← Real Estate Rookie
Loading summary
Transcript38 lines
- [00:00]
A
What if losing your very first deal isn't the end of your investing journey, but the push you need to win the next one? And what if the perfect market you're searching for is the one that forces you to make a tough choice? Travel to chase cash flow or settle for lower returns in your own backyard?
- [00:17]
B
Today we're answering these questions and breaking down what every rookie needs to know before signing up for their first brrrr partnership contract.
- [00:30]
A
This is the Real Estate Rookie PODC podcast. I'm Ashley Kerr.
- [00:33]
B
And I'm Tony J. Robinson. And with that, let's get into today's first question. Our first question today comes from Jeremy and he says, a few days ago I lost my first real estate deal. The property had offers from both investors and families who were going to reside in the property. The bank chose the family over investors. I put in an application with RCN Capital for funding on the property. I'm curious as to how someone gets close to 100% of the ARV for the rehab and and all of the other costs. Is that realistic? RCN referred me to another hard money lender who also gave me the scoop that typically they only fund deals at either 90% of the value or 65% of the ARV, whichever is less. To give some numbers on this deal, he's projecting the ARV to be $150,000, but that would leave him with a pretty large gap for rehab, which is, he says, about $25,000 approximately. So his question is on my next deal, can you get some advice on how to approach this? So Ash, there's really, I feel like two different questions baked into this one question right there. There's one side where it's just questions about hard money lending and best practices there. But the other part of his question, and like the title, was that he lost, quote unquote, lost a deal. And how can he maybe be more competitive? So let's maybe attack those two things separately. I think the first thing that I call out is that he says that he lost the deal, but he didn't really lose the deal. It's not like he had it under contract and like something fell apart. He just got outbid by someone else. Right.
- [01:58]
A
Well, and it bank chose the family over the investor. So like was this a foreclosure property too? Which, which makes me curious because usually I feel like a bank is just non emotional and just picks the highest. But also this could have been a HUD house where sometimes there will be a provision where it has to be only someone who's actually going to live their primary residence. They have X amount of days to put in offers and then that could be. And then it could go to investors and it could have been they got a high enough offer from someone who is actually going to live there as their primary residence.
- [02:40]
B
Yeah. And just to add to what Ashley's saying, so HUD offer, they have like auctions for homes that they've repossessed, foreclose on, whatever it may be. And you can literally go to like the HUD website. I just googled HUD auctions and I'm on the website Homes for Sale. Right. A bunch of single family homes all across the country. So if you guys are ever looking for auction type properties, it is a place to go. But yeah, so it is, I think, a different way of phrasing it. Again, I don't know if you lost on your, your first deal, but I think we can just maybe briefly cover. Ash, like what, what are some things that a rookie can do to make their offer more competitive?
- [03:15]
C
Right.
- [03:16]
B
Because I think that's maybe the, the crux of this question here, like what he's really trying to get at. And we talked about this before, but there are a few levers that you as the buyer have to make your offer more competitive. You have the purchase price. Right. Which is the first thing that comes to mind for most people. Sometimes just offering more money tends to get the deal done. You have speed. How quickly can you close? Sometimes sellers will take a discount on price if it means they can close tomorrow versus a larger price or higher price that closes in 30 days. So you have speed, you have contingencies if someone offers a higher price, but it's loaded with a bunch of contingencies that can make the deal fall apart, there's less certainty there if you go with no contingencies. At the end, other end of the spectrum, there's more certainty that you'll close. And I think the, the maybe the other piece too is just like your earnest money deposit that could tie into creating more certainty for the seller. If you have a larger EMD, it shows you're a little bit more serious versus a smaller EMD. Maybe someone's like, okay, I'm fine losing 500 bucks versus, you know, $10,000. Right. So those are some things you can focus on to maybe make your deal or your offer more competitive. Would you add anything to that, Ash?
