\n<\/p>\n
If a potential tenant<\/strong> approaches you about Airbnb rental arbitrage<\/strong><\/a>, you may wonder if there\u2019s a catch. Are you responsible for damages<\/strong>? What if you encounter a noisy guest<\/strong>? As a landlord<\/strong><\/a>, there are all kinds of pros and cons you need to consider before letting someone else lease out your home<\/strong>. But, not to worry\u2014our hosts are here to spell them out!<\/p>\n Welcome back to the Real Estate Rookie<\/em> podcast<\/strong>! In this episode, Ashley and Tony deliver some critical advice to landlords<\/strong>. In addition to rental arbitrage<\/strong>, they discuss non-renewal notices<\/strong>\u2014when and how to deliver them! For first-time investors<\/strong>, they also provide a step-by-step process for creating an offer letter<\/strong>. What\u2019s more, they break down the biggest differences between hard money loans<\/strong><\/a> and construction loans<\/strong> and which one is the better option for a BRRRR (buy, rehab, rent, refinance, repeat)<\/strong><\/a>. Finally, they touch on structuring partnerships<\/strong><\/a> and all of the details you MUST flesh out before making one official!<\/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: \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/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 334.<\/p>\n
I guess we can just go pros and cons for allowing someone to arbitrage your unit. You ideally could potentially charge slightly higher than market rents. If you\u2019ve got a bigger multifamily property, you could lease out multiple units at one time to one person. The third benefit, and this is counterintuitive, they\u2019ll probably end up being your best tenants, because they\u2019re going to handle a lot of the minor maintenance issues on their own if they\u2019re a good host, because they\u2019re going to want to make sure that it\u2019s ready for that guest.<\/p>\n
My name is Ashley Kehr, and I\u2019m here with my co-host Tony J. Robinson.<\/p>\n
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 today, we\u2019re back with another rookie reply, answering questions from you, our rookie audience. And look, if you would like your question featured in one of our episodes, head over to biggerpockets.com\/reply, and we just might choose your question for one of our shows. But today, we got a long list of stuff that we\u2019re going over. We talk a little bit about rental arbitrage at the end of the show. What is it? When is it beneficial for the landlord and for the person doing arbitrage? We talk a little bit about how to structure partnerships, and if you guys haven\u2019t yet, head over to biggerpockets.com\/partnerships to pick up mine and Ashley\u2019s book about partnerships where we cover on how to structure a partnership, what to look out for, mistakes that rookies make when they\u2019re doing that kind of thing.<\/p>\n
And if you have checked out our book and given it a read, we would love to hear from you if you could leave us a review at biggerpockets.com or if you ordered it on Amazon or Barnes and Noble, if you could leave a review there, too. Well, you guys, we have run out of reviews. That means we need you to leave a review, an honest rating and review of the podcast, so that we can feature you. And please share any lessons you\u2019ve learned, any wins you have had from this podcast, listening to these amazing guests, and we would love to give you a shout-out. But before we get into today\u2019s show, Tony, I need to have a little boring banter with you. So by the time this airs, you\u2019ll be holding a little baby girl in your arms, so just fill us in real quick: what\u2019s going on in the Robinson household to prepare for baby?<\/p>\n
That\u2019s a good question. Sarah\u2019s pretty proactive, so she\u2019s been prepping leading up to this. We cleaned out the garage last month to make room for all the stuff that we were going to get for the baby shower. We had a closet downstairs, the closet you have underneath your stairs, it was just a junk place. Now it\u2019s all the baby stuff. We just finished the nursery, I think last weekend, so we\u2019re pretty much ready. I think the only thing that\u2019s missing right now is diapers. For whatever reason, we didn\u2019t get any diapers at the baby shower, so we got to get diapers and wipes. But everything else, we\u2019ve got. We\u2019ve got literally everything that we need, so we\u2019re just waiting right now for baby girl to get here.<\/p>\n
It\u2019s funny because when I came to visit you guys in August, in the morning, I got up and made myself breakfast and I went, I don\u2019t know where anything is in your kitchen, so I\u2019m just going through random cupboards and I opened up this big cabinet and it\u2019s just a piece of paper that says baby stuff, just like the whole cabinet is saved for baby stuff.<\/p>\n
