\n
Ashley:
This is Real Estate Rookie episode 278.<\/p>\n
Tony:
You should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you\u2019re trying to get 1,000 bucks for your place right now, but because you tried to get a $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty, so you\u2019re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months. You\u2019re actually going to make more. You\u2019ll make $11,400 at 950 if it\u2019s rinsed out for the entire year.<\/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.
And I want to start today\u2019s episode by shouting out someone by the username of RSGreen2. They left us a five-star review on Apple Podcast that says, \u201cI tell everyone and anyone I can to listen to this podcast, especially when people ask me about where they can start. Tony and Ashley have great energy, and they keep things very tangible for listeners. Keep up the great work, Ashley, and keep laughing. Don\u2019t let anyone tell you different. Life is too short.\u201d
And, so, RSGreen, we appreciate you. And Ash, I got to say, I love your laugh as well. Don\u2019t listen to the haters. Keep doing your thing. Keep living your life.<\/p>\n
Ashley:
Well, thank you so much because it is physically impossible to stop laughing, so, here to stay. So, Tony, what\u2019s new with you?<\/p>\n
Tony:
We got this campground that we\u2019re working on in West Virginia, so I\u2019m super excited about that. And, honestly, by the time this episodes airs, I think we should hopefully have closed on it by now. But it was a deal that came to me actually on Instagram. One of my Instagram followers reached out to me. And most deals that get sent to me on Instagram are not all that good, but this one actually ended up checking out, so we\u2019re super excited for it.
Right now, it\u2019s got a single-family house plus a little \u2026 There\u2019s a church on the grounds, and there\u2019s a few RV pads, but we\u2019re going to build out some really cool dome campsites there. So, we\u2019re excited. It\u2019ll be our first true commercial project and hopefully the first of many. So, just trying to do our due diligence right now and get the money lined up and take this thing down.
So, we had a failed attempt last year at our first commercial deal, so I\u2019m hoping this one \u2026 hoping we actually make this one happen.<\/p>\n
Ashley:
Yeah, I\u2019m so excited for you. I got your newsletter that talked about the property the other day, and Daryl and I were reading through it. It looks so exciting and such a great opportunity.<\/p>\n
Tony:
Yeah.<\/p>\n
Ashley:
Okay, well, this week, we have, I think, five questions we actually go through today, five or six. And we talk about financing, getting bank financing, the differences between doing an adjustable-rate mortgage, a conventional mortgage, a second-home mortgage, lots of different things we talk about, and what are the pros and cons and what may be the best route for you, depending on your situation.
And then we go into estimating a rehab and some of the ways you can do that as a rookie investor.<\/p>\n
Tony:
Yeah, we also talk about analyzing deals, and we talk about FSBOs and how to kind of negotiate with sellers, without your agent being present. And we also talk about renting your property out and how to not get screwed when you\u2019re searching for tenants and make sure you\u2019re getting the place filled. So, lots of good conversation for today.<\/p>\n
Ashley:
We will also tell you what a FSBO is, for those of you that don\u2019t know. So, listen for that, the [inaudible 00:03:33]-<\/p>\n
Tony:
That don\u2019t know.<\/p>\n
Ashley:
Okay, so our first question today is from Ernesto, and this is in the Real Estate Rookie Facebook group. Guys, don\u2019t forget, if you want to ask questions that we may answer on the show, you can go ahead and join the Real Estate Rookie Facebook group. Ask a question in there. Most likely, you are going to get a whole bunch of people, rookie investors and experienced investors, to answer your question before we get to it.
But to Ernesto\u2019s question today is, \u201cIs it possible to get a new mortgage in an LLC with 20 to 25% down? Also, what are the documents and requirements needed?\u201d
And the answer to that is, yes, you can. That is actually typically what a commercial lender is looking for, is that 20 to 25% down. Sometimes, they may require 30% down or more. So, since this is going to be in an LLC, you are going to have to go to the commercial side of lending.
I have found one small, local bank that did allow you to get a loan on the residential side in an LLC but, most of the time, you\u2019re going to have to go to a commercial lender, and you can do the 20 to 25% down. There are lots of different options for the commercial lending. For example, how long you\u2019re going to amortize the loan. That will also affect your interest rate. If you\u2019re going to do an ARM, an adjustable-rate mortgage, lots of different options on the commercial lending side.