- [04:27]
A
Yeah, the one thing I would add is to like the speed to close, like saying you can close quickly but also being flexible. So like maybe it Is, you know, not in the example of this being a foreclosure property, but maybe it is a family and they, they're building a new house and their house isn't going to be ready right away, giving the flexibility to close when it's convenient for. Maybe they want to have it under contract and you know, to get their contingency removed on purchasing another house. But they want to be able to stay in their house until their new one is done. So they don't have to pay for a short term rental, live in a hotel or whatever. So that could also be something if you're able to find out, you know, information about the seller as to why they're selling, what they're doing, what their plans are for the money too. The other thing I thought of was their junk. Leave it. They can leave it. You will take care of it. And this works great for like estate sales or you know, someone's going into some kind of senior living or you know, maybe it was a hoarder house and they're just starting fresh. Those are things that it works great to offer. That as in like the family doesn't need to do anything else. You will take care of it. You will unload all of, unload everything and get rid of it. They can take what they want, the rest they can leave. You'll take care of it. That is a huge burden off someone's shoulders. Like, it may seem like it's not a big deal to rent a dumpster and go and throw it out, but you know, oftentimes that's the last thing anybody wants to do. Especially after maybe they just lost a loved one and they're, they're selling the property, the, the next thing is, even though you're saying like, basically I'll take care of everything, leave it. As a rookie investor, especially in today's market, one thing I would not sell Skip, is to do the inspection. Especially if you have no knowledge or you're, you're not confident in what needs to be done for repairs, still have the inspection done. And one way you could do it to be competitive is to say that you're not going to ask for anything with the inspection. You just want to make sure that it's going what you're estimating is going to be correct. Correct. So you could say, I'm not going to ask for a price reduction. I just want to make sure that my numbers are correct in what I'm running. So basically it's, it's only there for if you're going to, you know, go forward with the deal. So that does, you know, limit your offer is because you're basically saying, I'm going to back out of the deal if there's more repairs that need to be done than I essentially thought. So that can be a negative against you. But I think definitely in this market, you have more wiggle room to add an inspection into your property because I would rather you lose out on a deal than go into a deal that needs way more than you expected. And now you're underwater on your property and in over your head and don't have the money to completely finish this property.
- [07:31]
B
Couldn't, couldn't agree more. I know when rates were super low and the market was going crazy, there were a lot of folks just waving everything, you know, and if you're an experienced investor who sold a bunch of homes or rehabbed a bunch of stuff in that market, you know it really well. Okay, yeah, you're a contractor, that, yeah, you're a contractor.
- [07:51]
C
Yeah.
- [07:51]
B
But if you're first time rookie investor. Couldn't. Couldn't agree more. The, the second part of that, that question was about the, the terms that hard money lenders offer. And I, I think what was discussed here is in line with what a lot of hard money lenders offer. Typically, what you'll see with hard money folks is that they want you as the buyer to have, quote, unquote, skin in the game. And the amount of skin relates to how much money you're putting into the deal yourselves. Right? Because for them it's like, hey, if you have nothing in the deal, that's a little bit more risky for us because what incentive do you have to really see this thing through? But if you put some money into it, then there's the likelihood or the likelihood increases that you actually want to see this deal through. Every hard money lender varies and I think oftentimes you'll get different terms based on your skill set. So like, you'll, you'll see hard money lenders quote rookies, you know, complete newbies, one rate, one term sheet. And they'll quote more experienced investors, a different rate, a different term sheet. But typically they're looking at two things. There's the cost of the deal, right? So your acquisition plus the rehab, and then there's the arv, right? Like what the property will be worth afterwards. And he kind of alluded to it in the initial part of his question, but a lot of times they'll look at those, say they'll look at those two things and help and sorry, a lot of times they'll look at both of those things and use to come up with the terms they'll offer to you. So it could be, hey, we'll give you, you know, 90% of your cost. So if you're buying a property for $100,000 and you're spending another $100,000 in rehab, your total cost is $200,000. They'll say, hey, we'll give you 90% of your total cost. So they'll give you 90% of 200 or $180,000. That means you're coming up with the other $20,000 to get this deal done. Right? That, that's one way to, to look at it. They might say, oh, we'll give you 65% of your after repair value. Right? So on that same deal, say that you were all in for 200 and it's worth 300 afterwards. Whatever 300 times 65% is. Can't do that math fast enough today. That's what they'll, that's what they'll give you there. So those are the two different ways I've seen HARP and lenders approach their terms. So I think what he said is pretty in line. Now I have actually. I've gotten quotes from Harmony lenders. I've talked to them before, but I've never actually used one. I've been more of a private money guy or traditional bank financing. Ash, I know you've used private money at least once or twice before. How do those terms compare to what, what you've seen?
