Rookie Reply: Preparing for a Market Crash, Ending Leases

Ashley:
Let’s get your questions answered. I’m Ashley Care and I’m here with Tony Jay Robinson,

Tony :
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today we’re going back into the BiggerPockets forum to get all of your questions answered. Now guys, if you’re listening to this podcast, you should also be in the BiggerPockets forum because that is the place to go to get quick answers to all of your most pressing questions. Now in today’s work, you reply, we’re going to be talking about how to build a real estate team for your investing portfolio, whether or not there’s a real estate crash coming, a tenant who terminates at least after eight days on how to handle that and what is the absolute best exit strategy to pay partners on a deal. Yeah,

Ashley:
So Tony, I’m in the general real estate discussions in the BiggerPockets forum, so I wanted to start here and just pick one of these questions to start with.

Tony :
Yeah, so I’ve actually got one from Carlo here and he asks, I’m curious how people here built their teams. Was it just through the BiggerPockets resources like Agent Finder referrals? What were some of the questions you asked to be able to determine if this person was someone you’d actually want to work with? Thank you in advance and well, I guess maybe first, let’s define who should be on someone’s team as they’re just getting started. So for our rookies that are out there, Ashley, what are some of the folks that should be adding to their team as they look to get started?

Ashley:
Well, first of all, there’s tremendous resources on BiggerPockets. So if you go to biggerpockets.com/teams, you can find all the different team members that you need and how to find them in your market. So it’s definitely a shortcut. So highly recommend connecting there, but for the team members that you do need, let’s start with a real estate agent or a wholesaler, somebody who’s going to help you find a deal. Then the next, you’re going to need your lender. If you’re using financing, maybe you’re using hard money, whatever it may be, if you’re using some kind of financing, you need that lender to be able to close on the deal. The next is what is your strategy? Are you going to be doing a rehab on the property? Then you’re going to need a contractor. If you’re going to be managing the property, whether short term, midterm, long-term rental, you’re going to need a property manager for the property. Or if you’re going to self-manage, then you take on that role. Or if you are handy, maybe you’re going to take on the role of the contractor too, but you should still understand the key components of people that you do need on your team. And then also in some states to close, you do need an attorney to actually do the closing for you, so you can add an attorney, then maybe even a title company onto there too. If you’re in a non-attorney estate,

Tony :
There’s a lot of different ways you can go about finding all of these people, but honestly, I think Carlo hit on an amazing place to start for all of these. Right. So BiggerPockets, like you said, was it biggerpockets.com/team?

Ashley:
Yeah, teams.

Tony :
Teams, right. And that’ll get you in touch with agents, lenders. I think BP just launched their property manager finder as well. So there’s a lot of different folks you can reach out to just through BP directly, but say that you’ve maybe tapped out those resources and for whatever reason you can’t find someone. I do believe that the second best option would be going after referrals. So if there are investors that either in your own backyard or in whatever market it is that you’re focused on, I would lean into those folks to say, Hey, who should I be working with? And usually investors, they know agents, they know lenders, they know folks. If you ask me for folks in the markets that I invest in, I can give you a good list of people to go talk to. And I’m sure if I wanted to go into Buffalo and find a good agent or a lender, Ashley could point me to someone in that direction as well. So I think there’s an incredible amount of value in going after referrals from existing real estate investors

Ashley:
Or even I started out with just a referral from my parents. My first real estate agent was my parents’ friend and a family friend, and she has never invested, never at a property, but I still use her to this day as my real estate agent. So there are definitely resources right within your network that maybe you don’t even realize. I’m pretty sure I probably didn’t even know she was a real estate agent until I started looking for a property to buy. So once again, that goes back to telling everyone and anyone what you are trying to do,

Tony :
I think one other place to go for referrals as well because say maybe you don’t know anyone yet who’s investing in real estate in your market because you’re super brand new, which is totally fine. I would say going to a local Facebook group is a great place. Most markets have some sort of Facebook group for investors, and if you go on there and just search for the word lender agent, people may have posted they were just going there and post and say, Hey, my name’s Tony. I’m looking for my first deal and I’m looking for a good referral on an agent or a lender or contract, whoever it may be. And Sue reaches out to you. But I think local Facebook groups are a really great place to go.

