How to Analyze Rentals for Cash Flow

Ashley:
This is Real Estate Rookie episode 428. Let’s get your questions answered. My name is Ashley Care and I’m here with Tony Jay Robinson,

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, today we’re diving into the BiggerPockets forums, and that’s right, you heard me correctly, the BiggerPockets forums. Okay, so if you didn’t know, there’s a tremendous amount of information on the BiggerPockets forums. We’re going to start using some of those questions here on the rookie reply, and we’re going to use the forums today to get your questions answered. Now again, the forum is the best place for you to quickly get all of your real estate investing questions answered by tons and tons and tons of real estate investing experts, all who are present on those forms themselves. So today we’re going to discuss how to set up your rentals on Google Maps, how do you actually make a profit on a rental property, and then what is the best way to manage vacation home? And then we’re going to finish off by talking about our favorite friend, Dave Ramsey, and see if he’s right with his strategy about going all cash.

Ashley:
So we’re actually live in the forums right now, and we’re just going to pull questions, Tony. So there’s different categories first that you can actually, if you want to look up a specific question, maybe somebody already asked, there’s different categories in the forums you can go to. So Tony, let’s start out in the starting out discussions in the BiggerPockets forums. Let’s click on that topic and see if we can find one in there.

Tony:
So I got one here from Richard Hoyt and Richard says, so I’m confused when you actually start making money from a rental property, where’s the actual profit? If you buy a $300,000 duplex with a $2,500 monthly mortgage and each renter pays 1500, you get $500 in cash. However, as a landlord, you’re also responsible for expensive repairs like roofs, plumbing and electrical issues. Wouldn’t that 500 just need to sit in a bank account to cover these expenses? So lot to unpack there, right? So first, Richard, you’re absolutely right. Being a landlord doesn’t mean that you just get to collect the rental income. There’s no other expenses. There are expenses you have to account for. Now, one of the tools that BiggerPockets offers is the calculator tools. And the reason I love using the calculator tools as a new investor is because it forces you to think about all of those other expenses that you might otherwise overlook. Things like repairs and maintenance, right? Things like CapEx for bigger things like your roof, things like utilities, if that’s something that you are responsible for as a landlord, so you’re 100% accurate vacancy as well, you’re 100% accurate. Richard, in saying that there are other expenses, so that 500 that you have left over, a percentage of that needs to go towards those other expenses, and then what’s left over is what you get to keep as the landlord.

Ashley:
Yeah, so one thing I like to recommend is when you’re purchasing a property is to actually establish a reserve account ahead of time and add this into your purchase price numbers if you want, or your closing costs of the property where you are going to take $5,000, a thousand dollars or whatever, three to six months of reserves are, what your monthly expenses are that you’re going to put into a savings account so that if there is some big expense that comes up, you have those reserves to tap into, or you have a vacancy, you have those reserves already and you don’t have to save up your cashflow. So as Tony mentioned, and you can use the BiggerPockets calculator reports to help you identify what those fixed costs are and those variable costs are, and make sure that you actually will cashflow because the mortgage payment is oftentimes not the only expense.

Ashley:
Do you need to pay for the lawn care? Do you need to pay for the snowplowing? Different things like that that are fixed that you will know you have to pay throughout the year. Then of course, the variable costs do come up. So we like to give, depending on the age of the property, a percentage that you should be saving and allocating, but once you hit a certain threshold on your reserves, you don’t really need to save that much more unless you have a capital improvement you know that you’re going to have to do within the next couple years, such as, you know, the hot water heater isn’t going to last that much longer, you’ll probably need to replace it. So let’s say you need to save $1,500 that you know that expense is coming up, so you’re going to put three months of your cashflow saved waiting for that expense to happen. So that’s where the deal analysis really comes into play is to not only looking at day one of this property when you close on it, but down the line too, what are the repairs that you’re going to have to do? And that can really help you budget and figure out how much cashflow you’ll actually make on the property. Then of course, there’s always the unexpected expenses that come up that you do want to have those reserves for

Tony:
Ash, what do you feel is a good number to set aside for reserves?