And now it\u2019s filled up. We got stuff in there now. We got a lot of cool little trinkets and stuff, and one of the ones that was pretty cool is that it\u2019s like a Keurig, but for baby formula, so you just fill up the reservoir with water, and then there\u2019s a big thing at the top for the powder, and then it\u2019s literally wifi enabled, so say that we wake up in the middle of the night, we need to make a bottle, you hit a little button on the app, it mixes everything and gets it to the perfect temperature for the baby. We got a lot of cool little gadgets like that.<\/p>\n
That is cool.<\/p>\n
Because I had my son, he\u2019ll be 16 shortly, so that was almost two decades ago that we had him, and so much has changed.<\/p>\n
Did they even have Keurigs then?<\/p>\n
They didn\u2019t even have Keurigs. It has been cool to go on that journey, but we\u2019re excited. We\u2019re super excited.<\/p>\n
Well, thank you for sharing that with us. Everybody I\u2019m sure is excited for a little podcast baby to come and make an appearance sometime on the show. Okay, let\u2019s get into our rookie reply questions on this amazing Saturday. By the time this airs, I\u2019ll actually be spending every Saturday at peewee football games, but Tony, maybe it will be beautiful for you, and California probably be cold and windy and rainy at football games, but I hope everyone is having an amazing Saturday so far.<\/p>\n
Yeah, there\u2019s also a good chance that I might be holding a brand new baby girl in my arm, so we\u2019ll see, depending on how close. Actually, no, I\u2019ll definitely be, because this is coming out the end of October, so baby Robinson will be here by then for sure.<\/p>\n
Yes, I\u2019m so excited. I can\u2019t wait. Okay, so our first question is from Steven Cobb. \u201cHey everyone, I\u2019m about to try to make an offer on the house, but the property is on market, so I\u2019m talking with the agent. When I make the offer, is there any official document that I need to submit, or do I just give them the price I want to offer?\u201d Great question, Steven. And there are differences between submitting an offer to somebody on market and off market. On market is when the property is listed on the MLS, and there is a real estate agent that is handling the transaction. Tony, you can tell me if you read it differently, but I\u2019m thinking that he went to the agent that is listing the property?<\/p>\n
Mm-hmm.<\/p>\n
That he doesn\u2019t have his own agent, which is completely fine. A lot of agents who will do that, it\u2019s considered being a dual agent where they will represent you and the seller. In this circumstance, or if you go and get your own agent, there is no official document that you actually need to present or make up. The agent will do the whole contract for you. And that is one reason I love using a real estate agent, is because they do all of the paperwork for you, and you don\u2019t have to. Tony, you want to go through a list of things that when you\u2019re talking to your agent, I\u2019m talking to my agent, what are some of the things we have to tell them when we\u2019re making an offer? It\u2019s not just the price you want to offer, there\u2019s other things that go into the offer that needs to be considered.
What your agent would tell you this, or any agent will say, \u201cThis is the additional information I need,\u201d but just so you\u2019re prepared that you can have it. The first thing is what name do you want the contract in? Are you putting in your personal name? Are you going to put the property in an LLC? You can also put an LLC or a name and do and\/or assigned to. This way, you have the ability to change the contract before you actually close on the property. When I purchase a property, I always put them into the same development company.
And then I\u2019m like, \u201cOkay, here\u2019s my business partners, which one\u2019s going to be a great fit? Okay, great, it\u2019s going to be Joe this time for this property. I\u2019m going to put it into our LLC that we have.\u201d And then, by the time it\u2019s ready to close on the property, we make the change to the contract that it\u2019s maker. But this is also how wholesalers can do it too, where they can assign the contract to somebody else. That\u2019s the first thing. Start writing a list down you guys. The first thing is the name. The contract is going to go in. Tony, what would be your second thing?<\/p>\n
Yeah, I think the second thing, and the one that\u2019s always important for me is your due diligence period. And due diligence is your opportunity as the buyer to really open up the hood of this property, go under the hood for this property, and make sure that as it appears on the outside is how it appears on the inside as well. This is when you\u2019re doing your general property inspection, maybe you\u2019re doing a septic inspection, maybe you\u2019re scoping the sewer lines, you\u2019re having electrical bids created and plumbing bids created. But basically, this is where you really get to sharpen the pencil on all of your initial expenses that you projected associated with that property. And the due diligence period is important because typically during your due diligence, if you find something of concern, say that maybe you assumed that the roof is in good condition, but after the inspection was completed and having a roofing contractor go out, turns out the entire roof needs to be replaced.
