304: Rookie Reply: Don't Have 20% Down? Here's How to Fund Your Next Investment

This is Real estate rookie episode 304. So funding the 20 to 30% of the purchase price, depending where you go to actually get this loan on the property. So if you're going to a bank and you're going to put a traditional mortgage, they're going to want to see that the cash came from you and then you're not borrowing it. But if you go to a hard money lender, you can potentially buy, borrow that 20 to 30% that you're putting down from a private money lender. My name is Ashley Kerr and I am here with my co host, Tony Robinson.

And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And today we are back with a rookie reply. And we've got a ton of really good, really good questions to get into today, huh?

Yes, yes. Before we get into the questions though, Tony and I actually got to hang out together and we love it when we do. And I feel like it's becoming more common than not. We get to get to see each other.

So two times in the span of like two and a half weeks, I think we hung out in Denver and then like a week later we were back together in, in Arizona.

Yeah, we went to the Limitless Expo. Super cool conference ties in really real estate finances and then other types of investing such as gas and oil, gold. All, all different things. But it was really cool to network with different people. Tony hosted an amazing panel talking about branding yourself. And then also I did a partnership with Rent Ready where we did a, a talk on property management and software that you can use.

Yeah, it was a, it was a really cool event. And our friend Taro Yarber, who's been a guest on the Real Estate podcast a few times, he hosted the Vend along with Ken McElroy, who you guys may know from like the rich dad, poor dad ecosystem, written a bunch of books for, for that brand. Robert Kiyosaki was there, so a lot of folks got to, got to meet him in person. And overall, just an amazing lineup of speakers. And you know, Ash, I love, I love the events because there, there were quite a few sessions that I sat in just to like gain knowledge. Like there was a session where Ken talked about the economy. That was a super, super cool thing for me to hear Thatch win. Some of you guys may know Thatch from Instagram. He's always a guy that says, don't buy this, buy this, you know, but I I sat in on, on Thatch's session and a, just a super inspiring story, but B, just a really cool peek into the mind of a guy that's been doing this for 30 years. You know, I'm, I'm still a new investor, right. Got my first deal in 2019. So for me in almost four years, to be able to sit in a room with guys that have been doing it for 30, you know, there's, there's so much that I can pick up and that I can learn. So I really, really enjoyed this conference.

Yeah. And then before that conference, I went to Britt Aaronson's at Investor Girl, Brit on Instagram and AJ Osborne. Their conference, the, the Circle Live, and it was all real estate with residential and commercial real estate all kind of tied together and a lot smaller, more intimate event. I think Limitless had like 1500 people and this one maybe had around 100. So it was really cool. You got to meet almost every single person there over the several days, and it was really neat. Daryl came with me to that event and Mikey Taylor was speaking and he was also on the panel that Tony was on. And I was on a panel with him at this conference. And so Mikey Taylor is a phenomenal skateboarder and he's also on city council in California. But Daryl like was a big skateboarder, you know, back in his, his prime, his day. And so he always looked up to Mikey Taylor and we went to lunch with him the whole, the one day and I think Daryl maybe said like three words the whole time. He's like, I think I was like starstruck.

But he was just really cool down to earth, really fun to get to know over. Basically we him and there was probably like 10 other investors that did both conferences. So over the course of a week we all got to hang out and get to know each other pretty well.

Did you fly on, on, on AJ's plane? Did you get to take the, the private plane from Idaho?

No, I didn't because I had to be there a day early before he was there. Yeah. Yeah.

So for those of you that don't know AJ Osborne is, is all of our idols, he's got a, a private plane and Ashley was trying to bum a ride from, from Idaho down to, to Arizona, but looks like it didn't, didn't pan out.

Well the last time I did, I did record a music video getting off the plane with my friends.

So maybe that's why he's like, never again. These, these first time private plane riding people not knowing how to act in public, embarrassing me in front of all my plane owning friends.