Ashley:
And kind of the last part of this question was what are the questions you can ask to be able to determine if this person is a good fit for you to work with? And I think a great idea is to kind of give the person a task, but very subtly as to can you send me more information on that? And I think the follow up and the communication that happens after that initial phone call or that initial conversation will tell a lot about the person. So maybe you met the person face to face and maybe you’re at a showing and you say, could you actually send me the comparables for that property? How quickly and timely are they getting that over to you? Do they even send it to you or just brush you aside and you’re not that important to them as a client or even a lender.

Ashley:
Could you send me an example of what interest rates are at today? If I purchased a house for 500,000, if I close today, what would they be? Could you email that over to me? I just would like to look at it or your different types of loan products. So I think that is definitely a telltale sign as to how quick they are to respond to you and to communicate with you that they take the time to actually do that. Because if someone doesn’t really care that much about you as a client, then it’s not going to be a priority for them to send you that information or to get it to you.

Tony :
Yeah, I love that. Ask given them some micro commitments to try and keep before you jump into the big one. And I think one question that I do usually like to ask as well is just trying to get a sense of how often they work with real estate investors. And again, the question isn’t do you work with real estate investors? Because everyone’s answer to that will be yes. But it’s like if you’re talking to an agent, say, well, how many transactions did you close on last year? And they’ll say, X. And I say, okay, well of those, how many were real estate investors? And that’s how you really get a sense of what percentage of their business it’s coming from folks like you who are looking to do this as an investment as opposed to first time home buyers because that buy box and that strategy is very different.

Ashley:
The last thing I’ll add to this piece as to finding team members is also not only how quickly they communicate to you, but how long you get a well with them too. But also think about what is important to you. Why do you need this team member? I’ve refused to get my real estate license. I just don’t want to sell houses. I don’t want to have to show the houses I’m selling. I don’t want to have to do the paperwork. I don’t want to have to fill in a contract that is important to me that a real estate agent will do that for me. But the biggest thing is how timely they can get me into a property.

Tony :
Awesome guys, well stay tuned because in a moment here we’re going to discuss a tenant who terminated their lease after eight days of moving in and whether or not a crash is coming for the real estate market. So stay tuned, but first we’re going to take a quick break to hear a word from our show sponsors. Alright guys, welcome back. So Ash, how about you? What question sticks out to you from the forms? So

Ashley:
I’m looking in the general Landlording discussion ones and Brendan writes, hello all. I had my first tenant sign a 12 month lease agreement on my property in Alabama on July 1st. So congratulations. She has already paid rent and the security deposit but is requesting to terminate the lease after eight days because her mother passed away. She works for her mother’s business and needs to move back home. I have read that my tenant is responsible for paying the rent until a new tenant is found. What should I do with the security deposit? Are there any other charges or legalities I should know of? Okay, so the first thing you have to do is go back to your lease agreement. What does the lease say? So I’m thinking, he said, I have read that my tenant is responsible for paying the rent until a new tenant is found, which is common in lease agreements to have that clause in there, which is a great one, but you have to be proactive.

Ashley:
So usually there is law in your state stating that you have to proactively list and solicit new applicants into your property. You can’t just let it sit for the remainder of the lease and say, oh, sorry, you don’t have a new tenant yet. So in this question too, I had seen you asked about the security deposit. So we do refund the security deposit because we don’t want to say, and this used to be in the lease agreements where we would say you forfeit your security deposit because then that gives them no reason to care about the state of the unit when they leave. If they already know they’re forfeiting, their security deposit really depends on what your lease agreement says. If it doesn’t say anything in your lease agreement that you will retain the security deposit, then yes, you are obligated to return the security deposit unless there are damages of course, but then you can continue to charge them. But here’s one thing I wouldn’t do is I wouldn’t if say the apartment becomes vacant for it’s vacant one month and they owe you one extra month’s rent until you got a new tenant in place, I would not refund their security deposit until they’ve paid for that one month’s rent too, or else you may never see them again and they’ll never pay that extra month.

Tony :
I guess. Let me ask, well, I guess two questions, right? And I don’t know the answer to this. Maybe you can educate me actually, but say Brendan doesn’t have any language in his lease about early termination, what then takes precedent? Is it just, Hey, we’re going to make something up on the fly, or what happens in that situation? And I know you don’t know for Alabama would say that that was the case in New York. What would happen?