- [10:16]
A
It was the worst experience of my life. I will say that. I used one hard money lender and I did it for. I was supposed to do three deals with them and then I ended up just paying cash for one of the deals because the process was just so awful. Part of it was my fault for not asking the right questions and for not being fully aware of what the process is and what the fees are. So that was a big mistake on my part. But I did it as I actually did a line of credit with the hard money lender and just to have the line of credit and have the, the money up front, there was a one and a half percent point paid. So one and a half percent of whatever the line of credit was and then the line of credit was available. But it worked very, very differently than like if my other lines of credit that I just have at the bank, it was, I would be able to get 80% of the purchase price of the property, 100% of the rehab that it would need, but I'd have to present to them, you know, the, the property they would do. They would wanted an appraisal on each of the properties which isn't always common for hard money lenders is wanting an appraisal on the property. So they did an appraisal and then also I had to submit all my contractor bids to them, my scope of work to them for the rehab, which is common. And then after that, once the, the project was done, I had to refinance with them. If I didn't refinance with them, I had to pay another penalty. One thing I didn't know was that they will only refinance when you have five properties. So I didn't want to keep paying this I think was at the time 10% interest and wait until I had two more properties with them to actually go and refinance because they wanted you to keep those on the line of credit. And so I actually paid the fee to get out of them and went and refinanced with another bank for a way better interest rate. So I definitely did not ask enough questions questions and it was even my one closing the title. They didn't understand how title works in New York. And we were supposed to close on a Friday. I ended up having to hire a title attorney to try to mediate the situation. And finally by Monday we were able to close with a we told you so, you can't do that here. But still that ended up costing me more money that obviously the hard money lender didn't pay. I had to pay out of pocket to hire that, that title attorney to basically tell them what to do. And one question I had asked and they said yes we do, is, you know, do you work with properties in New York? And they said yes, we, you know, have done properties there, a ton of them or whatever. But when it came down to it, they did not even know how to close. So I think more specific questions should have been asked. And you know, who actually deals with that? One thing I didn't like also was that there wasn't one central contact person. It was okay, you're this person for that, this person for this. And it was just too many, you know, hands in the pot where one person couldn't answer questions for me or one person wasn't like my advocate or my representative or you know, so I really had a bad experience with it. But that was also a nationwide hard money lender where maybe if you get somebody more local, more, you know, maybe they only operate in two or three states or something like that where they're very niche and specific and knowing how to actually close on a property. But in New York State it is completely different than a lot of other states too.
- [14:14]
B
So I have a lender who works in every state except for New York State.
- [14:17]
A
Yeah, every time I see him I ask him like are you guys in New York yet? Even my one private money lender, he's not from New York and he always says like oh, the New York. Okay, fine, one more I'll do.
- [14:32]
B
New York is tricky, but I think you bring up a good point, Ash, of just asking more questions because every hard money lender does operate differently. So for all the rookies that are listening, if you do want to go the hard money route, it would definitely be in your best interest to talk to multiple different lenders nationwide, regional, local, because each person or each company is going to have a slightly different flavor of how they do it if you.
- [14:56]
D
Own a short term rental, here's something worth knowing. Not all landlord policies are built for your type of property, and with holiday bookings, chilly weather and higher guest turnover, having the right coverage is more important than ever. Steadily offers insurance designed specifically for short term rentals, covering property damage, liability, lost rental income and even unexpected issues like bed bugs. Steadily works exclusively with real estate investors so they understand the details that make short term rentals unique and they build coverage to match it. A quick review of your rates and coverage every year can help you protect your property and your cash flow. Get a quote in minutes@biggerpockets.com landlordinsurance steadily rental property Insurance for the modern Investor.
