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- [00:00]
A
Your tenant just texted rent is going to be late this month, but do you let it slide or do you enforce the lease? And what does your response right now say about how you'll run your business for the next 20 years?
- [00:14]
B
Today we're answering three real questions from the Bigger Pockets forums covering exactly what rookies are wrestling with right now. How to handle a late paying tenant without blowing up the relationship or your standards. Whether a single family or a duplex is actually the smarter buy when the numbers look identical on on paper and how two first time partners should structure a flip versus a brrrr decision before they sign up for.
- [00:42]
A
This is the Real Estate Rookie Podcast. I'm Ashley Kerr.
- [00:45]
B
And I'm Tony J. Robinson. With that, let's get into today's first question. So our first question says my tenant has warned me in advance that rent will be late this month due to some financial difficulties. This is the first time it's happened in the eight months that they've been renting. My question is, how do I manage this situation? Do I simply wait and see if the rent comes? Do I give them a deadline of when I need the rent? Also, my lease states there is a late fee if the rent is not received by the 5th of the month. Should I waive this or enforce this? I want to be a fair but firm landlord who is understanding of personal circumstances while at the same time needing to run a profitable business. Any advice would be appreciated. So Ash, obviously you've got a lot more experience dealing with tenants than I do, but I think I'll just share my quick two cents and I'll pass over to you. You can be a fair landlord and be firm. So I'm glad that you said that because I think where most Ricky investors get into trouble is when they start deviating too much from the lease that was signed and they allow all of this gray area to seep into the situation. So if your lease states that late fees happen, if rent is not received by the fifth, then even if they're in a tough situation, say hey, you know, Mr. Mrs. You know John or Jane. I hate to hear that. Thank you for the heads up. Let me know when the rent will come. As a reminder, here's what the lease states about late payments and I just want to make sure you understand what will happen from here if the rent doesn't actually come. Happy to chat if you need to about what the lease says, but I'm just going to give it to you now. So you're still there, you're still Nice. You're not saying like, hey, screw you for not giving me my rent. You're saying, hey, that sucks. I hear you. But also, here are the steps we're going to take if the rent doesn't come when it's supposed to. And I think just for the sake of your own peace of mind, for the sake of making sure this doesn't turn into some sort of recurring theme between you and this tenant, that's. That's what my first step will be. But Ash, again, way more experience than I do on this front. I'll let you lead.
- [02:34]
A
I really appreciate someone who's coming to me and telling me ahead of time. And I think Tony said it perfectly, sending them a message 100% you should still be charging the late fee on it. I think if they're telling you ahead of time, this is a perfect opportunity for you to give them some resources. So there's tons of housing organizations, small nonprofits in different communities that will pay people's rents that are having a financial hardship. And I've had a lot of tenants take advantage of these. Not take advantage, but take these opportunities that these different nonprofits and organizations have to, to pay me rent. And I actually have pretty good tenants right now. But several years ago I actually had like a little template or a little sheet that had all of the different housing organization, the different housing organizations that offer some kind of rent relief. And I, I probably still have it saved somewhere. I just haven't had to really use it. But you can go to like, you know, the county, like search housing, your like Erie county organizations, you could do like small non profits. There's like in your small community that probably like help people in all different ways, not just helping them pay rent that you wouldn't even know and give them those resources that they can go out and you know, reach out to these organizations and say, I'm in a financial hardship, I need some help. And I think that is being a very nice landlord and being proactive too to help yourself get paid for that. The second thing I would do is just like make sure that you are firm on your lease. You still charge the late fee. There are some circumstances for these housing organizations that if, if you do accept rent payments from any county or state organization, a lot of times they do have strings attached. Like you can't evict this person for safety amounts, things like that. So just be fully aware than like these smaller little organizations, they're literally just writing you a check from their nonprofit checking account and handing it to you. With no strings attached at all. So just be cautious of that. Another thing that a tenant used to do for me is when they were getting behind on rent, they would let me know that they were going to be behind. They would ask me in advance for a notice saying that, you know, they're late on rent and I would get it to them on the 2nd of the month compared to when I would usually send them out on the 6th of the month. So I'd send it, say your rent was due April 1, it's now the second, but not received your, your rent, they would take that and they would submit it to their 401k and they were actually able to draw out of their 401k their rent payment as a financial hardship and they were able to pay me by the 5th of the month and avoid that late fee. So, you know, you can look up some kind of resource about that and information and give that to your tenant too, to be able to do something like that.
