, go back to episode 255. We just interviewed Amanda Han, and she does a wonderful job kind of breaking down what you should be looking for in both a tax preparer and your tax strategist.<\/p>\n
Ashley:
And the cost is not that big of a difference. So William, I don\u2019t know if you\u2019re just filing your tax return yourself using Turbo Tax or something like that. Once you start adding onto investment properties, usually there is an additional fee they charge because now you\u2019re filing this form and stuff like that. So just the time you\u2019re saving by having a CPA do it, I think is just super beneficial and it\u2019s going to probably cost about the same. So for me to have an LLC tax return done, I believe this past year, it was 300. The years before that had been 250, I think. And then my personal return, I don\u2019t remember how much that was, but a couple of $100 to do.
But it\u2019s the tax planning portion that can be more expensive. But you can still do your own tax return if you want, if you feel like you\u2019re very confident in that, knowledgeable enough to actually do your tax return and then just pay a CPA for that tax planning piece and that portion. Also, you want to find one that\u2019s going to work with your attorney too, because that is going to kind of compliment each other if you are going to start setting up LLCs as to what that structure is going to look like.<\/p>\n
Tony:
So should we move to question two?<\/p>\n
Ashley:
Yeah.<\/p>\n
Tony:
All right. So this next question comes from Chris Lat and Chris has a question about Airbnb arbitrage. So he says, \u201cAirbnb arbitrage from a landlord\u2019s perspective, what are the major disadvantages of this strategy? I just listed my primary residence for rent and I\u2019ve already gotten inquiries about potential tenants that want to rent the property out as an STR for when they\u2019re not using it themselves or they want to rent a portion of the house as an STR.\u201d So I think the first thing that we should do is just define what Airbnb arbitrage is because not everyone is even aware of that term. So Airbnb arbitrage or rental arbitrage means that instead of taking a property that I own and listing that on Airbnb, I go out and I rent someone else\u2019s property and say I rent it for a thousand bucks a month, then I turn around and take that listing and put it on Airbnb and then I get to keep all of the income above the 1000 bucks that I\u2019m paying to that landlord.
As the person renting the unit and subleasing it on Airbnb, the benefit is that it\u2019s significantly less cash to rent someone\u2019s house than it is to go out and buy your own house. So you need less capital to get started with this, but there are some disadvantages while on the person who\u2019s doing the arbitrage. But from a landlord\u2019s perspective, are there some major disadvantages? So I mean, Ashley, you\u2019re doing an arbitrage unit already. Maybe if you can speak to why the landlord that you\u2019re working with outside of him being someone that you know, why was he open to that arrangement knowing that if he just put it on Airbnb himself, he probably would\u2019ve made more money?<\/p>\n
Ashley:
Because he didn\u2019t want to deal with operating a short-term rental or have any clue how to even list a property onto Airbnb. So one reasoning is that he just had no idea how to do that or no desire to do that, his game was long-term rentals. And I think the biggest thing is vetting the person who you\u2019re renting to that\u2019s actually going to operate the short-term rentals. So he knew that I would be paying rent, that he\u2019s not just somebody that he\u2019s renting too, that he\u2019s taking kind of a gamble with as to not knowing anything really about this person except for what their credit and background check shows. He knows where I live, knows where to find me if I didn\u2019t pay rent. So basically having guaranteed rent in that unit was a big selling factor.
So I think if you are going to find somebody who\u2019s doing this, who\u2019s going to operate a short-term rental and you\u2019re going to do a long-term lease to them is really take the time to vet them, see if they have any other short-term rentals, any other arbitrages they\u2019re doing, talk to those landlords, what\u2019s their track record? One benefit is that you\u2019re going to get the house cleaned pretty frequently than if you had just a long-term rental in there. You\u2019re going to most likely have it professionally cleaned every time there is a turnover. So I have two arbitrages right now and the first one I\u2019ve had since maybe August 2018 I think actually. And that unit has just stayed in pristine condition and I see a lot of the turnovers that happen in the same apartment complex, it\u2019s a 40 unit apartment complex.
Our unit is nicer than people who have only lived there two years and they have marks on the walls, things like that. Just wear and tear on the properties where since ours get cleaned so often that it has stayed in such a nice condition since 2018. Basically, we haven\u2019t done any remodel since that 2018 or had to make any kind of significant repairs. And if for some reason, a tenant did damage the unit a guest for the Airbnb, that would be us taking care of that. So that\u2019s another thing I kind of make clear when you\u2019re making this arrangement as to what kind of maintenance and repairs, who going to be responsible for what? So if there is a lockout, okay, if you\u2019re renting to a long-term rental and our lease is like a $25 fee for a lockout whatever. But if it\u2019s a Airbnb gust, are they contacting you as the arbitrage operator or are they contacting the landlord because they can\u2019t figure out how to get into the lockbox?