I have not seen, on the commercial lending side, where they will let you put less than 20% down. I have seen on the residential side, where a small bank that\u2019s going to hold the loan in-house will allow that, just because you\u2019re buying below market value. But banks are really flexible, especially the small, local banks, where maybe that does happen where you can put less than 20% down.
Tony, have you ever seen that, where a commercial lender will put less than 20% down?<\/p>\n
Tony:
No. Yeah, most of our debt, honestly, isn\u2019t carried by our LLC. And the debt we do have in our LLC is from private money lenders. We\u2019re usually going 0% down on those ones.
But I think my question to Ernesto would be, \u201cWhat is your motivation, Ernesto, for getting the LLC and going after commercial debt?\u201d
I think there\u2019s a common misconception that you need an LLC to buy investment property or to get all the tax benefits to come along with being a real estate investor. And that\u2019s not true. You can still claim all the deductions, even if the property\u2019s in your personal name and even if the debt is in your personal name.
The LLC really comes if you\u2019re worried about liability, right? Asset protection. And even still, there are ways to protect yourself from a liability perspective, without even creating the LLC.
So, I think that would be my first question, Ernesto. Because, a lot of times, you can get better debt if you\u2019re able to get that debt in your own name.
Now, obviously, if you do go that route, a lot of times, banks are going to want to make sure you have the DTI to cover that. So, maybe if you\u2019re going after commercial property, where they\u2019re kind of looking at your \u2026 Gosh, why can\u2019t I think of the name of the statement? Your personal financial statement, and they\u2019re looking at the NOI of the property, that could be one reason.
But Ernesto, if you have the debt-to-income ratio, you have the credit scores to go out and get that debt by yourself, I might even say, it might be more beneficial to get something in your personal name.<\/p>\n
Ashley:
And then, the second part of that question, was the documents required, and Tony touched on one of them, providing your personal financial statement, which lists your assets minus your liabilities.
So, if you own a primary residence, that would be your asset. If you have cash savings, that\u2019d be an asset. Your liabilities would be the mortgage that\u2019s on your primary residence, or if you have a car loan, things like that.
The next thing that you may need to supply, and these are especially if you\u2019re going to be a personal guarantor on the loan. So, even though your LLC is getting the loan, the bank may require you, or ask of you, to be a personal guarantor, where you are signing, saying that if the LLC defaults on the loan, you are now personally liable to pay that loan. You do get a better interest rate if you do sign for that, and you may get better terms if you are a personal guarantor.
So, they may want two years of your personal tax return, if applicable, two years of your LLC tax return if it\u2019s been open for two years, a profit and loss of the property you\u2019re purchasing, also the rent roll of the property that you are purchasing. And then, they\u2019ll probably run your credit too, as a personal guarantor.
They also will most likely require any partner that has more than \u2026 or has 20% or more ownership in the property too, to supply all of these things as well, such as their tax return, and to also be a personal guarantor.
I\u2019ve never seen it, where, if somebody owns less than 20%, they require them to sign on the loan or to provide their information, but that could also possibly happen.
Okay, so let\u2019s move on to our next question. This question is from Denise Biddinger, and this is also from the Real Estate Rookie Facebook group. \u201cWhat\u2019s the best way to structure a first-time partnership? Should we look for someone to split the cost of a mortgage, and each get a loan for the applicable half? Is that even an option? So, here\u2019s some background on it. It\u2019s a buy-and-hold. The property is listed at 265,000, the down payment only 20%, which is around 50,000, which, hopefully, would be funded by a partner. What other factors should I be considering? Thank you.\u201d
So, this is something Tony and I talk about a lot. There is no right way to structure your first partnership. That is completely negotiable. You just want to make sure that it\u2019s legal and that it\u2019s all in writing.
So, I think Tony will be able to talk to this better on this one because, Tony, you do partner with people who bring the capital to deals and how you do your joint venture agreements.
