Is Cash Flow STILL King? How to Get More of It in This Market (Rookie Reply)

Summary

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

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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.

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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]

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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]

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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]

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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.

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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]

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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.

Transcript

[Ashley Kerr]

Everybody says cash flow is king, but the reality of achieving that in this market is tough.

[Tony]

So today we are deep diving into questions from the bigger pockets. Rookie investors and one investor in particular is struggling with ways to find an increase in cash flow in his one property.

[Ashley Kerr]

So if you want to increase cash flow, is buying more rentals the right strategy or is it actually something else? I'm Ashley Kerr and this is the Real EST Rookie Podcast.

[Tony]

And welcome to the 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. So let's get into our first question for today.

[Ashley Kerr]

So this question says hi, I'm just starting out on my real estate investing journey and I'm thinking about my first property this year. The thing is I will be moving out of the current state, leaving myself to either self manage or or hire a property manager for my property. I am leaning towards the self manage option and got several questions regarding self managing a property while living out of state. I will be buying a multifamily property in a landlord friendly state without any rent control. My questions are how should you handle the showing of the units? How do you conduct the move out inspection? Are there specific tools and any other stuff I should be aware of when self managing? So Tony, let's go through those questions kind of one by one. So set the table, set the scenario here is moving out of state but is going to have a property in the current state that they're living in. So they're moving and they're going to be an out of state investor. The first question is how should you handle showing of the units? So Tony, when you had your out of state investment, what did you do?

[Tony]

For me I did go the route of hiring apm, so my PM was the person that showed the unit for me. However, I do know that the PM also offered lease up services just like a la carte. So if you just wanted to hire them just to do the leasing for you, which means they'll, they'll do all the showings, they'll do all that stuff, they'll get the property leased for you even if they don't manage it, that was an option that they offered. The realtor that I worked with, I believe she also offered like Lisa for investors as well. So your, your PMs in those markets and your agents can potentially be a resource for you if you're looking for ways to actually get the showing of the units handled remotely.

[Unknown]

What about you Ash?

[Tony]

What are other unique strategies yeah, even.

[Ashley Kerr]

Though I'm not an out of state investor and all of my rentals are local, I still use a leasing agent. So we actually hired a real estate agent and she does all of our showings and she actually does the move in now on the properties. So she charges a flat rate of, I think it's $500 every time she leases a unit. Some agents, we had an agent probably five, six years ago and she used to charge one month's rent on the property. So that can definitely vary. So you can get a leasing agent just by contacting. You could actually use biggerpockets.com/agent finder. And I'm sure there's a ton of investor friendly agents who also do leasing for properties. But I think the harder part than getting somebody to lease it is actually finding a handyman for the, you know, kind of being your boots on the ground. So we actually did have our maintenance guy do a lot of the move ins for a while too. Is kind of like a boots on the ground. But some states do require for somebody actually showing the partner apartment and like doing the rental application, things like that, that it needs to be a licensed agent. So make sure you check on your leasing laws to see if maybe you could use your boots on the ground handyman or you know, it could just be a friend or what those laws are too. How do you conduct move out inspections and cleaning once a tenant moves out? Is the next question. So Tony, I'm assuming your property manager handled this for you. A move out inspection. Were you involved in any part of the process or was it kind of they notified you someone's moving out and then let you know the result of the apartment.

[Tony]

That was very hands off. And yeah, they just kind of, they sent me a bill for like, hey, here's, here's the bid of what we think it'll cost to get the. You get the unit turned. But yeah, it was, it was pretty hands off for me H. Having a pm. And I guess one thing that I will call out and this is for all the rickies that are listening, the way that my PM worked was that I didn't have to use their company to handle the maintenance, but it was the only bid that they provided to me. If I wanted any other bids, I had to go out there and get that myself. And what I found was that they were typically more expensive than other vendors that were out there. So if you do opt to have like a pm, do your, your, your lease up or you know, kind of watch property afterwards just make sure you at least go out and get a couple of quotes on what that scope of work is instead of just committing to whatever the PM is going to give you.