Things like that you need to figure out as to what constitutes wear and tear that the maintenance company is going to take care of or whatever. I will give you guys one example of something that happened recently where it was kind of like a conflict with the arbitrage where I can see as the landlord that this would be a negative towards doing arbitrage. So in this apartment or complex, there\u2019s a property management company in place and so, it\u2019s not actually the owner dealing with it. But either way, the property managed company or the owner, they work for the owner. So the guest that was staying in the short term rental had a dog barking and they could not figure out how to get ahold of the guest because they did not have the guest contact information. They only had my information as the Airbnb host.
So they contact me, I call, leave a message for the guest, no answer. The property management company goes ahead and it was either them or the other people in the building, somebody calls the police. The police somehow find out who she is, whatever, call her, and it turns into this big huge thing. So that was one disconnect I can see is if there\u2019s something going on in the unit or something happening that the landlord doesn\u2019t have a way to actually contact the guest that\u2019s staying into the property. So maybe that\u2019s something you can clarify ahead of time as to contact per information must be provided for somebody that\u2019s actually staying into the house or something like that, just as the owner being able to correspond or can coordinate with that person. So, one downside that I\u2019ve encountered.<\/p>\n
Tony:
And I love that story, Ashley and this is me kind of putting my short-term rental hat on as a landlord and as the person operating the arbitrage unit. One thing that would be helpful, do you guys have noise monitors in that unit?<\/p>\n
Ashley:
No, I\u2019ve never even heard of that.<\/p>\n
Tony:
Yeah, so there are devices that we\u2019ve installed in our short-term rentals that essentially monitor the decibel levels inside of the property and if it goes above a certain level for a sustained period of time, it automatically sends a message to the guests asking them to keep the noise level down. And there\u2019s even a setting, I\u2019m pretty sure where you can have an alarm go off to really kind of rattle them. And if you can show to Airbnb like, \u201cHey, this person has violated my house rules because they\u2019ve been excessively noisy,\u201d now you can cancel their reservation and escort them off the premises without Airbnb being too upset with you. So there are some things you can do even as a landlord to say, \u201cHey, if you are doing arbitrage on my unit, I want to make sure that you have these noise monitors installed and that I\u2019m also notified whenever there\u2019s a noise issue.\u201d
So that\u2019s one thing, but I love that story because isn\u2019t definitely something that I think landlords might be concerned about. But if you\u2019re the person that\u2019s renting the unit, you also have an incentive to make sure that your neighbor or that your guests aren\u2019t everybody off because now you know that you\u2019re going to have a harder time trying to renew that lease when it does come due. So I think there\u2019s incentive on both sides to make sure the guests are always behaving well. I think the other thing that a landlord might expose himself to is maybe a little bit of additional liability. Airbnb does have what they call host protection, which is called AirCover. So if there\u2019s an issue at the property, Airbnb has up to $1 million in liability protection, but it\u2019s definitely not an insurance policy.
And there I\u2019ve seen a lot of instances where things have happened and Airbnb feels it doesn\u2019t fall under their AirCover protection. So I would probably try and make sure that your person doing the arbitrage has some sort of additional liability protection to make sure that if one of the 12 different people or parties that are coming through that house on a monthly basis, if something goes wrong, there\u2019s a multiple layers of protection between you and that guest as well.<\/p>\n
Ashley:
Yeah, that\u2019s all great advice, Tony. That noise level thing, I\u2019d never even heard of that. I almost want to borrow one from you and put it in my house and play with my kids somehow to trick that.<\/p>\n
Tony:
It actually might work pretty well for kids at home too. Like \u201cHey, if you guys go\u2026\u201d But no, I think that\u2019s the main thing. Honestly, Chris, for you is the landlord. If you don\u2019t have the time, desire, or ability to put it on Airbnb yourself, you get the benefit of, as Ashley said, the property\u2019s going to be cleaned professionally every two to three days. You\u2019re going to have maintenance and repairs, most of the lower level items being repaired by the person doing the arbitrage, not by you. You\u2019re going to be able to hopefully charge maybe even a little bit more for your rent, right? Because you understand that they\u2019re running a business out of your unit. So you can say, \u201cHey, if market rent is a thousand, I\u2019m going to charge you 1,300\u201d and you can even get a little bit of a bump there and they\u2019re going to be happy with that because they\u2019re going to make two x or three x that on the arbitrage side.