That\u2019s a relatively big expense. So you can then go back to the cellar during your due diligence and say, \u201cHey, I would like to get a reduction of $5,000 to help cover the cost of getting this roof repaired or replaced.\u201d And then you and the seller can negotiate. If the seller says no, as long as you cancel your purchase agreement during your due diligence phase, you typically can get your earnest money deposit refunded back to you. If you were to try and cancel outside of your due diligence period, and maybe there weren\u2019t some other contingencies, you might lose that EMD. I like to typically focus on the due diligence period. A shorter due diligence, it\u2019s typically more, I think, attractive to a seller than a longer due diligence. And I\u2019d say for most of our properties right now, especially if it\u2019s a flip or something we\u2019re going up, 14 days of due diligence is pretty typical for us, but that\u2019d be the second one for me, Ashley, is due diligence.<\/p>\n
Okay, well, that was the wrong answer because we were still on the first page of the contract and you skipped to the second page of the contract. The correct answer for the second thing was the address, so the address you want to put on the contract, and this is where your property taxes would be sent to. This is the address the county will have on record as far as the mailing address for this LLC and for the property where you\u2019ll get your property taxes. And then to tag along with that is the email address, because most agents use electronic signature, so they\u2019ll need your email where they can send the final contract to get signed by you electronically.
Then moving to page two, definitely agree, the due diligence, super important. Are you going to have that inspection period? For how long do you need to have that due diligence? Then the next thing would be your purchase price. How much are you going to pay for the property? And then to coincide with that as to how you are paying for the property. Are you going to be paying cash? Are you going to be getting a bank loan? Is it going to be an FHA loan? The loan type you are getting is important in the offer, too, because that will definitely play into someone\u2019s consideration for your offer.
FHA loans are harder to get in a sense, because there\u2019s more hoops to jump through. You have to do an FHA loan inspection, which is separate from your inspection that you\u2019re getting during your due diligence period compared to a conventional loan where the loan company, the mortgage company, isn\u2019t doing any of their own inspection. If you\u2019re looking at two offers, yours with the FHA loan seems a little more risky because what if we go this far and then they say, \u201cNo, sorry, FHA loan, we actually won\u2019t cover this property. It doesn\u2019t meet our inspection criteria.\u201d Then the contract falls out, and now these people have to start all over. The next thing after the due diligence would be what your price is and how you\u2019re going to pay for it, and then that ties into a contingency. You can put a contingency in there that if you do not get bank financing and you don\u2019t get your bank commitment letter by x date, then you can actually back out of the contract.<\/p>\n
There\u2019s tons of different contingencies you can add to your purchase agreement, Steven. I think the piece that\u2019s important is that you don\u2019t want to overdo it. You really just want to try and focus on the contingencies that are most important to you, so yeah, the due diligence, the financing contingency is a big one. We\u2019re doing stuff, we just signed a purchase agreement on a hotel, and one of the things that we had was the environmental study. And actually I learned this from you, Ashley, like, hey, we want to make sure that this thing passes a phase one environmental. And part of our due diligence, but we called it out separately, so there\u2019s tons of things that you can include from a contingency standpoint. But just know the more you have, the less attractive your offer gets. But we talked price, we talked owner information, we talked due diligence and contingencies. I\u2019m trying to think if there\u2019s anything else that I typically include in a purchase agreement. Anything that you\u2019d add that we haven\u2019t chatted on yet?<\/p>\n
The only thing I would add is a closing date, that we\u2019ll close in 30 days, so that would be the last thing that I would add. What I usually do is I write out an email to the agent, or I send this in a text sometimes, too, and I will literally just list out this information: name, address, email, inspection, due diligence period, price, how you\u2019re paying, and then closing date, or how many days until closing. It\u2019s just an itemized list I go through and I\u2019ll fill out that out and send it right over, and that\u2019s usually enough information to have all that filled out. And then if there\u2019s any other contingencies you want in there, too. For example, maybe you\u2019re selling your primary residence or another investment property, and saying you\u2019re only going to be able to close on this property if your other property sells, too.<\/p>\n
The closing date is super important. I was actually trying to look at the last flip that we bought earlier this year. But yeah, typically, a shorter closing window is more attractive to a seller than a longer closing window. Like Ashley said, 30 days is a pretty common escrow period on a single family or small multifamily type residence. Longer escrow periods typically if you\u2019re going into bigger commercial properties. But what we will do on a lot of our flips is we\u2019ll go no financing contingency, because we\u2019re typically raising private money or we\u2019ve already got the money raised in a lot of scenarios, and then we\u2019ll do a 21-day closing.