- [15:37]
C
If you treat your short term rental like the business it is, your insurance should do the same. Too many homeowners and hosts are relying on weak homeowners and landlord policies that were never designed for a revolving door of guests, heightened liability exposure, guest caused damage or loss of revenue. That's not just risky, it's bad business. Proper insurance offers the most comprehensive short term rental policy on the market, built to actually protect your property, content, liability and revenue all in one. And with it you get access to a dedicated risk manager, someone who understands the unique exposures of your short term rental and works with you to identify coverage gaps, evaluate your listing and help protect your revenue stream. Don't just settle for any insurance, use it to strengthen your business. Get a quote today@promininsurance.com BiggerPockets Check this out. Funding your next real estate deal might be easier than you think simply by using your retirement account with a self directed ira. You can invest those retirement funds into real estate while reducing or eliminating taxes. And here's the best part. You don't need a huge IRA to get started. You can partner with other IRAs or funding sources to make it work as BiggerPocket's exclusive self directed IRA provider Equity Trust brings over 50 years of experience and 58 billion in assets under custody and administration. Get started online in minutes@trustetc.com BP that's trust etc.com BP hey guys, it's Ashley.
- [16:52]
A
I wanted to pop in here real quick to tell you that managing rentals shouldn't be stressful. That's why landlords love rent ready. Get your rent in your account just two days Faster cash flow, less waiting need to message a tenant? Chat instantly in app. No more lost emails or texts. Plus schedule maintenance repairs with just a few taps. No more phone tag ready to simplify your rentals. Get six months of rent ready for just $1 using promo code BP2025. Sign up at the link in the bio because new landlords are loving rent ready. We are here with our second question. So this question comes from Craig in the BP forums. I'm in Central Valley, California. I've been looking for a deal on and off market. The off market deals are really hard to find and whenever I do find something and I work my numbers, I can never follow the 1% rule. I've looked all over the county for deals and find them in a decent amount, but by the time I factor cost of travel to check them out, difficulty of doing rental because I'd have to drive there with my tools and paying a property management company and also lack of knowledge of the new area, my profits seem to be eaten up. My question is do I just purchase local? Since I don't have to pay property management and can do the work myself or out of market and just pay the travel expenses, et cetera. How do you research a new area you've never been to before? How often do you travel to check out the property? If you travel, how long do you generally give yourself to check out deals? How can you find a reputable agent out of market? Thanks in advance. Okay, first of all Craig, I really have to commend you for analyzing your deals, factoring in a cost that no one ever does. No one ever adds in their time or their travel to the property. And so just right away congrats on even considering that because that does add up to, you know what your actual profit is on the deal the property. The next thing I'LL say is don't follow the 1% rule hard and fast. Any property, maybe two properties that I've had have exceeded the 1% rule. Like one was three and a half percent. These two or three properties that I've had and it's like, wow, those must be great properties. No, because they don't fit the 50% rule because their property taxes are so high that my expenses are way more than 50%. So don't get caught up that just because a property doesn't meet the 1% rule that it doesn't mean it's a good deal because it still possibly could be a great deal. You just have to look at all of the metrics, all of the numbers, and not just the, the 1% rule.
