Ashley:
Let’s get your questions answered. I’m Ashley Kehr and I’m here with my co-host, Tony J Robinson.

Tony:
And this is the podcast to help you kickstart your real estate investing journey. And today we’re going back into the BiggerPockets forms, which if you didn’t know, the BP forms are one of the absolute best places for you to go as a rookie to get your real estate questions answered by real estate experts like me and Ashley. Now what we’re going to discuss today, we’ll talk about how to determine if you should rent or sell your property. We’ll talk about how to fund the rehab for Flip and we’ll discuss if house hacking is dead in this high interest rate market. Now, before we jump in, we want to thank Corporate Direct. This episode is sponsored by Corporate Direct Protect your properties with an LC and let corporate direct take care of the paperwork. Go to biggerpockets.com/direct for a free 15 minute consultation and 100 bucks off if you mention the podcast. Now, let’s get into the show.

Ashley:
Okay, so the first question I pulled today is my wife and I recently moved to Lynchburg, Virginia for work and we’ll be living here for approximately a year and a half. Our work is expected to be completed by early 2026, after which we plan to move back to our hometown. In the meantime, we purchased a home with the intention of converting it into a short-term rental. Once we leave, we also plan to finish the basement, which would add about 700 square feet of living space. Before purchasing the property, we ran preliminary numbers and converting it to a short-term rental seemed promising. However, after taking a deeper look at the financials, we realized the property would barely cashflow based on recent short-term rental projections. We expect about $40,000 in annual revenue for a five bed, three and a half bath near River Mount Boulevard, which would only net us a couple hundred dollars in monthly cashflow.

Ashley:
The estimated cost of finish the basement is around 25,000 with an additional 25,000 needed to complete the rest of the property. Our latest calculation show a cash on cash return of just 5.87% based on the 40,000 revenue projection. At this point, we’re feeling uncertain. We’re seeking guidance on the best approach moving forward. So should we pursue the short-term rental strategy and aim to be one of the top performing properties in the market to increase cashflow potentially up to $1,000 a month? Or should we pivot and rent the house to long-term tenants? However, the potential long-term rent is about the same as our mortgage, meaning we lose money when factoring in repairs and maintenance. Should we go the short-term rental or long-term rental route to break even and rely on future appreciation with the goal of selling in five years? I plan on DIYing the basement to save costs, but it is having this extra square footage even worth the trouble.

Ashley:
Should we just sell the property when we leave and cut our losses? Our ultimate fear is that we dumped 50,000 into this property for a very small return. The biggest issue is that we already currently own the property and are unsure where to go from here. So Tony, there’s a lot to address here, but as our short term rental expert on the Real Estate Rookie podcast, let’s start off talking about the revenue potential here and should they finish the basement and what are some ways that they could actually be in one of the top places to stay and do you think that’s actually achievable?

Tony:
Yeah, so whenever we analyze, and this is true for any short-term, long-term, midterm, whatever it may be, but we look at a worst case, a best case, and then a most likely case scenario. And what it sounds like is that your worst case scenario is that you’re cash flowing a few hundred bucks a month on the short-term rental, which is better than the long-term rental option of breaking even or losing money potentially. So your floor on the short-term rental is much higher than the ceiling on your long-term rental. So I think that’s one data point taken into account. Now, I don’t know how you came up with this. You said potentially up to a thousand bucks per month, but it sounds like that might be your best case scenario is getting a thousand bucks per month in cashflow on this property, which then doubles your, or maybe even triples your cash on cash return to the low teens somewhere in that ballpark.

Tony:
So I like the range there. If the floor, I say we’re still doing better than the alternative and we’re still cashflow positive, that is not a bad floor to have the ceiling. I think in order to really understand what that ceiling is, I try and find as many supporting data points as I can to say, well, are there other properties that are, what did they say it was a five bedroom, three and a half bath? Are there other five bedroom three and a half baths in this part of town that are doing the kind of numbers 60, $70,000 per year in annual revenue? And if they are, is it a property that I can actually compete with? Right? Is it similar in functionality and layout and design aesthetic? Do they have certain amenities that I can also incorporate into my property and just ask yourself, can I actually compete with those listings? And if you can, then there’s more confidence for me to say, okay, well actually turning this into a short-term rental might be the best option. But that’s my thought on that first question there, Ashley, of like, Hey, should we or should we not?