We\u2019ll have 14 days to get our inspections and our due diligence completed. Then it\u2019s just another seven days to finish off all the paperwork with our private moneylenders, and typically, we\u2019re able to close within three weeks. For us, we\u2019ve got a pretty strong offer because there\u2019s a tighter window, no financing contingency, no other crazy contingencies as well, and it allows our offers to stand out. And I\u2019m pretty sure on this deal, we weren\u2019t the highest offer, but they liked our terms a little bit better than some of the other offers they got.<\/p>\n
Yeah, I think that\u2019s a great point. All these other contingencies and terms that you\u2019re putting into your contract can actually make a difference more than price. And that\u2019s why if you have the chance to find out why that person is selling their property can actually help you tailor your offer to that. Okay, so our next question is from Carrie Adams. \u201cAny recommendations on how to structure a partnership for long-term buy and hold?\u201d Cue Tony.<\/p>\n
I don\u2019t have my book.<\/p>\n
You don\u2019t have your book?<\/p>\n
Where\u2019s my book? I put it up here.<\/p>\n
Hold on. I got one.<\/p>\n
All right, so Ashley\u2019s so excited right now that she just ran into her microphone.<\/p>\n
I just spun around and hit my own head.<\/p>\n
All right, you do the honors today, Ash. I\u2019ll hold the book up, but you do the audience.<\/p>\n
Okay, well, I wheeled over to get my book in my chair, so I got mine too. But anytime we hear the word partnership, we are your go-to people, because we wrote the book Real Estate Partnerships. You can find it on the BiggerPockets bookstore. You can go to biggerpockets.com\/partnerships, and if you use the code Ashley or Tony, you can actually get a little discount, too. Now that I\u2019m all frazzled from running to my desk, in this question it says, \u201cI have great credit, and my potential partner has more cashflow.\u201d So they\u2019re both bringing value into the partnership. As in cashflow, this is meaning they have actual capital, they have cash to put into the property. They\u2019re willing to go half on the down payment, but the mortgage would be in my name. Tony, I think this is the perfect question for you, because this sounds very similar to how you set up your joint venture agreements.<\/p>\n
I\u2019s a great question, Carrie, and I think there\u2019s a little bit more to unpack here because I would want to know outside of just how were you structuring the purchase, because what you\u2019ve defined in your question is the purchase, is who\u2019s going to carry the mortgage, which is an important question, and how are we going to cover the down payment and closing costs, which is another important question. But what I would ask next is, how are you going to divide the responsibilities of actually owning and managing this real estate investment? Is one of you going to be the person that\u2019s going to handle everything, while the other person is more of a silent partner? Are you going to split responsibilities down the middle? Is one person going to do 70%, the other person going to do 80%? I think the long-term management of this investment is a critically important thing to consider as you\u2019re putting the initial structure together.
Because assuming all things being equal, how you have it set up right now, one person\u2019s bringing the capital, one person\u2019s bringing the mortgage, that\u2019s a pretty equal thing here, right? Because the ability to get approved for a loan is incredibly important. Better rates, maybe a lower down payment percentage, but you still need the capital to actually close on that deal. But say that you, Carrie, were the person that was going to manage everything, and this other person was literally just bringing the capital, it might make more sense for you to actually have more ownership in the property, because you\u2019re getting the mortgage and you\u2019re doing the management, or maybe you charge the property management fee. There\u2019s a lot of different levers here, but it\u2019s hard to really give a super concrete answer without knowing what the asset management\u2019s going to look like. What are your thoughts, Ash?<\/p>\n
Yeah, I would say one thing in here is I think that Carrie should get more equity than the other person is because she\u2019s taking on the debt and she\u2019s giving half the down payment. She\u2019s giving up more for this property, she\u2019s increasing her debt to income ratio, and she\u2019s putting in cash. I would take that, and whatever you\u2019re working out the percentage to be that I think Carrie has more value in this partnership, because she is taking on the debt and giving half of the down payment. Now, if that were to change and flip-flop, and maybe the one person was putting in cash and then just the whole down payment amount, and then for Carrie to get the debt in their name. There\u2019s definitely different variables, but I also think, too, is what is the outcome of this partnership? And I think one thing to be very cautious of when you are structuring this is do what Doni does in his joint venture agreements: do a five-year exit strategy.