Ashley:
So three to six months of your fixed costs. So that is your mortgage payment, your principal and interest, your insurance, your property taxes, and then if you have lawn care snowplowing, even though you don’t have that throughout the whole year usually, but you will take that and just divide whatever the cost is for that season and divide it by 12. And that would be for each month what your cost is for that, and any other fixed costs that you have. Maybe you’re paying the gas on the property, you’re paying the water and the sewer on the property, even if the payment is variable as to it’s not the same every single month, you still have an idea of what that payment would be if it was breaking out monthly. So that total amount is I would save three to six months, and if the property is on the older side and you know that there is going to be a lot of capital improvements coming up and you didn’t fully rehab the property, then that’s where I would go more on the six month side and kind of beef that up.

Tony:
I think a fantastic explanation on all the different expenses. And I guess the only other thing to add to that, Richard, is in addition to the expenses and the cashflow, cashflow is obviously the king when it comes to why people invest in real estate investing. But the other piece to consider is the appreciation of the asset as well. So even if you’re leaving that money maybe sitting in that bank account and it just kind of accumulates over time, either building your reserves or maybe you’re using that for your next purchase, you’re also still getting both the loan pay down, right? Your tenants every single month are paying down that loan balance, and if you bought in the right market, you’re probably seeing the value of that property appreciate over time as well. So you’re seeing your equity grow year over year, and we just actually closed on a refinance from one of our cabinets that we bought before, and now we’re taking that capital to reinvest into some of our other properties to improve them to increase the revenue that those properties generate. So the equity is oftentimes an overlooked metric that really does have a positive impact on you as a real estate investor.

Ashley:
And think too, there’s also, you can increase the rent as time goes on too, even increasing the rent, your mortgage payment, if you get a 30 year fixed rate mortgage, your mortgage payment is going to stay the same, but your rental income can increase over time too. I have one property, for example, where I’ve had it since 2017 and the rent has increased by $300 in the lower unit and by $200 in the upper unit just since I purchased it. And there was a $20,000 rehab done at one point in time, but that I had used from, I literally had saved up. I hadn’t spent any money from my cashflow and I saved that money and I used some of the cashflow. So that wasn’t even $20,000 out of my own pocket. That was just from the cashflow that I had saved up from that property, and now I’m cashflowing even more after investing that little bit into the property to get an even greater cashflow because my mortgage payment is still staying the same. Okay, so stay tuned because we’re going to learn how to set up your rental on Google Maps and to find out if Dave Ramsey is right.

Tony:
Alright, welcome back from that short ad break. Now, Ashley, what about you? Any questions that are jumping out in the forum that you feel we should tackle next?

Ashley:
Well, I started searching through the Burr discussions, the buy, rehab, rent, refinance, repeat, and I was looking for some rookie specific ones. And so Jeffrey a asked, I’m currently doing a rehab on a seven unit multifamily that I own. I have a Google sheet that I’m using to track different elements of the project, but I’m wondering if folks have success using other software that they can share with me. Thank you in advance. Okay. Well Jeffrey, congratulations on your seven unit. First of all, being clear with and deadlines is so important to managing rehabs. I have the same thing with my GC that I have to use as we are constantly going back and forth with communication and when’s this going to be done? When’s this sub going to be there? And so important to stay on top of it because you’re holding costs, especially if you’re doing a flip or even if you have a rental, that vacancy, it can really cost you some money. So Tony, how are you currently managing any of your rehabs? You just did the huge rehab on your motel too. Yeah,

Tony:
So we dabbled with a software called Flipper Force, but it was pretty robust and I don’t know, we just really didn’t take the time to probably get all the benefit that that tool offers. So for us, we typically just use Excel as well, and we kind of build out our entire scope of work. We make sure that everyone knows what the game plan is for each part of the house, and then Sarah usually does a pretty good job in our designer brie of making sure that in addition to the scope of work that says this many receptacles, this many can lights, this many, whatever it may be, there’s also a layout by room of what the finished product should look like. So they kind of have the tactical steps within the scope of work, but then they also get the visual with the design component and they can put both of those things together to be fairly clear on what the finished product should look like. So that’s what we typically use. Are you using anything else Ash or how are you guys managing it?