For myself, personally, my first partnership, we did a 50-50 ownership. My partner brought the capital, but he also was the lien holder on the property. He held the mortgage, so the money we used to purchase the property, we were paying him back that money over a 15-year amortization, at 5.5% interest.
So, he was getting a monthly payment every month of principle and interest. He was also 50% owner of the property, so any equity by mortgage paid on, he was getting that advantage. He was also any appreciation into the property that was building equity. So, when we eventually sold, he got 50% of the profit. He also was getting 50% of the cash flow through the lifetime of that property that we had it.
So, Tony, do you want to go ahead and touch on the joint venture side of doing a partnership for your first deal?<\/p>\n
Tony:
Yeah, so there\u2019s a couple things you should look at, Denise. So, the first thing you said is, \u201cShould we look for someone to split the cost of a mortgage, and then each get a loan for the applicable half?\u201d
I\u2019ve actually never seen that happen before, where you have two different partners, and each of them gets their own mortgage for their part of the property. Usually, if you\u2019re going to do it that route, both of you would just be applying for the same mortgage.
But here\u2019s the thing. I think, if you\u2019re in a partnership, typically, you want the smallest amount of people on the mortgage as possible, because if one person can qualify for that loan by themselves, then it allows the next person in that partnership to get the subsequent loan. But if both of you are in that loan, now both of your DTIs are impacted. So, usually, you want the smallest number of people possible on the mortgages as you can.
But anyway, to kind of answer your question about how to structure it, there\u2019s a few things to look at, Denise. You can look at mortgage. So, who\u2019s going to carry the mortgage? The down payments of the capital, who\u2019s going to bring that capital? And then, on the actual ownership of the property, you look at equity. How are we going to split ownership of this property? And then you look at profits. How will we split the actual profits of this property?
And you can tie in other things like, \u201cHey, is someone going to get a management fee for doing the day-to-day management of the property?\u201d Or if someone does maintenance on the property, do you get an hourly fee for the maintenance piece? But I think those are the different levers you want to look at.
And it sounds like Denise, you\u2019re looking for someone to bring the down payment, but it also seems like, if I\u2019m reading this the right way, that you feel you have the ability to get approved for the loan. So, one easy way to do it would be to say, \u201cOkay, look. I\u2019m going to carry the mortgage. You\u2019re going to bring the down payment capital.\u201d
And you have to make sure that that money gets seasoned or that your lender\u2019s okay with that person gifting that money to you. But say, you carry the mortgage. That person brings the down payment. And then you guys can say, \u201cHey, we\u2019re going to split the profits down the middle 50\/50. We\u2019re going to split equity down the middle of 50\/50.\u201d
Or your partner could say, \u201cHey, since I brought the 50K, I want to make sure that whenever we sell the property, I get my 50K back first, and then we split whatever\u2019s left over.\u201d
So, there are a million different ways to kind of skin the cat here, Denise, but I think those are the things you want to look at, is your mortgage, your down payment, your equity, and your profits.<\/p>\n
Ashley:
Okay, our next question is from Trevor Manning. He says, \u201cHi, Rookies. I\u2019m going to start analyzing deals. I was wondering if there is a rough rule of thumb for estimating rehab costs, like an estimate per square foot, moderate, heavy rehab. It doesn\u2019t have to be super accurate. I just want to get my hands dirty with practicing my analyzing. Have a great weekend.\u201d
Okay, so this is such a hard thing, as a rookie starting out, is estimating the rehab. And even still, I struggle with it, as to there\u2019s so many variables that come into play to get the perfect budget, the perfect estimate.
When I first started out doing full, heavy rehabs, I took on a partner who knew how to do construction, and that\u2019s how I learned to do my estimates.
The first thing I would do is to look into the book Estimating Rehab Costs by J. Scott. It\u2019s available on the BiggerPockets bookstore. And it\u2019s not going to be able to tell you, \u201cOkay, in your market, in your area, a painter is going to charge you $2.50 per square foot,\u201d but it\u2019s going to lay out everything. You should be getting quotes for, everything you should be estimating that you might be missing.
Another way to kind of look at it is, and this is very time-consuming, but once you do it one time, you can constantly reuse it for other properties, is build out your own kind of template, so you can at least get a very good idea of what the material cost will be.
