How to Comp Rent/Home Prices and Why Going SMALL May Make You More

Ashley:
Okay, let’s get your questions answered. I’m Ashley Kehr and I’m here with Tony j 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. And today we’re diving back into the BiggerPockets forums to get your questions answered. And guys, if you’re listening to the Real Estate Rookie podcast, just know the BiggerPockets forms are actually the best place for you to quickly get all of your real estate investing questions answered by tons of other real estate experts. So today we’re going to discuss how to pull comps when you’re analyzing your first deal, how to determine how much capital you actually need to get started and ways to transition out of your first house hack.

Ashley:
Okay, so let’s get into our first question. This question says, hi everyone. I’m looking to buy my first long-term investment property, and I’m not sure whether I’m approaching my research for rental comps correctly. Please give me any feedback. So what I’m doing is typing in the zip code into a rental statistics like Zillow. So when this is pulled up, the data shows a market temperature on the page that says warm or hot. So then from there, I’ll look up a house I might want to buy in that zip code. If it’s a three bed, two bath, I will look up three bed, two bath houses if that’s what the market showed for that in that zip code. I’ll choose similar houses as to the one I chose when I got the gauge for how much I can rent it out for. Along that process, I will come across a few homes in that zip code that have been on the market for a while, 64 days, 96 days, et cetera.

Ashley:
These houses seem to be in decent condition, clear photos, et cetera, and are renting at a reasonable price compared to the newer listings. When I see this, it’s concerning because why are so many decent homes in a warm market temperature per the stats page on the market for two plus months? And that usually steers me away from the zip code because I have to imagine that my house can possibly be vacant for months as well in conclusion, is that correct? Am I missing something or are there other ways to gauge the rental demand? Okay, Tony, what are your first thoughts on using a rental gauge to find comparables?

Tony:
My first thought is that every rookie who’s listening should use the BiggerPockets rental estimator tool that you get as being a member of BiggerPockets because it actually does a lot of the legwork for you. And I don’t know all the science behind how the tool works. I’ll have to ask Dave Meyer that piece, but I know I’ve plugged in some of the long-term rental properties that I had into that tool after they launched it, and it was very much spot on with what I was actually charging my tenants at the time. So if you want maybe an easier way to navigate that, the BiggerPockets real estate rent estimators are great tool. Now the other piece, and actually obviously you’re way more entrance into the long-term space than I am, but I do like to look at data to help me make decisions. And if I’m looking in a city or if I’m looking in a zip code and I see a ton of inventory that’s been sitting for a long time, I think it is reasonable to conclude that if you added another listing to that same market, there’s a good chance yours could sit for quite some time as well.

Tony:
So I don’t know if you’re missing anything. I feel like you’re looking at the date and it’s kind of telling you what you need to know about that zip code, the Zillow or whatever tool you’re using, who knows what they’re using to come up with these different labels of warm or hot and what the thought process is behind that. But always rely on your own due diligence or own research to really make that decision.

Ashley:
I guess one clarifying question in this question is that when the person writes along that process, I’ll come across a few homes in that zip code that had been on the market for a while. So are we assuming that these are houses that are listed for rent on Zillow or these are houses that she’s looking to purchase to actually rent out on Zillow?

Tony:
That’s actually a good question. I guess I made the assumption that these were other listings that have been up for rent for that period of timeframe. But I guess if say that it was something that was maybe just listed for sale, I wouldn’t be super concerned about that because you’re not listing to us for sale, you’re listing it for rent. I don’t know if you agree or disagree with that, Ash.

Ashley:
Well, I’ll give to answers for each one. If you’re saying you’re looking at the comparables and houses that are listed for rent are sitting for a long time, then I would say that that’s probably not the market rent. Then I would go back and I would look at other properties for rent. I would find property management companies in the area and I would call them, you can pretend to be somebody looking, a prospective tenant looking for a property and ask in that neighborhood what are the going rents for a property that’s a three bed, two bath? And I would get information from them. I would go on different data sources to look at what actually is available in other places. A lot of apartment complexes too, they’ll keep their postings up even if they don’t have anything available just to get you to call to get that lead.