There's probably, I think of that time Brandon Turner got like the, the behind the scenes, you know, role of that. And so there's probably the security cameras at the airstrip too that have another view of this all going on.

You guys are on Influencers in the wild. Didn't even, didn't even know. But any, any events coming up, Ash, are you're excited about.

Well, Tony and I might be seeing each other again soon. We might be doing some live PODC out in la. So Tony's neck of the woods. It would be actually my first time ever in Los Angeles. I didn't know if you know that.

Long overdue. Well, we'll show you a good time while you're out here though. You know, Sarah and I were actually supposed to be hosting our next summit in July, but just the thought of like a, you know, that's like such a big thing to put together. And with the baby coming, we were like, I don't know if we want to commit to hosting 400 people and in another event. So we're doing our ride along events again in July. Um, so July 14th through the 15th, that one will be coming up. I don't know when this episode comes out, but if you guys want to learn more about that, just over to strride along.com, but it's a super small event, 40 people. Um, so we're excited for that one because it's such an intimate group and like our, our first one, it was our first event ever that we did in early, early last year, March of last year. And it's so crazy actually because like the of those 40 people, like they've become best friends. I see them like traveling together, I see them doing deals together. Um, one of them was working with us for a brief period of time. So it's just really cool to kind of put those small event on. And then obviously BPCON is coming up in, in October and for all of you that are listening, you definitely need to be a bpcon. It always, it, it always sells out. Like as long as I've been involved with bigger pockets, it's sold out every single year. And even for me, like I tried to get someone from my staff a ticket last year and the team of BP was like, Tony, we are literally at capacity. We can't let anyone else in. So if you guys want to, want to get some more details on BPCON, head over to biggerpockets.com forward/events or just search BPCON 2023. I'm sure it'll pop up. But an amazing event, always a stacked lineup of speakers, amazing networking opportunities. And it's in Orlando. Like, you know, do a little Disney trip, get a little universal in, make it a, make it a family get together.

Yeah, I been joking, but I maybe I'll actually do this is buy a bunch of BP tickets and then when all of my friends text in a group text, you know, three weeks before the event, hey, anyone got an extra ticket? They sold out. I can say sure for double the original price and make some money off it. Yeah, yeah, yeah. BV tickets. Yeah, but you're right about the, the right about the value. Like think about how many people you have met and have maintained relationships with just from bpcon and then even the people that you do know and maybe you just know them from social media. You interact with them on social media. This is your chance to actually get to know them face to face and kind of rebuild that relationship. Some of my best friends are real estate investors that I've met at masterminds or conferences. But every time we get together it's like we haven't skipped a beat and like it's so cool to build those kind of relationships with other like minded investors.

All right, so before we keep rolling, just want to give a quick shout out to someone about the username of. It just says Tuesday. Maybe that's their favorite day of the week. But they they titled this review Fantastic advice. I'm learning so much from you guys. The big old exclamation mark. So sweet, short and to the point. But for all of our rookies that are listening, if you haven't yet left us an honest rating and review, please do. It only takes a few minutes, but it means the world to me and Ashley and the rest of the rookie community. The more reviews we get, the more folks we can reach. And the more folks we can reach, the more folks we can help, which is what we're all about here at the Ricky podcast. So do us a favor, take a few minutes and leave that honest rating and review.

One thing that I saw this quote the other day, that I actually saw so many people share it the same day. And it was something along the lines of the like, when you're at the bottom, everyone's your competition, but when you're at the top, everyone is your collaboration. And when you're just saying that, like about the rookie reviews, like help us reach other people to become, to learn about real estate investing and, you know, reach their. Why all those things? Because that's so true. The more people that become real estate investors, the more they're not your competition, they are your collaboration. That's another private money lender, that's another wholesaler to source you a deal. Yeah. So there's so many different ways that in real estate investing that having more people involved gives you more options for, you know, making those connections and to learn from others and, and things like that. So I, I thought that quote was really interesting and I wish I knew how to give it credit, who to give it credit to, but it was just like shared. So many people wrote it on their own Instagram and I don't know.