So, you\u2019re looking at a property. You\u2019re looking at the listing online, or maybe you go to do an actual showing. Take tons of photos and videos of the property. Then, sit down and go, room by room.
Okay, so I always use the bathroom as an example. You\u2019re looking at the bathroom. You want to rip the bathroom out and redo it. Okay. For the shower, maybe you know want to put in tile. You want to tile the whole shower. Okay, will they make a Schluter tile system. Okay? You can go and look at the price at Lowe\u2019s, Home Depot, or whatever hardware store you use. Pull up the cost of that. You are going to link that to your spreadsheet.
Then, you are going to find a YouTube video that talks about what it takes to build out a tile shower. And you are going to say, \u201cOkay, I need the grout. I need the tile. I need the thinset. I\u2019ll need these other things. I\u2019ll need the faucet. I\u2019ll need the handle. I\u2019ll need whatever else is in that video.\u201d Make a list and build out that kind of worksheet, that template, and then go online to the hardware store and pull those things.
Okay, so a toilet, you\u2019re going to need a wax seal to go with the toilet. You can google all this on YouTube. Put those things in there. Even if you don\u2019t use that exact same toilet that you linked, it\u2019s still going to give you a pretty good estimate of what your budget is going to need to be.
If you don\u2019t know what toilet to pick, go ahead and pick one on the higher end, and if you end up getting one that\u2019s cheaper, and it\u2019s going to work just as well, then great. You just saved yourself 25, $30 right there. So, always overestimate. Go for the higher-priced item. You don\u2019t want to blow your budget way out of the water by picking $10 per-square-foot tile if you\u2019re just doing a rental property, where you could get away with $2 or $3 per-square-foot tile. It\u2019s time-consuming, but I think that is a great way to kind of get an understanding of what materials cost.
And then, for as far as labor, call around and ask contractors, \u201cWhat do you charge to install a toilet?\u201d Ask other investors. James Dainard, we had him on. I\u2019m sure Tony already has his episode numbers teed up, as to what episode that was. But he did this heavy, deep dive. And he has a template, where he knows that his painter charges X amount per square foot. So, when he\u2019s estimating a rehab, he already knows, \u201cOkay, this is a 2100 square-foot property. I\u2019m going to times that by the $2.50 cents my painter, and that\u2019s how much I should be charged for \u2026 That\u2019s my estimate for the painting on the property.\u201d
And the same for installing tile and all these different things, or even drywall. So, calling and kind of getting an idea. Of course, no contractor\u2019s going to be able to tell you over the phone, \u201cThis is how much it would cost just for this,\u201d but just an idea or a range can really help you kind of figure out.
And then, for kitchens too, call kitchen cabinet places that do the design and ask if they can give you a low-end model or low-end cabinetry, what the price point runs on that. If it\u2019s 500 square-foot kitchen, things like that.
This is going to be time-consuming, but going around and visiting those different places, making the phone calls, looking things up online, it\u2019s going to be worth it, if you really do want to have a more accurate estimate. And if that\u2019s the one thing that\u2019s holding you back from getting started, then it\u2019s definitely worth the time doing this kind of research.<\/p>\n
Tony:
Yeah, it\u2019s a great breakdown, Ash. And, of course, I\u2019ve got James\u2019s episode teed up, so that was Episode 165 for Part One, and I think Part Two is 167, if I\u2019m not mistaken, or 166, one of those ones.
So, Trevor, in addition to everything that Ashley said, I\u2019ll just kind of share what my journey was when I was first starting out and what I did to try and estimate my rehab costs. And once I found my subject property, a property that I was looking at purchasing, I looked for other comps in that area that had recently sold, and I identified the comps that I liked, the ones that I was trying to emulate.
And I did two things, really. First, I went out, and I found another contractor and said, \u201cHey, here\u2019s what I\u2019m looking to turn this house into. Here\u2019s what I\u2019m looking to transform it into. Can you give me an example of projects you\u2019ve recently done that looked like this?\u201d
And this contractor said, \u201cYeah, here\u2019s one or two properties that I did, that are similar to what you\u2019re trying to do.\u201d
And I said, \u201cOkay, what was the cost for that property?\u201d
And he told me, \u201cHey, it was, whatever, $70,000 to do that rehab.\u201d
And then, that kind of gave me a ballpark, if I want to do a level of rehab, it\u2019s going to cost me around 60 to $70,000 to do that.