Ashley:
So you can find those, A lot of those posts on apartments.com, things like that. So I would rely on other comparables than just Zillow. So look other places too. Now, if you’re talking about the market rent looks great, the purchase price looks great, but houses available to purchase are sitting on the market and you’re having a hard time understanding why hasn’t somebody purchased these at these price and rented them out because they look great, they look in good condition in the photos. So what I would do is I would look and go to Zillow, the sold homes, and I would look at that area, that neighborhood, and at what has sold though. So maybe a ton of houses has sold and there’s just random things that have happened with these few that they have not sold. So I would go back and look and see like, okay, is there nothing that’s selling?

Ashley:
Then yeah, there may be a bigger issue here, but also have a ton of other properties sold. Maybe other properties are finished even nicer and they’re selling for the same price and that’s why these okay, ones aren’t selling for that. So go and look even further and dig deeper into the comparables. And then I think just to wrap up for the rentals, find out what things actually rented for, create a spreadsheet and track that market track listings that go up when the listing is taking down. Most likely it was rented for what the person was asking. Unless you’re in a market where people negotiate and rental prices and bid people out, then maybe it rented higher. But in most markets, whatever someone’s listed for, that’s what it’s for. And then if a price decreases, okay, this property was not able to rent at that amount and they had to decrease the price. But that’s what I used to do all the time when I first started out was I would just track the listings for rentals to see what things were rented for. Because unlike sold homes, it’s a lot harder to find what properties actually rented for and when they rented compared to seeing the listings that are available and what the vacancy is because even though there’s a few available, that could have meant that there was a hundred others that were rented that month too.

Tony:
Yeah, all really, really good points. Ashley and I plugged in the very first rental property that I ever purchased back into the BP Rent estimator tool. And again, this was 2018 when I bought that deal, and I think we were charging 1450 somewhere around there for rent. Now rents have since increased to 1600. So it feels pretty reasonable given that it’s been four years or however many years, six years now. Geez. But using that tool is another data point to give you that confidence.

Ashley:
I was really hoping it was like rent had tripled or quadrupled and you’re like, oh my God, I should have sold

Tony:
It. I should have kept that one. Yeah.

Ashley:
Okay, so we’re going to take a short break, but stay tuned because we’re going to find out how much vacancy you should expect when finding tenants for your house hack.

Tony:
Alright guys, welcome back. So we’re going to jump into the next question here, and this one’s about house hacking and kind of understanding how much house you should actually be purchasing. This question says, I’m looking to buy my first house hack in the Denver area. I’m hoping to buy a home for around 500 K with five bedrooms and renting out every single room while sleeping in a trailer. Currently a mortgage would be around $3,500 per month. So if I rented out every room at around $800 each, I’d have a total rental income of four minus my $3,500 mortgage gives me 500 bucks give or take in cashflow before reserves, and that’s with all the rooms rented out. My question is first, how hard is it to find renters immediately after getting a property? And the second question is, with a mortgage of 3,500 being just over 50% of my W2 income, I make about $4,200, I’m sorry, $6,200 per month and I’m biting off more than I can chew in case of vacancy.

Tony:
I’ve also looked into the kind of 400 price range with four bedrooms with the cheaper mortgage, but also lower cashflow at potentially just breaking even. So a couple of questions here. The first one is how hard is it to find renters after going live, which we kind of touched on with the last question, but the second one is, should I be taking on a $3,500 mortgage when it’s over 50% of my W2 income? So I think let’s probably start with that one first. Who cares about finding the tenants? Let’s figure out if you can actually afford it. So what are your thoughts, Ashley, on getting into a house hack where if it was sitting vacant, it would eat up 50% of your take home pay?

Ashley:
Well, I think the fact that you’re house hacking, so you’re going to be living there. So you should have some wiggle room where you could pay a percentage of the mortgage because you probably live somewhere else now where you’re paying X amount a month to live there and just keep reserves of that amount. And so in case you do have to funnel into a vacancy, but I feel like especially going with five bedrooms, even though it’s a higher mortgage, I feel like there’s less risk because now instead of one roommate moving out, if you have two bedrooms now, what are the chances that all four roommates, so maybe don’t pick four friends that might all decide to move out together to get their own place and leave you behind. But I think it’s just getting a small multifamily compared to a single family. If you have the single family and you have a vacancy, you have nothing to cover those expenses.