Ashley:
Yeah, honestly, I don’t know if there’s an exact specific law, but I would believe that you are in a contract, you were in a lease agreement and you could take them to civil court and put a judgment in for the time that they haven’t paid. But also think about it too as to if they move out and they stop paying and they still have nine months left on their lease, they’ve vacated whatever, you can go and place a judgment against them for the money owed, but you would have to wait until the 12 months is up. The judge would probably ask to show that the apartment was vacant during that time and then you could get a judgment against them because they broke their contract, whatever. And I have done a judgment against people before. I’ve never, I think twice, I’ve never seen a dime.

Tony :
Well, it sounds like Brendan, like what Ashley said, go back to your lease first, see what you stipulated in that lease and then if there is no language, because remember now you’ve got the ability to make a decision on what you want to do from there. But I do like your idea of you’re just saying, Hey, it’s a flat two months and I’m assuming did you go with that number because you feel confident that most of your units you can re-rent within that timeframe.

Ashley:
It was more because the standard had always been one extra month’s rent. That was the time for us, and then the security deposit retained you just for of it. So it was really just because that was how it’s always been. So instead of doing the security deposit, it’s two months. So

Tony :
You said this last unit that was like nine days or something like that. I mean is that typical for you if someone does need to vacate early, are you usually renting it pretty quickly?

Ashley:
Yes. We’re renting so fast that people are getting pissed because the schedule is showing and then we cancel their showing because it’s already rented. But usually move-in dates are most people are moving in the first of the month or around that. So it really depends on the unit. If we can show the unit before the person is moving out because it’s in great condition, then we can line ’em up pretty back to back. But if we need some time to do patch of pain or do some things to it, then we don’t show it until it’s done. So that’s where maybe we’ll take a week to kind of do those things, then we start showings right away and then we will get someone in. So I would say like 30 days max is what our vacancy is if we have to do some renovations to it. Yeah,

Tony :
So too much of more than cover whatever that missed time is. Yeah,

Ashley:
If you guys love talking real estate, we do head over to the BiggerPockets forums. This is where I was able to triple my real estate portfolio because I found the BiggerPockets forums and I was able to connect and network with other investors, ask questions and answer questions. It also made me realize like, wow, I actually know some things about real estate. So add on over to the forums, ask your questions, and we may pick yours to be on the show. If you’re loving this episode, please hit the follow button on your favorite podcast platform so you’re notified of new shows and it gives us a higher ranking so we can reach more people in the real estate world. Okay, Tony, back to the BiggerPockets forums. You want to go into the markets and trends discussion?

Tony :
Yeah, I do actually see a good question here from Nate and he says is a massive real estate crash on the horizon. Experts are divided, but what do you think? Are there warning signs suggesting caution for potential buyers and investors? Nate, I think you hit on a really important point in your question is that there are a lot of divided folks on this topic, but I think what’s maybe more important is defining, what do you mean when you say massive real estate crash? So different assets are being affected in different ways and different assets in different locations across the country are being impacted in different ways. There are some markets where maybe multifamily is seeing rents come down. Office obviously is being hit pretty hard in a lot of places right now, but things like light industrial, small warehouses and distribution centers, those are doing incredibly well.

Tony :
So it really varies on the asset class and the location. But I think what Nate is alluding to here with this question is are we going to see something like what we saw in 2008 where there’s a bunch of people underwater, massive selloff and this big correction in the actual value of the homes? And this is my take and I’m curious to hear what you think Ash, but my take is that we will not see anything similar to what we saw in 2008. And the biggest reason why is because the lending practice of change tremendously. We’re not seeing these no doc loans or people can go in and fog a premier and get approved for a million dollar mortgage. That’s not happening anymore and folks just have way more equity today than what they had in 2008 as well. So even if people were forced to sell for whatever reason, if you bought pre covid, which a lot of people did, or pre 2021 even, you’ve got a lot of equity right now built up in your home so you can still sell and be profitable. So I think the things that drove the market crash for real estate in 2008, those same things are happening today in 2024.

Ashley:
So on the real estate rookie bootcamp, we had Dave Meyer on yesterday and such a wealth of information. He’s one of the hosts of on the market podcasts with BiggerPockets and just I’m so enlightened by him every time I learn so much. But he was talking about a lot of people have this misconception that when there’s a recession that it will affect the housing market and cause a crash. And he said that’s not the scenario. They’re not correlated actually. And so he said that understanding the difference that if there is a recession, that doesn’t mean that the housing market will crash. And so there seems to be more of a recession than actual, he didn’t say this, but from what I’ve seen and what I’ve heard is that more of a recession trend than actually having a real estate crash on the horizon. But a big impact of this, if what will happen is based on the election as to who will be elected president because different tax policies and different laws that will be enacted will impact everything else.