Ashley:
Yeah, so we use mostly monday.com. I’ll do the initial scope of work with pen and paper, literally just take forever to walk room by room and I build my scope of workout just writing down pen and paper. Then I go and I actually plug it into the Google sheets because visually that works better for me and then also for my contractor. And then after I plug it into Google Sheets, I send it to the contractor and that’s where we walk through the property together as in usually he’s there with my scope of work on the phone with me and then he is asking questions about things and then we like, oh no, the flipper doing right now. He’s like, you should do a pocket door for this. And it was like, that is such a great idea, why didn’t think of it? So we’re making changes as he’s doing that walkthrough to my scope of work.

Ashley:
So then when we both agree on the scope of work, that’s where he goes and he gets bids from a sub and he puts prices to everything and then it comes back to me. So then once we have that scope of work that we’ve agreed on for price, everything’s set to go, that’s where I put it into monday.com and that’s where I’m tracking everything that’s done or what needs to be done and also what I’m responsible for. So my contractors, none of them want to use monday.com, none of them want me assigning the task. None of them want to go in and actually update it. So I am still physically doing that and that’s with me either sending Daryl to the property to do a weekly inspection of looking at, okay, where are we at in the project? And then we’ll sit down and go through and mark what’s done where we’re at this week.

Ashley:
For me, visually it just gives me a timeline. Nobody else wants to use the software except for me, but I would constantly be texting or calling if I didn’t have something that I could visually look at to track where we are. And I’m so bad at remembering what somebody told me here or there where this way I know, okay, I have it marked, they completed this on the date the invoice has been paid or whatever. And so monday.com is essentially just for me to keep track of it, but when we worked with our old property management company, they would use Buildertrend for any remodels they did, and that was the software that they used to coordinate large turnovers with us.

Tony:
I haven’t heard of Buildertrend before, I’ll also look into that one, but I guess one follow-up question, Ashley, in terms of timing, when are you actually creating your initial scope of work? Are you doing it when you’re under contract? Are you doing it post-close? Are you doing it before you make your offer? What does the timing look like for you?

Ashley:
It really depends on what kind of access I have to the property. So if it’s a vacant house and I have access to it, there’s one property right now I’ll probably close on maybe in a month. There’s literally just a key hidden under a statue and I can just go there. The owner says, just go there whenever you want and you need to, and that we have the scope of work already built out and that’s ready to go. But if I only got access during the showing and then if I only get access again for the final inspection, the day before closing, I do take as many pictures or I’m sending somebody to the showing who took a ton of pictures for me first to actually make the offer on the property. I will kind of build out a rough scope of work so that I can at least build a budget before I’m making my offer on the property.

Ashley:
And then I go through the photos again and kind of talk with my contractor as to what do you think? And we go back and forth a little bit before I close on the property, but if I don’t have that access, I will do the day I close or the next day I will go through and walk through the property and do it then. But my contractor already has an idea that the property is going to be ready to go, that it’s lined up and this is an overall estimate of what the project is going to be like. And then also too, if there is stuff inside of the property like the flipper doing now, we told the family they could just leave everything. The lady had died and we said we will take care of it as part of our offer to make it more enticing for them to want to go with us.

Ashley:
So we had to, I think it was four dumpsters total it took to just clear out all of her belongs. And it wasn’t like a hoarder house at all. It was just the family wanted nothing and left everything, furniture, her wedding dress, so much stuff was in there, but then I will wait until the house is cleared out to do the very detailed, how many outlets are there, the trim work, are there marks that need to be fixed in the trim, the closet rods, all that stuff. That’s when I’ll go and do the final really detailed scope of work.