Ashley:
But if you have a small multifamily and you have four units, one person moves out, you still have those three other rents coming in to help cover the overhead, and so you get another tenant filled into that. And I would say take into account what that cashflow is because you’re saying that your 50% of your W2 income, what if you can’t cover the mortgage payment? That’s where you’re going to have to save reserves and have reserves. So even as you’re taking cashflow in, if it makes you feel more comfortable, just save a little bit of that cashflow into even more reserves too instead of blowing it on something.

Tony:
Yeah, I agree with pretty much everything you said there, Ashley. I think I do have a little bit of concern over the mortgage being so high, but again, having five potential sources of income on that one property does reduce the risk. I think a lot of it also kind of comes down to this person’s own personal financial situation. If it is 50% of their take home pay, but they’ve got a paid for car, they’ve got no credit card debt, they’ve got no family, just them as a single person is what it sounds like. So they’re not worried about kids or a spouse or anything like that.

Ashley:
Well, it says he’s living in a trailer too in the parking or in the driveway of it. So if anything, sell the trailer, get a lump up sum of cash and then move back into the house.

Tony:
Yeah, there’s a few things you can do and I feel like if you’re living expenses are low enough to where maybe you could live off of 20% of your take home pay, well then you still got a 30% buffer there to make sure that you can hold things over if things were to go sideways. So I feel like a lot of it’s going to come down to your unique situation, like as you said, how much reserves do you have and what does that look like? But is it too much potentially? But I think a lot of it comes down to your unique financial situation.

Ashley:
Then he also gave the option of should he look at a four bedroom, which would be cheaper. I think if this is going to help you sleep at night, even though it’s less cashflow or you might break even, you’re still way ahead from somebody else who actually pays their own mortgage to live in a property.

Tony:
So it could be a win. Now the other part of his question here is how hard is it to find renters immediately after getting a property? So let me ask you this question, Ashley. Obviously it’s going to be very market dependent. So what Ashley’s doing in Western New York may not apply in Denver though Denver is a pretty popular and I think high demand city, if you can think what’s the fastest that you’ve gone from? I put the rental listing up and someone’s moved in. We

Ashley:
Have people that come into the property when we’re rehabbing it. That’s what’s happened within the last year is the property is being rehabbed and people come in and say, the neighbor told ’em that the unit was going to be available, it was being rehabbed, and they come in asking for more information on it that they want to move it. So most of the times the past year, we even haven’t even had to list a unit, but if we do list it, we get applications within three days, we probably have six to eight applications. And it really depends on the showing availability as to when we set our showing blocks that people can, they schedule their showings online. And so really it’s filling pretty fast. But I would say that renting by the room is definitely more unique and probably more pickier as to who you want living in your house with you. I mean, even though you’re living out in the trailer, these people will still be on the property with you. So I think that may take some more time finding roommates to rent by the room.

Tony:
We had Danielle Daley, who’s also a BP employee, come on the podcast not too long ago. So if you search her name, I’m sure it’ll come up somewhere. But she talked about she did a very similar strategy where she bought a very, very big house as a single person and rented out all of the other bedrooms. And I think that’ll be a good one to go back and listen to for the person who asked this question because Danielle outlines what steps she went through to both source potential tenants qualify and interview those tenants to make sure that she was actually going to enjoy living with them. And then obviously the management piece of doing the house act in that way as well. But I would say again, the reserves are going to be important here because what if it does take you 90 days to kind of fill all five bedrooms? Can you weather that storm by yourself for those first few months to make it happen? And Danielle’s episode was 287. If you guys go back and check episode 2 87, you can listen to that one.

Ashley:
And that’s also a downside of going with a larger property, even though you have a better chance of cash flowing because there’s more tenants in place, you also have to manage more tenants now and you also have to fill more vacancies and more units I guess. So it takes some more work for sure.

