Rent-Raising Renovations, the 1% Rule

Ashley:
Let’s get your questions answered. I’m Ashley Care 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. Now, today we’re diving back into the BiggerPockets forum to get your questions answered. Guys, the forms are the best place for you to quickly get all of your real estate investing questions answered by experts like me, like Ashton, and so many others who are active inside of those forms. So today we’re going to talk about someone who’s actually thinking about quitting real estate altogether. What renovations actually raise rents on a property, whether or not you should consider buying a turnkey rental, and would you buy a property that doesn’t actually follow the 1% rule?

Ashley:
So Tony, let’s go into the, I’m in the rehabbing and house flipping in the BiggerPockets forum section right now. Let’s pick a question out of there. Doucey a good one.

Tony:
Yeah, so I’ve got one here from Sam Z and Sam says, so I’ve got this rental property. I was currently rinsing it at $1,000 per month, but I’m trying to get that to about 1400 to $1,500 per month. The cabinets are original, about 45 years old. The cabinet under the sink had water damage to the base and have the option of just repairing that and painting the inside of it, or I could just get all new cabinets on the top and the bottom. What would you do? Also, the toilets are old, probably 15 to 25 years old. I’m having the old really worn and poorly laid tile floors replaced with full LVP, so they would need to be reseeded anyway. What projects do you consider when wanting to raise rents? Lot to unpack there, Ashley. So he talks about currently beating a thousand bucks, trying to get that up almost 50% to 1500 bucks per month. I guess what, before you even go into Ashley, let me ask you, before you even go into doing any sort of repairs on a property with the goal of rent increases, what data are you looking at first to help you make that decision?

Ashley:
Yeah, so you want to look at the comparables. So what are the properties that are renting for 1400, 1500 per dollars per month and are there actually those properties out there and what do they have that’s different from yours? So LVP is definitely one thing. We always immediately do rip out carpets, put in LVP, put in LVP over linoleum, whatever may be in there. That is a really great way to add value to the property and increase what you can get into rent. So right there, that’s a great first step. So look in the area, look at the other properties in your area. What are some of the things they have as far as the toilet? I would say just for maintenance that you don’t get maintenance calls that the toilet finally does break down or you’re needing to replace pieces and parts of this, the toilet valve, all these different things on it to go ahead and replace it because it is not that costly of a repair to do.

Ashley:
You’re looking at maybe if you’re having somebody install maybe 500 bucks with a decent toilet, the wax seal, everything you need, and then labor for insulation. So I would say that 100% definitely go ahead and do that. And everybody likes the look of a new shiny toilet instead of, I’m wondering if this one’s 15 to 25 years old if it’s one really, really small one that’s really low to the ground too. But what about the cabinets, Tony? Does painting the cabinets compared to installing new cabinets, do they make a difference in any of the rehabs you have done? So

Tony:
I feel like it depends, right? Because you can do some renovations with a goal of increasing the after repair value of the home and then you can do some renovations to a property that may not impact the A RV as much, but it’ll impact the rental rate. And that’s true for traditional long-term rentals, especially true for short-term rentals. We put a golf course like a mini golf inside of one of our garages. I don’t that’s really going to impact the RV as much, but it definitely impacts the rental rates. So I think you’ve got to try and decide. So I would look at the other, like you said, I would go back to the other comps in the air from a rental perspective and I would see are they all brand new cabinets or are they all just repainted with fresh hardware? And if you can get away with just repainting them, do that. And we’ve done that sometimes in our properties where we don’t replace the cabinets, we just sand ’em down, paint ’em, and put on some fresh hardware and we save a bunch of money doing it that way. So it all depends on what the market is saying and kind of what the market’s doing

Ashley:
And what the cost is going to be to replace those cabinets. Because if you have a huge kitchen and you’re going to replace all of ’em, that can add up really fast to replace all the cabinets and then say you are going to raise your rent to $1,400 per month from a thousand. But if those cabinets are going to cost, it’s going to be a $30,000 kitchen upgrade, then maybe that extra $400 isn’t worth it. But that’s where you have to see the kind of cost benefit there is. What is going to be your return on your investment of upgrading those cabinets? How will that increase your cashflow?