Tony:
Yeah, very similar process that we fall. We walked a property not too long ago and this was when we were picking up from a wholesaler, so there were tenants living there and obviously the property wasn’t in the best condition. So much you I’d like to do a detailed scope of work as I’m at the property, but in some situations maybe you can’t. So I actually picked this up from Taro Yarborough, our friend who’s flipped a bunch of houses in the Pacific Northwest, but I’ll do a quick exterior working counterclockwise around the exterior, getting everything that I can, and then I’ll just go room by room getting as many detailed photos and I’ll stand in each corner of the room so I can get the full picture of it and then I’ll do a video walkthrough of the exterior and a video walkthrough of the entire interior.

Tony:
So then when I get back to my house, I pretty much have all the information I need to still put that scope of work together and I’ll use the videos and the photos to build it out and then I’ll send it over along with all the photos and the videos of my contractor and say, Hey, here’s what I’m thinking. Give a quote based on what you see here. And we’ve done it that way as well. So I do think the photos and the videos help a ton when you’re trying to build out that initial scope of work. But yeah, timing really does depend on access and maybe who you’re buying it from. MLS listings, maybe a little bit more access, maybe a little bit more time direct to seller wholesale, maybe a little bit more tricky trying to get inside the property.

Ashley:
Yeah, tar, we’ve had him as a guest on the Real Estate Rookie bootcamp. So anyone who is in any of the bootcamps or is signed up for a future one tar will oftentimes come on and go through that process that he does when he has someone for him actually walk the properties and then he’ll be in usually another state and build the scope of work based off of that system. But it’s so cool, Tony, he showed us his photos on one property and it was like when you’re a kid, those little flip books and it’s like somebody walking and doing something. Yeah, that’s what it looks like. Okay, so as you guys can tell, we love talking about real estate and we love answering questions like this with you all, and we’d love if you’d hit the follow button on your podcast app wherever you’re listening so that you guys can get notified more episodes that come out and it helps other people find us too, so they can get into real estate and busting. Okay. Tony, do you have another question? Did you find one?

Tony:
Oh, hey, let’s see. So I’m actually in the short-term rental discussions forum, which is obviously one of my favorite places to be on the BiggerPockets website. And there’s a question here from Mark and he says, I would like my Airbnb to show up in a Google search. How is this possible? So great question mark. And first thing I’ll say, we actually haven’t done this for our Airbnb, but we have done it for, obviously our hotel was on Google and I’ve done it for other random things that I’ve done in the past as well. So it used to be called Google My Business, but I just looked it up right now. It looks like now it’s got a different name now it’s just your Google business profile is what it’s called. So if you just search the phrase Google Business profile, you have the ability to either manage an existing profile, so you’re buying something from someone else, or maybe you’re building it out for the first time.

Tony:
You can go on this website and it’s a pretty simple kind of three-step process. At first you have to prove that you’re the owner and there’s different ways that they can do it. Sometimes they can do it virtually. Other times they have to mail you a physical postcard, and on that postcard there’s a little pin that you then have to enter back into Google to prove that you own it. Once you have it built out, then you’re just kind of creating your listing just like you would anywhere else. Then you’re able to manage it, personalize it, all those different things. So it is a fairly simple process, but it’s, what is it called? Google Business Profile is which you want to check out.

Ashley:
I actually did something like this similar before and it was for an auto dealership and I think it was like Bing where you went on and you wanted to claim your property on there. And what they did was they sent you a postcard and they sent it to the physical address to confirm the physical address location, and then it had a code on it and you had to go back into Bing and enter the code to actually claim that business listing. So I’m assuming that’s somewhat similar to doing it in Google as to that where you have them mail you something physically in. I guess in the situation of an Airbnb, you’re most likely not going to be at the property and probably don’t even get mailed there. I’m pretty sure at our a-frame, we just took the mailbox off the property, but you could go to your local or call or fill out a form at the local post office. You could probably do it online now, but you could set up for the mail to be forwarded to whatever address you do use, or you could also have them hold the mail for you. So maybe if you are local and you just don’t want the mail sent there, you can ask the post office to hold the mail for you for a certain period of time and then you can just go and pick it up at your convenience too.

