BiggerPockets Real Estate Podcast – Episode Summary
Episode Title: From the Forums: One Thing That Most Beginner Investors Should NOT Do
Release Date: December 4, 2024
Host: Dave Meyer
Guest: Henry Washington

Introduction

In this episode of the BiggerPockets Real Estate Podcast, host Dave Meyer teams up with Henry Washington to delve into pressing questions sourced directly from the BiggerPockets forums. The duo addresses four hotly debated topics relevant to both novice and seasoned real estate investors:

1. Using Private Money for Your First Deal
2. Accepting Tenants with Red Flags
3. Raising Rent for Inherited Tenants
4. The Viability of the 70% Rule in Today's Market

1. Using Private Money for Your First Deal

Timestamp: 00:00 – 05:55

Question Overview:
Chris, a beginner investor, inquires about the pros and cons of raising private capital for his inaugural real estate deal, especially concerning the potential risks if the deal goes south.

Discussion Highlights:

• Responsibility of Borrowing:
  Henry emphasizes the gravity of borrowing private money, stating, "You are borrowing other people's money," and cautions against using it as a crutch for poor financial habits.
  [01:53]

• Risks for Beginners:
  Both hosts agree that beginners, who might lack financial discipline, could pose significant risks to lenders. Dave shares a personal anecdote about a recent rookie mistake costing him approximately $7,000, underscoring the unpredictability of initial ventures.
  [02:00]

• Partnering vs. Private Lending:
  The distinction between partnering with family or friends versus traditional private lending is clarified. Henry points out that equity partnerships differ from simple loans, which carry liens and can jeopardize property ownership if things go wrong.
  [03:07]

• Lender's Perspective:
  Dave adds that private lenders typically seek stable, experienced investors and would likely dismiss loan requests from novices without proven track records. He advocates for partnering with acquaintances who trust in your capabilities.
  [04:18]

Notable Quotes:

• Henry Washington: “You are borrowing other people's money.”
  [01:53]
• Dave Meyer: “I would not lend someone money who has never done this before.”
  [05:12]

Conclusion:
Borrowing private capital is feasible but fraught with risks for beginners. It's advisable to assess personal financial habits and gain experience before seeking external funding.

2. Accepting Tenants with Red Flags

Timestamp: 05:55 – 22:55

Question Overview:
Sandra faces challenges finding reliable tenants for her rental property. Previously, her first rental attracted a great tenant quickly, but her current property is struggling with applicants who have multiple late payments and past bankruptcies.

Discussion Highlights:

• Evaluating Bankruptcy:
  Henry advises that bankruptcy isn't an automatic disqualifier. Understanding the reasons behind it—like medical debt or divorce—can provide better insight into a tenant's reliability.
  [10:20]

• Contextualizing Late Payments:
  Both hosts discuss the importance of context. Dave shares a personal experience where a minor late payment significantly impacted his credit score, emphasizing the need to assess the severity and recency of such flags.
  [12:03]

• Gut Feeling:
  Henry underscores the reliability of gut instincts in tenant selection, noting, "Nine times out of nine... it ends up going south." Trusting one's judgment can often prevent problematic tenancies.
  [13:24]

• Strategies for Filling Vacancies:
  Dave suggests examining the three main factors affecting tenancy: price, condition, and marketing. He recommends adjusting rent, enhancing property appeal, or improving marketing techniques based on the identified issue.
  [15:51]

• Seasonal Considerations:
  The hosts highlight the seasonal nature of the rental market, noting that finding tenants can be particularly challenging during months like November, December, and January.
  [16:06]

Notable Quotes:

• Henry Washington: “If I find out the bankruptcy doesn't have anything to do with medical debt or a divorce... I'm not going to rent to that person.”
  [11:14]
• Dave Meyer: “I'd rather take it on the front end and then find a great tenant.”
  [13:25]
• Henry Washington: “It depends on what those red flags are and why and how they got there.”
  [14:03]

Conclusion:
When faced with tenants exhibiting red flags, it's crucial to evaluate the underlying reasons and context. Trusting one's instincts, coupled with a thorough assessment, can guide landlords in making informed decisions that safeguard their investments.

