2 Biggest Hurdles to Your First Rental (& How to Get Past Them) (Rookie Reply)

Ashley:
If you’re struggling with how to decipher all of your financing options, or maybe you’re just wondering what is the best kind of market to invest in this episode is for you. Today, we’re going to tackle the biggest roadblocks rookie investors face from accessing capital to making smart neighborhood decisions that will set you up for long-term success.

Tony:
Now whether you’re trying to figure out if you should house hack in a C class neighborhood, or wait to save up for something more premium, we’ve got you covered with some advice in today’s episode. Plus, we’re breaking down exactly how HELOC loans work so you can feel confident leveraging that equity for your next investment. Now, what I love about today’s questions is that they’re coming from people at different stages, some with equity already built up and others trying to make that crucial first investment decision. So no matter where you are in your journey, today’s episode has something valuable just for you.

Ashley:
I’m Ashley Kehr.

Tony:
And I’m Tony j Robinson,

Ashley:
And welcome to the Real Estate Rookie Podcast. Okay, let’s start off with our first question today. This is from the BiggerPockets forums and it is should I start off with a house hack and a D or C class neighborhood or should I save more and go with a B class neighborhood right out of the gate? Any advice would be appreciated and please explain why. Okay, so first, Tony, we should probably break down what actually a class neighborhood means between A, B, C, D, maybe an E. Is there an E class neighborhood? So

Tony:
When you think about a class neighborhood, those are going to be your luxury rentals. Those are going to be the ones that have the nice flooring, the nice countertops, the premium fixtures, maybe all the crazy amenities, that’s an A class and they’re obviously charging premium rinse. And on the opposite end of that spectrum, a D class neighborhood would be kind of the opposite of that, right? Where the rentals themselves probably aren’t as nice. Maybe the demographics of that neighborhood in terms of income, in terms of employment might be a little bit lower. The turnover of your tenant base, maybe it’s a little bit higher. The delinquency rates when it comes to the random paying on time might be a little bit higher. So just slightly different property types and slightly different demographic of people filling those types of properties.

Ashley:
So back to the question and the question is asking, should I house hack in a D or C class or should I save more and go with a B class neighborhood? So I think since you’re going to be house hacking and you’re going to be living there, there is some kind of emotional, usually we say leave the emotion out of your deals, but if it is going to be your primary residence, I think that should weigh into part as to where do you feel comfortable living? Where do you want to live or where do you want to live? So let’s say not even with the classes of neighborhood, but how far away is this property from your job? So in one neighborhood it’s going to be an hour commute where another neighborhood, it’s going to be a 10 minute commute. Does that play a factor? So when you’re thinking of yourself living in these properties, look at all the factors, what that would affect you personally too.

Tony:
Yeah, I couldn’t agree more. I think the idea of, hey, what I feel comfortable living here is an important one to answer for yourself, but I think even maybe just before C or D class, it’s like how much of a difference in cost has it actually in your specific neighborhood to go from a D class neighborhood to a B class neighborhood? Because if you’re using FHA 3.5% down, going from a, I don’t know, whatever the price difference is, how much more out of pocket is actually going to be for you? And have you coached those numbers? And even more so are there maybe other loan products out there where maybe you don’t have any cash out of pocket? There’s first time home buyer assistance grants. There’s things like the VA loan if you’re a veteran, there’s things like naca if you’re not a veteran, Ashley talks about the USDA loan. So have you really explored even all of the financing opportunities that are available to you that maybe would allow you to get into that B class neighborhood with the cash you have on hand currently?

Ashley:
And I think run the numbers. So take a property that’s a B class property and then take a property that’s in a C or D class neighborhood, and what is the difference in the cash flow of the properties? How do they perform against each other? And like we had mentioned in the beginning that basically to summarize, to explain a de class neighborhood, it’s more of a headache. There can be different issues, different problems than you’d have. I mean there still can be the same problems that you’d have, but for example, a de class neighborhood, it’s not going to make sense for rental income or for resale value. If you make this property really, really nice, you put in the granite countertops, you put in hardwood floors, nobody is going to pay a premium to have those finishes because it’s just not affordable in that area where maybe that’s the kind of comfort you want to live in.
Then when you go and resell it, nobody’s going to pay the premium for those high-end finishes in that neighborhood because they don’t want to live there. So you have to remember that too when you’re looking at the property as to what extent of any rehab remodel these properties would need to get it to a suitable living condition for you and your tenants. What is that going to cost? You’re looking at things that are already turnkey. Let’s look at the maintenance and the CapEx on the two different properties. So is there more maintenance in CapEx that needs to be performed on one? So maybe the class C property is actually better that you found because it actually has been updated. So you got to look at all the numbers, run the numbers and see where the differences are, compare and contrast. Literally go onto Zillow right now, find a property that is in each of one of those neighborhoods you’re considering and just run the numbers on each of them to give you an idea of what that comparison looks like.