[Ashley Kerr]

Yeah, we found that too with the, when we used a property management company that it was definitely more expensive. So we eventually started using our own contractors. So you're definitely paying for that convenience because you don't have to, you know, take a contractor into the property to get the estimate. You don't have to contact anyone, it's just kind of everything's going to the property management company and you're very hands off. But I will say too is like, I would have thought it would have been the opposite that if you're having the property management company do it that you know, you'd get a, a discount or you know, like a bulk rate because they manage so many properties are doing so many turnovers that they get discounts on their things. But we were charged more than what a, typical, you know, smart smoke alarm would cost. So it was actually the opposite of what I thought it would be. So like Tony said, make sure you are getting specific scope of work. So they used to send theirs through Builder Trend and I would actually go through it and look at, you know, what are the material costs, what are the labor costs, things like that too. So make sure you're actually getting provided of what's being done when a turnover is happening. As far as the move out inspection, what we do right now is the maintenance guy actually does the move out inspection. So he meets the resident, he walks through the property with them, indicates anything. And actually in New York State you have to give your resident residents the option to do a pre move out inspection. Two weeks, at least two weeks before they move out. They can opt out of it. So we send them a form, they select they want it or they sign that they're opting out of it. And what the purpose of this move out inspection is, the pre move out is that you notify them of things that are wrong in the apartment that they would be charged for. So this gives them time to rectify the issue before they're charged. So I mean, kind of, you know, take it with a grain of salt because sometimes you don't want your tenant making the repairs, things that need to be done. For example, I have this video of this wall where the person tried to patch the wall and it's like, you know, you push on it and the patch goes in and out like this, you know, so sometimes you don't want that to happen. But Per your say law, you may have to give them the option to do that, but we have the maintenance guy do that. Then once that is done, it's uploaded into our property management software and then that's where it's decided as to you know, the maintenance guy makes the recommendation we actually do need to make repairs. I'm going to make these repairs, this is going to happen. And then he's the one that actually notifies the cleaner that it's ready to be cleaned and then he notifies leasing that it's ready to be leased again. So you could have a handyman or a maintenance person do this whole process. You could also have a cleaner that comes in and does it. You could also ask the you know, the leasing agent if they would do move outs and maybe you work that in and negotiate it as part of their leasing fee is so like you move the person out. You're my eyes and ears of the person that's actually turning over the apartment, the cleaner, the handyman so that you know it gets the work done and then you get to lease it out sooner and you get to make your money and move on. So there's a bunch of different ways that you can do that. But the move out inspection should be emailed to you, sent to you so you can look it over to and determine the security deposit amount that's being refunded since you are self managing and.

[Tony]

As you touched on this a little bit but it leads into the next part of the question but is there a specific tool software that you use in order to manage your property in regards to rent collection, maintenance issues, et cetera?

[Ashley Kerr]

Yeah, so I actually went into the real estate rookie Facebook group and so there is a post in there about recommendations for property management software. So I actually learned of one that I have never heard of before because you know I only use one so and more and more are becoming so conveniently available but there's rent ready and that if you're a bigger pockets pro member you actually get it for free. So make sure you go to your pro resources and look for that. Then there's Turbo Tenant which I'm currently using and then there's ones like Avail. Zillow is starting to build out one apartments.com has one. But one of the new ones I learned from one of the rookies in the Facebook group was in a go into when you are searching property management software first of all look at the features. You want to be able to have a tenant portal so your tenant can pay online so they can submit maintenance requests online. You want to be able to maybe do your bookkeeping through there, at least get rent collection through there, you know, sign lease agreements electronically, collect rental applications, do the whole screening process. And then another thing that I had learned of is maintenance companies that you can attach to some of these property management software. So there's Latchel and Lula are two that I learned about. I haven't used either. But basically they're a maintenance dispatch service where you know, your tenant submits a maintenance request and they actually take care of it, contact a vendor and send a vendor out to take care of the maintenance.

[Tony]

Yeah, so so many good software tools that are out there and that are available. So I think a lot of it comes down to picking the one that you know, that's easiest for you to use, easiest to get started with. I think the last part of the question here says is there anything else that I should be aware of in trying to self manage a property? I think in general self managing is possible. Right? People do it all the time. And whether it's short term, long term, medium term, whatever it may be. I think good self management comes down to a couple of things. Number one, I think it's setting the right expectations for your tenants or for your guest or whoever is living or using your property. Because when the expectations are clear to begin with, I believe the management becomes easier. Because if your tenants know when to submit a maintenance request and when not to, then you're only being notified of the things that are actual issues you need to, you need to focus on. If your tenants know that they can't, you know, park in front of their, their, the other side of the duplex's driveway, then that alleviates potential conflict between your tenants. So I think the better job we can do during the onboarding, during the initial phases makes management a lot easier. The second thing aside from expectations are your own internal systems and processes. So if a maintenance request does come in, what happens in on your side of the business to make sure that, that it gets recorded, that it gets completed and that's communicated back to your tenant. Right. Just all of the different things that go into running your business, start focusing today on, on building out those systems in those processes. So those are the two things that come to mind for me. Ashley, But I guess any of the final thoughts on just like self managing, you obviously have it at a much larger scale on the long term side than I ever did. What are your thoughts?