Actually, I'll take credit for it. That's fine. I mean, I know, yeah, I'll take credit.

You're at the bottom competition. You're at the top collaboration. Tony J. Robinson.

Thank you for getting the J in there. I appreciate that.

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Okay, you guys, let's get into some questions. Okay, today's first question is from Javon Jones. Question for both new and seasoned investors. When you got your first flip or Burr property, how did you fund the 20 to 30% of the purchase price and the monthly interest payments? Okay, so let's, in this scenario, I think he's thinking about, okay, you're putting a down payment on an investment property, but then he's talking about the monthly payment. So maybe this is more towards you're getting hard money where you're putting down a down payment on that hard money and then paying interest only while you're doing the rehab before you refinance it. Is that kind of your understanding, Tony, of this scenario?

Yeah, I think that's how I'm, I'm taking it also.

So there's no income coming in during this time period of doing his first flip or the Burr property. So he's wondering how do you cover the, the holding cost in general? We can kind of make it even more specific too as to interest payments, holding costs such as interest or I'm sorry, not interest, insurance payments on the property, your property taxes, your utilities, for the electric, all things like that, that you have to pay for the property while you're, you're doing the rehab on it. So this is a great question. And so funding the 20 to 30% of the purchase price, depending where you go to actually get this loan on the property. So if you're going to a bank and you're going to put a traditional mortgage, they're going to want to see that the cash came from you and then you're not borrowing it. But if you go to a hard money lender, you can potentially borrow that 20 to 30% that you're putting down from a private money lender. And then as far as covering those expenses, that is where you make sure that you have enough in reserves to float the property during those rehab costs or that's kind of added in into the private money that you're borrowing from a private money lender if you have a heloc. So if you have equity in your current residence or another property, you could get a line of credit and you could also use that line of credit to cover those holding costs and covered the down payment to or just one of them.

All right, so we just finished episode 303 with Spencer Carpenter. And in episode 303, Spencer had a very similar situation to you, Javon, where he leveraged both a mix of hard money, private money, and his own cash to fund his flips. And I think that's a very common approach where it's like, hey, I found an amazing deal and I'm going to bring in, you know, uncle, aunt, friend, whoever, private money lender to cover the down payments and the holding cost. I'll do all the hard work of managing the property and managing the project and getting it listed and, you know, negotiating and all that stuff. So there's definitely, I think, opportunities, Javon, for you to use other people's capital to fund not only the 80% of the rehab and the purchase price, but also the other 20% that they want you to bring. And I'll go back to Spencer's episode because I know what a lot of folks might be thinking is, well, what if I don't know anyone that has the 20 to 30% that I need? It's a very common situation for rookie investors to be in where maybe they don't personally know anyone in their network that has ten, twenty, thirty, a hundred thousand dollars to help fund these deals. And if that's the case, focus on building your network. And that's why episode 303 with Spencer was so impactful. Because Spencer, as a first time investor with no network friends that had a bunch of capital, he was able to launch a meetup in his local town. And through that meetup, he found both. You know, he found wholesalers, he found hard money lenders, he found private money lenders. So just building your network and focusing on trying to find ways to provide value to other real estate folks or people that are interested in real estate is a great way for you to, to find opportunities to, to get that 20% funded, Javon.