- [05:35]
B
Ash, what is the potential risk of not staying true to the lease in this first situation? And I guess for you personally, have you ever experienced that in your own portfolio where you, you didn't quite stick to the lease and it came back to bite you in the butt later?
- [05:47]
A
Yeah, like people taking advantage of you. Not necessarily for late fees I would say, but that can definitely happen is where people get used to you not charging elite fee. But I had a tenant once that there was water damage from ice damming on the roof. It was neither the tenant's fault, it was neither, you know, the owner of the building's fault or mine is the property manager. It was just some weather related event that happened and their, some of their stuff got ruined when the water started leaking into the wall. Some of their personal items and per the lease agreement, you know, it states that you should have an insurance policy. This owner did not require someone to have renters insurance, but this tenant did have it, but they did not want to file a claim with their renter's insurance and they wanted the owner of the property to pay them to replace their things. And I actually convinced them to do it and I said, you know, this person always pays on time, blah blah, blah, stuff like that. And they're a great tenant. It's not, you know, it was a couple hundred dollars and I said, you know, I think you should. And he agreed and he did it. And that tenant continued to ask for more and for more and for more and for more. So it was one thing that I always regretted and I should have just stuck to the lease agreement and let them claim it on their insurance policy. I mean it. It's water under the bridge, but it was definitely a lesson learned. Before you have a tenant problem, you have to choose the right property. So so should you pick a single family home or a duplex when the price and rent are identical? We break it down right after this quick word from our sponsors.
- [07:24]
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- [07:55]
D
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- [08:46]
C
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- [09:32]
A
Okay, welcome back. So now that you know how to handle a tenant situation with a clear head, let's talk about the decision that comes even earlier. Which property do you actually buy? So this question comes from gash. In the BiggerPockets forums. I am evaluating a side by side duplex versus a single family home. The cost and rental income are nearly the same. Both have a purchase price of around 300k and can generate approximately $2,400 per month in rent. Given that the purchase price and rental income are roughly equal, is there any other compelling reason to choose a duplex over a single family home? Yes, there are opposing sides. So it's going to go back to why you're investing, what you're, you know, what you want to get out of it, things, what's your why, things like that. Okay, so if you're looking at it in number wise, it looks very comparable. Here are some other factors to think about. Okay, how long do you want to hold this property for? Do you have an exit plan on it? A single family home and a duplex can appreciate very differently in different markets. So for example, in the first town that I ever invested in, a duplex compared to a single family home, if I looked at the cost of each of those 10 years ago compared to now, the single family home appreciated way more than the duplex did. You're also going to have a bigger buyer pool when you go to sell the property because you're not only selling to investors and house hackers a single family home, you could be selling to investors, rent by the room investors or house hackers and just families or you know, a single person, someone who wants to make this their primary home. So you have a larger buyer pool during the rental period. It is definitely a lot nicer when you have a duplex and you have a vacancy but you still have the other one rented. So it's not from going to the mortgage paid to no money coming in. You at least have another unit that is going into, you know, that's paying rent. So and the single family, you have a vacancy, you have nothing coming in overhead. You have two units compared to one unit during the course of being the landlord, you have one roof instead of if you bought two single family, you have two roofs. Now you have to take care of. You do run into the problem of maybe having tenant disputes. Living right on top of each other, right next to each other. Where a single family home, you do not with landscaping, snow plowing. Depending on how the property is set up, like, if they have a shared driveway, you're going to have to figure out parking. Like, does one side get one side and the other get the other side? Like, navigating the common areas can be more difficult when you have more than one tenant living at a property. So making sure you set established and firmed rules and regulations so there's no arguments, disagreements, or, you know, miscommunication on who has access to what. In the single family home, it's a lot easier to put into the lease that they pay for everything. So all their utilities, the landscaping, the snow plowing, all of that. Where if you do have a duplex and maybe it's not separately metered, so maybe you can't, you know, chart, like, have them pay the water because it's just on one meter for both of them and you have to pay and you have no way of saying who used so much water, the landscaping. Maybe they both have access to the backyard. How do you say that? You guys have to share responsibility and take turns cutting the grass. It's very difficult to manage unless you have two great people that want to coordinate and work together.