[Ashley Kerr]

Yeah, the last piece I would say is just asset management. You know, make sure that you're managing your asset and not just a property manager. So you're quoting out your insurance, you're going over your financials, things like that. But we're going to take a quick break and when we come back, let's go over how you can purchase your second rental or even if you should. So we'll be right back.

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[Ashley Kerr]

Okay rookies, before we jump into our second question, follow us at BiggerPockets Rookie on Instagram and BiggerPockets Real Estate Rookie podcast on Facebook. Get all the extra tips and insider advice to help you succeed this year on your real estate journey. Both are linked in the show notes for you. Okay, so we got our second question here today. It says, I am an older investor seeking help. I own a two bed, one bath property in the Fort Worth, Texas area. When I purchased the property, the previous owners updated the plumbing, adding H Vac and updated electrical. It has rented well over the years. Currently I have about 20,000 left on the mortgage and the estimated value is 175,000. This is the only property that I own other than my own house. I am wanting to purchase another rental property but don't have the funds other than the equity in the current rental. Should I leverage the current property that I have to purchase another? Right now the rental has a cash flow of $250 per month. The rental should be paid off in about three years. Thank you in advance. Okay, so Tony, what do you want to start with? Do you want to discuss if he should tap into that equity or how he can tap into that equity?

[Tony]

I think let's, let's get into the if first because I feel like that'll kind of dictate everything else. So if we're asking about if, I think that it comes down to a couple of things. First, what. Again, I keep going back to this, like, what is your motivation for wanting another rental? Are you doing it for appreciation long term? Are you doing it because you want some additional cash flow today? Are you doing it because you need the tax benefits? Like what is actually driving the desire to add that next property? Because I think depending on how you land, that'll somewhat dictate what steps maybe make the most sense. Like if your goal is, hey, I just need to buy something else because I just sold my business and I need a, I need another tax write off. Okay, then yeah, maybe it does make Sense to potentially 1031 this property into something else that you can, you know, then do bonus appreciation on and create a bunch of passive losses. But if it's cash flow, then maybe there's some more math that goes into it. So those I think are the Questions that I would be asking Ashley first about the if. What do you think what might be.

[Ashley Kerr]

Missing there and maybe to diversify. So, like, maybe you just don't want to rely on having one rental. You want two rentals in case maybe one is vacant. The cash flow from one can help cover the other one. So there's reasons like that too, that you should consider. Um, but I think one thing that really intrigues me is this property is almost paid off. So what is the mortgage payment on this property right now? So after the mortgage is paid off in three years, what will the cash flow increase to? So say that the mortgage payment is, you know, $500 per month. Okay, so that would increase your not including escrow, no taxes and property, or no taxes and insurance, because those would still stay there. But just say it's 500 for principal and interest. That would increase your cash flow to 750 per month. So if you go and you pull equity and you put a line of credit or you refinance this property, what will that new monthly payment be and what would the cash flow be on that new property? So which one has higher cash flow, which option? But also what does the equity look like in both properties to three, five years down the road? So that's where I'd look at as to like, this property is almost paid off. I'm going to have in 3 years x amount more cash flow just by doing what I'm already doing. And I would see what the benefit of purchasing another one would be. What kind of cash flow you can get. You know, maybe if you're buying a property that's way below value and you're already getting, you know, $50,000 baked into equity because you're getting such a good deal on it, then yeah, that's where it makes sense to maybe go and grab that deal. Because in five years time, maybe when you're ready to retire and you want to sell these properties, you're going to have way more equity with the two of the properties than one. So like Tony said, you got to look at what you want. Is it cash flow that you want? Because maybe just keeping that rental is the best. Is it equity that you want so you can, you know, sell off in 10 years and just take your cash and run, Is that better with having your one property paid off, or is that better with having two properties? There's even some investors that like to keep their properties leveraged for liability reasons so they're less likely to get sued. Or if they get sued, there's not as much to take because the properties are leveraged so much. So I would say, you know, kind of look into those scenarios to see, and I wish we could give like a concrete answer on that part. But really, these are questions that everyone should be asking themselves before they go on to the next deal. Especially if you are this close to increasing your cash flow by X amount because the mortgage is being eliminated on the property. So Tony, let's kind of get into what are some ways that he actually can tap into that equity and use the equity to purchase another property.