Tony:
Alright guys, look, we love talking about real estate. We love answering all these questions with you guys, and we’d love it if you could hit the follow button or the subscribe button wherever you’re listening to the Real Estate Ricky podcast because the more folks that we can reach, the more folks we can help. And that’s what the Real Estate Ricky is all about. So we right back after a quick ad break from one of our show sponsors.

Ashley:
Okay, welcome back. So we have our final question today and this question is, I currently owe $157,000 on my house, 55,000 in various loans. I have 150,000 in a 4 0 3 B, which is a retirement account and will be out of debt in May to June of 2025, the 55,000. Congratulations. That’s awesome. My available income for investing will be around 30 to 40,000 a year just by saving. I’ve been pondering alternative ways to fund my first investment property, but I would love more strategies to do more than one property a year. I would love to do two to three properties a year. We have thought about selling our home, buying a duplex and renting the other side. We have considered tapping into our equity or partnering with someone, or maybe we should go ahead and commit to pay the house down. Our mortgage is 1100 per month. I’m a baby to this and learning the jargon. So go easy on me in regards to terminology, but I appreciate any ideas. Thank you. Well, what an opportunity. I love it when people have a dilemma as to how they should invest their capital because sometimes that’s the hardest part is saving your money and living below your means to actually have the capital to invest yourself.

Tony:
100%. And I think there’s a few pieces to this question, but one of the things she says is that I have a goal of buying more than one property per year. I would love to do two to three. Now, I just want to break it down mathematically for you, having 50% of two properties is the same thing mathematically as having 100% of one property. So before you venture into equity partnerships where you’re giving up maybe 50% of a deal, I think the question is what kind of scale will you be able to achieve by going after those partnerships and does it actually make sense for you to do that? So for example, in my real estate portfolio, we bought three short-term rentals by ourselves, and we bought 12 with partners over 12 month timeframe. I couldn’t have bought six by myself during that timeframe. So for us, it made sense to really double down the partnerships because it gave us that scale. But if you’re looking to give up 50% equity to go from buying one property year by yourself to buying two with someone else, you’re really just creating more management workload for the same amount of potential cashflow. What are your thoughts on it, Ashley?

Ashley:
That was a lesson that took me a long time to learn as to it’s not about unit count and sometimes you can actually figure out ways to make one property cashflow better than to have two properties that cashflow and it ends up being the same amount. So when I first started, I wasn’t focused on my systems, my operations, I was just like analyzing a deal. Okay, let’s buy this property. It’s cashflows $300 per month. It’s barely any of my own money into the deal. Okay, next deal. How many of these can I get and just accumulate 200 to $300 with zero money out of pocket into these duplexes and these properties? And I did not realize, and it took me a long time, that there’s ways to increase cashflow by actually spending more time on your financials of the property is to like, okay, where can I save money?

Ashley:
What are energy efficient things I can do at the property? Or what are capital expenses I can put into the property instead of using it as a down payment to fund another property? What can I do to put into this property to increase the rental income on this property? I would say run the numbers and look into if you purchase one property, what is going to be the cashflow? And then if you just, like Tony said, if you are going to purchase two, but you’re going to partner 50 50, what does that actually look like on those properties? And maybe you’re planning on doing different strategies where you want to do one long-term. You want to do a short-term and partner with an experienced operator. So maybe that would be different story than just and buying the same couple properties because unit count doesn’t matter.

Ashley:
I could have five rentals. Tony could have two rentals and they could cashflow the same amount of money and his could cashflow more because he took his lump sum and he put it into his properties and now he cashflows the same as me. I didn’t put any money into my properties, but we’re cashflowing the same. I have more overhead, I have more work managing these tenants, managing these properties, but yet we’re getting the same cashflow. Yes, he invested that money, but say, what did I do with that money? I’m making 5% in a bank account and it’s sitting somewhere, for example. So look at your options of what’s the offset, what are you going to do that money if you’re not putting it into real estate or however you’re putting it into there, think about what’s going to be the best return for you. And I think just sitting down and running the numbers, and sometimes it might just be leaving that money into one property or two properties instead of continuously pulling it back out and partnering with someone to fund the next deal, next deal, next deal.