Ashley:
Yeah. And kind of a follow-up piece to that they ask is, is it even worth renovating the basement for the extra square footage? And I think that goes right along with what you were saying is you have to look at the comparables and look at, okay, if you add that square footage, what is the new daily rate you can charge? How much more are they making and is it worth it that way When you actually run the numbers on it, how long is it going to take you to recoup that 25,000 that you’re putting to finish the basement?

Tony:
One other thing that I’d ask to this, because it said the estimated cost to finish the basement is 25 grand and then an additional 24,000 needed to complete the rest of the property. Five bedroom. I don’t think they gave the overall square footage for the entire house, but when I look at a five bedroom, I feel like you’re probably going to need more than 24,000 bucks to furnish and design the rest of that property because we typically say about 20 to 25 bucks a square foot if you want good design. So if you’ve got, I don’t know, five bedrooms, maybe three to 4,000 square feet, somewhere in that ballpark, I don’t know, I’m making up numbers here, but say it’s 3000 square feet, 3000 times, 20 bucks, what is that 60 grand that you’re going to have to spend on design and furnishing so that even the 24,000 feels a little light to me? And I think that’s the mistake that a lot of people make when they get their first short-term rental is that they underestimate how much capital actually goes into setting that up the right way from the beginning and then they don’t perform the way they want to. Not because the property didn’t have the potential, but because they simply didn’t put the necessary investment into that deal to make it reach that number. So just one other caveat, 24 grand feels a little light on a five bedroom plus 700 square feet of a basement living space,

Ashley:
And maybe they’re going to leave some of their own personal furniture, and maybe that’s why that number is off. But I wanted to address their decision between doing a short-term rental or a long-term rental. So it seems like they’re pretty comparable as so they’ll make a little bit of cashflow or basically break even may have to put money in if there’s repairs and maintenance that need to be done for the long-term tenants. So I’m looking at, okay, can you save that 50,000 by not adding the square footage in the basement, not furnishing it and get a long-term tenant in there? So how much would you end up losing throughout the next five years if your goal of selling in five years is that less money than if you were to go and dump the 50,000 and just break even? So I think look at that, but also look at your resources and your opportunities.

Ashley:
Is there a great short-term rental manager that is going to run this property for you? Is there a great long-term rental property manager? Because the operations of whichever route you go can highly impact, which will be a better investment for you. So if you were just going to self-manage remotely and a short-term rental, that’s going to be a lot more work than if there’s a long-term tenant in place too. So I think taking into account the actual operations of them can kind of help you decide too as to what strategy do you want to do. I think sometimes people get too caught up in just looking at the numbers and not what is the time consideration that can go into a strategy, but also who are the resources or the people that they’re able to outsource to that will really make or break their investment Also,

Tony:
What do you think about the just rely on appreciation with the goal of selling in five years? What are your thoughts on them knowingly getting into a deal that may either break even or lose money, but our hope is that five years from now we can exit on the appreciation.

Ashley:
So I’m going to say you’re at least getting mortgage paid down. You’re having somebody that’s paying your mortgage every month, so you’re going to recoup that equity from the mortgage pay down. I would have to look at, do a little market analysis as to has there been appreciation in that area? Does it stay stagnant? Are people moving into that area? Is the population growth? Are there things that are driving up prices in that area? But I do love having the mix of appreciation and cashflow, especially since you already know that you want to sell this property in five years. And also if you do lose money every month, but you think that this property can make you a hundred, $150,000 in five years when you go to sell it, what are you going to have to put in every month if you do lose money on the property and how does that offset each other? But I don’t like the risk of losing money on a property and waiting for appreciation to kick in.

Tony:
Yeah, I feel like the appreciation, and depending on why you bought this, it seems like you bought it for the immediate cashflow and the appreciation is just kind of like the icing on top. So I feel like I would, again, we talk about floor versus ceiling, your floor, if you go potentially long-term rentals that you lose money on this property every single month. And it’s like, are you comfortable personally with that floor, with that type of risk? So yeah, I think the final piece of that, should we sell the property when we leave and just kind of cut our losses? Again, I think that comes down to, well, why did you buy this in the first place and do you see a clear path forward to actually achieving what that goal is? And even if you’ve already invested time, effort, and energy into purchasing this property doesn’t necessarily mean you need to keep it and maybe subject yourself to even more future losses, even more money that you can’t recoup.