And the other thing I did was I gave him photos of what the property looks like today, the current state of that property, and I showed him those comps that I was looking at, and said, \u201cHey, to get a property like this, to look like this, what do you think it would cost me?\u201d
And he said, \u201cOkay, it\u2019s going to cost you around this much.\u201d
So, now, I\u2019ve got these concrete numbers of what he charged his previous clients to do these rehabs, and I\u2019ve now got this ballpark of what he\u2019s going to charge me to take this property that I\u2019m looking at and turn it into something new. And with those, it gave me a pretty decent ballpark on what I would be spending to kind of get the level of rehab that I was looking for.
So, I think, Trevor, talking to other investors in your market and asking them what they\u2019re spending on a price per-square-foot is super important. And then, also, just going to the folks that are going to be doing the work and getting their opinion.
It is incredibly difficult, Trevor, for me or Ashley to say, \u201cHey, use this price per-square-foot in your market,\u201d because it\u2019s what Ashley spends in Buffalo is going to be very different than what I spend in Southern California, and it\u2019s going to be very different than what you spend in whatever city or state you\u2019re in. So, you do have to kind of get localized information to make your best guess.<\/p>\n
Ashley:
Yeah, the last thing I would add on to that too is, even when you\u2019re just in Lowe\u2019s, if you keep an eye out, they usually have signs saying like, \u201cWe will install your flooring. We\u2019ll install your bathtub.\u201d Find out what their pricing is on that. And a lot of times, they actually do provide free quotes too, where they will send someone out. But sometimes, they will say, \u201cWe have a special going on. Our rate is usually $5 per square foot to install flooring, the luxury vinyl plank, but for this week only, we\u2019re doing it for X amount.\u201d
But you can at least see how their pricing kind of varies, and you can use that, too as kind of a starting point as to what the prices are.<\/p>\n
Tony:
Ash, I\u2019m just curious, have you ever not used LVP in your properties? Have you ever done, I don\u2019t know, tile, actual tile, in your properties or, I don\u2019t know, what\u2019s the old linoleum type, or do you always go LVP?<\/p>\n
Ashley:
Recently, always LVP. I\u2019ve done tile showers and tile in bathrooms. I don\u2019t think ever tile in a kitchen before for a rental property, but I\u2019ve definitely done the tile shower, the tile in the bathroom floor, and then luxury vinyl plank throughout. I, actually, in one unit right now, that I just did a big turnover, and when we ripped up the carpets from when I bought it, we were going to put the LVP down, but it actually had hardwood floors. And it was cheaper to refinish the hardwoods, than it was to rip the carpet out or to put LVP into that unit.
And then, the A-Frame, the short-term rental, we did do tile in that bathroom and the shower too, but that was the rest was all LVP in there. Yeah.
And then, in the apartment complexes that I asset-manage for, we do linoleum in the kitchen, in the bathroom, but we\u2019re slowly changing that into LVP, as people move out and just keeping it consistent the whole way through.<\/p>\n
Tony:
Yeah, same for us. We tile all of our bathrooms, the bathroom floors, the shower floor, the shower walls, we always tile those. We have patios in most of our backyards. We will tile the outside with some nice tile as well. And then, everything else is a really nice LVP also. I\u2019m just curious because one of my friends, this is in primary residence, and instead of doing LVP, he just tiled the entire inside of his house. And it almost looked like LVP, but it was tile. And he told me that they were thinking about doing LVP, but it ended up being cheaper to do that tile. So, I was just curious if you ever tried anything like that before.<\/p>\n
Ashley:
Yeah, actually, in this property that I\u2019m in right now, I wish \u2026 There\u2019s the whole stacking. You can kind of see it, the whole pallet of flooring right there, and it\u2019s LVP, but I wish that I would\u2019ve done tile in this one throughout.