Tony:
Yeah, I want to talk about the mailbox here really quickly, but first I got to talk about Microsoft Bing. I haven’t heard Bing in such a long time. I forgot that it was even out there. That’s what

Ashley:
I was thinking about. I was thinking, I was like, Bing, what was Bing? Oh, I like a search space.

Tony:
But for the mailbox piece, you talked about maybe removing the mailbox. So we’ve had in some of the cities that we invest in, in Joshua for example, it’s incredibly difficult to get deliveries at some of these properties, and part of the reason why is because the previous owners never established mailboxes. So for us as short-term rental owners, we have a lot of consumables that we purchase paper towels, dish soap, toilet paper, and we have to ship those things to the property. And we had a lot of things that were getting lost in translation because the mailbox was never established. So just word to the why’s, if you are looking to buy a short-term rental or operate one, just make sure that you have your mailbox set up with the local post office. Otherwise you’ll start buying a bunch of things at this property thinking that it’s going to get delivered and then all of it going to get returned to the center and you’ve got to kind of sort that thing out. So we’ve had quite a few of those instances where my wife and our team have had to figure out where, anyway, it’s happened a lot, so just take my word on it and get your mailbox set up. If you’ve got a short-term rental.

Ashley:
So it should be similar process where you have to enter some kind of code that you get in the mail and put it into, and maybe it wasn’t even a postcard, maybe it was actually a letter I don’t even remember. Then you could enter the code into Google and then it verifies you is the address and that you can claim the business to enter the information for it.

Tony:
Yeah, one last thing that I’ll add is that, again, we haven’t done this for our single family portfolio, but we do have the Google My business or the business manager thing set up for our hotel, and about 50% of our bookings right now are coming direct from the hotel, which is way more than what we were anticipating. We thought the OTAs would be a much bigger percentage, but it just goes to show that depending on the market, depending on the property type, something like that can actually drive a decent bit of revenue. And we’re getting just a pretty consistent stream of reviews on Google as well, which has been surprising for us also. So it can be something that maybe does drive a lot of business for you if you set it up the right way.

Ashley:
Okay, so the other kind of question I have for this is a follow-up. If you’re putting your address out there and somebody can search it and it’s a single family residence, what I think about is because doing all these horror stories on episodes is like, okay, you’re putting the address out there because when it’s listed on Airbnb, it doesn’t say the address until you’ve booked and then it sends it to you ahead of time before you come and stay. But if you’re putting it out there that this is an Airbnb, is there any kind of security risk that you’re going to get squatters in the property as to them driving by and knowing it’s a short-term rental and be like, oh, there’s no one there today. We’re going to go and break into the property and now live here. Something like that nightmares from all these horror stories that are happening. But I just want to think of all the situations that could happen by putting your address out there.

Tony:
Yeah, for sure. I mean, I guess it definitely is a possibility that someone with maybe the worst intentions could do that. But I mean, I feel like even in a regular neighborhood, people can probably pick up on which properties are the Airbnbs and which ones aren’t because you’re going to see days, maybe two days in a row where there’s literally no cars there, right? You’re going to see maybe a different car there every couple of days you’re going to see people unloading luggages. So if someone really was that motivated, they’re probably not looking on Google searching for the Airbnbs, they’re probably just driving around seeing what properties look like. And so in the grand scheme of things, probably a relatively low amount of risk doing that. Now, obviously don’t take this as advice, legal advice, whatever it may be, but I would assume that you’re probably not exposing yourself in a pretty significant way by doing that.