Ashley:
And it says there’ll be living there a year and a half, so they’ll be moving out in 2026 it says. So I’m thinking too, why do they expect to take a loss in 2026? Why do they think that they’re going to take a loss? It’s not like it’s right now where they know that it’s going to sell. They’re looking at comparables and it’s going to sell less. So I think that as you get closer, this isn’t a decision that you need to make now, but you can continuously watch what the market is doing compared to looking at home sales, looking at rental prices. Maybe today when we’re recording this, we just found out we have who the new president is going to be. So that could dramatically change the market in the next year and a half. So I think you don’t have to make this decision right now, but continuously looking at what are the short-term rental rates, what are the long-term rental rates even?

Ashley:
What are the short-term rental laws that are in place in this market? And will they change during this time period too, which may affect your strategy? So I think you don’t have to make a decision now and you can kind of keep an eye on everything and know that you’re actually in a position to have three options, which is great. Not a lot of people can do that with a property. Before we jump into our second question rookies, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as original content, like my new series Rookie resource. We want to hit 100,000 subscribers and we need your help. If you aren’t already, please head over to our YouTube channel. You can find it at youtube.com/at realestate rookie and subscribe to our channel. Okay, everyone, welcome back, Tony. What’s the next question you got for us?

Tony:
This one says, I’ve saved a 20% down payment for a property, but I’m struggling to save the remaining 60 5K for actually fixing this property up. For example, the property costs $150,000. I’ve saved up $35,000, but I’m struggling to save up an additional 60 5K to do the rehab. My understanding is that the lender will not give me the rehab money right away. I have to pay my own money to start rehabbing, and the lender will then reimburse me in stages of the rehab portion. Is that correct? Is there a lender who will give the construction budget right at closing When I purchase the property, I have some equity in my rentals, but I don’t want to touch them with the interest rates being so high. If there were a lender who could lend to me without needing to save up the 60 5K, that will be great. Thank you. So what this question is really asking us here, Ashley, is are there different loan products that exist that might allow this person with his 20% down payment to cover not only his purchase price but his renovation costs as well? I know you’ve done a lot of burrs, Ashley, so I’ll kick to you on this one first, but have you seen any loan products to kind of fit what this person is looking for? Yeah, what are your thoughts?

Ashley:
Yeah, so I think the first question I would have back is this for a primary residence or this purely investment property, because that will definitely impact what type of loan product you’re going to get if it’s going to be your primary residence. There’s a 4 0 3, is it 4 0 3 B? Yeah.

Tony:
Okay. I don’t know.

Ashley:
I was going to say 4 0 3 K, but I was like, no, that’s 4 0 1 where you can go to the lender and they will lend you a percentage of the purchase price plus the rehab on the property. But during that time period, you have to use a contractor that is approved by your lender, you have to do draws. They’ll have an inspector that comes out and inspects the property. And I’ve heard I’ve never done this type of loan that it can be kind of gruesome going through all the hoops and going through the whole process. Everything is documented, everything just a lot more grueling than if you had your own cash and you’re paying out your contractor going along the process. So there is that option for you, which it has worked for a ton of people to go this route. But there also are small local banks that do in-house portfolio loans where if you are buying this property under market value and can show them that this property is right now worth a hundred thousand, but I have it under a contract for 80,000, they might be willing to lend you more money than what you’re actually purchasing it for so that you can use that on the rehab too.

Ashley:
As far as your other properties that you have, you don’t want to touch because of the interest rates being so high. I would go to one of these small local banks or a credit union and ask about a commercial line of credit. So get a line of credit on these rental properties and then you can use that. So that’s actually what I do. I pretty much fund all of my rehabs with a line of credit that’s on two of my rental properties, and I will take money off as I need it. And then once my rehab is done and I either refinance or I’m selling the property, I pay back my line of credit and then it sits there until I’m ready to use it for the next deal. So I’m not continuously paying interest on it just when I’m using it. And this is a way better option in my opinion, than going out and borrowing from a lender for the rehab and having to follow the rules and their processes.