My aunt and uncle did that. They actually ripped up all of their hardwoods in their house and put tile that looks like wood on it, just because of the durability. Their dogs were scratching up the hardwoods.
My house that I built, we did tile in the kitchen and the bathrooms and the laundry room, but the rest \u2026 in the mudroom, but then the rest is all the hardwoods. I hate it so much. The first couple years living in that house, I would cringe every time a toy dropped onto the floor or whatever. Now, there\u2019s dings and scratches and everything throughout it, but it\u2019s also LVP, I think, is a lot easier to keep clean too, but also a lot more durable than the hardwoods too. So, I just don\u2019t care for hardwoods anymore.<\/p>\n
Tony:
Yeah.<\/p>\n
Ashley:
Okay. So, our next question is from Jordan Alexander, and it is, \u201cWould you go with a conventional second home mortgage at 10% down, with long-term fixed, or start an in-house portfolio relationship with a lender at 15% down, 5% interest, and a 20-year amortization?\u201d
Okay, so, my opinion on that is, what is your why, first of all? Are you going for cash flow? Are you going for appreciation? Are you going to build this huge portfolio, where you think that doing this one loan differently with the lender is going to give you years of great business with them?
I think run the numbers and what\u2019s going to give you the better cash flow. If you can get both of those, look at five years down the road, where you\u2019re getting the better return on those things.
Doing the in-house portfolio loan, if you work with that lender to do the portfolio loan, or you work with them to do the second home mortgage, you\u2019re still going to be establishing a relationship by working with that loan officer, no matter what type of loan product you are doing.
So, in my opinion, I would recommend doing the 10% down and getting that 30-year fixed mortgage on that, with a lower interest rate. The 5% interest for the second one that you mentioned with the 20-year amortization and putting a little bit more down, maybe that is a lower interest rate right now. I\u2019m not sure when this post was done or what it would be for the second home mortgage, but 5% interest doesn\u2019t sound that bad for me now.
I\u2019m doing \u2026 helping my business partner. He\u2019s doing a loan right now on a primary residence. And when I was filling out some of his paperwork, it was 5.125% that he was getting, but it\u2019s a 7\/1 ARM, so it\u2019s only fixed for seven years, and then he\u2019ll go and refinance it, depending when \u2026 what rates are, or probably just pay it off.
But Tony, what do you think about that? And also, Tony, I have another question for you too, are you \u2026 And I heard this. This was a rumor that was swirling around, and I keep forgetting to ask you if it\u2019s true, are banks getting more strict on lending the second home mortgage, that the 10% down is going away?<\/p>\n
Tony:
Yeah, it\u2019s a great call-out, Ash. What I was going to mention is, as I talked about Jordan\u2019s question here, is that banks aren\u2019t necessarily getting away from the second home mortgage, but they are becoming more expensive. So, they\u2019re still 10% down, but a lot of banks are now adding additional points, on top of the 10% down payment, that almost makes it less desirable for people.
So, we haven\u2019t closed on a 10% down second home loan in a while, and we\u2019ve been going with 15% down investor loans because, when we add up the total cost of the debt, it\u2019s actually been cheaper to go with a 15% down loan with no points, versus a 10% down with all the added points and fees.
So, I think I would answer Jordan\u2019s question in a very similar way, Ashley, where it\u2019s like, \u201cJordan, you got to look at the total cost of the debt and understand, between the second home mortgage and that portfolio loan, which one\u2019s going to allow you to achieve better returns and better cash flow long-term?\u201d
Like Ash said, I mean, 5%, if that\u2019s today\u2019s rates, that\u2019s pretty good. So, I might be interested in doing that. You didn\u2019t mention what the term was for that, so I don\u2019t know if that\u2019s a three-year term, a five-year term, but 5% does seem pretty solid. But yeah, I would definitely just run the numbers and try and figure out which one makes the most sense.
So, just before we close this one out, I just want to talk about what points are and how it adds to your closing costs. So, one point is essentially 1% of your mortgage amount. So, if I had $100 of mortgage, one point would be 1%, which is $1.
So, as you add these additional points, it really can start to add up, especially if you\u2019re buying a house for 300,000, 400,000, 500,000, $800,000, one point can make a pretty big difference in what your down payment cost is.