Tony:
So it feels like we’re both saying the same thing, Ashley, is that Sam, if you want to make this decision, it could be the right thing to do, but don’t just go off a gut feel, look at the data, see what other properties you were charging that much, what are they offering to their residents, whether they’re offering to their tenants, and see if you can incorporate those things in at a reasonable amount.

Ashley:
And the last, the piece of his question was what projects do you consider when wanting to raise rent? So something besides the LVP, that’s our number one thing, but the next thing is the toilet, the vanity and the tubs surround. If the tub surround is nasty and it’s worn and just not great and the caulk is all bad, we’ll just rip that out and replace that, seal it all up nice. And then also new faucet, new shower head, things like that that can really make a difference in the bathroom and not be super expensive. And then just a cheap Lowe’s vanity that looks nice and new compared to the one that’s disgusting and gross that’s been in there for years or that’s completely outdated. You can get a vanity pretty cheap these days too. So those little bathroom upgrades we will do too. And then fresh coat of paint, fresh coat of paint makes all the difference in the world as long as you’re not just painting everything over outlets and things like that. And then painting the trim. So in a lot of older apartments that have wood trim that’s stained, we’ve actually been painting them. I don’t know what the guys do, but they put some kind of something on the trim before they paint it since it was stained first. So doing that too.

Tony:
And I guess just the last thing too, and you touched on this a little bit, Ashley, but it’s like how do you calculate what your return on investment is for this upgrade? And a lot of times as investors we have the decision of making, do I reinvest back into my existing properties or do I take that capital and deploy it into buying something new? And it’s a case by case basis on what makes more sense, but say that you are able to achieve a $500 per month increase in rents, right? So $500 per month over 12 months, what is that? Six grand times? 12? Yeah, 6,000 bucks a year. So say it costs you Sam $12,000 to do all of these renovations on this unit, you just earned an extra $6,000 per month in revenue and assuming your expenses stay the same, that almost all of that’s going to your bottom line. So you got a 50% return on the $12,000 that you just invested. So I think that’s a metric that we probably don’t talk about it enough. We’re talking about upgrading existing properties, but what kind of return will I get on this specific cash that I’m putting into these repairs?

Ashley:
And we had a guest, and I can’t remember who it was, but that’s what they were currently doing. That was kind of like their goal for 2024 was instead of buying new properties was adding value, like putting in a sauna and different things, spending their money that they were saving up to add value because it was increasing their nightly rate by so much that they were actually getting more benefit, a bigger return by adding value to the property they already had. And it was less headache. You weren’t having to manage another listing, prepares on another property less overhead. Definitely a good way to think about it. Okay, so we’re going to take a quick break, but stay tuned because we’re going to talk about if you still need to follow the 1% rule when buying properties.

Tony:
Alright guys, welcome back. So how about you Ashley? Is there any questions that are maybe sticking out to you inside of the BP forms?

Ashley:
Well, I’m looking in the general investing discussions and here’s one that he writes. I’m thinking of selling my rental properties and quitting real estate investing due to stress of ownership. I have two properties managed by a property manager. The reason I’m thinking of getting out of being a real estate investor is due to the stress and constant little expenses that are adding up. Recently there was a major plumbing problem at one of the single family homes and the tenants were not able to use the bathroom. Unfortunately, the issue was so severe that it required the tenants to move out for the repairs to be completed. I was genuinely stressed out by this feeling bad for the renters who are unable to use a bathroom fearing possible litigation even if there is no reason to be sued. Just an irrational fear. The other issue is recurrent expenses.

Ashley:
Although I have allocated 20% of rental income for both properties for repairs and maintenance, I have easily spent over that for both properties. Plumbers are crazy expensive, increasing city taxes, thinking if another issue is going to come up and I won’t be getting the full rent to cover the mortgage using my personal finance to pay for repairs and numerous other small things that in isolation are not a big deal, but they just keep adding up and create anxiety for me. I am debating if I should sell my two houses and just move the money into syndications or the stock market. I’m looking at my Vanguard account and my portfolio is up 30% year to date with zero stress Real estate for me is not my primary source of income. I have a regular job that pays well. What are your guys’ thoughts? Is this something you have experienced as well? How did you deal with it? Does it get better or worse? How do you deal with the stress of ownership? 100% relatable.