In five years, you\u2019re evaluating if you want to keep the property, or if one person wants to sell, you sell it. Having those exit strategies in place, very key when setting up your structure for this. And I think a joint venture agreement is the way to go, because if you are going to\u2026 Or you could do an LLC on this, you\u2019ll just have to go and get the financing in the LLC, which then you wouldn\u2019t be bringing as much of a value to the partnership, because the debt would actually be in the LLCs name and not in your name, and the interest rate and the terms wouldn\u2019t be as great, either.<\/p>\n
But there\u2019s so many different ways to structure it, Carrie. I think what\u2019s most important is that the two of you sit down and really identify, we\u2019ve got the acquisition piece hammered out, but what does the long-term management of this buy and hold look like? Who\u2019s going to be playing what roles? And then do your best to assign either equity, or fixed hourly payments, or percentage of the revenue as a management fee for those duties and responsibilities of actually managing the property? I think it\u2019s a common mistake that a lot of rookies make is that they overvalue the acquisition side, and they undervalue the long-term asset management. The acquisition, it\u2019s a one-time event, right? You\u2019re going to buy the property one time. But the asset management, that goes on for as long as the two of you own that property together, which could be a year, could be five years, could be 30 years, could be forever. You just want to make sure that you\u2019re keeping that in perspective as you structure this partnership.<\/p>\n
Okay. The next question is about hard money loans versus construction loans by Rhett Miller. He wants to know, \u201cWhat are the best ones to use for a BRRRR: a hard money loan or a construction loan? Pros, cons. I\u2019m looking at two lenders and one suggested a construction loan. I was just wondering what your thoughts were. Thanks in advance.\u201d Okay, so the only construction loan I\u2019ve used is actually to build my primary residence, so that was just ground up construction. Have you used a construction loan, Tony?<\/p>\n
Yeah, I have. I\u2019ve used it twice for some of the properties that I had in Louisiana, my first few long-term rentals out there. But I think it might even be beneficial just from my own understanding to at least break down some of the differences here. Hard money versus construction loan: typically a hard money lender is a company of business that specializes in funding rehab projects for real estate investors. And usually you\u2019ll see higher interest rates than a usual investment property loan. Additionally, there\u2019s points like additional fees you have to pay upfront to use that debt as well. But a hard money lender\u2019s bread and butter customer is the real estate investor.
At least for the construction loans that I\u2019ve used and the ones that I\u2019ve seen, you can get those from a more traditional bank. I got both of mine from a local credit union in the market that I was investing in. Even big banks like Bank of America has a construction loan. Typically, those are going to be for your primary residences, but you can get a construction loan from a local bank or credit union, not just a hard money lender.
I\u2019ll explain how my construction loan worked, and I\u2019ve actually never used hard money because I\u2019ve always gone the private money route, but I\u2019ll explain how the construction loan worked. The way that this specific credit union had it set up, I had to go out and find a property. Once I found the property, they would do\u2026 Basically, I would submit my identified scope of work. Say \u201cHey, here\u2019s the work that I plan to do on this property.\u201d They would then take that scope of work along with the current condition of the property, and they would basically do a future appraisal where they would say, \u201cHey, based on the scope of work and the current condition of the property, here\u2019s what we think this property will appraise for after your work is done.\u201d And as long as I was below a certain percentage, I think it had to be like 72% of the after repair value, they would lend me all the money for the construction and the purchase.
Basically, I had a one-year construction loan with them. It was an interest only loan, it was a great loan product. I think at the time interest rates were at a little over three, maybe, and I was paying 6% on the construction loan, so it was pretty good. Cheaper than if I would\u2019ve gone out and gotten hard money at that time. I had a 12-month interest only construction loan. And what was great about the loan was that I was only being billed on the amount that I had drawn at the time. I bought the property for whatever, 70,000 bucks. Initially, it was only 6% on that 70,000. And then as my construction bill got larger, then the loan itself, the balance that I was being charged on got larger as well.