Okay, our next question is from Peter Bieva, his question is, there's somebody in my network who is independently wealthy from real estate, and I am thinking about approaching them, asking to work with me as a private lender. Tony, I think he's talking about you. They live in another part of the country, but are highly experienced in real estate, so they have the tools and support to validate any data or assumptions I give them. My question for those with more experiences. What kind of professional relationship do you have with your personal private lenders? Did you simply approach them with. Would you be interested to look at the economics of a deal I'm currently working on as you try to pull them into the deal? What kind of DD package do you prepare before approaching them? Does it include a financial model projecting cash flows through the refinancing period? Do you pull comps to show arv? Do you wait until you have a specific target property in mind, or do you reach out well in advance even before you found the perfect house for your investment? If anyone has any examples of an investment property that they use to get private money, I'd appreciate you sharing. This is a great example. And a lot of investors will do like a private money lender packet. So they kind of have this packet template put together and then they'll plug in the property and put in information about it. Other people just go to a private money somebody and say, like, hey, I got this deal. And the private money money lender's like, okay, don't even tell me more. Let me write you a check. Here it is. In my experience, I've worked with a couple private money lenders, but it's all been people that I knew personally where I didn't have to go ahead and put kind of any information together to actually pitch the deal. We just already had that kind of working relationship. Um, somebody I want to do give a shout out is at lattes and leases solely. She actually does give out her private money lender packet, so you can just reach out to her on Instagram. And I think once in a while she'll do like a zoom call to actually walk people through it and you know what she puts in there. If you're thinking of reaching out to people that you know are outside of your network or are in your network and just, you don't feel comfortable or don't think that they. You could just sell them on this opportunity without providing them this packet.

Private money is such a powerful tool because there are so many folks out there who have a desire to invest in real estate but don't have the time or ability to do it themselves. So if you can step in to give them a passive vehicle where they can just dump their money into something and get back a, you know, a double digit return that's backed by real estate, that's an enticing offer for a lot of people. So I'm excited to dive into this. But first, Ash, I got to give you some, some props because I honestly thought you weren't going to say Peter's last name because it was, it's a little spicy, but, but you pulled it out. So kudos to you on that one. But, but back to Peter's question.

So it's the energy drink I just had that's giving me confidence.

So, you know, there's a, there's a couple questions here. Right? So, so Peter's first part of the question is what kind of professional relationship do you have with your private money lender? So let's, let's first as, as your relationship with your private money lenders grow and evolve, the comfort level between the two of you changes as well. So that first deal, maybe there is a ton of, I won't say proof, maybe there's a big due diligence packet that you have to give to them not only about the deal, but about yourself. And you're kind of selling them not just on, on that specific point property, but on who you are as a person. So that, that initial deal probably takes a little bit more time, but as you do a successful deal and 1 turns to 2 and 2 turns to 5, now there's this track record there that you've built and most folks that I know, myself included, like once you've done a few deals with the private money lender, instead of you having to jump through all these hoops for the next deal, sometimes it's just a text or a quick email to say, hey, I got another one. Are you, are you interested? And that's how kind of we are with, with, with a few of our private money lenders as well. So my, my first point, Peter, is that that relationship will evolve over time in terms of what to include. Ash talked about this a little bit, but yeah, I think give them, give them the breakdown of, of why you think this is a good deal. So what is your business plan with this property? Right? Like what is the current condition and what condition are you trying to get it to? How much capital do you believe you'll need to fund that? How much margin, how much buffer are you giving yourself? So if you think that the job is going to cost $60,000. Are you only asking for $60,000 for rehab or are you giving yourself maybe a buffer there in case there's some, some just for some fudge factor. So walking through what you, what you're planning to do with the property, and I typically do like to include comps if I'm talking to a private money lender for the first time. So that way they understand, hey, I'm not making this number up on what I think it's going to be worth. But here are two or three comps that are pretty solid and pretty comp comparable to the one that I'm working on. The last thing that I think is super important is educate them on the process, educate them on the process of being a private money lender. Because if, if they've sounds like this guy's a little bit more experienced, maybe he doesn't need it as much. But say you're working with someone who's never dealt with private money before, they have the capital, but they've never actually done this. It's on you to educate them on what the steps are that the two of you will go through to secure and make this deal happen. And the steps are going to kind of vary from state to state. What Ashley has to do in, in New York is slightly different from what I'm able to do in, in California. But understand what it is in your state. I can tell you for us in California, when we're doing a flip here, you know, we, we educate our private money lenders on the documents that we use. So there's always a mortgage security document and there's always a promissory note. The mortgage security document basically ties that lender to the property and says, hey, this property person, you know, Tony Robinson, has a lien against this property for this amount. And the promissory note says Tony promises to pay back this private money lender this amount every single month. Right? So we, we get those paperwork, we get that paperwork filed with the county so it's clean, it's on the up and up. So say I tried to go and sell, I couldn't even technically sell that property without that private money lender getting paid back first. Because title's going to see that that deed that was required recorded, that has that private money lender's name on it. So we, we make sure that we take steps to, to kind of safeguard both ourselves and our private money lender. And then we always do everything through escrow and title for ourselves. And I know some folks that are super Cool. With their private money lenders where it's just kind of like a, hey, I'm, I'm going to wire the money directly to Tony and maybe you're just going to pay me every quarter. So you can, you can set it up however you want to. But typically for us, if we're doing on a deal by deal transaction and rerun everything through title and escrow as well. So I think that's the kind of 30,000 foot view, Peter, of what you should be looking at when you're working with a private money lender.