Ashley:
I was thinking of my oat stress literally right before we recorded this episode. I got a phone call saying that the plumbers are trying to schedule a water leak from the upper units bathroom to the lower person’s bathroom and the lower people are cooperative. The upper person saying, well, I’m not sure if I’ll be here. You can try and see if I’m here. And it’s like, no, you have to be there. Like say yes, you’ll be there. No, this is the time I will be there. And that’s exactly what I was thinking of. Yes, and it’s probably going to be an expensive expense, but so yes, these things are definitely relatable as a real estate investor. So Tony, what’s the first thing you look at as to, here’s the first thing you should be analyzing if this is for you or not for you.

Tony:
Yeah, I just add onto what you just said as well, Ash. I just think it’s good for everyone to hear that these issues that Mosen is talking about, these are the issues that come along with investing in real estate and I think this is why there are returns to be made in real estate, why there’s profit to be made in real estate because there are issues that the general person or the average person maybe doesn’t want to deal with. And it’s us accepting that kind of risk that allows us to reap that reward. So just know it is part of the process, most of it that we go through. I think actually the first question I’d ask Ashley is because he said I have two properties that are being managed by a property manager. And when I read that sentence I was thinking to myself, why is there so much stress coming back on Mosen as the owner if he’s paying someone as the property manager, the plumbing issue, that’s probably a one-off thing that I wouldn’t anticipate happening all that frequently where you got to move tenants out of the property and relocate them somewhere else, but all the day-to-day grind of managing this property.

Tony:
So it should be done and taking care of by that pm. So I don’t know. I guess from your perspective, just hearing this, do you feel like Mo’s property manager is doing a good enough job?

Ashley:
Well, it could just be that they’re telling him what’s happening and him getting stressed by that could be the fact. It’s not like he’s coordinating where they have to stay when they move out and things like that. But also he could be footing the bill. When I had a property management company, there was water coming into someone’s apartment and they rented her on the company’s dime to go and stay at a hotel. She ended up not even showing up to the hotel, but still we still had to pay. But even though they coordinated that, it was still stressful. I could say in a sense like, oh yeah, now this tenant’s obviously not going to be happy. What other issues are going to come up now? And just I think that would be a lot of it. But as far as the expenses, so when you have a property manager, it’s a lot harder to control your expenses.

Ashley:
For example, plumbers are expensive. Yes, when I started out, we used just the local handyman that I don’t even know if he had his plumbing license, but he did everything and it was definitely a lot cheaper than having somebody from a plumbing company come to the property. But I was able to control my costs that way. Where as a property management company, a professional company, they need everybody to be licensed, insured, bonded, have all their ducks in a row, which are going to be more expensive for them to bring out to your property to do the work. So I think maybe if the stress is actually the financial stress of even though you can’t afford to pay these things, it doesn’t mean that you want your money to go to all these expenses that are adding up. I think that if you want to be able to control costs, maybe this is where you hire an asset manager, somebody who can actually go to the property management company and they’re the ones controlling the cost for you as to, okay, we’re lowering threshold.

Ashley:
If there is a repair that needs to be done, it’s no longer a $500 minimum where you have to talk to me, it’s now a hundred dollars minimum, which maybe they won’t agree to, but then you’re having your asset manager go and kind of look, say like, yes, okay, this isn’t actually a good price or not. Or you just hire somebody to be your own property manager and help you control those costs because a property management company is going to have relationships with these contractors where for a plumbing issue, they’re not going to go and bid it out, bid out a $500. Yeah, they already work with this reputable vendor, they’re just going to keep using them. And that was a problem that I had too. But even now with our property management company, we use the same plumber every time, but we get a great deal and we get great service because we use them constantly for our properties, unfortunately. But I think there are ways to hire somebody and reading the book, the self-managing landlord that’s on BiggerPockets, again help you if you want to hire someone, it just has to be a couple hours a week for them to manage your properties and you can control more of the costs that way too.

Tony:
That was something that I noticed when I had my first long-term rental, my pm, my property manager also owned his own maintenance company and obviously his first option for any maintenance needs was always his own company. And I noticed the same thing where we were spending a lot of money every month on these small kind of nickel and dime type repairs. And I actually did very similar ash to what you just laid out where I said, Hey, I need to have a little bit more control over what gets sourced to you guys versus what we’re sourcing to someone else. And it took a little bit more work on my end, but we were able to shave off some of that monthly expense by bidding it out to someone who was 50% cheaper. So I do think mosen that if you maybe play a little bit more active role in the selection of who’s actually doing those repairs, you can start to pull down what you’re spending for that on a regular basis. And honestly, it kind of goes back to what we were talking about in the last question too, Ashley, where it’s like, Hey, what are these things that are giving you a headache that are causing these issues? And does it maybe make more sense just to spend a little bit more upfront to fully repair or replace those things that way these knickknack, every single month type repairs start to go away.