- [19:40]
B
And just to define the 1% rule, it basically states that as a quick back of the napkin way to check a deal, the purchase price should be represented as 1%. Sorry. The rent should be 1% of your purchase price. So if you buy a home for $100,000, 1% of that is 1,000. So it should rent for at least 1,000 bucks every month. And I think that is getting harder to come by in many markets and probably even more so in a high cost of living area like California. So there's a few questions in Craig's question here. Right? So do I just purchase local? That way he can take care of it himself. How do you research new area? How do you build a team? How long do you travel? There's a few things here. Maybe the first thing we can answer, Ash, is just local versus out of state. I say this all the time, but I think that decision comes down to what your motivations are for investing in real estate. Craig, I was actually talking to someone yesterday who's looking to get into short term rentals and they're a pilot and he loves being a pilot. Doesn't ever want to stop being a pilot until it's time for him to retire. But he's looking to invest in short term rentals just as a way to diversify his retirement portfolio. Right. Right now it's all in. He's got I think one or two long term rentals and mostly in the stock market. He's like, I just want some other diversification. Tax benefits are great, but I don't want to quit my job. I don't even need the cash flow. That is a very different perspective than like me when I really got started and I lost my job and I was like, we need cash flow today. Right. So I think the the motivation that you have to get into real estate investing will dictate whether or not staying local in California makes sense or going to a higher cash flow market makes more sense. If you love what you do and you don't have any plans of leaving and you don't need the cash flow today and you're just looking to diversify, who cares about the 1% rule as long as you're net positive, right. With some level of margin. I wouldn't want you to be like zero net profit, but some amount of net profit on an annual basis and you're able to invest in a market that's going to, if history repeats itself, continue to appreciate rapidly in comparison to the rest of the market, especially some of these higher cash flow markets, then yeah, staying in your local area could be a fantastic idea. But if you are more focused on cash flow and trying to build that, you know, those multiple streams of income today, then I think that's where going to the other markets might make sense.
- [22:06]
A
Well, Tony, I think to the point too is like, you know, you read the book on out of state investing or talk about out of state investing, everyone says like you should be able to do a deal without ever having to go there. But I think what you and I have kind of learned over the years from guests being on and also you investing out of state is that you know, what's a plane ticket to go to your property. And like I love that Craig would incorporate the travel costs to going wherever because if you're buying a $500,000 proper as your investment, you can buy a $500 plane ticket as part of your due diligence. Work that into the cost of the purchase price of the property if you want. But you should I more and more I believe that definitely when you're purchasing the property, if you don't have somebody trusted there that can walk through the property and is knowledgeable about the property, then you need to go and be your own boots on the ground. I would not personally rely on just the real estate agent to be the person to say yes, this is a great deal. No offense to the real estate agent, but I don't know what their motive is. Is their motive just to to close the deal? Is it to really establish a long term working relationship with me? I don't know. So that wouldn't be like my trusted resource, somebody who already has a benefit from the property being sold. Tony, even you, you went out to Oklahoma to look at properties in person. You have the knowledge and experience to know what A good dealer is. Or not. But you still took the time to. To be the boots on the ground. And what did the plane ticket cost you to. To go and do that?
- [23:44]
B
It was probably like a couple hundred bucks. I ended up paying for it with points, so I think it was free for me to go. Technically, yeah. Had I. Had I not used points, would have been a couple hundred bucks for me to go out there.
- [23:52]
A
And I think if you're thinking that's a lot of money for me, then I think you need to evaluate, as in, okay, you need to have that amount of money saved. Just like you save for a down payment, just like you save for reserves is okay. I need to know that if I'm going to invest out of state, I need to have those travel costs saved. So the flight, the hotel to actually go in and check out the market. If you don't have that person that's the boots on the ground, you can 100% definitely purchase a property without ever seeing it. Even if it lives, you know, in the. The. If the property lives right next to you, you still could buy it without ever going to do it. But I think, especially a rookie just starting out, being able to put your own eyes on it, I think is a benefit in the area, too. So as far as the travel costs of, like, going to the properties, Tony, how often do you actually travel to the Smoky Mountains or Joshua Tree to. To see your properties?