Tony, that was an excellent breakdown and example. Really a lot of value there. Tony has obviously dealt with a lot of private money lenders. That's how you funded most of your flips, correct?

Every single one, yeah. Let me just add one other thing on the private money side. So my. There's two little nuances here that I think are important when you're dealing with private money. One of these actually came from my escrow officer, but one of the things that I didn't include initially was an amortization schedule. So I would give them the note and I would give them the mortgage security document, but I wouldn't give them the amortization schedule. And it was actually my escrow officer that called it out and said, hey, Tony, you should really give your lenders this document. That way there's, there's extreme clarity on how much interest they're accruing every single month. So that way when you get to the end of your note, maybe it's not the full 12 months, say you're six months into this deal before they even sign the docs, your lender knows exactly how much they're going to get on a month by month basis. So now every single lender that I work with, we give them the deed of trust, we give them the promissory note, and then we also give them the amortization schedule. The second thing to include, and this actually saved us on one of our recent flips that didn't pan out how we wanted it to, but it's having some kind of clause in there around what happens if you need to extend beyond the initial term. And for us, we have that our initial term is 12 months always. But if we have to extend beyond that, we have the ability to do so. However, we have to give our lenders an additional half percent on their interest. So if their note was originally at 10%, it converts to a 10.5% note. Those are two things that have been helpful for us as we've had to navigate the whole private money field with.

The doing the amortization schedule. That is great for seller financing, too. When you're submitting an offer is to include the amortization schedule to actually show the buyer or the seller as to how much interest they'll be making.