Ashley:
Okay. I actually have a follow-up to that as to another scenario, not to go down this rabbit hole, but I was in this Lake Facebook group the other day and somebody posted from their ring cameras, the three people just down on their deck, you have to walk down from the road down their stairs alongside their house and on their deck and they’re on their deck and they’re taking pictures of the lake views, they’re looking in their windows and stuff like that. So do you think that there’s more of a risk, and maybe this isn’t even a bad thing, is that people search for a short-term rental, they see your address and they say, okay, you know what? Let’s go look at it and see if maybe this is where we want to stay next year. And they come onto the property, they look around it, but here’s where that might be a great thing.

Ashley:
And then we say, wow, this is actually wonderful. Let’s book it. But what if you have guests staying there and then you have people coming to the property to look and see what’s going on because the address was so available. And yeah, I know I’m going down a rabbit hole, but that was something that happened in that scenario is there was over 300 comments in this small lake community page of people saying that happens to them actually quite often where they’re a rental and they have people that come and they’ll see, they post it on Facebook marketplace or whatever, and they’ll look and find the house and blah, blah blah and come and just look at it.

Tony:
Maybe because a lot of our guests are coming from all over the globe, really. I don’t know if we’ve ever had anyone who just kind of drove by and said, maybe I’ll stay here next time, Sarah. It might be a market dependent thing, but I can’t say that I’ve ever gotten word from anyone on my team that that’s happened to us before. So it might be more of a corner case for that specific area of the country where people are coming back every single summer to that same lake. And maybe it’s more common, but we haven’t seen that. We haven’t seen that. Okay.

Ashley:
So Tony, what’s the final review? Thumbs up, thumbs down as to posting your Airbnb address on Google business.

Tony:
I’m going to say thumbs up. I’m going to say thumbs up because I do, again, we’ve seen the benefit for the hotel that we just launched and now we’re even trying to lean heavier into direct booking for our single family portfolio after seeing the success of that. And that Google profile, I do believe has played a pretty big part of a lot of the direct bookings that we’ve received. So if you’re looking to diversify, if you’re looking to increase revenue, I’d say do it.

Ashley:
Okay, our next question, we are going to find out if Dave Ramsey is right, but first a word from our show sponsors.

Tony:
Alright guys, so welcome back. So Ash and I are still digging around the BiggerPockets forum here, and we were actually looking in the innovative strategies and discussions section, and here’s a question from Kia. And Kia says, Dave Ramsey says, buy everything in cash, which we all know. What are the pros and cons of both? Have you guys bought real estate in cash and rented them until you saved up for your next investment to pay in full versus getting a mortgage and paying the interest, but being able to buy more real estate instead of waiting and saving for a longer period of time? Debt, a lot to unpack here, but I always say this when it comes to Dave Ramsey, and this is true for a lot of the people that maybe we see who are like of Dave Ramsey’s stature. Dave Ramsey built his wealth not necessarily by doing the debt snowball and buying everything in cash. Dave Ramsey built his wealth because he built a nine figure media company on the back of this framework, the debt snowball on the baby steps. So even if Dave Ramsey just followed Dave Ramsey’s own advice, he wouldn’t be Dave Ramsey, right? So we always have to take that with a grain of salt. So that being said, Ash, what are your thoughts on only buying real estate and cash?

Ashley:
So I’ve bought real estate and cash and never put a mortgage on it, but they were $20,000. So I think that definitely really depends on the market you’re investing in too. How long would it take you to save up that much of money to actually buy in cash? And that could be a really long time depending on what the cost is in that market. So let’s start off with the pros and cons of it. Pro you probably sleep pretty good at night knowing that you have no debt, and that’s got to be a really great feeling and you should be really proud of yourself. The cons I would say, and I guess too a pro is very low risk tolerance. You have a lot of equity that you can tap into. If something else happened in your life where you needed to pull cash out, you could go and refinance or get a line of credit, some of the of paying in cash. You can’t grow and scale as quickly, you won’t accumulate as much wealth most likely because you’re going to buy at a slower pace if you have to save up for every single property that you’re going to buy in cash. What about you, Tony? Have you ever bought any properties in cash and never put a mortgage on them?