Ashley:
And one thing we had problem too was with we would be charged for a maintenance tech to come out and look at the issue and then we’d be charged with the vendor, the plumbing company they hired to come out and quote the issue and then we would be charged again for them to come and perform the issue. And so that was a big thing as to, okay, if you already know based off of the work order, this isn’t in the scope of the maintenance staff of the property management company, just send the plumbers out directly right away. And so there was a lot of inefficiencies that we figured out that were costly to us. And then also too things that we were charged for that should have been the tenant’s responsibility like this. I don’t know if this happened, but it’s the only thing I can think of right now is if the glass broke on a window, the chances of glass just randomly shattering, most likely they hit something with it or whatever. Something like that would be obvious. It’s the tenant’s responsibility for different things and they should be charged, but yet we were still charged with it. So having to constantly watch for things like that too.

Tony:
What about that last part of Moss’s question you said I’m debating on if I should sell. When I hear that question, I think there’s probably one big thing that comes to mind for me, it’s how much equity do you have in inside of these properties right now? Say you bought these maybe pre pandemic 2000 18, 17, 16, maybe even sooner than that, and you’re sitting on a ton of equity right now even though maybe your cashflow is getting eaten up because you have to keep dealing with these repairs. If you can sell those two properties and you get six figures plus in equity, you can then roll into another property. Well hey, there’s your opportunity to still be a real estate investor, but maybe move this into an asset that it’s maybe a little bit newer, maybe a little less management headache. But I think that’s the question I would ask is how much equity are you sitting on and what kind of return can you get if you deploy that equity elsewhere?

Ashley:
Yeah, so with him talking about the stock market now his portfolio is up 30% here to date. Okay, well that’s today. If you’re going to hold this property for 30 years, look at the historical of what, say you’re investing in index funds, what’s the historical rate over the past 30 years and how much has that actually gone up? And it’s still a good amount, very decent for very passive investment, but what’s that compared to somebody who bought a property? Say you put a hundred thousand dollars 30 years ago into index funds and at year 30, how much did they make off that property compared to somebody else who bought a property for a hundred thousand dollars 30 years later? What’s their property worth then? I don’t know the answer and I probably should because that’s a great comparison, but use that to kind of gauge as to, okay, there’s some more work now and financial commitment to buying real estate, but down the road holding this property, is it going to be worth more than what your investments are? And if you’re invested in different things that’s more volatile than index funds, then it’s not as easy to measure, I would say. But that 30% is just what you’ve yielded today or this year, that’s not long-term like a rental property, what would you get? But if you can guarantee you’ll get 30% over the next 30 years, then yeah, stick to your vanguard stocks for sure.

Tony:
And I think we’ve mentioned this on the show before as well, but I do think that part of the appeal to me of real estate is that you tend to have a little bit more control and think about the issues most that you’re talking about for these two properties that you have. Ash and I just walked through several things that you personally can do to potentially improve the performance of those assets. And that is a level of control that you do not have when it comes to the stock market. And even though year to date, like Ashley said, you’re up 30%, how realistic is it that that will continue? Not to get political, but we’re in an election year, stock market tends to react pretty wildly to depend it on who gets elected to be president and you have zero control over that mos, right? So it’s just certain things to consider of how much control do you want to have over this money that you’re deploying with these different assets.

Ashley:
Yeah, I think the last thing I would add too is there may be headaches now, but as time goes on, you’re going to be able to increase your rent and yes, insurance will increase, property taxes will increase, but if you are locked in to a 30 year fixed rate mortgage, exactly what your mortgage payment is going to be for the next 30 years, so that’s not going to increase. And most of the time you are able to increase rents more than your insurance and your property taxes are going to increase. So you will see the margin of your cashflow actually growing as time goes on in most markets and most scenarios, of course not always the case and you could have huge capital improvement expenses that hurt that. But if you have a property over the long term, your cashflow usually can get higher based on the fact that your mortgage payment stays the same except if you’re in escrow, you’ll see those little bit of increases. Or if you’re in Florida and Texas and your insurance has skyrocket, then that does not apply. Okay, so I guess the last part of his question is how do you deal with it? So the stress of ownership. So Tony, what are you doing daily? Is it facials followed by a massage? What’s the de-stressor? I