3. Raising Rent for Inherited Tenants

Timestamp: 22:55 – 34:58

Question Overview:
Larry Nelson seeks advice on increasing rent for a long-term tenant in a newly acquired rental property. Currently, the rent is $500 below the market rate, and he's contemplating the best approach to adjust it without losing a reliable tenant.

Discussion Highlights:

• Assessment of Tenant Quality:
  Henry emphasizes ensuring the tenant is reliable and maintains the property's condition before considering rent adjustments.
  [17:31]

• Open Communication:
  Initiating a conversation with the tenant about the necessity to align rent with market rates is recommended. Proposing gradual increases can make the transition smoother.
  [18:48]

• Gradual Rent Increments:
  Techniques like "stair stepping" the rent—raising it by small amounts over time—can help tenants adjust financially without feeling overwhelmed.
  [19:34]

• Data-Driven Transparency:
  Dave suggests presenting tenants with comparative market data to justify rent hikes, ensuring transparency and trust. Explaining the benefits of having a new, responsive landlord as opposed to impersonal corporate entities can also foster goodwill.
  [19:53]

• Fairness in Multi-Unit Properties:
  In cases of multiple tenants, it's crucial to apply rent adjustments uniformly to maintain fairness and avoid tensions.
  [22:11]

Notable Quotes:

• Henry Washington: “Good tenants are hard to find... If they're a good quality tenant and they're paying consistently, that's gold.”
  [17:31]
• Dave Meyer: “Think about the long term here and don't just like fight over $200.”
  [22:03]
• Henry Washington: “If I'm buying a house in a rockstar neighborhood... I am willing to stretch that out for a good amount.”
  [32:49]

Conclusion:
Balancing business needs with tenant satisfaction is key when raising rent. Transparent communication, gradual increases, and demonstrating value can help retain reliable tenants while aligning with market rates.

4. The Viability of the 70% Rule in Today's Market

Timestamp: 34:58 – 35:27

Question Overview:
Shayon, an experienced flipper, questions the relevance of the 70% rule in the contemporary South Florida market, noting slim profit margins and seeking alternative metrics for successful flips.

Discussion Highlights:

• Understanding the 70% Rule:
  Henry explains that the 70% rule suggests purchasing properties at 70% of their After Repair Value (ARV) minus repair costs. However, he critiques its lack of market specificity and advocates for more tailored calculations.
  [27:47]

• Customized Profit Calculations:
  Instead of adhering rigidly to the 70% rule, Henry prefers performing a "max allowable offer" calculation, factoring in ARV, closing costs, holding costs, repairs, and desired profit.
  [28:44]

• Incorporating Closing and Holding Costs:
  Henry details how to account for expenses such as closing costs (both buying and selling), holding costs (like mortgage interest), and repair costs in the overall evaluation.
  [29:50]

• Determining Desired Profit:
  Both hosts discuss the importance of setting profit goals based on the rehab expenses and the specific risks associated with each deal.
  [30:52]

• Flexibility and Market Adaptation:
  Henry emphasizes adjusting profit expectations based on market conditions, property location, and the unique challenges each deal presents. Over time, with experience, investors can better calibrate their profit targets to balance ambition with realism.
  [32:49]

Notable Quotes:

• Henry Washington: “The 70% rule is not market specific. It's just a general calculation.”
  [28:46]
• Henry Washington: “I dictate the profit that I want to make based on what that deal is telling me.”
  [32:03]
• Dave Meyer: “How do you come up with that profit... it's something you learn over time.”
  [33:11]

Conclusion:
While the 70% rule offers a foundational guideline for fix-and-flip deals, Henry advocates for a more nuanced approach. Customized calculations that account for specific market dynamics and individual deal factors provide a more accurate roadmap to profitability.

Final Thoughts

Dave Meyer and Henry Washington provide invaluable insights into common dilemmas faced by real estate investors. Their discussions emphasize the importance of personalized strategies over rigid rules, the significance of due diligence, and the value of experience in navigating the complexities of real estate investing.

Relevant Timestamps:

• Using Private Money: 00:00 – 05:55
• Accepting Tenants with Red Flags: 05:55 – 22:55
• Raising Rent for Inherited Tenants: 22:55 – 34:58
• 70% Rule in Flipping: 34:58 – 35:27

Note: Advertisements, introductions, and other non-content segments have been omitted to focus solely on the informative discussions within the episode.