Ashley:
But also, there’s hard money lenders too that you can find, and you can go into the BiggerPockets forums and get recommendations where they’ll do a lot of these loans where they’ll lend you percentage of the purchase price, maybe all the rehab, a percentage of the rehab, and then their expectation is that you’re going to go and refinance this property and sometimes they have it in house where you can just go ahead and refinance with them for your end loan product that’s a fixed rate over so many years, or you’ll take it somewhere else and refinance and pay that loan back. But if you have that equity in those rentals, I would definitely try to tap in and get a line of credit for sure, because then you don’t have to go through inspections. You don’t have to get approval and go through the loan process every time you want to do a rehab on a property, you’re able to just use your own line of credit and honestly will probably, the interest rate will be better than if you’re going to a hard money lender than having says sometimes pay points and pay usually a higher interest rate.

Tony:
Yeah, I couldn’t agree more. I think that the hard money portion is probably the most expensive debt that you’ll maybe run into, but I think actually you hit on a super important point. Like a lot of the smaller local banks and credit unions, those might be a great place to go because they tend to have a little bit more flexibility than even hard money lenders in some situations because some of these bigger, hard money lenders are these massive organizations and corporations as well. I think one of the things that I realized as we’ve grown our portfolio is that even though a mortgage is a mortgage and debt is debt, every lender has a slightly different way in which they package that debt to you as a real estate investor. And I think the more lenders you can talk with, the more potential financial institutions you can build relationships with, the more tools you start to add to your tool belt to say, well, hey, this debt actually makes a ton of sense for this deal or this type of loan product makes a ton of sense for this deal. So if you’re buying, you said property costs 150 K, you’re probably buying in a smaller town. There were probably credit unions in that city who would love to give money back to folks in your area to say, Hey, let’s go revitalize some houses in this community.

Ashley:
Well, you guys, we love talking about real estate. We love answering your questions like this with you all, and we’d love if you’d hit the follow button on your podcast app. Wherever you’re listening, we have to take one final break and we’ll be back with our last question. Okay. Welcome back. Our final question today is, hello bp. New to the forums and new to real estate investing. I’ve been debating on house hacking into homes because the prices of homes are just so pricey. My question is, is house hacking dead and to live rent-free no longer exist in today’s market? I’m looking at a duplex and I’d owner occupy it. My game plan is to buy and hold multifamily houses to build my portfolio off appreciation due to cashflow. Homes seem so hard for me in my market. Okay, what do you think, Tony? Let’s answer that first question is how’s hacking dead? Let’s use this as a social clip to stir up some debate.

Tony:
Is house hacking dead? I don’t think in any way, shape or form that house hacking is even close to debt. It’s not even on life support. It’s not even in its old age. House hacking is young and spry. Now, is it slightly more challenging because of the interest rates that we’re seeing? Sure, but that’s just real estate across the board. It’s not specific to house hacking. It’s house hacking. It’s medium term, it’s commercial, it’s whatever it is. We’re all seeing a bit of a pinch because of the increased interest rates. But to say that house hacking is dead, I think it’s probably one step too far. Now, I think that for some people, they only categorize a house hack as a success if they can 100% cover their living expenses and produce cashflow on top of that.

Ashley:
I think that was with the Burr strategy for a long time too. People said, oh, if I can pull all my money out and cashflow, that is a burr where that is really hard to do. Now,

Tony:
For sure, even for the Burr example, say that you have a hundred thousand dollars little nest egg that you’re starting with, and maybe you don’t get a hundred K back, but what if you get 50 K back, right? Well, now you still have 50% of your initial capital that you can go deploy into something else. Is that a US No. Right? So yeah, I think it’s redefining what a goodhouse hack actually is, but our biggest expense monthly is the amount of money we spend to live the roof over our heads.

Ashley:
And if that is not the case for you and it is your car or a depreciating aspect,

Tony:
That’s true, you

Ashley:
Need to go back and lose at all our episodes.

Tony:
For most people, it is their mortgage, it’s their rent, and if you can get that even 80% lower, well now you’ve just freed up 80% of your income to pour back into buying more real estate, which is a win. So is it dead? Absolutely not. I think we just need to redefine what success as a house hacker actually looks like and that it’s a bit of a range and not just a black and white answer.