Tony:
Now the other part of her question was we’ve thought about selling our home, buying a duplex and renting the other side. Also a possibility. But I guess I’d ask the question, if you already have a home, why sell it? If you’ve got 30 or 40 K that you can imply as a down payment to something else, could you use that money to go out and get the duplex that you’re then going to house hack? So now you have the primary residence, the single family home you just moved out of, convert that to a long-term rental, use the funds. You have saved that to buy a duplex. Now you’ve got an additional unit to rent out there as well. So you went from one to two with one deal, right? You got two units with one deal. So it is a possibility, and we’ve interviewed a lot of folks in the podcast who every 12 months for a few years, they’re just jumping from primary residents to primary residents, and that’s their entire strategy for building their real estate portfolio. That is definitely an option. If you feel like your lifestyle would support that,

Ashley:
That is a great idea. Tony and I stand behind that. I 100% say that probably is an amazing option. You have to look at what the rent comparables are for your property, and your mortgage is 1100. So if you can get more than $1,100 and you can make the rent work and it will cashflow for you and you’re not coming out of pocket with expenses, that is a great idea, especially because you’re going to get the best type of financing on that duplex by living in the property. But also you probably have really great financing terms on that current property now where if you went out and bought an investment property, we just had a guest on the show that was paying 7.1% on an investment property they bought. And depending when you bought your home, you’re probably paying less than 7% interest right now on that property. So it can be hard to give up those really nice loans that have the low interest, especially these days. So I think Tony had a great idea of turn your primary into a rental.

Tony:
Now the other piece that she says here is, should we go ahead and commit to pay down the house? The current house they’re currently living in, the mortgage is 1100 bucks a month. The question I would ask is, how does doing that help you achieve your goal of buying maybe two to three properties per year? I think in the short term, you’re going to divert a lot of capital back towards paying down that mortgage. We don’t know what the loan balance is, but as you said, it’s

Ashley:
157,000,

Tony:
150,000, right? So I mean, how long is it going to take for you to do that? If you’re saving 40 KA year on the high end, that’s going to take you four years to pay off the mortgage. And I think the question is, could you have deployed that a hundred and almost $60,000 elsewhere and potentially gotten a better return? And probably so now in four years from now, you’ll be in a good spot because you’ve got to paid for a home. You can use that equity in your house and maybe get a heloc. You get some low interest debt that you can then use to and kind of build your real estate portfolio that way. But I think you’ve got to ask yourself, which one of those actually helped you achieve your goal of building the portfolio? And I guess getting to your ultimate end goal of whatever that may be,

Ashley:
But also looking at the interest rate too of your primary residence now paying it off. So if you took that 157,000 and paid off your primary, you’re saving what? Say you’re paying 4%, you’re saving 4% that you’re no longer paying, but then you’re going to take 157 and put it into a rental property. Your now paying 7% interest in that property. But maybe you’re making a great return. Maybe you’re making 12% cash on cash return on that money or something like that. But I think you really have to run the numbers and see, okay, but if I buy that property, what’s going to be my cashflow and how does that compare if I pay off my mortgage too? And I think the timing too is because she’s also paying off the 55,000 in miscellaneous step first. So it’s actually five years from now before the primary resident’s mortgage would actually be paid off too.

Tony:
So we’re not saying no, but I think we’re saying run the numbers, see which decision may be best supports your long-term investment goals. But I think based on what you shared with me, I probably would lean away from that and maybe focus on actually going out there and getting the deal.

Ashley:
Okay. Well, if you want to get involved with the real estate rookie community or BiggerPockets at all, you can head over to biggerpockets.com/forums and connect with other like-minded investors. Thank you guys so much for joining us today. On this week’s rookie reply. I’m Ashley. And he’s Tony. If you have a question, head over to the forums, leave a question. Also join us in the Real Estate Rookie Facebook group. Thank you guys, and we’ll see you next time.