Ashley:
So for example, if interest rates are brought down, then inflation will increase and vice versa. So there’s all these economic factors that will come into play based on the policy. So I think the political play will make a big impact on what actually happens with the market. But I agree with you Tony. I don’t see a massive real estate crash. I think different, like you said, different asset classes will be affected. I see all the time headlines about multifamily syndicator getting their property foreclosed on or they’re not making payments to their investors and they’re not being honest. If you go in the BiggerPockets forums, you’ll find all this juicy gossip of what’s happening in these syndications that people invested in. So I definitely agree it will depend on the asset class for sure.

Tony :
I guess the question, should I be investing today? But it’s how do I adapt my strategy so that it makes sense to invest today?

Ashley:
So I think that’s a great point to bring up. I think about what strategy you are doing. So not only what asset class but what strategy. If you’re doing a flip and there is a market crash, that’s where you’re in big trouble. Or if you’re doing a brr and you’re planning on refinancing and there’s a big crash and now all the comps are not what you thought they were going to be and you can’t refinance for as much as you thought you were going to be able to. So that’s definitely where it can affect you more. But if you’re going to sell the property, that’s where you can get into trouble. But if you are planning on holding this property for 10, 20, 30 years, you’re going to have mortgage pay down, you’re probably going to have at least a little appreciation. And yes, there will be capital improvements, repairs, and expenses that come up for the property along the way, but if you don’t need this to sell the property, what do you care what the comps are doing and what other properties around you are doing?

Ashley:
So if you buy a property three years later there’s a market crash and your property isn’t worth what it was, then if you don’t need to sell it, it doesn’t matter. Ride the market out and keep holding your property for the next 10 years. And if you look at the historical history of property value, they tend to increase even if there are ups and downs, you look at the historical chart, you’ll see, yeah, there’s dips 2008 or whatever, but if you bought that property 30 years before 2008, that is still going to be worth more than what you bought it for the 30 year priors even when there was that market crash. So looking at the data can kind of give you that sense of security, but I think that’s the great thing about buy and hold, but also understanding that if there is a market crash, there’s an affordability problem where if you do have the nicest the luxury town homes that you’re renting out, that you’re going to have a really slim tenant pool because people won’t have the discretionary income they did. And that’s where you can get into trouble is if you are not in that affordability bubble, I would say.

Tony :
And that’s where honestly even for me, I should, I’ve been thinking about if we ever did dip our toes back into the world, and I think at one point we will of traditional long-term rentals, I would really want to focus on affordable housing of some sort because I feel like that’s where the biggest need is. And I don’t know if it’s necessarily doing section eight or something like that, but even if it’s like I’m only going to do room rent by the room type long-term rentals because folks can get into the places that are typically more expensive but at a fraction of the cost. So what does that look like and how can you kind of build that into your business model to be a little bit more, I don’t think there’s any asset classes for recession proof, but how do you kind of build that up to be maybe more recession resistant? Right.

Ashley:
Okay. So we’re going to take a short ad break, but when we get back, our next question is going to be what is the best exit strategy to pay back partners on the deal?

Tony :
Welcome back. So Ash, I’m looking at the bird discussions and here’s a question from Kieran. Kieran says, so my parents are buying my first fixer upper for me all cash in their name. Now we’ve created a contract that states I have to pay them back within two years via a refi to get it out of their name and into mime. What would be the best way to go about this HELOC, cash out or any other strategies? What is a good exit strategy? I

Ashley:
Would ask your parents if they want to be the bank and they want to make interest on you and do some kind of seller financing, it would technically be seller financing. But if they want to be your private money lender and ask if they want to actually make payments, I don’t think he’s making payments right now, right? He has two years.

Tony :
It doesn’t say. So he has to refi.

Ashley:
So I would first throw out that option and say, mom, dad, what if instead of just paying you back the cash, what if I paid you this lump sum now of maybe the next few years you save up 20 grand or whatever and you say, I’ll pay this 20 grand and then I will pay you monthly payments at 5% interest over the next 15 years or something like that. You might as well throw it out there and see what they say. If they say no, then okay, moving on. But the best way I think to go about this would be to do a refinance. So cash out refinance because you’ll get the best interest rate and you’ll get the lowest payment by doing that. If you go and get a HELOC on the property, you’re going to maybe have a fixed rate for, sometimes they’ll do an introductory rate for the first six months, your interest’s only 3% or whatever.

