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My Rental Property Has Zero Appreciation: Should I Hold or Sell? (Rookie Reply)
00:26:49
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A
If you have equity sitting in a property right now, we are going to show you exactly how to put it to work and which tool to use to do it.
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And if you've been thinking about launching your first short term rental, we're covering what it actually takes to get up and running and to stand out on Airbnb from day one.
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Plus, what do you do when you bought a property a year ago and it hasn't appreciated one single dollar? We'll give an honest review on this.
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The Real Estate Rookie podcast. I'm Tony J. Robinson.
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And I'm Ashley Kerr.
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And with that, let's get into today's first question. So question number one says I'm trying to decide my best course of action into the rental game. I have a lot of equity built up in my primary home and I'm debating whether I should do a cash out refinance or take out a heloc. Interest rates were about the same, but the heloc has a 15 year max term. I tend to hear more people take the, the cash out refinance option when keeping a property as a rental. Is this just to keep payments lower or are there other benefits? My goal is to have money for a down payment on my next property as well as some rehab money. Well, first I, I think let's just quickly define the differences between a cash out refinance and a heloc. If you have equity in your primary residence, there, there's a few ways you can tap into that. One way is to sell that property, right? You just sell it and then whatever the difference is between what you owe on that property and what you sell it for, minus any closing costs, you walk away with that amount, which you can then go deploy however you want. Another way to tap into that is doing what's called a cash out refinance, where you're able to tap into some, generally not all of that equity by replacing your existing loan with a new loan. And the difference between your existing loan amount and your new loan is what you get what, what you get to take. Now when you do that, typically your, your loan terms will change, right? So it could mean your interest rate will change to whatever days or whatever today's rates are. Sometimes your payment could go up. You know, if rates are higher, sometimes your payment could go down. I refinanced my, my primary residence when rates were super low. My, my, my payment went down. But you, for a lot of folks, maybe your, your rate might go up or might stay the same. So that's one way and Then the, the third option is the home equity line of credit. This is where your original loan stays in place, right? So the first mortgage that you have that remains there and then you're basically, you can think of it almost like as like a credit card, but it's your, the equity in your home that they're using as collateral. So you get this line of credit that you can use or not use as you choose and you only pay for the amount that you actually use. So, so those are really the, the core three ways. I, I think for me personally if, if you've got a really good interest rate in place right now, I, I would probably leave that there. So I would avoid doing a, a cash out refinance. I know you said, it seems like you said interest rates were about the same, so maybe there's not a whole heck of a lot of difference there, but if you like where you're at, I might leave that there. And I actually like the HELOC because a, it doesn't increase your, your mortgage payment on your primary residence. And then you can go deploy that heloc, maybe marry that with some, some hard money and you can go out and start finding some rehab projects to where you can hopefully increase the value using what's called the BRRRR strategy, where you buy it, you renovate it and through that renovation you increase the after repair value, increase the equity of that home and then you can refinance from the back end, hopefully recoup some of that HELOC capital that you spent. And we, I know plenty of folks who have built their entire portfolios off the backs of one heloc. A heloc, some hard money and some rehab projects can go, go a very, very long way.
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A
So I actually went to the bank this morning to do a refinance. It was a, on a commercial property where took out some extra money. We pretty much have the, had the property paid off until this morning when we took more money out of it. But while we were there the lender was just like we have this great rate going on right now for HELOCs where. And this is where if you are going to get a HELOC on your property, you should watch for this where banks are doing promotions. So a lot of small local banks will do this credit unions and their promotion was like 4% interest rate for six months and then it would go variable rate and go higher than it said expected between 6 to 8%. But the introductory rate is, they said they just released it. It's competitive towards other Banks, I haven't really looked, but if you are going to do a heloc, watch for that, where you can get that introductory rate. And Tony, you just did this correct. On a HELOC where you got an introductory rate, what was that interest rate
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and for how long did I want to say it was? It was 5.99 for the first six months, but yeah, and then, then it kind of goes to variable, traditional variable rate.
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So, like, think about it, that if you have a plan, you want to use a HELOC to fund your down payment, if you can find a way to pay off that down payment within six months. So, like, maybe you know that over the next six months, you're. Maybe you're getting a bonus at work or something like that, but you want to buy this property now and you have a plan in place or you have additional discretionary W2 income that you can funnel. So instead of waiting to actually buy your property till you have it saved, you want to use your line of credit and then funnel money to your line of credit to rapidly pay it off. I don't like it when people use the dump. They use their line of credit and like, plan to pay it off over the next 10 years. Like, I like the idea of a line of credit to be money that is used for a short period of time and then it is paid off and then is recycled and reused for something else too. If you don't have a plan in place to pay it off rapidly, that's when I would actually go and do the refinance. But it depends, you know, what your interest rate is. And maybe you don't want to lose that interest rate what you have on your current property, and you want to go ahead and use that heloc, but definitely shop around with different banks. The lender also said to me that they had such a slow first quarter. He's like, please let me know if you are buying anything. I. We can make deals happen because we just need. We need the business. We have so much capital sitting. Like, if you need to refinance anything you need to, you're gonna buy anything. Like, we're getting really, really competitive because we had such a slow first quarter. So, like, bring me anything you have and you know, we'll try to work something out for you. So that was like, that is never ever happened to me before where lender is like begging me to bring him business. It's always me reaching out to the lenders and saying, I got this deal, you know, what do you got? And Blah, blah, stuff like that.