And then at the end of that 12 months, I was able to refinance with that bank into permanent long-term fixed debt. I went from the 6% construction loan down to, I don\u2019t know, a 4% investment loan. That was a process for the construction loan. It\u2019s all in house. They handle both the short-term debt and the long-term refinance, pretty much all under the same roof.<\/p>\n
For this one, I think my answer at least would be using hard money versus the construction loan, just because in my experience with hard money, there is a lot less oversight compared to the construction loan. The construction loan, when actually I had to have a licensed contractor who was actually approved and verified by them, by the bank, where with hard money, they didn\u2019t ask who was doing the work or anything like that. Not that I wouldn\u2019t use somebody who wasn\u2019t doing a good job. I think different hoops like that, the hard money was easier than doing the construction loan as far as having those hoops, and having so much information verified, and things like that. And for the draws with the hard money, it was a lot easier process to get the draws than it was for the construction loan, too.<\/p>\n
I guess the inverse of that, I actually found it super helpful, Ash, because I had this construction loan on my very first investment property ever, and I found a ton of value in actually having the bank send a representative to the rehab before they released a draw, because I was getting this confirmation. I was in California, the property was in Louisiana, several thousand miles away. I had my property manager, I\u2019d already contracted the property manager, they would go and walk the property for me. I was FaceTiming with the GC once a week, he was giving me a walk through the property. But then I also had the representative from the credit union who would walk the construction to make sure that, okay, there\u2019s progress being made before they release the draw. It was this security blanket for me to make sure that the rehab was moving the right way.
And then even on the acquisition side, I had this bank who knew the market way better than I did give me their estimate of the ARV. And so, I was super confident moving forward with it, because not only did my initial analysis make sense, not only did my realtor\u2019s suggestion make sense, but then the bank who knows and has lended on tons of properties in that market, they also had this ARV that made a ton of sense. I think for a first time investor for a lot of our rookies, even though there are a few more hoops to jump through, it really can be a good set of training wheels on that first big rehab that you\u2019re doing.<\/p>\n
Yeah, that\u2019s a great point as far as the training wheels, is someone holding your hand along the process, where with hard money, there definitely wasn\u2019t that for me, at all. But that\u2019s a great point. The one thing that I will challenge you on, I guess, with that is I did this YouTube video years ago with a hard money lender, and I said the same thing. \u201cWow, you send inspectors out? That\u2019s actually really great. It\u2019s like that second set of eyes on the property, somebody else who maybe has more construction knowledge.\u201d And he looks at me and he goes, he\u2019s like, \u201cYou know you\u2019re paying a lot of money for those inspections, right? Those are baked into your loan fees. It\u2019s not a free service.\u201d
And he said, \u201cIf that is really why you want to do this type of loan product is for the inspections,\u201d he said, \u201cit is way cheaper to actually go and hire a third party inspector to come out and to actually do inspections like that for you, too.\u201d I always think about that and how that was interesting. And sometimes you look at some type of service or product and you think like, oh wow, I love it because of this feature. Try to think more outside of the box, and if that\u2019s the only feature you really need and why you\u2019re finding value in this thing, is find a way to make that work for you without having to buy the whole process or system.<\/p>\n
Totally agree with that. I think I was in a unique position because this was a truly small credit union that had just a few branches in and around that local area, so it wasn\u2019t expensive debt by any means. Like I said, I think there were no points. I didn\u2019t pay any points upfront. The interest rate I\u2019m pretty sure was 6%, and this was back in 2019, which was pretty good, so it seemed like a good one for me. I will say that the one downside was that I couldn\u2019t use it to flip a home. I could only use it to BRRRR. And they made that very clear to me, like, \u201cHey, you can\u2019t sell this property once the construction\u2019s done. You have to refinance into permanent debt with us.\u201d And then I think I had to hold it for at least like a year or something like that before I could sell it, so it was only for BRRRRing.<\/p>\n
That\u2019s actually another great point as the pros and cons versus hard money and a construction loan is what their refinance terms are. Especially when you\u2019re doing a BRRRR like the question asked, the hard money lender that I had used on two BRRRRs, you had to refinance with them, but you had to have at least three properties you were going to refinance at a time, and they would only do almost a portfolio loan to refinance. I ended up pulling my properties off, and there was a 1% fee to actually not refinance with them.