Tony:
I have not. Pretty much every property I’ve ever purchased had some level of debt associated with it. And again, like you said, I mean different price points as well. I think the cheapest property that we’ve purchased was like 2 85, I think was our lowest purchase price. And trying to do that multiple times would be difficult to pay that in cash only. So we’ve always leveraged debt. Now, when we talk about cons and pros, pros and cons, I think first we have to recognize for the individual investor, what is it that’s important to you and why are you investing in real estate and who are you as an investor? Because if someone tells me that, Tony, the reason that I’m investing in real estate today is because I want to build for my retirement 40 years down the line, maybe someone who just graduated from college or a couple years into their career, 25 years old, they’re like, I want to retire when I’m 65.

Tony:
I got 40 years to make this work. But I also have a very, very low risk tolerance in that scenario. You don’t need any cash today. You don’t need to worry about what that asset’s going to do over the next 40 years. Then yeah, maybe buying in cash and buying a property every so often is the right strategy for you because you’re able to wait to buy those properties because you got such a long runway. Now, if someone says, Tony, I’m 40 and I want to retire by the time I’m 55, well, you’ve got a very compressed timeline, and for you, cashflow is going to be more important because you need that to be able to step away from your job. Buying in cash is probably not the right strategy for you because it’s going to be significantly more difficult to get that momentum or to get that kind of stockpile of cash big enough to buy multiple properties. So in your scenario, it does make more sense to do that. So before we talk about pros and cons, it’s always about what is your motivation as a real estate investor? What are your resources and what is your risk tolerance and profile?

Ashley:
Yeah, and I think that’s a great point as far as if you do pay in all cash and you have these properties that are paid in cash, but you don’t need the money until later on. But also the fact that you don’t have as high of expenses to cover. If you have vacancies or something happens at the property that really lowers your risk tolerance. If maybe some form of covid happens for, again, God forbid, but all the tenants have to move out or something like that, and you’re left with all these vacancies, you’re going to be in better shape than people who do have mortgage payments. But one thing I kind of want to add to that too is there’s also a balance to this. Instead of doing one extreme or the other, instead of leveraging every property, instead of paying in cash for every property, you can also do a mix.

Ashley:
I have several properties that have no mortgage on it. Some of ’em I started out with no mortgage on them. Some of ’em I just paid off the mortgage for them because we sold another property in our portfolio and we just paid off the other property from the sale proceeds. So you can kind of have a mix of it and balance and look at the overall percentage of what your debt is compared to the value of your property, and then how much equity is in your property. So what actually helps you sleep at night? And I kind of do it by LLC. So with my partnerships, I have an LLC for each partnership. So what is our risk tolerance? How much debt do we want to have in each LLC where, okay, if one property is underperforming, we want to make sure that the other properties can cover that.

Ashley:
Well, having at least one property paid off really does help if one LLC is struggling because maybe there was a huge repair or something like that that happened. And so there’s always that balance where you can kind of mix it and 100% and helps me sleep at night not having every property leverage because we also have that property now as an emergency fund that we can tap into that equity at any time. We have the history of it being a rental. We could very easily get someone to finance it because the long-term leases that have been on it, the amount of rental income that’s coming into it and being able to show its performance in the past really does help with being able to get financing out of property too. So always, it’s not like you use it or you lose it. You can always tap into the equity on the property later on too.

Tony:
Yeah, that’s a great point, Ashley. I feel like a lot of times we live in a society that’s very black and white, but a lot of times you can operate in that gray area. And like you said, maybe the blended model makes the most sense. I also think like a lot of real estate investing, oftentimes the decision can be boiled down to a math equation because say for simple numbers’ sake, I have $100,000 that I want to invest in real estate. I could pay in cash and purchase one property worth $100,000, or I could take that same $100,000 and put 20% down on five $100,000 properties. And what we have to look at is how much cashflow we generate by having one $100,000 property fully paid for versus five that have a mortgage on it. And I didn’t run the numbers, but generally speaking, you’ll probably produce more cashflow with five properties that have a mortgage versus one that’s fully paid off, assuming they’re all the same exact property. So there is a bit of a math equation look at as well, but at the end of the day, Kia really comes down to you as an investor, your risk profile, your personal goals, your resources, and what’s driving you to invest in real estate.

