Ashley:
Today we are kicking things off with a question that every landlord eventually faces. What do you actually owe a tenant when a repair turns into a full blown project and their living space becomes unusable?

Tony:
And this one gets interesting fast. It’s not just about fixing a bathroom. It’s about what’s fair, what’s reasonable, and what responsibilities belong to the landlord versus the tenant. We also get into when you should be reviewing your investments and what to do when an opportunity actually comes.

Ashley:
This is the Real Estate Rookie podcast. I am Ashley Kehr

Tony:
And I am Tony j Robinson. And with that, let’s get into today’s first question. Today’s first question comes from Brandon in the BiggerPockets forms. Brandon says, about a month ago, new tenants moved into one of my rental houses. After they moved in, they discovered a leak in the bathroom. My maintenance guy checked it out and said the entire tub has to be ripped out and most likely the subfloor needs to be replaced as well. It’s about a four to six day job. Obviously that means they’ll be without a bathroom for a few days, so we offer them two options. Number one, comp their rent for the days the bathroom is unusable, or two, let them stay in one of our vacant three bedroom units for free until the work is done. They chose the temporary unit but then asked if we could also rent a truck to move some of their belongings over there.
I personally don’t feel like that’s something that we’re responsible for. The repair is unforeseen and out of our control and we already provided temporary housing or rent relief for context. Our lease also includes a section recommending renter’s insurance, but as far as I know, renter’s insurance would not cover the cost of a moving truck in this situation. So here’s my question. As a landlord or homeowner, what would you do? Do you think covering a moving truck is our responsibility? Are we being fair with the options we offered? And then finally, some people are also saying that maybe giving them a place like an Airbnb or hotel, but in my area there is not any. Airbnbs and hotels are limited. They do have a dog and the hotel will not allow the dog. Alright, bit of a sticky situation here and this is never I think a fun time when you got to take a tenant out of their unit.
I know when I worked at, again, very briefly after I graduated from college, I worked at this big leasing company and they actually had, I mean they had thousands of units in the town that I work in or that I live in, and they had at a few of their larger complexes units that were fully furnished that they would just keep empty for these kinds of situations. So if a guest had something that would preventive from staying at their own unit, they would say, Hey, we have our hotel at one of our other properties you can go stay at. So that was kind of their way to work around that. But Ash, as someone who has a lot of experience in this, what is your initial take on whose responsibility it is to cover the cost of this move and getting them from the unit they’re in to the vacant unit and then back?

Ashley:
Well, the first thing I thought of is four to six days seems like a really long time for them to replace the tub and the subfloor. I had a unit where we had similar situation. The tub needed to be ripped out, the drains all replaced, and this was for an upstairs unit. So there was a tenant living downstairs, tenant living upstairs. Their bathrooms were right on top of each other, and so they did it within 24 hours. So they came one morning, they ripped everything out, they started putting everything together and making all the repairs and they were done by the next day by 1:00 PM The upstairs tenant was currently being evicted and actually called fair housing on me saying that I did not give him a place to live and he couldn’t use his toilet, couldn’t use his shower, blah, blah blah, which he could use his toilet.
The only water that was not working was to the shower. His bathroom sink worked, his toilet worked and his kitchen sink worked and it was just a shower and the fair housing agreed with me and said 24 hours is a completely acceptable time period to go without a shower to make a repair. Where he was getting a brand new tub and a brand new surround put in and new drainage, which he had been complaining that it wasn’t draining properly either. So you’re making the repair that he requested. So that would be the first thing is contacting other plumbers and seeing if there is a different timeframe than four to six days to actually get that replaced. Because I feel like it could be done maybe if it’s this huge bathroom, but if you’re just replacing where the tub is, I don’t see it taking that long.
So I would try and find a contractor that can do it in a shorter amount of time. I would’ve recommended the hotel before he added that section at the bottom, that that’s what, there’s not a hotel that accepts a pet. So maybe what you could do in that situation is do the hotel but also set the pet up at a boarding place or groomers or something like that where they take in dogs and you could pay for the dog to be boarded for those four to six days and then you could also pay for their housing if they accepted or not. I feel like that’s on them. I definitely agree not to rent the truck for them and take responsibility of moving their belongings. And I think didn’t mention in there if this rental was fully furnished or