Ashley:
But then it’s variable, so you don’t know exactly what it’s going to be. You’re going to be paying interest only on the loan, and then you can pay whatever you want for extra principal, but your monthly payment will be lower if you’re just paying the interest. But then you won’t have any principal pay down, I would say cash out refinance. The downside to that is that you’re actually going to have to pay closing costs where on a heloc you usually don’t have to pay any closing costs. Those are covered with the heloc. Tony, what’s your experience with both of those?

Tony :
Yeah, I would agree with you Ash, that I think doing a refinance would probably be the best exit strategy. But Kieran, you just want to make sure that you have enough room between what your all in cost is for this property. And you said pay. So I guess one piece of data that we’re missing here is that you said, Kieran, that you have to pay them back within two years, but are you paying them back with interest or are you literally just repaying them back the principal amount? But either way, whatever amount it is, jab barring from your parents.

Ashley:
Actually Tony, we have to stop there because I reread the question and his parents are buying it in their name, so it’s not even in his name yet. So wouldn’t be a cash out refinance. It would be a purchase of the property.

Tony :
So then that changes things. Karen, here’s what I would instruct you to do. I would instead have you purchased the property in your name? Let your parents be the lenders on records. That way there’s a note between you and your parents for the amount of the purchase. Because like Ashley said, if they own the property, you can’t do a cash out refinance with their property. You would just have to buy that property from them, at which point you’re going to have to put up a down payment of some sort for a lender to approve that purchase. But if you own the property originally and your parents are just listed as the lender, now you can do a cash out refinance to pay them off. That’s a great catch actually. I think just logistically from a paperwork perspective, it’s important how you put this deal together.

Ashley:
Yeah, I mean, the other thing is you could have your parents quick claim deed it into your name, and then they sell it to you for a dollar or whatever it is. Or they say that you are selling it to them for, like you said, putting that they sold it and they’re holding the note on it. And then you can go to the bank and do the cash out refinance. But you have to make, you have your lender lined up because a lot of lenders have a seasoning period where after you purchase the property, in order to do a refinance, you will need a seasoning period. So that could be six months, that could be a year. So make sure you understand those little details before you have the property transferred into your name. So if you are going to transfer it and not do a purchase from them, then I would make sure that you know what the seasoning period is with the bank that you want to use and that you’re going to be able to go ahead and refinance right away too.

Tony :
Yeah. So two super important things. I personally would have your parents act as the lender, as your private money lender on that initial purchase. So your name is on the title, but they’re listed as lien holders against that property with the loan that they gave you. And then second, I would just make sure that you are all in call. So your purchase price, any rehab is less than about 75%, maybe even 70% of whatever you project that property would be worth afterwards. Two super important things to really nail that exit strategy.

Ashley:
Unless you’re planning on house sacking this property and you’re going to live in it, then I would go and look for an FHA loan product or something like that where you’re going to only have to pay 5% down and you’re going to be able to finance 95% or even 3.5% put down and finance more of it the property that way. And probably get a really good interest rate too. That’s if you’re house hacking, going to live in it for a year.

Tony :
If he did go that route, he could also maybe get a credit. If his parents do buy it, then he could get a credit from his parents at closing to cover whatever his down payment and closing costs is. So then he could technically still get into it for zero.

Ashley:
And you know what? That’s true. His parents could sell it to him for whatever they wanted to, but then they would also pay the capital gains on whatever that amount is on that property too, because it’s not their primary residence. So honestly, your parents should go and talk to their CPA as to how they should handle that sale or that transfer to you of that property. And hopefully their CPA would say that the best tax strategy is for them to sell or finance it to you, and then you can just make payments to them.

Tony :
And that’s the easiest way.

Ashley:
But it’s all serious. That is a huge tax advantage when you are selling a property. You don’t want to pay this capital gains. Okay, well, if you guys have a question you’d like to ask, make sure you head over to the BiggerPockets forums. You can pin that at biggerpockets.com/forums and submit your question, and we may pick it to be on the show. I’m Ashley, and he’s Tony. Thank you so much for listening and we’ll see you on the next episode.

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 Rookie.

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