Tony:
Yeah, I think one other thing to add to is say you do decide to move forward with the C or the D class neighborhood, I would really encourage you to spend even more time than you typically would screening all of your tenants, right? Because if you are house hacking and maybe a part of town where it’s known to have tenants that can potentially cause problems. You want to make sure that whoever you’re sharing walls with is someone that you’re going to enjoy sharing walls with. So even if you have a long line of people banging down your door to get into your place, I would be very, very within the reason or within the confines of what’s legal as a landlord, I would be very, very picky about who I allow in and I might even give myself more vacancy on the front end to make sure that on the backend of actually living in this place for the next 12 months or however long it is that you actually enjoy it. So just taking your time leasing up this property,

Ashley:
And you do have a benefit as house hacking, like some of the fair housing laws don’t apply to you because you will be living on the property. So you do have more of a say as to who can actually live with you.

Tony:
That’s cool. So there are certain things that apply to landlords that don’t apply to landlords who are house hacking.

Ashley:
Yeah. So okay, I am a female and I’m renting out one of my rooms. It is okay for me to say I only want a female in that room and to pick based off of personality really. We just had Miller MCs swen on and he’s writing the co-living thing. If you’re living in the property can most of the times you are interviewing the person as to what I like living with them.

Tony:
I only want Lakers fans living with me with

Ashley:
Seasons tickets. So this question and so many others are exactly the type of problems you can get answered at BP Con if you’re looking to take your investing to the next level. BP Con in Las Vegas is the answer, early bird pricing was actually extended to April 30th. So grab a ticket now and come and say hi to Tony and I. Now a quick word from our show sponsors. Okay, welcome back. So this second question, I love this. We actually pulled this from the real estate rookie YouTube channel. This was a comment on one of our videos and I love that we’re getting so much engagement on YouTube. If you guys aren’t watching on YouTube or if you are, make sure you leave a comment below, ask your questions or engage with the others here that are commenting. Okay, so this question says, hi guys. I just recently learned about this podcast.
Welcome, and this is by far my favorite. I’ve been listening to a lot of the success stories and the fun journeys of the investors you have in your show and thank you. We love that they take the time to come on in and talk us to. Okay, so as question is, I am just wondering if anyone in this community can give me any advice on what to do. Me and my wife own a half duplex. We bought it for 305,000 a couple years ago at 5.4%. It’s five years fixed on 25 years amortization. So before I go on real quick, let’s just break that down. So their interest rate is 5.4% and it’s only fixed for five years, but their payments are amortized over 25 years. So after that five year mark, they can go and refinance or it will usually go into a variable rate for the remaining 20 years. Okay, so the question continues on. We are now left with $264,000 mortgage balance. The house has a 345,000 city appraisal, however the same house was sold in my neighborhood for 365,000. We’re thinking of buying a second property to use as a rental using the equity that is available to us. Any advice on what should be the best course of action to take in this situation? Okay, so Tony, I actually have a question for you. What is a city appraisal?

Tony:
I was going to say the same thing. I didn’t know that appraise properties and there’s a tax assessed value, but that typically doesn’t accurately reflect the real world value of a property and we typically see that to be a lot lower than what a property would typically sell for. So I actually haven’t heard of a quote city appraisal

Ashley:
And I wonder if there’s some confusion there because I’ve spoken to a lot of people that have mistaken those terms, the city assessment for your taxes with appraisal, like getting that reversed as to the language. So maybe for this sake they could both ways as far as they actually got an appraisal done and it’s 345,000, but if this was the wrong word was mistaken, it’s actually the assessment on the property taxes. Like Tony said, that’s usually not an accurate value of the property. So on your property taxes you’ll have the market value which is actually closer to what the property is probably valued. And then the assessed value is a percentage of that and it’s lower and that’s what they based your taxes off of. But even the market value, I look at some of my property taxes, that is definitely not what the value is, but I’m not going to complain because I don’t want my taxes to increase by saying, Hey, my property is actually worth this. And that’s why, and this changes by state and county to when you sell the property. If the town does a reassessment, that is where they go and say, okay, we see you’ve got these permits, you added another bedroom, you did all this stuff on the exterior, your property is now actually assessed at this value and your property taxes have increased. So the first thing I’m going to say is if this is the assessed value, it is like a Zillow estimate. It is not reliable as the actual home’s value.