- [24:52]
B
Yeah, I mean, ideally for us, it's slowed down a little bit since we've added a bunch of kids over the last couple years. But previously we were trying to get out there probably twice a year. Recently, it's probably been about once a year that we go through and check on the properties where we have to travel. Same for the hotel. I've gotten up to the hotel about once, a little bit more than once a year. Maybe once every, like eight months or so. So it's not, you know, I'm not going out there like six times a year. Right. It's. It's really just to go there, see where maybe some things are that my team has missed that me as the owner would recognize. So it's. It's not super frequent that you need to go out there. I. I think the. The bigger thing is, like, if you do decide to go out of state, you know, because he asked, like, how do I know which state or which market to go into? How do I know what a good market is versus what a good market isn't? And I think maybe spending more time there first as opposed to just like hopping on a plane and going and trying to see it. I think there's a lot of legwork you can do before you actually get on that plane to give you a good sense of, hey, is this market actually going to work out for me or not? And again, depending on your goals, there are different things you can look at. But let's say that it's just cash flow. Okay, well obviously you want to look at prices, rent price to rent ratio. You want to look at job demand are big job options and opportunities. There is the population growing or shrinking. Those are probably the key metrics that we want to focus on to say, does this market actually make sense for me to go in and buy a property and rent it out on a long term basis? So there's no magic bullet, I think, and it's just doing the work of digging into the research for all of you that are listening. When I've this is before I even became the host on the podcast, but if you go to the real estate rookie Facebook group and you search my name, one of the first posts that I did in there, it was me while I was trying to figure out what market to like do research in and I had this like massive spreadsheet with a bunch of different MSAs that I had like put together with a bunch of different data in there. The data is stale now because that was what, seven years ago but. Or six years ago maybe. But the point is you can see the data that I was looking at to try and decide on which markets I should be investing into. So again, just go to the real estate rookie Facebook group, tap my name and that that should pop up as well. And then last piece here, he does ask like, how can you find a reputable agent? I think that is one of the challenges for new investors. But BiggerPockets has the agent finder. So if you go to BiggerPockets.com agent finder, you'll be able to find investor friendly agents. Many of these folks are investors themselves. They know what it means to be an investor and you can get connected with them. Ash mentioned the trip that I took to OKC earlier and the agent that showed me around, you know, shout out to Laura, found her through the Bigger Pockets agent finder. Right. So I think it's a great resource for most rookies if you're looking for an agent in a new market. All right, we're going to take our last break before this next question, but while we're gone, be sure to subscribe to the real estate rookie YouTube channel. You you can find us eestateriki and we will be back with more right after this.
- [27:59]
D
Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy and one of the smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily they focus exclusively on landlords. Whether it's a single family rental, a Brrrr Builders risk policy or midterm holiday guests, you get fast quotes, flexible coverage and protection for property damage, liability and even loss of rental income. Now is the perfect time to review your rates and coverage. Get a quote in minutes@biggerpockets.com landlordinsurance steadily landlord insurance Designed for the modern investor.
- [28:51]
C
Most short term rental hosts think it'll never happen to me. Until it does, that one guest throws an unapproved party, leaving behind extensive destruction of your property and months of repairs. Or worse, someone gets seriously hurt on an amenity you provided. That's when owners and hosts find out their insurance wasn't built for short term rental risks. If you have a standard homeowners or landlord policy, there's a good chance you're misinsured. Proper Insurance is the nation's leading short term rental insurance provider since 2014. Their unique commercial homeowners policy offers unmatched protection for your property contents, liability and revenue all in one. And with unique enhancements for guest caused damage, amenity, liability, bed bugs, squatters and more. Don't wait for a wake up call. Get a quote today@pro properinsurance.com BiggerPockets looking to build serious long term wealth in real estate? A 1031 exchange can be one of the smartest ways to make that happen. This strategy lets you defer capital gains taxes while reinvesting in new properties. Whether you're looking to diversify into new markets or different property types, Equity 1031 Exchange will guide you through every step. Learn how to defer taxes and reinvest smarter in just minutes. Visit getequity1031.com bprookie that's getequity1031.com BProokie.
- [30:05]
A
When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more at WhatsApp.com Tito's Handmade Vodka is America's favorite vodka for a reason. From the first legal distillery in Texas, Tito's is six times distilled till it's just right and naturally gluten free free, making it a high quality spirit that mixes with just about anything from the smoothest martinis to the best Bloody Marys. Tito's is known for giving back, teaming up with nonprofits to serve its communities and do good for dogs. Make your next cocktail with Tito's, distilled and bottled by 5th Generation Inc. Austin, Texas. 40% alcohol by volume. Savor responsibly.