Tony:
Think for me what kind of keeps me centered and keeps me balanced as a real estate investor is the understanding that almost any path you choose, there’s always ups and downs. And for me, and this goes back to what I said earlier and for me, I would always choose to be the person in control at least somewhat of what those ups and downs look like. And I think that’s what gives me the confidence is maybe it’s the confidence in myself to know that, hey, I can figure this thing out. And as long as I have that confidence in my ability to sort through these issues, that gives me the confidence to say, Hey, let’s keep moving forward. But I think that’s what it is. It’s a level of control that you have. What about for you, Ashley? What helps you keep a level head throughout all the stress?

Ashley:
Having really nice reserves in place and knowing that those reserves are meant to be spent, that that’s not my life savings, that that is for big repairs, capital improvements, those unexpected costs. And I had a really hard time parting with money to put into my rentals thinking about this could pay for my kids to have a dirt bike or whatever, putting it that amount of money in relation to something, a personal benefit for me and my family instead of this is what this money is meant for. It’s meant to be spent on the rental properties. It’s meant to be spent on my business, it’s meant to invest in my business. And once I became okay with that, that’s really where things started to change for me as to the stress level went down. But also I really started to understand the time a stressor actually took from my life was actually not that much time that okay, maybe it was a phone call to a plumber, then writing the check to pay the plumber, something like that.

Ashley:
And I was just using the stress was what was overwhelming me. And once I became okay with parting with the money, it was like, okay, this is going to take me 10 minutes. It’s the plumbers actual problem to solve, not mine. I don’t have to figure it out. And so once I became at peace with those types of things, it became a lot easier for me to not get overwhelmed, to not get stressed out and to not lay awake at night like gritting my teeth, like, oh, why do I have to pay this big expense and blah, blah, blah. And the same with evictions too. If someone stops paying and I’m going through the eviction, I used to lay awake at night and get so aggravated and irritated these people, I can’t let them get away with this. I can’t let them do this to me and stuff.

Ashley:
And once you understand that’s part of the business that is going to happen, you have to just let it go. You got to do an emotional release, man and breathe it out. So once you understand these things will happen and you become at peace with that and you’re ready with your reserves and understand, you may have to spend money and just like right now, you’re spending money now, but as Tony said, figure out what are the expenses that are coming up and maybe this is the end, maybe I think you bought the properties the last two years maybe. I don’t know if you said, but maybe these are just little things that needed to be done and you’ll have a break and it’ll be good. Or maybe you actually do need to get another lump sum of cash and put in a big expense to repair it and replace it instead of just doing these little tiny fixes. So

Tony:
I guess the only other thing that we haven’t considered ash is that maybe he did just buy a bad deal. Maybe he bought these properties in a war zone in a property or in a city that he knew nothing about and he just saw like, Hey, the purchase prices were pretty low, not thinking about what actually comes along with the day-to-day management. So I guess there is that possibility most, but without doing a deep dive into your actual underwriting, it’s hard for us to say for sure, which is why everyone who’s listening to this podcast right now use the bigger pockets tools for estimating your revenue and profitability and all those things before you jump into a deal. Because just because something has a lower purchase price doesn’t always mean that it’s a better deal. So just something to consider as well. But hopefully most of that, that isn’t the case for you. And you did the analysis and it all worked out.

Ashley:
And one thing too, you specifically mentioned that plumbers were expenses is we always put in our lease agreements if you clog or plug any drain or pipe after, I think it’s after 30 days of moving in, maybe it’s 60, it’s your responsibility to clear it. And we give a list of here’s the different ways to vinegar and baking soda. I don’t even know what it is, but so a list of different ways to clear the sink because if it clogs after 30 to 60 days, it was not from the previous tenant, it wasn’t from us, it was from something you put down the drain, whether it be something disposed out of your body, your hair falling out of your head, or a kid shove it down, shut down the sink or grease going down the sink. And that has saved us a lot of money and plumbing costs of not having those calls anymore because really it’s not your fault as the landlord unless there is something at the street or whatever and it starts backing up or whatever. But yeah, so that’s one thing that has really helped us a lot just all of a sudden, and especially in the apartment complexes because there’s or a duplex because if there’s something wrong with the pipes from the house to the road, it’s going to be going on in both units. It’s not going to just be one sink that has the issue too.