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Actually get some sleep okay, so our next question is from Lawrence Briggs. So if you guys remember, Lawrence was actually a mentee on this podcast, so he's been on a couple times. I did a shout out on my Instagram account today letting everyone know we're doing this rookie reply and I got a bunch of questions and our producer picked this question and the question is, is what is the best way to increase the volume of offers to submit? This is a great question and when I first read it my immediate knee jerk reaction was defining your criteria. So even today I was thinking, I was like I haven't really just looked at the MLS lately as like in general, you know, Darrell's set up to receive the automatic emails for, you know, our criteria. But like sometimes I just want to go on and browse. All of a sudden, 45 minutes later, you know, I'm still looking at random properties that don't even fit my criteria. I'm just sucked in, wasting time and so really having that, you know, it's called your criteria, your buy box. It's called so many different things and everyone tries to coin it as to this is my term that I created for it. But the best way to increase the volume of offers to submit is first defining your criteria so you're not wasting time looking at deals that don't have anything to do with what you are trying to do. So that way you can only focus on the deals that you'll actually need offers on. So when you take away all those other properties and even giving your time to them, you'll have more time to actually submit offers. So in Lawrence's question, it's the best way to increase the volume of offers to submit. And my first advice is to eliminate all of the exterior noise of all the other properties that are coming onto your plate. Find a way to build that criteria of what you actually want and then find a way to filter it. So have like, kind of like a initial checklist of like, okay, I can look at a property and these are the fourth or five things that I can see right away from a listing or however you're getting your property sent to you. And I'll know right away if it doesn't meet these four boxes, it's not even worth opening the email or it's not even worth reading the description of the property and I can go ahead and knock it out. So like, an example of that would be like the market, Is it even in one of the zip codes that you search in? Is it a single family, a duplex, a triplex, whatever your criteria is, does it fit that? And already if it, if it's not, if you're looking for duplexes or maybe triplexes, small, multifamily. And this is a single family with a barn and you know, used to be used as a dairy farm. But it, it looks super cool on the outside, like, like it's not even worth wasting your time even looking into that property any further. So that would be my advice is you'll be able to submit more offers because you'll be more focused on the deals that are coming in and then also have a template. So when I want to submit an offer, I on the MLS at least, or even if it's off market for the MLS I have, I will send my real estate agent, here's the property want to make an offer on. And then I have a list and you can kind of save this template so that every time you go to your agent to submit an offer, they don't have to respond with, oh, what do you want for your earnest money? And things you forget. Like this seems like such an easy thing to send them the information of what you want to offer. But it's also so easy to forget something. So just save time and just hassle save some kind of templates like, okay, if I want to submit an offer, I need to know the purchase price, how I'm funding the deal, Is it a cash offer? Is it conventional financing? The do. What's my earnest money deposit? What's the name? Is it. My name is an LLC name that's going on the contract, what's the mailing address of the LLC or your address that you're putting onto the contract, when do you want to close on the property, all these different things. And you can just ask your agent, say, hey, if I'm submitting an offer, what do you need from Me to actually submit that offer and then every time you can just fill out those blanks and send it to them. The then for off market deals is having a sample letter of intent or the same thing. You're just filling in the blanks, you're putting in the, the property address, the seller's name, everything like that. So as far as the side of submitting the offers, have those templates so you can just boom, boom boom boom boom, fill them in, send them out.

Ash, that was, that was fantastic. Love the buy box piece. Also love that the template right about like hey let me send this to my, my agent. So I have the same stuff. I didn't really systematize it but I guess I had the same process where anytime I would send a new offer to my agent, like you know, sometimes I'll just send like you know, 10 offers at one time. I would just go back to my last email ad, the last email I sent to my agent. All the stuff about like, you know, days of due diligence, like all that stuff was the same and I would just swap out the purchase price and the, the address. So I love that approach. I, I think the other thing to answer Lawrence's question about increasing volume of offers to submit is I, I guess it's twofold. First is increasing your deal flow, right? Like if you can have, if you can look at more deals, that's going to give you more opportunities to analyze and then eventually submit offers. And I think so many people, especially when they're first starting out, they almost rely excuse exclusively on properties that they can find on the mls. But if you can start networking with wholesalers, if you have the ability to go direct to seller because you're good at that, if you want to go door knocking, if you want to go driving for dollars, like there are so many ways to increase the top of funnel activities to help you identify a property to submit an offer on. So if you feel that there aren't enough properties in your specific market that are listed, then try and go off market to find some additional opportunities as well. Because I think that's probably a source of deal flow that most new investors wait too long to tap into and there's a good chance you get a better deal if you go that way anyway and then the second piece and this kind of ties into what you're saying Ashley, but it's about honing your investing analysis skills. You know we, I have students in my coaching program and one of the first things I always tell them when they come into the program is, look, if you want to get your first deal, the very first task that I assign to them is I want you to analyze 100 deals in the next 90 days. And it always sounds like a big number. But when you have this goal of man, 100 properties in 90 days, it triggers something inside of you. First, it's going to hustle, like make you hustle to really find or more deals to analyze. But second, you're going to get so good at analyzing deals in your chosen market that by the time you get to like property, the first look, the first five are going to be like a slog, right? You're going to be like, oh my God, like all this information I need to pull. But by the time you get to like 10, you're moving a little bit faster. By the time you get to 25, if you've analyzed 25 deals in the same market, you are almost going to be an expert on analyzing deals in that area. So I love that exercise of just like forcing yourself to, to analyze a bunch of deals in a short period of time because it allows you to get better at quickly making offers. So ties into what Ashley said about the buy box. But once you have your buy box, really focus in on trying to analyze as many deals as you can and that's how you get to the point where you're submitting more offers.