So there definitely are I think a lot of positives and the disadvantages, I would oppose that question to the person that\u2019s doing the arbitrage or asking to do the arbitrage and see what their responses are. If you bring up the concerns about maintenance and repairs and they\u2019re just kind of like stumbling, they don\u2019t have a good response for you, then don\u2019t work with them. If you bring your concerns around liability and what they\u2019re doing to minimize that or mitigate that risk, then don\u2019t work with them. So pose your questions to that person, see what their responses are and if you feel confident with what they\u2019re saying it, I think it\u2019s a win-win for both of you guys.
All right, so let\u2019s go on to question number three here. It comes from Mike Woodruff and Mike\u2019s question is, \u201cRecommendations on how to best protect myself as an investor. I\u2019m purchasing a rental and trying to figure out what is the best type of insurance or ways to protect me personally. I know an LLC would probably be best but have heard mixed answers if I would be able to transfer it after closing if there\u2019s a loan on it. Another option I have heard is just to get an umbrella policy. Also, are there any specific disclosures or terms you make your renters agree to?\u201d So there\u2019s a couple of questions in here, Ash. I think maybe we should kind of break them down in each of their own pieces. So the first is maybe we should even take a step back from a liability protection standpoint, there are two options. You have an LLC and you have an umbrella policy, I can say what we do in our business. Then Ash, I\u2019m curious how you do it in yours.
For most of our properties, we have the actual title is in the name of our personal names and most of the debt is in our personal names as well. We still recognize all that revenue and the expenses and the profits as business income. So from a tax perspective, it\u2019s part of our LLC, but from a legal perspective, it\u2019s owned by me personally or my partner personally. So what we did in our business was we got additional insurance. So we have home insurance and we also got an umbrella policy for all of those properties as well. And it\u2019s like several million dollars of liability protection that comes along with those umbrella policies. So if something were to happen at one of our properties, even though it\u2019s our personal name that\u2019s on title and on the debt, we still have this extra layer of protection. So the liability would have to be in excess of 2 million before it starts to affect us personally. So that\u2019s what we\u2019ve done in our business to try and mitigate some of that risk. How are you doing it in your business, Ashley?<\/p>\n
Ashley:
Yeah, so anytime I take on a partner, I definitely open an LLC. And then at the first partnership I did, I was just super afraid of being sued. So I even had an umbrella policy over that LLC way more than you actually need to have. And especially at the time we had one, two, then three properties in it with not a ton of equity in it. So if we were sued, there\u2019s not really anything anyone could really take from us being new investors. But now, I don\u2019t have the umbrella policies over any of the LLCs. Personally, I do have umbrella policy over my primary residence. I still have one rental property in my personal name cover some of my businesses and then I still have the properties that were in my personal name. I had an umbrella policy over them too, but then I\u2019ve recently deeded them into an LLC and I no longer have that umbrella policy over those.
One thing I recommend having is your tenants getting renter\u2019s insurance, having them have carry their own insurance I think is a huge plus. But I think doing an LLC is a great way to protect yourself. Only thing to watch out for is if you do want that nice 30 year fixed low interest rate mortgage that you most likely have to put into your personal name and that\u2019s when you should go ahead and get that umbrella insurance. So you can get that good mortgage rate. Not as good of a mortgage rate now as it was a couple of years ago, but still better than commercial. I just did a commercial loan and I think I got 7.4% was the interest rate on it. Have you done any recently, Tony, on residential or commercial?<\/p>\n
Tony:
Yes. We closed on a deal recently on the residential side. I want to say we were right around 6% on that deal, so about a point lower than what you\u2019re saying. And honestly, that\u2019s a big reason why so much of our debt is in our personal name because we were able to get such favorable terms. Like I said, our best interest rate on one of our short-term rentals right now is 2.6% on a 30-year fixed. And it\u2019s like that is just free money, especially in comparison to where rates are today. So there is some things to think through. We did do an episode now, I was trying to look at the episode number but I couldn\u2019t find it so maybe we can put in the show notes.