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And, but I think that's a smart thing to remember is that, you know, for lenders, their product is the money, right? And they have to sell their product in order to be a viable business. So I think it's important for us as the investors to realize that lenders want to lend out their money, right? They're incentivized to do that. So, um, I also think that's the benefit of going with like smaller local banks where you can have that conversation and they can hopefully kind of point you in the right direction.
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Coming up, someone is about to launch their very first Airbnb and wants to know how to do it right from day one. Tony is going to break that down right after this.
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Welcome back. Okay, here's our next question from the BiggerPockets forums. I'm about to launch my very first Airbnb listing and I'd love to hear from those who've been in the short term rental game. This is a furnished finder apartment in a well located area and I've taken care of the basics, cleaning, photos, wi fi, et cetera. But I want to go the extra mile to ensure great guest experiences and maximize occupancy. What amenities or touches have made the biggest impact on your reviews? How do you handle check ins and checkouts efficiently? Any tips on pricing strategies or dynamic pricing tools? What should I do or avoid in my first month of hosting? And, and how do you manage communication and automate guest messages? So, Tony, you are the short term rental expert. I am second expert on the show. So let's go question by question. I'll ask you each one of them and kind of give me your best so they want to go the extra mile. First question is what amenities or touches have made the biggest impact on your reviews.
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Yeah, I think part of this will vary from market to market depending on who, who your guest avatar is. If you're, if you're launching a property in Scottsdale that's catered towards bachelorette parties, that's very different than a property that's outside of, you know, Disney World, that's catering toward families, which is very different than a property in, you know, the Poconos. It's a couple's getaway. So I think the, the amenities that you offer really need to reflect the, the guest avatar that your specific property is targeting. Now, you said that it's a furnished apartment, and typically when I think apartments, I'm usually thinking more kind of, you know, metro or suburban type markets. And oftentimes in those markets, maybe you're getting more of the, you know, less of the vacation traveler, more of the utility business traveler. And what they're typically looking for is more so like a place to lay their head and like a, you know, place to work and things of that sort. So for me, I might focus more so on things that cater toward the remote worker. Right. Or the traveling business professional. Like what are the things that they might, that they might need, you know, a dedicated workspace, super fast Internet, you know, maybe like a white noise machine so they can get some good sleep, you know, at the end of a long day. You know, business professionals, maybe it's like a, like a steamer for their dress clothes. Right. So just think about the things that someone in that, that category of traveler might need and try and speak to those.
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I would say for me, like the biggest thing is cleanliness. Like PMAC people comment how good of job my cleaners have done. Um, and then really the second thing would also be like the mattresses and the pillows. Like that's like, to be very specific, those are like things that people have called out. Not like, oh, the coffee maker or you know, like other items in the house. Like they talk about how beautiful the design is or how nice the woods are, things like that. But to be very specific, to talk about furniture or anything like that, the only thing they talk about is the beds, the mattresses and the pillows, how comfortable they are. Okay, so our next question here is how do you handle check ins and checkouts efficiently?
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Great question. So first, Airbnb for, from the guest perspective, they can rate your overall listing, right? They can give you an overall rating for your property, but they, they can also rate you on different subcategories. And one of those subcategories is the actual check in process. So it's important that you get this right because if it's, if it's a poor experience and then folks will rate you poorly on that and it'll pull down your ratings overall. For us, we try and automate as much of that as we can. So for us, we have on every single property, it's a keyless entry pad and we set the code to be the last four digits of that guest's phone number. So it's super easy for them to remember. Hopefully most of us know our own phone number, so it's not one that you'll forget. And then we do a few things to, to streamline it even more. Number one is that we send them their checking code multiple times before they check in. Before we would send it to them once. And then the day of check in they'd say, hey, where's my code? So now we send it to them a few days before check in, we send it to them the morning of, and then we also resend it right before check in as well. Right. So we try and over communicate the check in instructions so it's easy for them once they get there, they also get a link to a video that shows them how to use the keyless entry pad. And then even at some of our properties, we have a little QR code next to the keyless entry pad that links to a video that shows them how to use it. So we try and make it as easy for them as possible to get into the property. And then we also do our best to offer early check in at no additional cost whenever we can. So our process is that once our cleaners finish clean, they'll notify us and then we'll immediately reach out to the guests. And our standard check in time is 4pm but if the cleaner finishes up at 1pm then we'll immediately reach out to the guest and say, you know, hey Ashley, just so you know, the property was finished a little bit early. We've gone ahead and updated your checking code. So it's active now if you want to get a head start, if you want to get a head start on your vacation. Right. So that's how we try and build some goodwill at the beginning of our stay. So it's a little bit of automation or a lot of automation and then a little bit of communication to make it easy for them.