And then also when I\u2019ve done it with the bank, it was my primary residence or whatever, but we had to refinance with them once the construction loan was done. But I think really comparing what the refinance terms are, so not only the terms of the rehab process and that initial hard money and the construction loan, but also what happens when you refinance? Are you charged fees because you\u2019re refinancing with someone else? What is the interest rate going to be? Can you lock in a rate? All those different things, look at that end scenario to the actual refinance piece, too. Okay, our next question is from Arbin Pale: \u201cHow much notice do you give to tenants that you\u2019re not renewing the lease?\u201d Tony, what\u2019s your-<\/p>\n
I give them 24 hours notice. \u201cYou guys are leaving tomorrow at 10:00 AM, and if you don\u2019t, I\u2019m calling the sheriffs.\u201d<\/p>\n
This depends on your rental landlord laws in your state. I mentioned this actually our last rookie reply, we did episode three of 31 a couple of times, avail.co, or you go to your local housing authority website, or you Google your state and then tenant landlord laws. And usually, there\u2019s some kind of handbook or guide available to you, free or really low-cost landlord classes you can take. Highly, highly recommend taking them. In New York state, you have to give notice depending on how long the person has lived at the property. If they\u2019ve lived there for less than a year, they\u2019re on a year lease and they have to live there over a year, you have to give 30 days\u2019 notice that you\u2019re not renewing their lease, or that you are renewing their lease. And if there\u2019s a rent increase, it has to be that amount.
If it\u2019s two years or less they\u2019ve lived there, then it\u2019s 60 days. And then anything over that is 90 days\u2019 notice. Having to juggle this if you have multiple tenants, keeping track is very important as to how long they live there, as to when you actually have to do their lease renewal. Highly recommend setting some notification five days before that 30, 60, or 90 days, giving your time to write up their new lease agreement, their lease renewal, or that notice to let them know that you\u2019ll not be renewing their lease. Check your state laws as to what that requirement is. I think the more notice you can give, the better. You just want to make sure that if you\u2019re not renewing their lease, that they don\u2019t retaliate by not paying rent for the next three months.<\/p>\n
I was going to ask that too, Ash. Say that you do issue a non-renewal notice, and let me just take a step back. So again, that property management company that I worked at for a very brief period of time, they also had it very clearly laid out inside of the original lease agreement what would constitute a non-renewal. For example, if you got X number of documented noise complaints that could lead to a non-renewal. If you had X number of late rent payments, that could lead to a non-renewal. So some things are super clear, where it\u2019s like, hey, when your lease is up, you already knew that you weren\u2019t going to get renewed. But say that it\u2019s something maybe more severe where you\u2019re issuing that notice. Have you ever had a tenant trash the place because they were angry, or just leave in the middle of the night? Or are most understanding, and they leave peacefully?<\/p>\n
I actually can only think of one tenant that I\u2019ve done a non-renewal with. And maybe when my properties were with the third party property management company, they did and they took care of things, so I was oblivious as to if someone was given a non-renewal or not. But before that, even when I property managed, I can\u2019t think of anyone offhand unless it was like we said, we gave them their notice to cure or quit because they weren\u2019t paying rent, for non-payment.
But as far as anything else, we did have one resident recently where right when we took over, her lease was up, we gave proper notice that we weren\u2019t renewing it because of all the complaints. An old property management company had emailed us every time there was the issue, so we had record of it. It was issues with her dogs. And then she also was late all the time, and so we did a non-renewal with her. And she did try to say that she wanted to stay and things like that, and we just stuck to our guns, and she ended up moving out, and she actually moved in with somebody else at the apartment complex for a little bit. We heard from the neighbors or whatever, but apparently she\u2019s found somewhere else now. But I can\u2019t really think of any other times that we\u2019ve done non-renewals for somebody.
Okay. Our last question today is from Chris Latt. And Tony, it is a question for you. \u201cAirbnb arbitrage from the landlord\u2019s perspective: what are the major disadvantages of this? I just listed my primary residence for rent, and I\u2019ve already gotten inquiries about potential tenants that want to short-term rental the home when they are traveling, or they want to short-term rental a portion of the house. I added a private entrance to the master bedroom of my current house.\u201d In this scenario, we have Chris who has somebody inquiring to be his long-term rental in the property, but while they\u2019re traveling, going on vacation, doing whatever, they want to turn part of the house into a short-term rental to supplement what they\u2019re not paying so they can go and travel. Tony, what is your take on this?<\/p>\n
Yeah, as the landlord, I guess we can just go pros and cons for allowing someone to arbitrage your unit. The pros are that you ideally could potentially charge slightly higher than market rents. If market rent is whatever, 1300 bucks, maybe you could charge this person, do an arbitrage, 1500. And it\u2019s not uncommon, I think, to see that. The second benefit, and this is more so if you\u2019ve got multifamily, but I know you\u2019re talking single family, Chris, but I\u2019ll talk to our multifamily folks as well. We took on our first arbitrage units from a buddy of mine that has a 12-unit apartment complex, and we took on not one, not two, but three of his units. He had three vacant units, he only had to go to one person, and I was able to lease all three of them from him.
