Real Estate Rookie Podcast Summary

Episode Title: Is Cash Flow STILL King? How to Get More of It in This Market (Rookie Reply)
Release Date: February 14, 2025
Hosts: Ashley Kehr and Tony J Robinson
Podcast By: BiggerPockets

Introduction

In this episode of Real Estate Rookie, hosts Ashley Kehr and Tony J Robinson tackle a pivotal question in real estate investing: Is cash flow still the paramount factor in building a successful portfolio, especially in today’s challenging market? They delve deep into listener inquiries, providing actionable strategies and insights tailored for rookie investors aiming to enhance their cash flow without overextending themselves.

1. Managing Out-of-State Properties

Listener Question:
“I’m starting my real estate investing journey and planning to purchase my first multifamily property in a landlord-friendly state without rent control. I’ll be moving out of state and am considering self-managing versus hiring a property manager. How should I handle unit showings, move-out inspections, and what tools should I use?”

Handling Unit Showings

• Tony’s Approach:
  “For my out-of-state investments, I hired an Assistant Property Manager (APM) to handle unit showings. They offered lease-up services a la carte, managing all showings and leasing tasks even if they weren’t managing the property overall.” [02:36]

• Ashley’s Strategy:
  Ashley utilizes leasing agents for all showings and move-ins, charging a flat rate of around $500 per lease. She highlights the variability in agent fees and recommends using resources like biggerpockets.com/agent-finder to find investor-friendly agents.
  “We actually hired a real estate agent who charges a flat rate for each lease, which simplifies the process.” [02:39]

Move-Out Inspections and Maintenance

• Tony’s Experience:
  With a hands-off approach, Tony relies entirely on his property manager for move-out inspections.
  “They sent me a bill for the turnover costs, and it was very hands-off for me.” [04:18]

• Ashley’s Process:
  Ashley employs a maintenance person to conduct move-out inspections, adhering to state-specific laws (e.g., pre-move-out inspections in New York).
  “Our maintenance guy walks through the property with the resident, noting any damages, and then we decide on necessary repairs.” [06:00]

Tools and Software for Self-Managing

• Recommended Software:

  • Rent Ready: Free for BiggerPockets Pro members.
  • Turbo Tenant: Currently used by Ashley.
  • Avail, Zillow, Apartments.com: Other notable options.

  “Look for features like tenant portals, online rent payments, maintenance request submissions, electronic lease agreements, and integrated bookkeeping.” [08:30]

• Maintenance Dispatch Services:
  Latchel and Lula are mentioned as options for handling maintenance requests efficiently through integrated software solutions.

Final Tips for Self-Managing

• Setting Expectations:
  Clear communication with tenants regarding maintenance requests and property rules eases management burdens.
  “Setting the right expectations during onboarding makes management a lot easier.” [11:00]

• Asset Management:
  Beyond property management, investors should focus on managing their assets by reviewing insurance, financials, and overall property health.
  “Ensure you’re managing your asset, not just relying on your property manager.” [12:01]

2. Leveraging Equity to Purchase Additional Properties

Listener Question:
“I own a two-bedroom, one-bath property in Fort Worth, Texas, with $20,000 left on the mortgage and an estimated value of $175,000. Cash flow is $250 monthly, and the mortgage will be paid off in three years. Should I leverage the current property to purchase another rental, and how?”

Assessing the 'If' – Should You Leverage?

• Tony’s Considerations:
  Assessing the motivation behind purchasing another property is crucial—whether for appreciation, additional cash flow, or tax benefits.
  “Understand your motivation—are you seeking appreciation, cash flow, or tax benefits?” [16:53]

• Ashley’s Insights:
  Emphasizes the importance of considering how cash flow will increase once the mortgage is paid off and the benefits of diversification.
  “If your mortgage is paid off, your cash flow could increase significantly, influencing your decision to invest further.” [16:53]

Options for Tapping into Equity

1. Selling the Property:

   • Potential equity: Selling a property valued at $175,000 with a $20,000 mortgage could net approximately $155,000 after closing costs.
     “Selling could provide a substantial lump sum to invest in additional properties.” [20:35]

   • 1031 Exchange:
     If selling, consider a 1031 exchange to defer capital gains taxes by reinvesting in another investment property.
     “Look into a 1031 exchange to defer taxes on your gains.” [20:35]

2. Refinancing:

   • Replace the existing mortgage with a new one, potentially at a higher loan-to-value (LTV) ratio, to extract equity without selling.
     “Refinancing allows you to tap into your equity while keeping the property.” [21:02]

   • Considerations:
     Assess how new mortgage payments will affect cash flow. Refinancing at a lower interest rate can be beneficial.
     “Compare your current and new mortgage payments to understand the impact on cash flow.” [21:37]

3. Line of Credit:

   • Obtain a commercial line of credit to access funds as needed, paying interest only on the amount used.
     “A line of credit can provide flexible access to funds for property purchases or renovations.” [23:06]

4. Debt Service Coverage Ratio (DSCR) Loans:

   • Use the property’s income to secure a loan that allows for additional borrowing based on the property’s cash flow.