Ashley:
And also too, the last part of that question said getting a mortgage and paying the interest, but being able to buy more real estate instead of waiting and saving for a longer period of time. So the question was very specific about paying the interest. Do I want to have that added expense of paying interest? And that’s where I don’t want investors to get too caught up in the interest because that is, if you can still cashflow and you can still have a good performing property, who cares if you are paying interest? That shouldn’t be a determining factor as to I shouldn’t pay interest. You should not have that mindset at all because interest payments are actually going to propel you. Right now, I’m doing a hard money loan on a flip where I’m paying 12% interest, and that’s the most interest I’ve ever, ever paid. I think before that, the highest I ever paid was maybe 8% and to pay 12, it doesn’t matter. It’s not affecting me because the property is still going to perform, it’s still going to sell, pay the interest, pay the principal back, and I’m still going to make money. So don’t get too caught up on paying interest that it’s money wasted because it can be a tool to help you make a money too.

Tony:
100%. And your tenants are paying the interest, really not you. Right? And it’s same thing for PM. I hear a lot of new investors say, I don’t want to pay PMI, so I’m going to put down 20% when maybe 15% or whatever the other percentage is, actually gives you a better return. So again, comes down to the math equation, what puts you in a better position as the owner, as the investor in that situation?

Ashley:
Yeah. And with the PMI, even if you’re deciding on how much to do as a down payment and pay PMI or not that exactly what you said before about doing the math, look at where you’ll be in five years, three years as to what’s the total amount of interest you’ll pay. Also, what could you have done with that extra down payment money that you used and compare that. And also when a bank wants to charge you points to lower the interest rate, I look at what the cost of the points are. So what are those fees they’re making you pay upfront to reduce your interest rate and look at three, five years down the road as to how long does it actually take you to save an interest before you recoup that closing cost you paid upfront too? If it’s going to be 10 years of interest that you’re going to pay, you might as well pay that money over 10 years, then have to pay it upfront.

Ashley:
But if you’re going to save that amount in just two years, then okay, yeah, you might as well go and pay those points. But okay, so if you would like to get more involved in the BiggerPockets community, you can ask us questions, you can answer questions, and you can connect with other real estate investors by going to ww.biggerpockets.com/forums. And if you feel like you are a rookie investor, you don’t know anything, you could not answer any questions and you don’t even know what questions to ask, I highly, highly recommend you go into the forums and you just read. You read and read, and you actually might be surprised just from listening to podcast episodes like this, the knowledge that you actually do know and could be beneficial to someone.

Tony:
Ash, I’ve shared this before, but the first time that I found BiggerPockets years and years ago was through the forms. I googled something about real estate investing, and naturally one of the responses from the forum showed up in that Google search result. And I just went down this deep rabbit hole about real estate investing, which then led me to the podcast and the books and the community. And now here I am a few years later hosting one of their podcasts. So the amount of support and guidance that exists within the forum is unparalleled anywhere else on the internet. So if you want to find that community, if you want to get that support, BiggerPockets Forum is the place to be.

Ashley:
Thank you guys so much for watching and listening to this episode of Real Estate Rookie. If you’re watching on YouTube, make sure to hit that subscribe button. If you are listening on your favorite podcast platform, make sure to follow along. Thank you guys. I’m Ashley. And he’s Tony. And we’ll see you guys next time on a real estate rookie.

Tony:
This BiggerPockets podcast is produced by Daniel Zarate, edited by Exodus Media Copywriting by Calico content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony:
And if you want your questions answered on the show, go to biggerpockets.com/reply.