But we interviewed a guy, Ashley and his whole business was about helping real estate investors from a liability perspective and how do you structure your business in different ways to reduce your liability. And obviously, his process was for folks that maybe had a little bit more equity and net worth and were more concerned. But he had a very solid framework that he had built out to say, \u201cHey, you need this kind of entity holding this, you need this entity holding this and you should own these kinds of properties with this thing.\u201d So if we can find that episode out.<\/p>\n
Ashley:
Yeah, it was Brian Bradley.<\/p>\n
Tony:
There you go.<\/p>\n
Ashley:
I know because I use it, I recommend it all the time. And it was episode 105 and then it was either 104 or 106 because we did back to back episodes with him. But that was a phenomenal episode. He also has a newsletter too that you can sign up for and he\u2019ll email you, I don\u2019t know what the frequency is. But I get them and I\u2019ll glance through him every time, which is great recommendations on that liability piece as to how to protect yourself.<\/p>\n
Tony:
That\u2019s one of the episodes that\u2019ll scare you almost away from being a real estate investor when you hear all the things that could go wrong. But I think he definitely did a great job of breaking down how you can set it up to protect yourself from some of the things that come along with being an owner.<\/p>\n
Ashley:
And one question we always see too is should I open an LLC in the state that I live in or the state that I\u2019m investing in? Or should I open one in Delaware or Wyoming and that he goes all into that too, because it depends on what your situation is. So, definitely two great episodes to listen to and if you do remember those episodes, great, time to go back and refresh those episodes too.<\/p>\n
Tony:
All right, so let\u2019s jump into the next question here. This one comes from Chase Fayver, and Chase\u2019s question is, \u201cWhat are the main downsides of turnkey properties? I\u2019ve seen 6% interest on a 30-year loan advertised, which I\u2019m not sure most people could get right now with an 8% management fee. Other than that, they seem like a pretty good option, especially if you could buy a new build with a cash flow from year one. So what are your thoughts?\u201d I think in general, Ash, and I\u2019ve never purchased a turnkey property, I don\u2019t think you have either. But I think in general, you are always going to get a better return assuming that you buy right. You are always going to get a better return if you do the work yourself of finding a distressed property, rehabbing it, and then refinancing it yourself. The benefits of a turnkey property is that the hard work of finding the off market deal and managing the rehab and getting it stabilized, it\u2019s all done for you.
So if you don\u2019t have the time, desire, or ability to do all the hard work of doing that process, then I do think that there is a place where turnkey properties make sense, especially if you have maybe a consistent source of capital so that maybe every six months to a year, you\u2019re able to buy another property without really worrying about, you run enough capital yourself. But if you want to be able to recycle your capital, buying is obviously a better approach. So I think Chase, it depends on your unique situation and what your goals are.<\/p>\n
Ashley:
On Real Estate Rookie episode 29, so one of the original episodes we had Whitney Hutten and Lance Robinson, where they go into depth about their turnkey investing experience and they both were able to build their wealth based on doing turnkey rentals. That\u2019s how they started out, and they built these great portfolios and built their wealth from that. Since then, I know Whitney has gone on and done other things, but that\u2019s what got her started. So they kind of go into what are some of the things you should look for and like pros and cons of doing turnkey rentals. But they\u2019re definitely two success stories that came out of doing turnkey rentals. But the thing here on this question is I\u2019ve seen 6% interest on a 30-year loan advertised, which I\u2019m not sure most people could get right now with an 8% management fee.<\/p>\n
Tony:
I\u2019m assuming Chase meant that it won\u2019t cash flow as well. The returns won\u2019t be as good with interest rates being high and accounting for the management fee. That\u2019s my assumption. So Chase, if we\u2019re off base, let us know. But that\u2019s what I\u2019m thinking he\u2019s getting at.<\/p>\n
Ashley:
Okay, so if that\u2019s the case, then that would be a great question to ask the turnkey company provider. Say, \u201cI\u2019m looking at this, I don\u2019t see how the numbers are penciling out\u201d and see how they respond to that as to what they are kind of giving you feedback. If you\u2019re not using an actual turnkey company and you\u2019re just looking for a property that\u2019s already redone, you\u2019re buying it off the MLS. There\u2019s not like a property manager in place or anything like that. It\u2019s just somebody selling in just doesn\u2019t need any rehab. Just throw out those low ball offers, try that. I mean, we are doing the men 90-day mentees here and we had Brandon on who\u2019s from day one we\u2019re just like, \u201cWell, how many offers are you making?\u201d He\u2019s like, \u201cWell, I haven\u2019t made any.\u201d The next time we talked to him, he made an offer. Offer accepted and he threw out what would work instead of just waiting for the purchase price to match what he wanted put out in low ball offers. So that would be my advice there is go ahead and make that happen.