[Tony]

And I think we can, we can kind of break it down, like access, like I guess how easy it will be to access that. Right. So the first way is just to sell the property, right? You sell the property, you'll be able to tap into virtually all of the equity that you built up minus any closing costs associated with that sale. Right. So if you really wanted to get the most, you could sell that. And then maybe you get, you know, sounds like you got 175 is a value. You owe 20,000. So you got a 155,000. Maybe you walk away with 145 somewhere in that ballpark after your closing costs, it's a good chunk of cash to maybe go put down on potentially one or two other properties where maybe you get more than the 250 per month in cash you're getting right now. So that's one option for that option.

[Ashley Kerr]

Too, Tony, is there's the 1031 exchange. So you don't have to pay taxes on that gain too. But if you just go ahead and outright and sell it, you will have to pay whatever that gain is. You're going to have to pay taxes on that. So if you are going to do that option and use the funds to actually go and purchase another property, I would look into doing a 1031 exchange to avoid or not avoid, but to defer paying taxes on that income.

[Tony]

I. I think the second option would be refinancing the property. And that's where you're basically going to replace this mortgage that has $20,000 left on it. And you're going to install the new mortgage at whatever value you want. Maybe it's 60% of the value that you have at 175. Maybe it's 75% of the value that you have@ 175. But you're going to replace that with the new mortgage. And you get the difference between the new mortgage and the 20,000 bucks that you owe, which you can then Go deploy into the purchase of another property. So selling and refinancing are two ways that you can use this existing property to get more capital.

[Ashley Kerr]

Yeah, with the refinancing piece too, you look at what your payment is. So we've used the example for 500amonth, so let's just keep it at that. So like compare also what your new payment would be. So maybe you bought this property when interest rates were super, super, super high and you know, maybe you have a 8% interest rate and you go and refinance and you could get a 6% interest rate or whatever it may be. Like maybe when you look at this, there isn't that huge of a difference in what your monthly payment is going to be. So really take a look at that too. This was 2021 and we were back to, you know, 3% interest rates. Like I would say, probably this is a great time to refinance. And your mortgage payment probably isn't going to go up that much because it's going to be amortized over 30 years and it's going to have that lower interest rate. So it also depends on what type of loan he had on the property too. So maybe if he did, when he purchased, it was only a 15 year amortization, his monthly payment would be bigger than if he did a 30 year. So if he does a 30 year this time around, then maybe, you know, the, the mortgage payment would be close to what he comparably has on the property, which would not impact his cash flow that much on the current property where it could make sense to tap into that equity and go and purchase another property with it.

[Tony]

So as we talked about selling, we talked about refinancing. What other options would this person have to tap into some of that equity?

[Ashley Kerr]

Yeah, so another thing would be to do a line of credit. It may have to be on the commercial side of lending, since this isn't a primary residence. But you could get a commercial line of credit and you could use that, tap into that money, pull it off when you need to use it. So for example, I use my line of credits to purchase properties or to fund rehabs, but it's always for a short period of time. So there are investors that use the lines of credit for down payments. I don't specifically do that. I do it to make purchases of the property in cash and then I pay my line of credit back when I go and actually refinance the property. But you have the option to use a line of credit. That way you're only paying interest on the money when you're actually using the money and then you can go ahead and recycle the money. Also, if this is on your commercial property, your interest could be tax deductible if it's on your investment property and then kind of the last piece is that you could actually get a DSCR loan and this could be maybe because you don't have the income to support another property, but you could do a DSCR loan to refinance it and it would be based off the performance of the property. So another option there too to to go ahead and refinance and then just the last thing I'll say is talk to small local lenders in your area about what you're trying to do and see what kind of options they have available for you. We have to take one final ad break, but we'll be back with more after this to discuss what happens if a repair needs to be made on your property right before you close on it. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job Notice on other job sites Indeed sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking and it works. Sponsored jobs on indeed get 45% more applications than non sponsored posts. The best part? No monthly subscriptions or long term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you. 23 people just got hired through Indeed Worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of the show will get a 75 sponsored job credit to get your jobs more visibility at indeed.com Rookie just go to indeed.com Rookie right now and support our show by saying you heard about Indeed on this podcast. That's indeed.com rookie. Terms and conditions apply. Hiring Indeed is all you need.