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So then the next question is any tips on pricing strategies or dynamic pricing tools?
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Biggest thing I'll say is use a dynamic pricing tool from day one. Don't, don't try and price manually. Don't use Airbnb smart pricing tool. Use a tool like Price Labs. That'll be the best bang for your buck to make sure that you're maximizing occupancy on days when demand is high or maximizing revenue, I should say on days when demand is high and maximizing occupancy on days when demand is low.
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When I first started, I wasn't using anything. And then this was 2018 and I didn't even know about property management software, what dynamic pricing was. But I used to, I would go in and like set my basic rate of like, I don't know what it was, $90 a night. And then I would manually go in and put like, oh, on Christmas Day it's 1:50 or whatever. And like I would have to remember going forward with the calendar to always update the calendar to reflect that before I even started implementing. Now I use hospitable and I use their built in dynamic pricing. Okay, so next question. How should I do or avoid? What should I do or avoid in my first month of hosting?
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And I think in the first month you want to try and do things that don't scale. And what I mean by that is, you know, I got this from a book I think was called Lean, the Lean Startup. It's like an older book and like the startup industry. But he talked about how a lot of these SaaS companies, when they first start, they do things that work when you have 10 customers, that would never work when you have 10,000. So like for example, they'll, they'll personally call every single one of those 10 customers to personally onboard them to get a better sense of how they're using the tool. And what does it look like you can do that when you have 10, you can't do that when you have 10,000. I would like to try and take the same approach. When you launch a short term rental is when that first guest gets there, just call them and say, hey, you know, you're actually our first guest checking in. We're incredibly excited to host you because you are our first guest. There's a chance that there might be some things we need to improve upon and if there is, please let us know. We'd love to make, you know, we'd love to have the opportunity to correct that for you. So hey, hope you have a great day. Just give me a call if you need anything, right? And so just like super white glove service for those first couple of guests. And if you, if you can continue that on as you scale up your portfolio, even better, you know, you know, as you get to a certain point, it does become a little bit harder to do some of those things. But I think the, the, the better relationship you can have for those first two guests, the better job you can get at extracting some feedback from them. Then you can go and implement that into your listing or implement into your pricing strategy or implement into your guidebook or implement, implement that into your own processes. But trying to identify those things that don't scale early on I think will help a lot.
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Yeah, there's no way I'm calling someone, but what I did do when I like my cabin, so like our first several bookings, I tried to make a really great impression because I really wanted those five star reviews to start and to gain some traction. So handwritten notes thanking them for selecting this Airbnb. The very first guests ever. We did like champagne and you know, went over the top and like did let them know your first guest ever, whatever. But then for everyone, for probably like the first ten bookings at each. And I still do this occasionally, not all the time because it's gotten to be a lot of bookings now, which is great, but fresh flowers on the counter, water bottles, some sports drinks in the fridge, a little bin of snacks, just little things like that. Sometimes I would like go down and get from the local bakery, get like a Pie or something from the bakery and like write in the little note, I left you a treat in the fridge or something like that. But sometimes things like that get tricky with allergies as to, you know, what you can give someone and things like that. But yeah, very important, I think their very first stays because there can be hiccups, you don't know about them. But also this is kind of like building the foundation and your traction are those very few stays for your reviews. And then there was one more question they had and it was how do you manage communication and automate guest messages?
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I think you hit it already, Ash. It's just like having the right software. We both use Hospitable. That's like, I think one of the best tools for newer hosts to use a lot of functionality out of the box, but not so much that it's overwhelming. There are other tools out there that I think have maybe more like, more customization. Like Guesty is one of those that's like super well integrated, has a lot of different bells and whistles, but maybe for the host that's just starting out, they might be overwhelmed by that. So I think Hospitable is a great, a great mix of functionality with kind of ease of use for the folks who are just getting started. And you can automate the vast majority of your communication when you do it that way.
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A
Whenever someone asks me about Hospitable and like its features and stuff, the first thing I always think about is how the AI will message for you. And my brain just like can't get past that. It's like I black out anything else because it's like that is just the best benefit to me as to. It reads all your past messages. It pulls in any document you submit to it about your property, you're listing everything and it just messages for you and does it way nicer and well more well better written. However, I would say that then I would do it because I. More, more well better let alone write something out. There's also a button like if there was something that I need to actually explain, I will write it out and then I will hit the little improve button and the AI will make it form into nice complete sentences. But it also saves me time because I can literally just input the key points I want to make and then it forms it into nice customer service friendly messages to send.