Tony:
Well mos a lot for you to chew on there. So hopefully got some value from kind of hearing how Ash and I would both talk through that. But you got options. I think that’s the most important thing. But guys, we love talking real estate. We love answering your questions and we love it. If you guys could hit the follow button on whatever podcast platform it is you’re listening to this podcast on follow, subscribe and really share it with someone, right? If you are enjoying the concept on the Ricky Podcast, take a few minutes share with that friend or family member who you want to see do well. So yeah, we appreciate you guys supporting the podcast as always.

Ashley:
Okay, so we’re going to take a quick break and we will be right back and we’re going to take a question out of the house hacking discussions in the BiggerPockets forums right after this break. Okay? So welcome back and thank you so much for taking the time to check out our show sponsors. So Tony, let’s look into the house hacking discussions. Do you see one there that you like?

Tony:
I do. So I see one from Jayquan and he says, what’s up guys? I’m trying to buy a quadplex or a fourplex to house hack for my family. We’re planning to stay there for about one to two years and then looking for the cashflow after we leave. So my plan is to get experience managing properties and managing tenants. Right now I’m looking at a deal that seems promising, but the numbers aren’t that great, but also they’re not that bad. It seems a deal is a little out of the 1% rule and the 50% rule, but here are the exact numbers. So the asking price is $486,000. The rental income is $1,200 per unit for a total of $4,800. He says his mortgage will be $2,600 at a 7.3% interest rate and he’s estimating expenses to be about $2,200 on top of that. So he comes in at about 45% on the 50% rule, which we’ll define here in a bit.

Tony:
So he says these numbers, again, the $4,800 per month are not with me house hacking, but it’s after I move out and I’m doing it that way to see if this is a good house to start with. In short, the deal falls below the 1% rule, but it does meet the 50% rule for expenses. I feel this also looks not super great because of the 7.3% interest rate, but he’s trying to be conservative to take vacancy into account. So Ash, what are your thoughts on hearing this? And maybe first let’s define what the 1% rule and the 50% rule are. So the 1% rule is basically just saying your rental income ideally should be 1% of your purchase price. So for him, he’s pretty darn close. He’s at $486,000 in his purchase price. So 1% of that is 4.87 almost. So he’s pretty close on that piece. And the 50% rule is saying that 50% of your income should be expenses, right? Yeah.

Ashley:
Your expenses should be no more than 50% of your income on the property. So on here, he’s not hitting the 50% rule either because 2200 he’s saying would be 45% and his mortgage payment alone is going to be 2,600 a month. So that would be over 50%. I think he said the max he wanted to be was 45% expenses. I think house hacking is a different scenario to actually be using the 1% rule or the 50% rule as a metric because you are using it to reduce your living costs. So say Tony’s living in his house right now and he goes and buys a single family home as an investment property and it hits the 1% rule and it hits a 50% rule, but he’s still paying the mortgage he has on his house, but you are going and maybe you’re not hitting the 1% rule and you’re not hitting the 50% rule, maybe your expenses total are less than what Tony is paying between his primary and his investment.

Ashley:
So I feel like it’s not apples to apples to use those ratios in comparison because you’ll be living in the property. And also it is very hard to hit the 1% rule anywhere these days. I used to super easy, I could get 3% one time I got on a property and now you can’t even. But also in New York the expenses are really high for property taxes, so it’s really hard to hit the 50% rule. So that’s why it’s important not only to never just use one metric or even two metrics, you want to take all metrics into consideration, but also you want to know in the market you are investing in, and I don’t think he says what market this is in, but you want to know what the standard is in your market. So look at houses or rentals that may be recently sold and then we’re listed what was the purchase price and how much are they being listed for rent for?

Ashley:
And you can kind of gauge an idea of like, okay, this is what’s currently happening in my market and they’re not even close to the 1% rule. Then you got to kind of figure out, okay, how are they making the deal work? And maybe it’s because they paid all cash and they just did a 10 31 exchange and they just wanted to buy something, or maybe they’re house hacking too. So I wouldn’t worry about those metrics too much. I never pay attention to them honestly because they just don’t apply to what I’m trying to do. I guess I’m more concerned about what the cashflow is on the property than those rules of them.