Ashley:
So let’s kind of put together an example, and this is the way I always like to describe my sister’s house hack. So the first duplex she got, she was paying $45 a month and it wasn’t, she had to pay something, but if she would’ve lived in that same exact unit somewhere else, today she’s paying less than 45 now she’s probably paying zero now just because rent has increased and her mortgage payment has stayed the same, but that same size unit when she moved in could rent for $900 per month. So if she had gone and moved into a house that was similar and rented it, she’d be paying $900. And instead she went and bought the house and she paid $45. And then the person that lived below her paid a thousand dollars a month I think it was, and that covered her mortgage. So she was not making cashflow, but she was getting mortgage pay down. So equity built up in the property, she could save that $855 every single month.

Tony:
And I just did the math. It’s just over $10,000 a year that she’s putting back into her pocket

Ashley:
And then you get increase in rent. So she’s lived there, I’m trying to think, 2019, maybe 2018, maybe it was. So she’s lived there a while, and I think right now that downstairs person is paying 1200, so it’s increased $200 in that five, six years that she’s lived there. So now she is cashflowing off the property. But yeah, so I think there’s other metrics to look at instead of just cashflow on the property. So you’re having someone pay part of your mortgage, I think is really a win. But if you’re having somebody live there and it’s not making a dent or you’re going to be paying more money than if you were to go and rent somewhere, then maybe it’s not it for you because you’re having to increase your living costs so much, even though it is you’re buying an asset. But if it’s just going to be more of a burden on you because you are paying more every single month than if you were to go live somewhere else, then maybe that’s where you should reconsider is to know this isn’t the deal. For me,

Tony:
I think the other big benefit of house hacking is just the reduced level of capital that you actually need to get into a deal. When Sarah and I, my wife, when we bought our first home, our first primary residence together, we got a, I think it was a 5% down conventional loan. And at the time we live in California, there was a grant for first time home buyers, and the grant covered the majority of our down payment. And I want to say we bought our house, I think it was like, I don’t know, just under half a million bucks when we bought our house. And the total cash out of pocket for us was like $13,000, something crazy like that. So we were able to control this property that’s worth half a million with $13,000. And it’s like I’ve heard and seen that same story so many times from so many different people where you can go out, either buy a five big old five bedroom house and you’re renting out the other rooms, go out and buy a duplex or a triplex or a fourplex and rent out the other units. But the cost of capital, the amount of capital that you need to actually get into the deal is so incredibly low. The interest rate is going to be lower than if you’re doing it as a traditional investment property. The terms are going to be better. Everything about the debt and the acquisition is so much easier. So how could we say that house hacking is dead when that still exists?

Ashley:
And I think too, and the point of that story isn’t to say, oh, if you have very little money, this is your way to get in. It’s more of like, you still want to have money so that you have reserves and you get to be more liquid. So if I have $50,000 and I went and put $13,000 down, like Tony said, I can save the rest of that. I can put that in my four and a half percent interest account and be more liquid and have more reserves on hand or use some of that to invest in something else or continue to grow that. So I think the opportunity of house hacking is just incredible if you are able to do it.

Tony:
Yeah, we just interviewed Jefferson Galloway on the podcast. His episode may be out already, but if you go watch and listen to his episode, he bought six properties in six years, almost house hack, I think it was like half of that portfolio. He house hacked. He would buy a property, move in, live it in himself, rent out some additional space, move out of it, go do that again somewhere else. And he did that multiple times and he built a cashflow cashflow machine, right? I think he said on that podcast he had gotten to a million dollars in equity cash flowing about 50,000 bucks a year. And it all started with him buying properties that he was going to live in himself. And this is recent. This is in the last couple of years, right?

Ashley:
2020. He bought the first one, I think. And yeah,

Tony:
So it works

Ashley:
Well. If you’re listening and you want to get more involved in the community, like all these other real estate investors, you can go to biggerpockets.com/forums. Thank you guys so much for joining us. We really appreciated having you listen to us today. Whether you’re on your favorite podcast platform or on YouTube, don’t forget to follow or subscribe to the podcast. I’m Ashley, and he’s Tony. We will see you next time on Ricky Reply.