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[Ashley Kerr]

Let's jump back in. Tony, what's our last question today?

[Tony]

All right, the last question says I am set to close on a property soon, but we found through the inspection process that the property will need a new roof along with closing off previous skylights that have begun to leak. And the seller is okay with taking care of this and has already contracted a a contractor to get it fixed. We were considering escrowing the funds to get this taken care of as I had locked in my interest rate. And if we waited the total estimated time to get the roof done, I would end up paying $1,400 in the rate lock extension fees by pushing back the closing date. Do you have any recommendations when it comes to escrowing funds to ensure that the work is successfully completed? Should the seller's agents be primarily setting this up with a title company? I also want to be sure that I'm approaching this in a way that that doesn't throw a red flag for my lender to be concerned about the condition of the property. So I'm reading this. I just, I just want to make sure that I'm tracking. Maybe, maybe you can help me understand a little more clearly too here, Ashley. But it sounds like they found a property under contract. Things come up in the inspection and this question says the seller is okay with taking care of this and already has a contractor lined up. But it sounds like the buyer doesn't necessarily want to wait to have the buyer seller take care of it because then they'll have to pay for this rate lock extension. That's. I'm interpreting this question. Are you hearing it the same way, Ashley?

[Ashley Kerr]

Yeah. So it must be like a very quick closing period where they don't have time to get the contractor in or the contractor doesn't have time to put them on their schedule before they're set to close. So if they don't close by the rate lock date, so he'd have to pay an extra fourteen hundred dollars to extend the rate lock. So depending on what current rates are right now, keeping that rate lock could be very important if they have a better rate than what they would get right now. So some recommendations as to kind of handle this scenario. First of all, I'll give you an example. Because I'm going through something very similar right now with a septic. So with a septic you have to have the county inspect it every time it sells. And when there's snow on the ground, they cannot inspect the septic or they will not inspect it. If it has been vacant, I think it's for 90 days because there's nobody using the septic so they're not getting accurate testing or something like that. So this property has been vacant for over a year and it's winter time. So typically you hold funds in escrow and then the septic inspection is done by the county health department in the spring. If it passes inspection, then those funds are released to the seller. They get the rest of the purchase price. So say it was 10 grand, they didn't get 10 of their the purchase price, so they get that 10 grand back. @ that point, if it doesn't pass inspection and it needs work, the purchaser can use those funds to pay for the work that needs to be completed. So in New York state we use attorneys, so the attorneys handle all of this. Tony, in California, have you come into this situation where you've had to hold funds in escrow for repair and how is it handled not using attorneys for closing already?

[Tony]

No, I, I haven't purchased any properties where we would need to like escrow funds post close or kind of have anything like an escrow account after closing. And I think even hearing this question, I guess I'm, I'm trying to understand the logic behind why they feel they would need to escrow funds. Because if the, if the seller is the person that is fine covering the cost of the repairs, but it really is just a timing issue. In my mind there are kind of two options. Either one, have the seller give you a credit that equals your rate extension cost, which was 1400 bucks, right? So just have them give you an additional credit for fourteen hundred dollars. That way you bring fourteen hundred dollars less to closing table, you can apply that to the rate lock and then everything's fine. Or second, have them give you a credit for the amount that the repairs would actually come to. So if they have a contractor line up, maybe they have a bid and you say, okay, cool, if it's going to cost whatever, $12,000 to get this fixed, give me a credit for 12,000. So then I can reduce my cash out of pocket at closing by 12,000 and apply that to those repairs. So in my mind those are the kind of probably the approach that I would take, but I would prefer just have the seller do it before closing. And in my mind, I would almost rather pay the fortune bucks to get it done with certainty before actually taking control of this property.