Tony:
And you made a lot of good points there Ashley, and I couldn’t agree more on not just viewing this isolated as a traditional real estate investment, but yeah, how much money are you actually saving and what are you paying in rent right now, wherever it is that you’re living. And at 4,800 bucks or 1200 bucks a unit, even if you’re living in one on the other three, you’re making $3,600 in revenue from those which is still going to cover your mortgage. And then even while you’re living there, you’re living for free and you have money left over to cover your mortgage, which is great. Now, I think the other thing that I would consider too in this equation, Jaquan, is what cash out of pocket are you putting into this deal as well? Because say you’re able to get into this for three and half percent, down 5% down, or maybe you’re using some down payment assistance program, you get into it for zero down.

Tony:
Well now this is a killer deal, right? Because who cares if you’re not hitting the 1% rule? If you got into this for only a couple thousand bucks, your cash on cash return is going to be sky high. And is that something that you can repeat over and over again to start buying up a bunch of fourplexes in your neighborhood where every 12 to 24 months you’re putting down another three point a half percent and you’ve got something, another property to add to the portfolio. So I think that the cash out of pocket is going to be an important thing to consider as well to kind of gauge how good of an investment this actually is.

Ashley:
And I mean it’s super close to the 1%. If he buys it at 486,000, he’s still getting 4,800 in runs. So that’s like 0.98% maybe. So that’s actually pretty close. So yeah, I would think that this seems like definitely a deal to look into further that this could possibly, it does say, oh, it did say down here more. I see now Houston, Texas is where the property is. So make sure you get your insurance quote.

Tony:
Yeah, I was going to say one thing that I would add to this as well is the very first deal that I did, it was a long-term rental and I think my rent was a hundred or 1,350 bucks a month, something like that. But I think my mortgage was I think one 40 somewhere in that ballpark. So I was slightly below the 1% rule as well, but it literally cost me $0 out of pocket. It was a perfect burr, so I had no money left in this deal. So who cares if I’m not meeting the 1% rule because I have no cash left in this deal at all, and I could do that infinitely, and it’s still going to be cashflow positive for me because I didn’t have to leave anything in that deal. So I think the 1% rule, the 50% rule, those are just benchmarks to kind of help you quickly analyze and skim through deals to see if you’re way off. But I feel like you’re pretty close on both of those. So to not stop me from moving forward.

Ashley:
Okay, so our last question here is in the starting out discussion. And Jason asks, this is my first time posting to the BiggerPockets forum. Well welcome Jason, and congratulations on your first post. So Jason says, I must say the education I’ve been getting from the BiggerPockets podcast has been amazing. I live in California and have managed to put some money aside from my W2 job to hopefully get into my first rental property. As everyone is well aware, the cost of investing in California is astronomical. So I’ve turned my attention to long distance investing. I work long hours at my job and have a five-year-old at home. So my time is very limited as an investor. What are the pros and cons to buying a turnkey rental?

Tony:
Maybe let’s define turnkey first for the Ricky audience, right? So turnkey basically means that you are buying a property that’s been usually recently renovated, and most times it’s already placed with a tenant. And then you also have the option and sometimes the requirement of using whoever you purchased it from, using their company for property management. So turnkey in the sense that all you have to do is sign your closing docs. Everything else is pretty much taken care of for you, right? Tenant place management is there and you just start collecting a check on the backend. So that is the definition of turnkey. Now, there are some pros to it. There are some definite benefits to buying turnkey. And first that it’s very easy. A lot of these turnkey providers, they have all of their deals that are available for sale just listed on their website.

Tony:
And you can just go through, you can see what options there are and kind of pick the one that you feel suits your suits, your buy box even. I’ve seen some of the turnkey providers and I think some who even advertise through bp, but they’ve been able to negotiate lower rates. And I dunno if it’s seller finance or whatever it is, but I see some, whereas a lot of investors right now are getting interest rates at seven plus percent. Some of these turnkey providers are offering rates in the threes and the fours. So even right now in this elevated interest rate environment, going with the turnkey provider might give you the ability to get a lower interest rate. So ease, speed, convenience. I think those are all the pros of going with the turnkey provider. And I guess one last thing I’d add as a pro as well is that it does allow you to get somewhat familiar with the market. I’ve met quite a few investors, even probably folks we’ve interviewed on the show who started off investing turnkey and X, Y, Z city. And once they bought maybe one or two there, they felt confident to do that third one by themselves because they knew the market a little bit already. So it is a good way to kind of get you introduced for market as well.