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B
All right, we have one more question, and this one is for any rookie who has ever looked at their property after a year and wondered if they actually made the right decision. We'll tackle that right after this quick break.
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B
All right guys, welcome back. Our last question today is one that I think a lot of people are quietly asking themselves but are afraid to say out loud. So the question says, I bought a property in Stockbridge, Georgia about a year ago for $225,000. It looked like a solid long term investment at the time, but I'm starting to question if it was the right move. Here's where I stand. The purchase price was 225,000. The current value after one year is still around 225,000. That's zero appreciation. Appreciation total invested so far is around $70,000. Including down payment, closing costs, Asian fees and renovations. Cash flow is only about 200 per month before expenses. I'm looking for some perspective from experienced investors. What would you do? Well, first I, I just want to say like, like at a macro level, when we talk about real estate appreciation, if you zoom in on any one year, it can feel maybe a little bit frightening if you don't see a lot of change. But, but when we zoom out and we look at a five year or ten year window, I think that might be a, maybe a better kind of scope to have on whether or not a property is actually appreciating at the right clip. Because, you know, there could be a lot of things in the very short term that could influence the level of appreciation in a certain market. Maybe in Stockbridge, Georgia, you know, maybe because of the purchase price, folks are a little bit more sensitive to interest rates in that market. Right. Like in a market like the Bay Area of California, where there's a lot of high income earning individuals, they're a little less sensitive to the fluctuations in interest rate. And purchase prices are like a million bucks for a starter home. But in a market where, you know, the median home price is below the national average, maybe it's just we need rates to come down a little bit in order for that appreciation to return. So, you know, I just say that to give some context that maybe one year might be too short of a window to gauge appreciation and we might need a slightly longer time duration. And then I think the second thing I would share is that 70k invested, you said $200 per month in cash flow before expenses. So I'm not sure how we're saying cash flow, but then before expenses, because typically cash flow is after expenses. So maybe you're talking about like occupancy or like capex, like some of those other things we should be setting aside. But Even still, at 200 bucks per month, that equates to. We'll just do the math here really quickly. 200 over the course of 12 months, that's $2,400 per year. Over $70,000. That's about a three and a half percent return on your investment, which generally speaking isn't all that great. You know, especially maybe if this deal doesn't end up producing a lot of appreciation in the long term, you can probably go out into some markets and get a better cash on cash return. So is it a good deal? I think it might be a little bit too early to say definitively, but I can say that I would ideally at least like, see a little bit more cash flow, especially if that $200 doesn't account for all of the expenses associated with that property.
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A
Yeah, I agree with Tony that one year is too short of a period to determine. I mean, my property is some of them. Like especially my very first one that I bought barely cash flowed, you know, $100. But I held onto it for eight years and by then it was cash flowing great. It built up equity and like I look at. So I started investing in 2013 and I look to now. So, you know, 13 years later, my properties have gone, you know, they started out pretty low, they've gone up and now they're kind of steadying out as to what their, their value is. And I think if you really, you know, if you bought a property in, you know, when I 2017, even my property value skyrocketed in 2021. But now it's come back down a little bit. So you can't like time the market. And unless you're hitting a super specific like that buying during, right before COVID and then buying during COVID like, or selling during COVID you're not going to see appreciation that people have seen in the last, you know, during that time period where they just saw a ton of appreciation in a very short period of time. So I would say like hold the property unless you can take that $70,000 and you can put it into something else that is going to give you a better return. So it goes back to the basics. Running the numbers. Look at the last 10 years of Stockbridge, Georgia. What did the appreciation, appreciation look like in the last 10 years in the last 20 years. Okay, now use that same formula to go forward. What if you held this property for another 10 years based on that, what would you expect depreciation to be? On the conservative side, then you're going to look at, okay, if I took that $70,000, what else could I invest in and what would that return be and how would that compare? You also look at increasing rent over time. How has you know, how much has rent increased every year in this same town? Um, so really goes back to running the numbers and not just thinking about what's the better solution. Actually run the numbers on both scenarios. Well, thank you guys so much for joining us today. I'm Ashley, he's Tony, and this has been an episode of Rookie Reply. We'll see you guys on the next episode.
- [28:48]
B
Hey, rookies, if you're watching this, we want you to apply to be a guest on the real estate Rookie Podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our real estate Rookie podcast. Now look at you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener.
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A
As a rookie investor, especially if you just got your first deal, it is all fresh in your minds and you are the best person to tell your story, give your experience on how you got it done to help someone else get their first deal.
- [29:19]
B
So head over to biggerpockets.com guest if you want to be a part of our show again. That's biggerpockets.com guest and we'd love to have you on.