If you\u2019ve got maybe a bigger multifamily property, you could lease out multiple units at one time to one person. And I only signed one lease for all three, so all three are managed under one lease, so there\u2019s less management, less overhead, et cetera, for that landlord. The third benefit, and this is counterintuitive, but the third benefit is that they\u2019ll probably end up being your best tenants, because they\u2019re going to handle a lot of the minor maintenance issues on their own. Because as a short-term rental host, if I\u2019ve got the window between 10:00 AM when one guest checks out and 4:00 PM when the next guest checks in, if there\u2019s a leaky toilet, or a handle gets broken, or something is wrong, I\u2019m not going to wait on the landlord to come. I\u2019m just going to fix it myself to make sure it\u2019s ready for that next guest. A lot of those minor maintenance issues go away when you\u2019re allowing someone to sublease if they\u2019re a good host, because they\u2019re going to want to make sure that it\u2019s ready for that guest.
Those are some of the benefits. The disadvantages are potentially, you could have short-term rental guests that maybe bug your other residents. If you\u2019ve got a single family house, it could be your neighbors. If you\u2019ve got a multifamily, it could be the other folks that are inside of those units. But Chris, yours is a single-family home, so maybe you\u2019ve got a little bit of space between your neighbors and your home, so it\u2019s not as big of an issue. But if you\u2019ve got people upstairs and downstairs, it becomes, I think, a bit of a harder thing to manage. And the other disadvantage is that God forbid, but you could have someone that there was a rager or something, and maybe they caused some extensive damage to the property, but I\u2019d say that\u2019s probably more of a rare occurrence than people actually understand. Honestly, I think there\u2019s more pros than cons. But Ash, you\u2019re the actual long-term landlord lady here, so what are your thoughts on this piece?<\/p>\n
And I also arbitrage two apartments that I rent from somebody else. I\u2019ll say, first of all, the first thing that came to mind is my short-term rental units, one of them, I was just trying to think, it\u2019s been 2018 or 2019 I\u2019ve had it, and that apartment to this day is nicer than people who have lived in an apartment at that same apartment complex for only a year. One huge benefit is it\u2019s constantly being cleaned, and it\u2019s always maintained and nice. That was the first thing I thought of is if these people are going to be renting it out as a short-term rental, they will most likely keep the house and the property very nice and clean, because they will want those five star reviews. They\u2019ll want to get as much money as they can. That was my first thought as to that it may actually work out in your favor, and it\u2019s not going to be a long-term tenant that\u2019s just going to trash the place or not clean it and not take care of it because they\u2019re going to be renting it out.
Another thing is, too, is that you\u2019ll be able to look up the listing, and you\u2019ll be able to read the reviews as to if they are taking care of the place, or if people are commenting and saying that the place is disgusting and blah, blah, blah, don\u2019t stay here. The next thing, too, is I would check with your insurance agent as to how this would work for your insurance. Tony has short-term rental insurance on his properties. I have landlord insurance on my properties for my long-term rentals, so talk to your insurance agent and see how this would come into play. Do you need to have your long-term tenants get short-term rental coverage, so that way if somebody does throw a rager and do all this damage, or things happen to the property, that it\u2019s actually your long-term tenants that are responsible to cover through their insurance all of the damages that were done at the property, and it\u2019s not even anything to do with you?
And that actually would give me more peace of mind knowing that the long-term tenants have the insurance in place, so it\u2019s them paying any deductible, and it\u2019s their insurance premium increasing because they have a claim, and not you having a claim on your own homeowner\u2019s insurance. Everything you touched on was great. Those are the only two things that I would add.<\/p>\n
Yeah, for the arbitrage units that we\u2019re doing, we also have our own insurance in place as well, just to try and protect everyone. But yeah, honestly, I think it could be a win-win for you as the landlord, and for the folks that are renting it from you.<\/p>\n
Well, thank you guys so much for listening this week. I\u2019m Ashley at Wealth from Rentals, and he\u2019s Tony at Tony J. Robinson. If you have a question, you can submit it at biggerpockets.com\/reply, and you can also check out our new book, Real Estate Partnerships, at biggerpockets.com\/partnerships. Thank you, and we will see you back here on Wednesday.<\/p>\n