Ashley:
Yeah, so let’s go into the cons on this. And I think one of the biggest things for me is that everything is wrapped together for you so nicely in a package that there’s not a lot of checks and balances. So if you’re going to just purchase a property on the MLS, you have your real estate agent who’s working for you, who’s on your side helping you have a home inspector come, you go and purchase the property, maybe you remodel it, you have a contractor you hire or you’re having a contractor come and look at the property. You’re hiring a property management company. And most of the time all through this process, all these people are unrelated. The person who’s doing the rehab, the person who’s going to manage your property, that’s finding you tenants, your real estate agent. So you have these different kinds of different people from different businesses as resources.

Ashley:
Okay? So when you’re doing turnkey, usually it’s the model of the rehab’s already done. We did that for you. So here’s the property, we’re telling you everything is great, we’re telling you what the numbers are, what it can list for. So they’re telling you, you don’t need a real estate agent, you just buy it directly from us. Here’s all the information you need, the comparables, the market information, what this is going to rent for, and here’s our property manager that’s going to manage it all for you. So everything stays in house. So there are some turnkey providers where you can take your property, you can go, you don’t have to use their property management service once you buy the property. But the thing I would say is have all the information given to you verified. So doing the rehab, you want to make sure that it was a quality rehab that was actually performed on the property.

Ashley:
So get a home inspector onto the property that’s not affiliated with the turnkey company. You can hire your own property manager. You don’t have to go with theirs, but maybe theirs is great. So just having some kind of checks and balances or a person who could be the boots on the ground for you, paying a real estate agent to just say like, Hey, can you just check on this for me at this property? I’ll give you a hundred bucks. I’m a little worried about something or whatever it may be. But that’s the one thing I don’t like, is no checks and balances because everything is wrapped up in house for you and you’re relying on one sole company to take care of everything for you.

Tony:
Totally true. And I think the biggest potentially is just the margins, right? The profitability on turnkey deals tends to be a little bit lighter than if you did that work yourself. Because think about it, the turnkey companies, they have to make margin somewhere. And usually that margin is coming from you typically because the turnkey providers are the ones that are sourcing the deal off market, direct to seller. They’re the ones that are getting the benefit of that equity increase by forcing the value of the property up, and then they’re selling it to you with that spread baked in. So the returns are typically going to be lighter on a turnkey deal. And that’s probably the biggest con I see for folks who are getting started as

Ashley:
Well. And also, turnkey can mean different things too. It doesn’t mean everything is brand new in the property either. It just basically means it’s rent ready. So it could be a property that wasn’t redone from the guts all the way to the cabinet hardware. So I think having an understanding of how far does this company take it when they are remodeling a property or is it just doing the bare minimum on the property? But you know what? The boiler, it was five years old, so it should have maybe another five years in it. You’ll be fine, you’ll be good. And then it ends up needing repairs constantly or something like that. So having an understanding of what you’re actually getting brand new, what the turnkey actually means, turnkey really means it’s rent ready. And so make sure you understand what rent ready means that it’s most of the time doesn’t mean you’re never going to have a repair or a maintenance cost, but a lot of turnkeys companies do new builds too.

Ashley:
So there’s always that option too is going with the new build. But I do want to say, I think you can go on the MLS and you can pay buy properties that are turnkey on there. There’s lots of turnkey rentals available on the MLS too where you could actually go. And then you just find your own property manager who use your own real real estate agent and you put a tenant in place. And yes, you are going to pay a premium on those properties, but you do on turnkey too. Okay. Well, thank you guys so much for joining us for this week’s episode of Real Estate Ricky Reply, and if you have a question, make sure you post it in the BiggerPockets forums and we’ll be happy to answer your question on the show. And you’ll probably get the answer to your question in the forums from all of the investors that had joined in and contribute to the forum. If you haven’t already asked a question, make sure you jump in and maybe you’ll be able to answer a couple of questions too in the BiggerPockets forums. I’m Ashley, and he’s Tony. And we’ll see you guys next time.

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

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

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