- [13:24]
B
Have you ever done that before? Like, hey, you, you know, you take odd weeks, you take even weeks for the grass.
- [13:28]
A
No, usually we'll pick someone and we'll say like with the. Usually it's the lower unit and we'll say like, especially if it's a small, if it's a small yard. We'll do this like in the city and just be like, you know, you get access to the, the yard, but you also have to cut the grass. So we definitely, like, kind of cut as many shared areas as possible to eliminate different frustrations.
- [13:52]
B
Let me ask one, one thing, Ash, because I, I've never personally purchased a duplex. When you, when you look at the appraisal, because you mentioned, like the differences in appreciation. Which, which makes sense, right? When you look at your appraisals for a duplex, have you ever seen them pull in single family homes as comps. Or is it always just duplexes? Or is it always. Is it maybe sometimes even like a, a triplex or some other. Like a fourplex maybe even. Or is it just. Yeah, I've got to go out and find a duplex to, to, to comp against it.
- [14:22]
A
Has been a really long time since I've looked at an appraisal for small multifamily to be honest. But I would say from memory I do know that it was definitely like if I had a duplex there would be a triplex on there. I can't say for sure about if they would use a single family as a comparable, but I do know that if it was a two unit I would have a three unit on there as a comparable for like a small multifamily.
- [14:50]
B
And the reason why I ask is because to your point, I think part of what makes the appreciation gain a little less is like a, there's just fewer transactions typically for small multifamily than there are for single family residential homes. But two, if there's just like not a large volume then maybe they've got to go out super far and like, like it's just a little bit harder to find good comps to support. So even if the properties super profitable and some appraisals will look at how much revenue the the property is making and use that as one of the factors, but still they're also going to look at the look at the comps of that deal as well. So I was just curious how big of a mixed bag that that appraisal actually is. So maybe to the person who's asking this question, like talk to your agent and see if they can give you an appraisal for a duplex in that same area from like a previous client that can, you know, whatever blackout, whatever confidential details are in there. But that will then give you also a better sense of okay from a, from a value perspective, how are appraisers looking at this duplex versus the single family homes in that market? All right, we're going to take a quick break and while we're going, if you haven't yet subscribed to the Real Estate Rookie YouTube channel, you can find us at realestate rookie. We'll be right back after this.
- [16:04]
D
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- [17:02]
C
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- [17:43]
D
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- [18:38]
C
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- [19:11]
B
All right, let's jump back into our final question for the day. And this last question says, my business partner is a real estate agent and I am a general contractor. Just by the way, what a great tag team. You got someone who can, like, find the deals, the other person who can fix them up and the same person go out there and list the deals. It goes on to say, we are trying to buy our first deal together. We've been looking at properties that need repairs and are debating between fix and flip and Burr. How do we decide which strategy makes more sense for us? And how should we structure our partnership? It's a great question. To Ashley's point earlier, right. A lot of it's going to come down to goals. What do you guys want? Do you want active income? Do you want passive income? Do you want tax benefits? Do you want, you know, not tax benefits that come along with flipping. Like, what are the goals and the motivations for this? But I think for me, when I enter into a partnership, I really want to focus on dating first before we get into something long term. So for me, I would focus on flipping if for no other reason, or if for no reason other than it allows us to just test this partnership and we're looking at something that maybe takes six months as opposed to us signing on to a loan together for 30 months. Months or for 30 years. So for me, I think flipping makes the most sense to start with. And like I mentioned earlier, it leverages both of your skill sets. The agent, as they're maybe out there prospecting for, you know, buyer's leads or sellers leads, whatever it is, they find something needs a little bit of work, they pass it off to you as a general contract, you do the work, and then you pass it back to them to actually get it listed. Now, in terms of how you structure it, I think there's a lot of options here, right? And there's no right or wrong way to, to structure this partnership. But you could do it as just like a basic 50, 50 split. Like, hey, agent partner is going to do X, Y and Z. Contractor partner is going to do A, B and C. And we're just going to split the profits at the end. Or you could be maybe a little bit more systematic about it and say, hey, buyer is going to get, you know, or the agent's going to get, you know, some sort of fee up front for sourcing the deal. The contractor is going to get paid X for actually doing the work on the deal and then the, you know, the agent on the back end, when they sell, they'll, they'll get their commissions, whatever it is from there. So you can, you can structure it either by you know like assigning an exact value to each task or you're saying, hey, you know, we're going to go into the source 1:5050 and see how it goes from there. But, but that's my initial take. I like flipping. Get you in, get you out, allows you to test the partnership and even build up some capital to, to start buying some more deals together. But that will be my first approach. What about you, Ash?