Tony:
It doesn’t say, it just says our vacant three bedroom

Ashley:
Unit. So if there’s no furniture in there, then yes, I could understand why they want to move some of their stuff if there’s no furniture in there. So maybe you should provide some kind of assistance in moving for that period of time. But I think I would rather not have them in one of my units and I’d rather put them up at a hotel. I mean, what if they cause damage to this unit? You don’t have a lease with them on this property. Their dog rips a hole in the carpet, choose a hole in the carpet or something while they’re there. I think of liability reasons. They don’t have a lease agreement with you for that other property. It’s a different property. Their security deposit is on a different property and not that property. I would try to reimburse them for a hotel stay somewhere else.
When I used to work for an investor who had a 40 unit complex, we had to do this a couple of times where we would actually call the hotel and we would make the reservation for them in their name and we would pay it, but they would still have to put their credit card for incidentals when they arrived at the hotel. So we did it that way to set up and a couple times people wouldn’t even show up to the hotel and wouldn’t even stay there. So I don’t know, wouldn’t tell us anything. It would just be like we’d get the email from the hotel and saying, here’s your one night fee for no-show, for your one week stay or whatever it was. But I think try and eliminate yourself from the equation as much as possible and use third party resources to kind of take that away. But I think that the dog issue in the hotel not accepting dogs is maybe looking for a place to offer to pay for the dog to be boarded and then it can be up to them if they choose to do that or not.

Tony:
But you bring up a really good point Ash about it sounds like the tub is all that needs to be ripped out and he said most likely the subfloor. So I guess the question is would the rest of the restroom still be usable during that timeframe? And if so, maybe you get them a gym pass so they can go shower at the gym if they need to for whatever 72 hours while this is happening because the toilet and the sink and everything else still works. I think that might honestly be the best approach is like, Hey, I’ll pay for you to go to the YMCA if you need to shower while the tub’s being replaced, but everything else in your restroom is still usable and I love your call out of the timeframe.

Ashley:
I mean unless they’re going to tile it and things like that. But if you’re just doing a standard tub with a surround, it shouldn’t be that big of a job.

Tony:
So hopefully that helps Brandon. Yeah, it seems like he might be in a smaller town too, so maybe he’s limited on labor. The fact that there are no Airbnbs and seems like only one hotel could maybe just be a smaller town, don’t have a lot of options for plumbing work, which we’ve run into in some of our cities as well.

Ashley:
Well, I’m in a small town and I got, that’s true actually, really just I think it was on Monday I had a tenant put in a maintenance request for their hot water tank wasn’t working. The plumbers showed up and I didn’t even know Daryl handled all this, so I didn’t even know until I got the invoice. But they called, they were there, we needed to put in a new hot water tank and from it leaking, the hot water tank was leaking, the subfloor needs to replace it, it’d been slowly leaking for a while and the tenant never noticed. And so the subfloor was starting to rot. So they actually went to the local ACE hardware, got materials, replace the subfloor for me, replace the hot water tank all in that same day in their laundry room or their utility room of their apartment. So definitely things can be done a lot faster than four to six days.
We are going to take a short break and we’ll have two more questions from the rookie listeners afterward from our show sponsors. We’ll be right back. Okay, welcome back. Our next question comes from Tracy and the BP forums. I’ve seen many investors unlock growth simply by reassessing older properties for refinance opportunities instead of selling. Curious how often property owners here evaluate equity positions as part of their long-term management strategy? I think this is a pretty good question that we don’t often get all the time as far as assessing your portfolio and understanding when to exit, when to keep or how to become more strategic or how to leverage the property for more opportunities. I know Tony, you have a five-year exit plan with a lot of your partners in that plan. Is it just to sell or do you have a plan that maybe you guys decide to refinance at that point?