[Ashley Kerr]

Yeah, so I'm so torn on this. And I, I, I've done escrow a couple times over different repairs and things like that. And one was for roof on a duplex. And we had the seller take care of it and everything like that. And after we closed, we found out, you know, they, the contract there they used, I mean, he was licensed everything, but, like, he did a horrible job. We actually had to have them come back several times where, like, looking back on it now, like, I wish we would have also taken the credit and we would have fixed it ourselves. So, like in the, in this example, like, first of all, are you sure you want to use a contractor that they have lined up? Second of all, do you have time to actually go and get your own contractors or other contractors to come in and give you quotes to see if, okay, if this contractor doesn't work out, are you able to, you know, have enough money in escrow to cover those funds for another contractor to do it? Because I think that's why the funds are being held in escrow in the first place, is because the seller is saying, like, this is how much it costs. Here's the contractor that will do it. And so they're putting those funds in escrow. But also the seller is saying, I want to make sure it's done. So they're keeping that money in there. Where. So I think there's some kind of negotiating that could happen, and there's different ways to handle this. I think there's a security on both sides of like, it's set in stone as to what it's going to be paid for. And the purchaser doesn't have to line up a contractor. They know it's already going to get done. They know that it's already going to be paid for in that sense. So I would think the best thing is to have an attorney holding an escrow. But also agents have escrows too, so they keep your earnest money deposit in an escrow account. So you could always ask your agent for some guidance on this too, and what they can provide as far as holding the money. But a really big thing I would do is when you are deciding on this payment, how much it should be, and you know that you're going to hold it in escrow, is set a time frame, so set a timeframe saying that this work has to be done by exit. So whether that's 30 days. Because if that contractor doesn't show that, you know, the, the work doesn't get done, you don't want that money sitting there forever and them being like, well, you know, you agreed to this contractor, it's just sitting there waiting, waiting, waiting. And you don't have your roof. That way at least at 30 days the funds can be released to you because the work was not completed and you can go ahead and you know, have your own contractor come and do the work. And one thing too is like with the seller credits is sometimes people already max out their seller credits too. So maybe that's something that happened in this scenario. But also you could just go and change the purchase price too and just decrease the actual purchase price.

[Tony]

Yeah, you make a fantastic point, Ashley, about putting a time limit on those repairs as well. But like, I think just in general, like the last part of the question was like, hey, how, like who can help facilitate this? I don't live in like in an attorney state, so like I'd never have to close through an attorney. We typically go through our escrow and our title companies that handle that. And I know they also offer services to facilitate these things post transaction. Like the hotel that we bought, actually this was in Utah, the, the title and escrow company that we used out there because it was a seller financed deal, they offer to basically be like the intermediary to kind of help settle the payments between us and the seller. So just know like depending on what stage you're in, your escrow or tattle company could also help facilitate this and get the paperwork drawn up, make sure everything's done, you know, to the letter of the law to kind of protect both sides.

[Ashley Kerr]

I'm going to give you guys an example of how my septic negotiation is going. So my attorney is handling it and the seller's attorney. So we got actual quotes because this has been going back and forth and negotiating on it because the septic is actually underneath a porch. So if the septic needs to be repaired, the porch has to be ripped off the house and rebuilt. So we got a quote on the septic. If it had to be replaced, we got a quote and we submitted it and it ended up being, I don't know, like 27,000. And so we said, you know what, we will take 25,000 because originally they said no at 28,000. So we said 25,000. So this is the email the attorney sent back to my attorney. 25,000 is simply not acceptable. Let's just cancel the contract. There is no down payment to return. So my attorney said, well, how would you like to handle this? And I said, let's just say nothing. And three days later, they sent a letter renegotiating with us. So I think this was just the attorney acting out of outrage. I don't know. But first of all, down payment is the wrong word. It's earnest money deposit. So just a funny example of this attorney that doesn't seem to know what he's doing. And this property has been under contract for a year and a half, where I've documented where it's been 30 days before the attorney even responds to my attorney. And I've sent this to the seller, like, just want you to know, none of this is my fault. This is your attorney. But the seller did not even know that his attorney tried to cancel the contract. So.

[Tony]

And it just goes to. Nothing is sacred in a real estate negotiation. There's so many different levers you can pull. So, you know, try and fight for what makes the most sense for you. I love that.

[Ashley Kerr]

Okay, well, thank you guys so much for joining us for this episode of Real Estate Rookie. As you may know, we air every episode of this podcast on YouTube, as well as original content like my new series, Rookie Resource. We really want to hit 100,000 subscribers, and we need your help. If you aren't already subscribed, please head over to our YouTube channel, YouTube.com@realestate rookie, and subscribe. I'm Ashley, and he's Tony, and we'll see you on the next Real Estate Rookie podcast.