So, you want to make sure that you understand, not just the down payment percentage, but also the additional points and fees that are being added onto that, because when you close on that property, it\u2019s the down payment, plus all the closing costs, which includes those fees and points.<\/p>\n
Ashley:
I\u2019ve seen banks doing a lot of options for people, is that they\u2019ll offer, if you pay points, you get an interest rate buydown. So, say, for example, your interest rate is 6%, if you pay one point, they\u2019ll knock it down to 5.8% or something like that.
So, what you have to do in those scenarios, is you have to look at, \u201cOkay, how much more money am I going to have to put down?\u201d So, one point, say it\u2019s a $300,000 property, that\u2019s $3,000 added to your closing cost, but let\u2019s look at over how much interest are you saving by having that interest rate knocked down a little bit and is it worth it?
Also, look at your monthly payment too. How much extra cash flow will you actually have and how long until you can get that $3,000 back, that you put up, up front? Or is it worth it taking higher interest rate and not having to put more money into the deal upfront too?
So, just a couple things to think about, as lenders are trying to get creative to attract people when those interest rates are higher by offering those point paydowns. So, just make sure you\u2019re understanding if it really is a better option for you or not. And I\u2019ve seen it up to three points, where you can pay 3%, to get your interest rate knocked down a little bit.<\/p>\n
Tony:
Yeah, just really quick, Ash, before we go to the next one. I know we\u2019ve talked about NACA before. And I recently had a guest on that used NACA as well. And NACA\u2019s like a loan program, that helps people buy properties. And they\u2019re really good at allowing you to buy down your interest rate as well. And when interest rates were super low, I know some people that were getting NACA loans below 1%, which is crazy to think about. That\u2019s literally almost free money.
So, yeah, if you are able to buydown your rates, it can be beneficial in the right environment.<\/p>\n
Ashley:
Okay, our next question is from Preston Wallace. \u201cListed my first rental about two weeks ago. I have had a few people reach out about applying, but never complete the process. I am using a property manager, as I have moved a little over an hour away. At what point do you all consider reducing the ask on the monthly rent? I did a fair amount of research in the area and even priced rent about $50 lower than a few comparables in the neighborhood that rents it out in January. I can afford to pay the mortgage without the rent, but at the same time, I don\u2019t want to have it vacant for much longer.\u201d
So, the first thing I would look at is to the property management company or your property manager. What are the things that they are doing to market your property? If you search your property, or you search, say, the properties in Buffalo. Apartments for rent, Buffalo, New York. Two-bedroom apartment in Buffalo, New York, or whatever the city is that your property is in.
Where do you see the listing? Is it in multiple places? Is it being blasted out to 10 different places? Is there a sign in the front of the yard? So, that\u2019s the first piece I would look at, is the actual marketing of the unit.
And then, I would take your property manager\u2019s advice. They\u2019re the expert, supposed to be the expert, in that market, and get their opinion as to, \u201cOkay, this is listed, what I thought was below $50 before comparables in the area. In your experience, what do you think is the difference between my unit and these other units?\u201d So, maybe these other units have a washer and dryer, and yours doesn\u2019t. And that\u2019s actually becoming more of a big deal than it isn\u2019t. And then, see if there\u2019s an opportunity, for whatever you are missing, to add that into it.
So, maybe these other properties allow pets, and you don\u2019t allow pets. Okay, maybe do reconsider and allow a pet and charge a pet fee upon move-in? Things like that.
So, that\u2019s what I would kind of do some research, before you actually go in and decrease the rent any further than what you have.<\/p>\n
Tony:
Yeah, I think the only other thing I\u2019d ask that, Preston, is that you should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you\u2019re trying to get a 1,000 bucks for your place right now, but because you tried to get $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty. So, you\u2019re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months, you\u2019re actually going to make more. You\u2019ll make $11,400 at 950 if it\u2019s rented out for the entire year.