Tony:
That five-year plan is really more so geared towards unhappiness in the partnership. So if any of us were unhappy, it would just be an easy way for us to break without there needing to be an argument over what should we do. But it is an option for us as well to refinance if we find that it makes sense. Now, we did buy a lot of our properties when rates were relatively low, so I can’t see a scenario where us refinancing any of these properties in the near term, it makes sense for us. But I do like the idea or just the question itself of at what point do you evaluate how much equity you have in a home to see if it makes sense to go redeploy that capital elsewhere. Dave Meyer’s book start with strategy. I know he kind of touches on portfolio strategy a bit as well, but I think a lot of it comes down to the person and their risk profile, their risk appetite and what kind of portfolio actually makes ’em sleep easy at night.
Because there are some folks who are of the mind that I’d rather have eight fully paid off properties even if that means that my return is less than what I could get because I’ve got a lot of equity trapped in these. They just like the idea of not having a mortgage on any of their real estate and for them that makes sense. And there are others who are maybe a little bit more mathematical and if they get more than X equity in a deal, then they’re like, Hey, we need to go redeploy some of that equity into something else and we’re going to push back up to what our max LTV is. So let’s say that someone’s max LTV is 75% and they’ve got a deal where they’re sitting at 50%, well they’ve now got 25% equity that they can go leverage to go buy their next deal. So I think a lot of it does come down to you as an individual. And what’s more important to you? Is it the growth and the scale and getting the next deal to keep the portfolio growing to keep putting fuel in that engine? Or is it I just want a very small portfolio that produces some heavy cash flow even if it’s not maximized in the best way? And I don’t think there’s a right or wrong answer to that. It’s really a personal choice.

Ashley:
I’m actually refinancing a property right now to, and I’m doing a cash out refinance. This is the first time I’ve ever done a cash out refinance on a property that I bought a long time ago. Usually the only time I’m doing it is I purchased the property, rehabbed it, doing the burr strategy, then I’m refinancing to pull the cash back out. This property I bought in 2014, it was a second duplex I ever purchased, second property I ever purchased and we bought it for I think like 70, 80,000. And we actually put a 15 year note on it and there’s about 30,000 left right now on the note and we’re going to pull out another 50,000 to bring the note up to 80,000. The property’s worth about 150,000. The bank, I asked them what would be the amount that I could refinance that you don’t need to go in and do an appraisal so I don’t have to pay 800 bucks for an appraisal.
I don’t have to coordinate with my tenants to get an appraiser in there. And so as of right now, they asked me, well, what’s the amount that you want? And I said I’d like 50,000. So as of right now, they’re going to do kind of a desktop appraisal, I guess, where they’re looking at comparisons and things like that and not actually paying for an appraiser to go out to the property, which if that happens, that’s fine. I’m just trying to make things easier on myself. But that 50,000 is going to be used for another property that we own in that same LLC to do a bunch of improvements and upgrades until this point in time, anytime a property has needed a big capital improvement or renovation, my partner and I have always put in the money for that, whatever we would need beyond our reserves and things like that or to replenish our reserves.
So this is the first time I’m actually doing that, tapping into a property that has a lot of equity to actually take this other property and turn it into a better property and really maximize the potential of this other property. But I think it’s a great strategy to do and I think it’s been a really big mindset shift for me is the longer you hold the property, the more opportunities and the different options you have moving forward. So a lot of my properties I don’t want to play around, I don’t want to refinance, I want those paid off. I want that peace of mind on some of those properties. But some of them, especially the ones I have with partnerships, I am okay with playing around with the money to see how I can deploy it in different places and things like that.