5. Local Lending Options:

   • Consult with local lenders to explore tailored financing solutions based on specific investment goals.

Ashley’s Example and Recommendations

• Case Study:
  If the current mortgage is nearly paid off, refinancing could lead to increased cash flow once principal payments cease.
  “With your mortgage paid off in three years, refinancing now could enhance your cash flow significantly.” [22:59]

• Strategic Considerations:
  Evaluate purchase price, expected cash flow from new properties, and long-term equity growth to determine the best leveraging strategy.
  “Understand how purchasing another property aligns with your long-term financial goals.” [22:59]

3. Escrowing Funds for Property Repairs Before Closing

Listener Question:
“I’m closing on a property that requires a new roof and fixing leaking skylights. The seller has a contractor lined up, but delaying the closing to let them complete the repairs would incur $1,400 in rate lock extension fees. Should I escrow funds to ensure repairs are completed without delaying the closing?”

Understanding the Situation

• Key Issues:
  • Repairs needed: New roof and skylight fixes.
  • Seller’s proposal: Seller-contracted repairs.
  • Buyer’s dilemma: Incurring rate lock extension fees if closing is delayed.

Tony’s Recommendations

1. Negotiating Credits:

   • Request the seller to provide a credit equivalent to the rate lock extension fees to avoid postponing the closing.
     “Have the seller give you a credit for the $1,400 rate extension fee to maintain your closing schedule.” [20:35]

2. Repair Cost Credits:

   • Negotiate a credit based on actual repair costs, reducing the cash needed at closing.
     “If the seller can provide a repair credit, it lowers your out-of-pocket expenses and avoids delaying the closing.” [21:37]

3. Preferred Option – Seller Completes Repairs Pre-Closing:

   • Insist that the seller completes repairs before the closing to ensure the property meets condition requirements without financial offsets.
     “Preferably, have the seller complete the repairs before closing to maintain certainty and property condition.” [21:37]

Ashley’s Insights

1. Potential Risks of Seller-Contracted Repairs:

   • Quality concerns: Repairs done by the seller’s contractor may be subpar, leading to future issues.
     “Sometimes seller-contracted repairs are not up to standard, leading to additional work post-closing.” [33:43]

2. Escrow Management:

   • Use an attorney or title company to hold escrow funds, ensuring repairs are completed satisfactorily within a set timeframe.
     “Set a clear timeframe for repairs in escrow to avoid indefinite delays and ensure work is completed.” [36:39]

3. Timeframe and Contingencies:

   • Establish deadlines for repair completion and contingency plans if the seller fails to complete the work.
     “Set a timeframe, such as 30 days, for repairs to be completed, after which funds can be released or reallocated.” [36:39]

Practical Example

• Ashley's Septic System Negotiation:
  Ashley shares her experience with escrow negotiations, highlighting the importance of clear communication and realistic repair cost agreements.
  “We negotiated repair costs and ensured funds were appropriately allocated through escrow to handle unexpected issues.” [37:29]

Key Takeaways and Conclusions

• Cash Flow Management:
  Enhancing cash flow remains crucial, achievable through strategic property management, leveraging equity, and informed financial decisions.

• Self-Managing vs. Hiring Professionals:
  Balancing cost savings with operational efficiency is essential. Utilizing leasing agents, maintenance personnel, and effective property management software can streamline self-management.

• Leveraging Equity Wisely:
  Whether through selling, refinancing, or obtaining lines of credit, understanding the implications on cash flow and long-term equity is vital for sustainable growth.

• Escrow Utilization for Repairs:
  Properly managing escrow funds for repairs requires clear agreements, timelines, and reliable escrow agents to protect both buyer and seller interests.

• Strategic Negotiation:
  Effective negotiation with sellers regarding credits and repair responsibilities can safeguard financial interests and ensure timely closings without unnecessary expenses.

Notable Quotes

• Ashley Kehr:

  • “We actually hired a real estate agent who charges a flat rate for each lease, which simplifies the process.” [02:39]
  • “Setting the right expectations during onboarding makes management a lot easier.” [11:00]
  • “Ensure you’re managing your asset, not just relying on your property manager.” [12:01]

• Tony J Robinson:

  • “If your mortgage is paid off in three years, your cash flow could increase significantly.” [16:53]
  • “Have the seller give you a credit for the $1,400 rate extension fee to maintain your closing schedule.” [20:35]

Final Thoughts

Ashley and Tony emphasize the enduring importance of cash flow in real estate investing while acknowledging the complexities introduced by current market conditions. They encourage rookie investors to build robust systems, leverage available tools, and engage in strategic financial planning to navigate challenges successfully.

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This summary captures the essence of the discussed episode, providing valuable insights and actionable advice for rookie real estate investors seeking to maximize cash flow in a competitive market.