Tony:
So I guess let’s get into their options here then, right? I mean because assuming that the 365 of the house that sold around the corner is maybe a more reasonable target, they’ve got about a hundred thousand dollars in equity now. They can’t tap into all of that. Different ways of tapping into your equity are going to maybe limit you up to 90% somewhere in that ballpark. But I guess there’s kind of two options here. You’ve got, or I guess technically there’s three options, right? Option one is you sell the property, but it sounds like you want to keep it. So maybe we take that one off the table. So your two remaining options are you can refinance the property where you replace the initial mortgage, that 5.4% on a 25 year am you replace that with new debt. And then the second option is maybe a heloc, a home equity line of credit where you’re getting a line of credit using that equity.
Now between those two options, there’s pros and cons to each. A HELOCs going to play more like a credit card where you get charged for what you draw against that line of credit, whereas the refinance is like, Hey, you’re getting all that money on day one and regardless of whether or not you actually use it, you’re going to start paying on it. So there’s pros and cons to each, but I don’t know. I think in their position, Ashley, if they’ve got this 5.4 rate currently, if it was fixed for the entirety of the loan, I might lean more so towards the HELOC just to keep that 5% in place because it’s better than what we’re getting today. But if it’s going to adjust based on some prime plus whatever, they maybe end up paying 9%, who knows what that new rate is going to be. So to me, if that flex on that rate gets you above and beyond what the prevailing rates are today, I’m probably just going to go with the refinance because it’s cheaper. But if that floating rate ends up being lower than seven, which probably isn’t going to happen, then I might go with the heloc. That’s my initial thoughts, Ash. I know. What do you think on that?

Ashley:
I think it says they’ve owned the house for a couple years, so let’s say they’re two years, they got three years left on the fix. I definitely would go and find out what current rates are to either get refinance for another five year fix because you’re most likely going to get a lower interest rate. I did just talk to a couple banks and there actually was one bank, which really surprised me. The rate was higher for a five year fixed or a seven year fix compared to the 30 year fix, which really surprised me. Everybody else though, the less period of time you were guaranteeing to fix it, the interest rate was lower.

Tony:
And I wonder why that is, right? If they’re giving you better rates for the long term fixed, are they assuming that? Yeah, I wonder what their thought process do they think rates are going to

Ashley:
Right? And it was just this one bank and I was shocked by it because I’ve always experienced that it’s lower interest rate when you’re only fixing. So my only thought is is that they have more of a guarantee that you’ll stay with them for a longer period of time and they’ll end up making more interest if you do sign the 30 year one compared to you refinancing at five years in the risk you go and refinancing at another bank. That’s literally the only thing I can think of. But that is super hypothetical

Tony:
And I was thinking of it from a slightly different angle where if they’re going to charge, you call it 10% for a five year note, my thought process was that maybe they think that rates are actually going to increase in the next five years. So if they lock you in for a lower rate, they’re actually going to end up losing money in that five year term. So that’s them kind of trying to hedge their bet. So maybe this bank knows something we don’t know about where rates are going.

Ashley:
I think figure that out as to what rate you could actually get on refinancing your property. Also too, it’s on a 25 year amortization. So if you did a 30 year amortization, that might actually even with a little bit higher rate, that could make your payment closer to what it is now by increasing that amortization, I would then also look at how long do you actually plan to stay in that property. So if you plan to move in a year or two years, then okay, maybe you don’t refinance and pay those extra closing costs and you stay in the property and then you’re going to sell it anyways. But if you plan to stay there for a long time, consider refinancing and looking the comparison of rates and terms and amortization period. Also, the next thing to look at is what are you going to use the funds for?
So is it going to be for a down payment? Is it going to be for the full purchase price of the property? Are you going to do some kind of burr strategy where you’re going to purchase the property? Then you’re actually going to go and refinance anyways because if you do the line of credit, you at some point have to pay that money back and you’re just paying interest only. There are lines of credit where after a certain period of time, if you do not pay it back, it automatically converts into some kind of amortization. So say you get a line of credit, whatever your balance is due and after two years that will automatically turn into a loan and you can have the option to buy a fixed rate at that time, and there’s different intricacies of this, but then they’ll put it into payments amortized over 25 years or something.
So then it does turn into a long-term loan. So you’d want to find out what that interest rates are, what those terms are if you don’t pay off the line of credit during the X amount of time. But if it’s something like you just want to use it for the down payment and you’re going to pay it off quickly, if you have the cashflow from that property, if you have money from your W2 where you just don’t want to delay purchasing something, so you’re going to borrow from the line of credit for your down payment and then you’re going to rapidly pay back that line of credit, then I think that’s a good decision. But if you have no idea or no course of action or plan to actually go and pay that off immediately, that line of credit, just remember on top of your mortgage payment from that second rental, you’re going to have those interest payments to the line of credit. So I think that’s a really important piece to look at as to which way you go as to how you’re going to use the funds too.