Tony:
Yeah, I mean I think the other benefit too is that refinancing and tapping into your capital that way is more advantageous from a tax perspective as well. Because if I sell a property to tap into it, that’s like a capital gains event you’re going to pay on what you earned on that sale. But if you refinance, you’re just getting more debt and you’re not taxed on new debt that you get. So there’s also something to be said about leveraging that equity as a tax advantageous way to scale your portfolio as well. So just something else to consider. But I think that’s the beauty of investing in real estate is that you can talk to 100 different people who have 100 different strategies and each one of those strategies could be correct because the right strategy is very much dependent on you as an individual person, what your goals are, what your risk appetite is, and all these different elements that go into why you decided to invest in real estate in the first place.
So I think a lot of it comes down to that. But to Ash’s point, I think if you do want to tap into it, there’s probably some math that you can look into to see, okay, what amount actually makes sense for me to pull out? Am I actually going to increase my cashflow by doing this or am I going to decrease my cashflow if I take a 3% interest rate and refinance it to a 6%, but I get a hundred thousand dollars in capital to go buy another deal, am I actually ending out on top at the end or am I maybe making less in cashflow on an annual basis? But then you can factor in the appreciation of the other deals. So there’s a lot of different ways you can look at it. I think my strong recommendation would just be to evaluate all of those levers that you’re pulling to make sure that at the end you’re still getting closer to the goal that you have of why you invested in real estate to begin with.

Ashley:
Yeah, and I think that’s a great point too, is looking at what works for you. And I definitely don’t like being over leverage. So this property, the comparable show that it’s probably worth 150,000, but I’m at the 30,000 balance that’s due on the loan plus another 50 that’s still leaving me like 70,000 in equity left in the property where someone else would say, why would you leave that in there if you’re going to refinance, pull out the full amount and use that money to build your portfolio scale, things like that. But it’s actually more important for me, even if I have slower growth to be under leveraged and to have more equity in my properties so that anything ever did happen, I have options available to me with that equity.

Tony:
Alright guys, we’re going to take our final break here, but when we come back we’re going to talk about how to take down a really solid deal when you maybe don’t have enough funds to do it. So we’ll be right back afterward from today’s show sponsors. Alright guys, welcome back. Alright guys, here’s our last question for today also comes from the BiggerPockets forms. And the question is, so the issue for me has always been about not having enough money. I recently had my uncle reach out to me because he heard I’m getting into real estate and he wants to invest and is willing to partner up with me as he owns multiple businesses. At first I figured why not do section eight houses, but I don’t think he would want to put 20 K into a single family home and only cashflow 500, which would be 250 every month.
So I figured commercial real estate would make more sense. I’m new, but also a quick learner. It’s easy to learn when it’s fun to learn different ways about real estate. I’ve always heard of commercial and the different types of it, but I just don’t know which one would be best and especially where to look and how to find the best ones. I’ve looked at correct and LoopNet, but the numbers are horrible. On most deals I’ve looked at if somebody can guide me or point me to a direction so I can find something to take it to my uncle and start this journey. Alright, so first let say, I mean congratulations for you on having someone in your family reach out and say, Hey, I’ve heard that you’ve been thinking about real estate. Let’s do this together. I’ve got all the capital. I think that’s for a lot of folks listening, their dream is to have someone just reach out to ’em and say, Hey, let’s do this together.
But it sounds like in some way, shape or form, you’ve been talking about wanting to do this. You said, Hey, I’ve heard that you’re getting into real estate, so kudos to you on that. Now, I think that when we talk about partnerships, there’s a lot of different ways that we can approach this. You said part of your draw into commercial real estate simply that there can be more cashflow on any given deal, which is true, but it’s also probably more capital. So you could have four single family homes or maybe four, five single family homes or one five unit multifamily and the capital required to take those deals down could be roughly the same, right? So don’t think about it so much as one being better than the other because I mean you’ll still need capital in either deal, it’s just are we going to spread that capital out across multiple deals?
Are we going to dump all that capital into one deal? So if your only true motivation is you think that there’ll be more cash on the commercial deal, it’s true, but it’ll probably also require maybe a little bit more capital as well. And maybe in some situations you would be better off buying five section eight houses where you live as opposed to buying one multifamily property. So just something to consider. There’s the other point Ash on finding deals, but I guess I just want to get your take first. Do you think that the logic behind why this person’s looking at makes sense or would you give him any feedback there?