- [31:01]
B
All right, let's jump back in with our last question. This one comes from Dustin. Dustin says, does anyone have experience with partner contracts? Hoping to get something in writing between my brother and stepfather as we begin our first brrrr purchase. We have verbally agreed to what each of us will do. But working with family doesn't always go as planned. Just want to protect ourselves. Dustin, Dustin, Dustin, great question and we applaud you for thinking about this before you jump into it. I think working with family can be challenging. Working with family can be rewarding and I've met investors who've seen both sides of that coin. But I think a lot of it comes down to your ability and you know, you, your brother and your stepfather's ability to have the difficult conversations up front beforehand before they're necessary, get it all written down and memorialized so that way you can never have to think about it again. I think that's the biggest thing. So luckily Ashley and I have written a book, we've co authored a book called Real Estate Partnerships. If you head over to biggerpockets.com partnerships you can pick up a copy of that. But in there we go through all the details of what a good partnership looks like and what you should be focusing on and how to make it work. But at a high level it's just have all those difficult conversations. What happens if someone's sucking at their job? What happens if one of us passes away or dies? What happens if one of us just wants out? What happens if we end up hating each other? What happens to the property or the deal doesn't pan out the way that we want it to? What happens if we need to put more money in? What happens if One of us runs out of money? What happens if one of us goes bankrupt? What happens if one of us gets a divorce? What happens if the sky, you know, turns to fire? You know, whatever you can think of, all of those scenarios are, I think, what you want to put into there and then just have a clear division of labor and responsibilities. So that will be my first start. Ash, what's your take?
- [32:51]
A
Yeah, and I think really the hard part is, okay, if you are saying what everybody's role and responsibility is and. Or even a lot of the things you mentioned. But what happens if somebody doesn't go along with that? I think that is like the bigger issue. You can put all these things in as what happens if someone wants out? Well, you know, what if the other person can't buy them out? What happens if somebody isn't doing their job? What happens if somebody gets divorced? Like, what happens if there is a complication, Whether it's stated or not, how is it handled? Because, yes, everything could be in the contract as it is, but at the end of the day, you really need to ask yourself if you, your brother and your stepdad are actually going to go to court over this. If one of these things are violated or aren't going along, will you actually go to court over it? And I think, like, thinking big picture, are there other. Like, what exactly can we state in here that will even prevent us from having to go to court? Court, as in, is there some way we can do this where if we have, you know, a decision and it's a, you know, if there's three of you, I think it's easier because then you have the tiebreaker. But I have seen in some circumstances, like small business owners having an advisory board, where there, if there are two, the two owners or, you know, they don't agree, it actually goes to the advisory board and they have given the final decision to the advisory board to prevent, like, further disagreement between them, that ultimately it's not up to them. It's, you know, there's five people who are on the advisory board and they get the ultimate say. And then it's not one person has more power than the other, but they're still both the owners. So I think having, you know, not only thinking of the situations as to what will happen if this happens. Ultimately, if someone needs to step away, how do we buy them out? You know, what. What happens in that scenario if they need to get out of it, and it could be for a multiple of reasons, is the plan to go and refinance is the plan, everybody's just going to save up money. So if someone wants to leave, they can leave, is that you're. If one person wants out, you're going to sell all the properties. So I think really figuring out what those scenarios could be, then the next step is, what is the plan if those happen? And then the third thing is, is there something else that you could do to resolve something if in not going to court about it? And like, the biggest one I think of is me and Tony are in a partnership. I say I'm gonna do the bookkeeping. He says he's gonna do the maintenance. All of a sudden, he finds out it's tax time. And I haven't documented a single check. I don't even know where the receipts are, anything like that. And it's been a full year now. No bookkeeping has been done. What is the action that would actually happen? Is it Tony suing me as his partner for not doing my job? And it says in the contract. So I think what are other things you can do to kind of be proactive? As in, we are having a quarterly meeting where everybody is presenting what has happened, what they've done, what is happening. Their report, submitting the report Tony sends in. Here's all the maintenance requests I did. Here's the issues that are still outstanding. Here's what improvements we need that are coming up. And here's me presenting the financial statement. Statement. So I think along those lines, too, are one of the preventative, proactive measures you can do, too. And our good friend Steve Rosenberg always recommends. What does he call those meetings, like, at the end of the year with your partners to make sure you're on the same page still.