Tony:
And I think the last thing to call out here is just how much cash are you actually going to be able to get because you’ve only, and I say only, right, but you’ve got a hundred thousand dollars in equity and let’s say that you’re right, maybe the house actually does appraise for 365 say that you’re able to get up to 80% of that value. 80% of 365 is 292, you owe 2 64, so you’re not even getting 2 92 minus 2 64. It’s $28,000 is what you’d be getting if you were to access 80%. It goes up a little bit if you can tap into 90, but just trying to make sure that there’s some context here on how much of that equity you’ll actually be able to tap into with some of these refinance options. We’re exploring HELOC right now, and I think we were quoted right at about 80%. What’s the highest loan to value that you’ve seen on a line of credit ash?

Ashley:
95%, but that was nine years ago. My first ever partner. That’s how we funded our second deal was he tapped into his equity and got a HELOC on his primary residence and it was up to 95% he was able to take for the heloc. Yeah,

Tony:
That’s true. It might be higher if you’re doing it on a primary, we’re pulling a line on an investment home, so maybe it’s a little bit different there. But yeah, if you can get up to 90, that changes things a little bit. I think you’ll probably go from like 30,000 to 60,000 somewhere in that ballpark. But I just want to make sure, even for the rookies that are listening, just because you have a hundred thousand dollars in equity doesn’t mean you’re going to get all of that $100,000, right? There’s always a little bit of limitation there.

Ashley:
And one thing too, and let me know if this is different for your commercial line of credit, like it being an investment property, because I can’t remember on mine, it’s been a long time since I’ve actually opened one, but usually when you do a eloc, there’s usually no closing cost and a lot of times the bank will even pay for the appraisal or figure.com. They actually do an in-house appraisal too and can actually get you approved in five minutes and you can actually get funded in five days. But with doing a refinance, there can be closing costs attached to that. There are refinances where you can do no closing cost loans, but your interest rate is going to be a little bit higher. So you have to compare how much am I paying extra every year compared to what the closing costs were. So that’s something else to take in comparison to as to the money you would need upfront to pay for closing costs or that would come out. So say you can borrow 80,000, you would have to take 8,000 of that and pay the bank for the closing costs and the fees for that property. Do you know, are you paying closing costs for your line of credit on your investment property?

Tony:
We definitely didn’t pay for an appraisal. I know that the lender we’re working with is charging some points. I dunno, it might be a point or two that they’re charging us on the line of credit to get it established for us, but we’re not even paying for that upfront. It’s just getting rolled into the line of credit itself. So out of pocket expense for us is basically zero. But yeah, there are some fees going back to the lender that’s in the HELOC for us.

Ashley:
We’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the real estate Rookie YouTube channel at realestate Rookie. We’ll be right back with more after this.

Tony:
Alright guys, let’s jump back in with our last question. So this one comes from a short-term rental host and it’s definitely an issue that I’ve dealt with in various forms before as well. But this question says our neighbor has 100 acres and freaks out when anyone walks on his property. So their property land’s right next to each other beside our fire pit is the top of a mountain that substantially drops off. He just put up this temporary barrier and if you’re watching on YouTube, you can see the photo of it. But if you’re on the podcast over to the YouTube channel, you can see this photo, but it’s literally a think about construction zone type barrier that he’s put up right in front of this person’s fire pit for their short-term rental. The question goes on to say, I’ll probably get the survey to get the exact location for the property line. I’ve got one idea to maybe plant some evergreen trees that don’t grow too high. But the basic gist of this question is how should this property owner maybe respond or deal with this very, I guess, overzealous neighbor kind of making an eyesore at what should be a focal point for a short-term rental?

