Real Estate Rookie - Episode Summary

Title: 5 Things You Can’t Afford to Get Wrong When Analyzing Deals (Rookie Reply)
Host/Authors: Ashley Kehr and Tony J Robinson
Release Date: March 21, 2025
Podcast: Real Estate Rookie by BiggerPockets

Welcome to this episode of Real Estate Rookie, where Ashley Kehr and Tony J Robinson dive deep into the essentials every new real estate investor should master. In this episode, they tackle two pivotal questions from listeners, providing insights into analyzing deals and forming solid partnerships.

1. Analyzing Deals: Maximizing Cash Flow and Understanding Turnkey Providers

Question Overview:
A listener is considering purchasing a turnkey property in the Midwest where the rent only covers taxes and mortgage. The property management fees are waived for the first year, resulting in approximately $50 in cash flow. The market isn't appreciating significantly, prompting the investor to question the viability of the deal.

Understanding Turnkey Providers

Tony explains:
“Turnkey providers are companies who go out there, they find distressed assets, they fix them up, they place tenants inside of them, and then they sell those fully leased up units to other investors. Those are called turnkey providers because basically on day one it's turnkey. You don't have to do anything to it, any work, and you can really just kind of get started cash flowing on day one, hopefully.”
[00:48]

Key Points:

• Definition: Turnkey properties are fully renovated and rented out, allowing investors to start earning income immediately.
• Advantages: Minimal involvement required from the investor; ideal for those seeking hassle-free investments.
• Potential Downsides: Cash flow can be minimal, especially if only property management fees are waived temporarily.

Evaluating Cash Flow and Expenses

Ashley highlights:
“The person wrote absolutely nothing else is factored in, such as capex improvements like roofs, H Vacs. Usually we like to save a percentage of that.”
[00:34]

Essential Expenses to Consider:

• CapEx Reserves: Allocate funds for major repairs and improvements (e.g., roofs, HVAC systems).
  • “If I'm buying a home that was built in the early 1900s, I'm saving at least 10% to cover those improvements on the property.”
    [02:07]
• Maintenance Costs: Ongoing maintenance can quickly erode modest cash flows.
  • “Any maintenance cost would basically take away that $50 of cash flow.”
    [03:17]
• Bookkeeping and Administrative Fees: Additional costs such as bookkeeping, tax preparation, and legal fees.

Conclusion on Cash Flow:
With only $50 in cash flow after accounting for taxes and mortgage, and excluding other potential expenses, the deal appears unfeasible unless supplementary income streams or appreciation prospects exist.

Ashley advises:
“I think this probably isn't an investment that I would want to do.”
[06:00]

2. Real Estate Partnerships: Structuring Ownership and Planning for Growth

Question Overview:
A listener seeks advice on entering the real estate market through partnerships. They plan to pool funds for a down payment and closing costs, with one partner qualifying for the mortgage. The questions revolve around claiming ownership, lender underwriting for future purchases, and avoiding pitfalls when scaling their portfolio.

Claiming Ownership Without an LLC

Ashley explains:
“You could not be on the mortgage, but you could still be on the deed. So whether you have ownership of an LLC or you have a joint venture agreement, or it's your personal name, you need to have your name on the deed or that joint venture agreement saying that you are, you know, own part of the joint venture that owns the house.”
[10:53]

Key Points:

• Deed vs. Mortgage: It's possible to be on the property's deed without being on the mortgage, ensuring legal ownership stakes.
• Ownership Structures: Options include holding property in personal names, forming an LLC, or creating a joint venture agreement.
• Down Payment Sources: Funds should come from personal savings or gifts from family members to comply with loan requirements.

Tony adds:
“Typically when you're doing a house hack, the reason that people like to house hack is because of the type of dust debt that you get access to. … the actual deed would show Ashley and Tony right.”
[12:28]

Lender Underwriting for Future Purchases

Tony discusses:
“So if you're both going on the mortgage together because maybe you can't qualify by yourselves when you go to buy that next property … They see you both are responsible for $2,000 each instead of 1,000, 1,000.”
[16:45]

Key Points:

• Debt-to-Income (DTI) Impact: Both partners' debts are considered individually, potentially affecting loan eligibility for future properties.
• Individual vs. Joint Mortgages: Joint mortgages may lead to higher combined DTI ratios, complicating future financing.