- [36:53]
C
I don't know.
- [36:54]
A
You and Tony and Omar had. Or you, Tony and Omar, you and Sarah and Omar.
- [36:59]
B
Like, alignment meetings.
- [37:00]
A
Yes, alignment meetings.
- [37:01]
B
Oh, okay.
- [37:04]
A
Alignment meetings to make sure you're all on the same page. And Steve always says to, like, incorporate your spouses, like, bring those. Them into the meetings, because they have a big impact on each of your partner's lives too. So, yeah, I think, like, not only putting everything in the contract, but also being proactive so it doesn't come to the point in time where you're taking your. Your brother to court.
- [37:28]
B
And I think the alignment meetings are big, too. And I'm glad you mentioned that, because you can also just kind of see if over time, because people change and their desires change, what they want in life changes. And if you can align on a regular basis, I think it does help keep the Health of the partnership high or at least give you guys visibility or insights into, okay, maybe this partnership isn't serving us the way that it was in the past. And does it make sense for us to continue this partnership? So having, having those alignment meetings and just saying, like, hey, where are we going? What's next? What are the goals? What are our challenges? How do we want to attack these things? Can, can keep you guys on the same path. And I, I think the last thing I, I'd add is, as you think about division of responsibilities, there are a few ways you can tackle that. One way is, hey, I'm, if I'm doing maintenance, I'm going to get paid an hourly wage for maintenance. Or if I'm doing property management, I'm going to get a percentage of the revenue for property management. That's one way you can do where you can actually compensate it for your time. The other way is just that the duties you agree to are given to you or you're doing them in exchange for your equity in the deal. Like, hey, Ash and I split a deal 50, 50. We both put up half the cash. My duties and responsibilities represent my 50% ownership, and that's what I'm doing to maintain the deal. And Ashley's duties and responsibilities represent her 50% and what she's doing to maintain the deal. So just know there are different ways. There's no right or wrong answer. It really just comes down to what you and your partners agree and feel is right. But I think it is important to clarify compensation within the partnership because that can obviously be a sticking point where you jump in saying, I'm going to manage it. And you're assuming you're going to get some percentage of revenue. Your partner's thinking, oh, great, Ash is going to manage this thing for free because we're partners on this deal. And then you, you know that that's where conflict comes out. So just clarity on, on compensation, I think, is big as well.
- [39:18]
A
And then the last piece of this to add is just, even if you get a sample of a contract from somebody just to like, think about things, I would still have it run by an attorney or have an attorney create it for you. It's not going to be that expensive. They have, they do this all the time and have basically templates that they already have put together. And then they're asking you the right questions to actually fill them out for you personally. So I would definitely seek an attorney to have them fill it out for you. Okay, well, thank you guys so much for joining us today on Real estate, Rikki, this has been a Ricky reply. I'm Ashley, he's Tony. And we'll see you guys on the next episode.
- [39:59]
D
If you own a short term rental, here's something worth knowing. Not all landlord policies are built for your type of property. And with holiday bookings, chilly weather, and higher guest turnover, having the right coverage is more important than ever. Steadily offers insurance designed specifically for short term rentals, covering property damage, liability, lost rental income, and even unexpected issues like bed bugs. Steadily works exclusively with real estate investors so they understand the details that make short term rentals unique and they build coverage to match it. A quick review of your rates and coverage every year can help you protect your property and your cash flow. Get a quote in minutes@biggerpockets.com landlordinsurance steadily rental property insurance for the modern investor.