- [21:41]
A
So as soon as you said you would start with flipping that I had seen this news alert come on my phone, I think yesterday. So I just found it and it came up and it's home flippers see smallest profit since the great recession. Real estate data firms. So it's like, okay, so then I, you know, I have to scroll through and like, okay, what is this saying? And it's like, yeah, the lowest number of flips in any year since 2020. And it's like, well yeah, 2020 was like the best time to buy a property. I mean I bought a house for I think $27,000. It was a four bedroom, two bath house and you know, did some renovation to it and sold it for like 170,000. I think it was like. So, yes, it is hard to compare it to that time. But I think too you have to really unders, like read into it as to more. It's just clickbait a lot of these headlines because it is so market specific as to, you know, what neighborhood you're in, what city you're in, what area you are in. Because there are flippers making great money, making a ton of money. And even if it's not what people were making during COVID on a flip, like our friends in Seattle, I mean they could make, you know, half a million dollars on a flip. And you know, it's also based on your price point, if you're flipping million dollar homes, you should have a bigger margin of profit than if you're flipping $100,000 home because you're taking on way more risk if you don't end up unloading that property. So I do think that flipping is a great way to build capital, especially because you have an advantage. You don't have to pay for a lot of labor and you're already going to save on a lot of costs if your husband is going to be the general contractor on this property and, you know, do a lot of the repairs on this deal. So, yeah, I think starting with a flip is a great idea, but it really depends on your market, too. So pull some comps, look at other houses that were flipped. You can see what the flipper bought it for and then look at what it's listed at. But better yet, look at what it actually sold at and how long did it sit on days on market. And that can kind of gauge you. What kind of finishes do you need? And then if you do decide to do the Burr method, you know, make sure you're looking at comps for those too. What are rentals priced at? We just had a guest on talking about, you know, getting a DSCR loan and then deciding throughout the project whether they were going to sell it as a flip or they were actually going to keep it as a rental. So as much as it's good to have a plan in place, it's also good to have multiple exit strategies to be able to pivot. Because I've been in situations where I bought property thinking I was going to do X and the market changes and I want to be able to adapt, I want to be able to pivot. I don't want to get stuck with properties or stuck, you know, not being able to pay holding costs and things like that. So I think it's even better if you can find a property where you have the option to do either of those things.
- [24:47]
B
Yeah, I love the point about the optionality. Right. Because the more exit strategies you have on a deal, the less risk there is going into it. So, yeah, there are a lot of markets, to Ashley's point, where flipping is getting harder. But we've interviewed folks in this podcast in the past year who are still doing it and doing it profitably, but they've just had to shift and change what the. What their business model kind of looks like to make that work. So, yeah, I love the flexibility around exit options.
- [25:10]
A
Well, thank you guys so much for joining us for this episode of Ricky Reply. I'm Ashley, he's Tony, and we'll see you guys on the next episode.
- [25:18]
B
Hey, Ricky's. If you're watching this, we want you to apply to be a guest on the Real Estate Rookie podcast. That's right. And Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie podcast. Now, look, 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
- [25:36]
A
next listener 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.
- [25:49]
B
So head over to biggerpockets.com guest if you want to be a part of our show again, that's biggerpockets.com com guest and we'd love to have you on.