Avoiding Pitfalls in Scaling the Portfolio

Ashley recommends:
“Have some kind of operating agreement or joint venture agreement. … putting a five year exit plan.”
[17:51]

Tony elaborates on the Five-Year Exit Plan:
“At the end of the fifth year of the partnership, the default option … sell the property … extend the partnership on an annual basis thereafter.”
[17:51]

Key Points:

• Operating Agreements: Clearly outline each partner's responsibilities, ownership percentages, and procedures for conflict resolution.
• Exit Strategies: Implementing a structured exit plan ensures both partners are aligned on the long-term intentions and can amicably dissolve the partnership if needed.

3. Making Appropriate Offers and Handling Appraisals in Out-of-State Investments

Question Overview:
A first-time investor made an offer exceeding the property's appraised value while investing out of state. They seek guidance on determining appropriate offers and managing appraisal discrepancies.

Navigating Appraisal Challenges

Tony advises:
“If you believe that the appraisal is wrong, then … it's very reasonable to … say, here are some comps … you picked a comp that was three miles away that sold for less, but here's one that sold more recently, that's two miles away.”
[25:44]

Key Points:

• Disputing Appraisals: Presenting better comparable sales (comps) can challenge low appraisal values.
• Switching Lenders: Changing lenders may necessitate a new appraisal, potentially leading to a more favorable outcome.
• Negotiation Leverage: Use appraisal results as a bargaining tool to negotiate purchase price reductions.

Building a Reliable Team for Out-of-State Investing

Ashley emphasizes:
“Get a property manager or someone on the ground to walk properties for you … take pictures, take video.”
[28:43]

Tony adds:
“Sometimes paying 200 bucks for a round trip airfare could be worth it to go and set up a whole bunch of properties … to actually look at them.”
[31:10]

Key Points:

• Local Representation: Hire a trustworthy property manager or local agent to inspect and report on property conditions.
• Documentation: Comprehensive photos and videos provide a clear understanding of the property's state.
• Personal Visits: Occasionally visiting properties can offer firsthand insights that remote evaluations might miss.

Utilizing BiggerPockets Tools

Ashley recommends:
“Use the BiggerPockets calculators … make your offer based on the verified numbers, not what you expect the property to appraise for.”
[32:17]

Key Points:

• Financial Analysis: Leverage BiggerPockets calculators to account for all expenses and ensure the offer aligns with financial goals.
• Data-Driven Decisions: Rely on accurate data rather than appraisal expectations to formulate competitive and appropriate offers.

Conclusions and Key Takeaways

• Thorough Deal Analysis: Always consider all potential expenses, including capex and maintenance, to accurately assess cash flow viability.
• Understanding Partnerships: Clearly define ownership structures and maintain comprehensive agreements to safeguard both partners' interests.
• Appraisal Management: Actively engage in the appraisal process, dispute inaccuracies, and use local insights to ensure fair property valuations.
• Building a Supportive Team: Establish a reliable local team to manage and inspect properties, especially when investing out of state.
• Utilizing Resources: Take advantage of tools and resources provided by BiggerPockets to enhance deal analysis and investment strategies.

Notable Quotes:

• Tony on Turnkey Providers:
  “Turnkey providers … you can really just kind of get started cash flowing on day one, hopefully.”
  [00:48]

• Ashley on CapEx Reserves:
  “If I'm buying a home that was built in the early 1900s, I'm saving at least 10% to cover those improvements on the property.”
  [02:07]

• Tony on Partnerships:
  “Typically when you're doing a house hack … the actual deed would show Ashley and Tony right.”
  [12:28]

• Ashley on Operating Agreements:
  “Have some kind of operating agreement or joint venture agreement.”
  [17:51]

• Tony on Appraisal Negotiation:
  “Appraisers are coming from … they don't know that area ... you might know that area better than the appraiser does.”
  [25:44]

For aspiring real estate investors, this episode underscores the importance of meticulous deal analysis, strategic partnerships, and proactive management of investment challenges. Ashley and Tony's expert guidance equips listeners with the knowledge to navigate the complexities of building a sustainable real estate portfolio.

Stay Connected:
For more insights and resources, subscribe to the Rookie Newsletter at biggerpockets.com, and join the conversation on the BiggerPockets forums to submit your questions and engage with a supportive community.