Also, I\u2019ve heard investors that say that one strategy they do is they don\u2019t even buy for cash flow. They\u2019re just looking to break even because they know there\u2019s so much appreciation in the area and they\u2019re investing for appreciation. So maybe that could be a way to kind of pivot what your strategy is. If for sure you want to go for cash flow because you want to quit your job next year and you need that income coming in, then maybe this isn\u2019t for you. But if you\u2019re just trying to build wealth, maybe build up some retirement and you\u2019re not looking to really cash in on anything right now, you know, want to work your W-2 for a couple more years, things like that, then maybe breaking even isn\u2019t that bad of a thing if you\u2019re going to be building appreciation in this property just because it\u2019s such a growing hot market too. So make sure you\u2019re looking at all the different ways to actually build wealth off of a property and not just the cash flow and see if maybe one of those other ways will kind of suit your needs.<\/p>\n
Tony:
Yeah, Ash, I\u2019m so glad you brought up that last topic about appreciation because there are other things outside of just cash flow that we should consider when we\u2019re looking at deals. Cash flow is just one piece, but you have appreciation of the property, you have debt pay down and you have the tax benefits. And if you are a W-2 income earner and you\u2019re looking for an opportunity, there\u2019s some things you have to do to be able to check those boxes. But if you\u2019re looking for some waste, maybe offset some of that W-2 income, buying something that it already is set up and running might be an easier way to go.
It\u2019s easier to do it in the short-term rental space. Significantly harder to do it in the long-term rental space, but if you can jump through those hoops you can. But we had J Scott and Dave Meyer back on episode 224 and they talked about the four ways that real estate generates profits. So if you want a refresher on things outside of cashflow, you should be looking at when you\u2019re analyzing a deal. Go back to episode 224 with J Scott and Dave Meyer. Two of the smartest people that I know in real estate.<\/p>\n
Ashley:
I agree with that for sure.<\/p>\n
Tony:
All right, so this next question comes from Denise Bedinger and Denise\u2019s question is, \u201cIs an interest only HELOC a good tool to use equity as a down payment for a buy and hold property? Or would the financial method work best for a fixed and flip where you can force equity and refi or sell? So Ash, what are your thoughts on using a HELOC for a long-term buy and hold?<\/p>\n
Ashley:
So for me, I\u2019ve done this, but with I\u2019m going to rehab the property, build that appreciation, I\u2019m going to refinance and be able to pay off my line of credit. Felipe Mejia, who used to be a co-host on this podcast, he used to use his HELOCs to purchase a property and he would just take all of his cash flow and rapidly pay down the HELOC. He never went and refinance. He would use it as the down payment in this situation. So he did it that way and it seemed to have worked well for him, just like he wasn\u2019t until that HELOC was paid off, he wasn\u2019t keeping any of the cash flow for himself. And then any other properties was, so say he had two or three other properties that he had already paid off the down payment, he was taking that cash flow too to pay off the down payment for that fourth property. And would just go hard at paying down that line of credit until that was paid off and then go and start looking for the next house. Use that line of credit again as the down payment.
So definitely can work like that. So if you\u2019re able to put some equity into it as to rehab it, maybe you\u2019re even able to raise the rents going and refinancing. The downside is you\u2019re paying closing costs twice. So when you purchase the property, you get the mortgage, you\u2019re paying the closing costs and you go and refinance to pay off that line of credit and the first original loan, you\u2019re going to pay closing costs again. But if you work that into your numbers, so when you\u2019re using the BiggerPockets calculator reports, there is a section to say closing costs. So when you do the burst strategy, you can account for that. So you can still see what your cash on cash return is as to how much money you\u2019re putting into the deal. So make sure you\u2019re accounting for those things too when you\u2019re doing the cash-out refi as to after you\u2019ve already done an initial loan on the property.<\/p>\n
Tony:
Yeah, I think my idea has always been anytime you have short term debt like HELOC, private capital, hard money, I typically am of the opinion that you should only do that for a short-term project. So I like the idea of doing it for a flip. I like the idea of using it for a BRRRR, but I just feel like I want to be able to sleep at night. And the idea of having this debt that\u2019s really made for short-term purposes tied up in a long-term property, it might get you into sticky situation. But if the amount of money you\u2019re using was relatively small, maybe this deal\u2019s going to put off a bunch of cash flow. Maybe it does make sense, but I definitely think it is a risk that you want to weigh before you jump into it, Denise. So hopefully that helps.<\/p>\n
Ashley:
Well, Tony, another great episode of Rookie Reply. Thank you guys so much for joining us. I\u2019m Ashley @wealthfromrentals and he\u2019s Tony @tonyjrobinson on Instagram, and we will be back on Wednesday with a guest. I\u2019ll see you guys next time.<\/p>\n
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