Ashley:
Tony, I have to say that I honestly would probably be this neighbor. I wouldn’t want people continuously logging on my property either. I feel like there’s definitely a way better way to handle it than putting up a construction barrier fence for sure. But I guess you are the short-term rental expert here, and if you guys are watching on YouTube, you can see the picture here of this or you saw it and you’re not on the podcast, you’re just listening on the podcast. So right now, this is a beautiful outdoor setting. They have a really nice cabana with it looks like a fire pit, all this beautiful stonework, and then right behind it you see this ugly orange and yellow construction fence basically blocking the view. So I guess, Tony, if this was your property, what would be the first reaction, your first course of action on this?

Tony:
I think before even getting to this point, we always try and reach out to neighbors when we launch a new property because a lot of times when you’re setting up, you’ll see ’em outside poking their heads out, and we’ll just walk over and say, Hey, most of the time sometimes you get neighbors who can just tell don’t want you to be there. And we’re just like, all right, cool. Then there’s not much we can do. But typically we want to start building those neighbor relations when we launch and just go over there and shake hands and say, Hey, my name’s Tony. This is my wife Sarah. We own this property next door. Hey, there’s a short-term rental. But hey, we do our best to be really responsible hosts. Our guests are typically pretty awesome people, but hey, look, if there’s ever an issue, here’s our number. Give us a call. We’ll make sure to get it addressed for you. So I think just extending that olive branch on day one is important. And then if they ever do call, just making sure that you’re actually following up on those issues and keeping them abreast.
We’ve had quite a few neighbor issues with different properties that we own almost the inverse of this, but we had to build a fence because we had a neighbor who was just causing a nuisance for our guests. So I think in this situation, I would reach out to the neighbor first and I’d say, Hey, look, I noticed you put a, Hey, I get it, but hey, what I guess were you seeing or what were you experiencing that made you feel that this was necessary? And just let them vent and they’re just going to go on, they’re going to complain about your guests. Were stepping on my property line and blah, blah, blah, and whatever it may be, understanding that, hey, I get it. Definitely not our intention, and I think there’s probably a way that we can make sure that our guests respect your property line a little bit better. But hey, is there a way that we could maybe do it without the kind of eyesore of this construction tape that you’ve put up, how cover the cost? But just let me know if there’s something we can do to get you to take it down on your side. So I think that would be my first step is calm a levelheaded approach to the neighbor and seeing if we can come to a solution that works for both of us.

Ashley:
I mean, even barbed wire fencing would look better. Oh, nice and rustic Yellowstone feature of the barbed wire fence, the origin yellow construction fence. Yeah, I think that’s a great recommendation.

Tony:
I mean, you can’t keep every neighbor happy, and unfortunately, if that is the case, that is the case. But yeah, I probably would, if the neighbor’s not going to want to play ball, I would put up something on my side of the property line that’s a little bit more aesthetically in line with what we would want for that space. So yeah, privacy, hedges, whatever it may be. If you put up your own fence, it’s actually you’re missing that view. You’ve got a beautiful view, and you’ve probably marketed that a little bit with your Airbnb, but better that than what we see here.

Ashley:
Yeah, we actually, one of the A-frame cabin, it’s just on three acres, but it’s kind of out in the middle of nowhere or most of the surrounding properties have more land. And the one neighbor, once they heard that it was going to be an Airbnb, they went and put posted signs. Actually, it saved us work from having to put up any signs to make sure nobody goes across that. But we also provide in our guidebook an aerial view and kind of an outline of this is the property you have access to. These are the property lines where you can go and enjoy and stuff like that. But they winded in so far. Knock on wood, we haven’t had any issues at all with our neighbors.

Tony:
Neighbors can make things tough for everybody. So neighbor relations day one, always super important.

Ashley:
Well, are you guys enjoying our podcast? Because your support would mean the world to us, and it just takes 30 seconds. If you could please leave us review on Apple Podcasts, it would make a huge difference. Your feedback not only motivates us, but also our team, and we really truly appreciate it. So Tony, I saw that you have a shout out.

Tony:
We do. Someone left a glowing five star review on Apple Podcast. So again, if you’re enjoying the podcast, be sure to leave your honest waiting and review. But this one comes from AJ 1800 and it says, I love listening to this podcast. Listen each time driving to and from my hospital rotation with three exclamation marks. So we appreciate you AJ 1800, and thank you for supporting the podcast.

Ashley:
Yes, thank you, aj. Well, I’m Ashley. And hes Tony. Thank you so much for listening to this episode of Real Estate Rookie. We’ll be back with another episode.