And, so, I didn\u2019t even include the fact that you have to pay the mortgage yourself for those two months of the property sitting vacant. So, sometimes, you can make more money by reducing your rent. So, I think just take that into consideration as well, where sometimes real estate investors get so fixated on the monthly amount, they don\u2019t realize the impact that it\u2019s having on vacancy, which is the biggest expense for us, as real estate investors.<\/p>\n
Ashley:
And the last thing to add onto that, that\u2019s great advice, Tony, the one thing to be careful with that is don\u2019t \u2026 You want to fill that unit. Don\u2019t just take on the first person that applies for your unit and risk getting a bad tenant in. The one time it is good to wait and have that little bit longer vacancy is waiting for a good tenant, and not just settling because you want to get it rented super quick. And then, the people end up trashing the house, and you saw all the red flags, but you just wanted to get it rented. So, that would be my one cautionary tale.
Okay, our last question today on Rookie Reply is from Samuel Hall. \u201cA FSBO, which is For Sale By Owner, has agreed to move forward with my offer. However, they want me to provide comps, comparables, to them. How would you handle this?\u201d
Well, I think this is a great situation for you to control, Samuel. They want you to provide the comps, instead of them going out and finding their own comps. So, I think you can definitely use this to your advantage. So, go onto the MLS, Zillow, realtor.com or whatever, and I would look at comparable properties that have sold in that area, not what things are listed at, because just because they\u2019re listed at something, does not mean they\u2019re actually going to sell for that.
I would also go to propstream.com. They have a free seven-day trial, so just use it for the seven days, and you can cancel it or you can keep it if you love it. But you\u2019ll also be able to pull comparables from there too, by putting in the address, and there\u2019s a little button you push to look at comps in the area.
So, you\u2019re going to compare bedroom count, bathroom count, but also square footage, and then finishes of the property. If you find a property that\u2019s $400,000, but it fits every check box, but it has all these high-end finishes, where yours is still designed in the \u201960s, that\u2019s not going to be a good comparable, or you\u2019re going to have to adjust your comparable by showing this house has an extra $100,000 of upgrades in it that this person\u2019s house doesn\u2019t have.
The place that I would be cautious about that is this person probably has this sentimental value to their property, so try not to bash their property by saying, \u201cOh, these comparables are way better than yours. That\u2019s why I am looking at something different.\u201d
So, even look at, see if you can find a property that is worse than theirs, or level as there\u2019s, and it sold for actually what you are going to pay for it. But I think you do have an advantage by picking and choosing what comps you use, to make your offer look more favorable.<\/p>\n
Tony:
Yeah, I think the only thing I\u2019d add to that is, also include, Samuel, and I\u2019m making an assumption here that there\u2019s some work to be done, but I would also include what you predict your rehab budget to be. So, you can go to the seller and say, \u201cLook, I\u2019m buying this property from you for X, but I also need to invest another 10, 20, 50, $100,000 to make this property even livable for the next person. So, I\u2019m taking on all of the work that you don\u2019t want to do.\u201d
And the last thing you can tell the seller is like, \u201cLook, Mr. And Mrs. Seller, I\u2019m going to buy the property completely as is. You literally don\u2019t have to lift a finger. If you want to just leave all the trash here, leave the trash air. If you want to do \u2026 Don\u2019t touch anything, I\u2019ll take care of everything. But just know I also have to put a little bit of work into it myself.\u201d
We\u2019ve used that tactic a couple times with some off-market deals we\u2019ve purchased, and it\u2019s been helpful to say, \u201cLook, we get that you have the sentimental value, but for us, it also is a business for us as well, and here\u2019s what we\u2019re going to have to spend to make this worthwhile.\u201d
So, I found that to be helpful when you\u2019re negotiating with folks also.<\/p>\n
Ashley:
Yeah, that\u2019s really good advice. So, the more information you can provide as to \u2026 that\u2019s going to be to your benefit, the better.
Well, thank you, guys, so much for joining us for this week\u2019s Rookie Reply. If you guys are watching this on YouTube, make sure you are subscribed to the channel, and you like this video for us, and leave a comment below, as to what question and answer you found the most valuable this week. And don\u2019t forget to leave us a review if you are listening on your favorite podcast platform.
Thank you, guys so much. I\u2019m Ashley @wealthfromrentals, and he is Tony @tonyjrobinson, and we\u2019ll be back on Wednesday with a guest.
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