Ashley:
I think they need to look at other elements of investing in residential like section eight compared to commercial, just them thinking that they’re going to get a better return or more cashflow. Since he says he doesn’t think his uncle would only want two 50, which you put in 20 K, you get 50, that’s what, 15% cash on cash return?

Tony:
Yeah, that’s pretty good.

Ashley:
I mean, yeah, that’s not bad, especially since, okay, it’s a single family home, you’re one tenant managing one tenant. I think really look at the pros and cons of each strategy and I think look more at what you are capable of and really understanding the full thing besides just the return. And I think once you figure out which asset class is better for you and fits your goals and what you’re capable of, then I think you can get more into the nitty gritty of analyzing the deals and looking at the numbers and then only buy a property within that strategy that fits what you’re looking for. So for example, for a commercial, you have a vacancy. A lot of times commercial properties are a lot harder to fill than just a single family home to find a tenant, like if your commercial property is retail or a restaurant or even just office space.
So I think understanding that, and if you have commercial space, you have an operating business most likely in that where I used to manage a couple commercial properties and if the HVAC system goes down or the plow driver doesn’t show up or something and they can’t get customers in and their customers don’t have AC running when they’re doing their business, I think that that’s more urgent and can be more of a problem to you than if it’s a residential customer who puts in their maintenance request saying their AC isn’t working today. You can make that where I think. So I think just really understanding the two different management styles it takes for each of those properties. And if you’re going to hire out management, there are commercial property managers and there are residential property managers. And I think making sure that you have somebody in your area that does one or the other depending on what strategy you decide on because they’re definitely not the same management.
And I think that should be a big thing you should look at when deciding between the two, especially if you’re going to manage yourself. I’m trying to think if there’s anything else to look at, but also look at the vacancy of single family homes and commercial property in your area. Like what actually does rent out better? Look at the rental rates, look at the demand. Are there people actively searching? So for the commercial property, you could go to local real estate agents that do commercial property only and ask, do you have clients that are looking for commercial properties in these areas to lease to put their business in? Things like that too.

Tony:
Ash, I couldn’t agree more. I definitely think that aligning your skillset with the strategy is one of the most important things. And I think the final piece I’ll comment on is just the actual deal finding people always kind of PPO on crec and LoopNet, but we bought our very first commercial property right off of Krey and it took some time to negotiate with them. There was a lot of back and forth and it had been listed for a while, so we maybe caught them at the right time. But I think it’s a great place to start building connections with brokers and just continue to follow up with those folks even after you find that first deal because maybe when they get another deal, you can be one of the first folks they reach out to. So I wouldn’t just necessarily negate or say that all the deals on correct scene LoopNet are no good because I’ve met tons of folks who have bought right off of those platforms.
I’ve personally done it myself. It’s just a matter of being consistent and actually picking up the phone and talking to folks and building that relationships with those brokers so that you can be one of the folks they think about calling as more deals come across their desk. And then I guess the last thing I’d say is just make sure you’re underwriting is solid as well. Underwriting commercial properties, because there’s a wide range, is going to be very different How you underwrite a hotel, that process is different than a mixed use building, which is different than self storage, which is different than light industrial. You’ve got to make sure that you understand how to really underwrite these properties so that your projections are accurate because both sides of the coin are dangerous. If you over project, you end up buying a deal that maybe isn’t going to pencil out and if you end up project, you end up buying nothing because all the deals look bad. So making sure that you’re truly educated on what the correct underwriting process looks like.

Ashley:
Thank you guys so much for listening to this episode of Rookie Reply. I’m Ashley. He’s Tony, and we’ll see you guys on the next one.