Okay, our next question is from Andre Bernal. Hey guys, I'm just wondering if anybody can could share their experience about transitioning from small multifamily, duplex or triplex to five units or more. What would you think are the differences in terms of capex, maintaining legalities, etc. I think it would help me in the group that have have that information with experienced investors. Thank you. Okay, so the first thing that comes to mind for me is as far as the legalities of it, that some states have different laws depending on how many units are within a property or a building or not even just a building. So it could be an apartment complex where maybe there's five buildings on it. But if it is one, if it has, for New York state at least if it has more than six units, the security deposits have to be held in an escrow account where the resident is earning interest on their security deposit. So it's actually tied to their Social Security number and they are, when they move out, if they get their security deposit back, they also get their interest that they made over the four years that they lived at the property. So that is the first thing that I think of is that there may be some laws regarding the security deposits depending on how many units you have. And there could be laws on other things. So another example for New York City State is that if you have say you have a property with six units again and they're all the same unit, same floor plan, same finishes, and you have tenants in there that are paying you know, $600 a month and then for some reason and then you someone moves out, you rent it to someone else for 650. Okay, the small increase you're keeping up with the market. But a month later you rent another unit that is exactly the same for 800. You can't do that if you've rented the the unit recently for one price and then charged someone else a lot more. If the units are similar in like kind, you have to kind of establish that base across the the apartment complex. If, if you go ahead and remodel and add upgrades, then you can go ahead and charge more for one unit than the other one because it is different and has the upgrades in the property. So there's just different little things like that that you may want to kind of factor in. Another thing too I want to mention is that with small multifamily a lot of people house hack with that, with house hacking you have a lot more leeway as to how who you are renting to. So maybe you're house hacking a duplex right now. You get to basically pick your tenant that's living next to you without violating fair housing laws because you live there. If you go and buy a five unit now and you're not living there, you have to comply with fair housing laws. So as far as legalities, those are the things that came to mind as far as cap X and maintaining the property in a building that is larger. There may be common areas. So you know, a duplex usually have two exterior entrances. There's might be a small little common area hallway, but as you get to the larger units in one building there may be a laundry room. So now maybe you're taking care of you know, coin operated washer and dryers. You're having to keep that area clean. So you're having to take care of the, the lawn care, the snow removal, where maybe at the duplex there's you know, one tenant takes care of it or something like that, which still could be the case in a larger unit. But as. And another thing to think about too is that now instead of two people having to live under one roof, you now have five people living under one Roof and one of the things that I dislike the most about property management was mediating between tenants when there was issues. So that's just another headache that that can come up. As far as cap X I, I'm, I still would keep like the same amount in reserves per unit on the property. The thing is that the lar obviously the larger your building is, the more expensive it is going to be to put a new roof on and things like that. So you're, if you have, you know, two duplexes and a single family, maybe one duplex will need a roof. And it may not be likely that all three of your properties with the five units will need roofs at the same time. But if you have one five unit building then most likely that you're going to have to redo the whole roof. You don't want to do half the roof and not the other roof. So capex expenses will be larger than if you had a smaller multifamily. I can't really think of anything else off the top of my head.

All right, so I've never, I've never purchased multifamily. Every long term rental I have was a single family unit. But I am looking to get into commercial real estate on the hospitality side. And part of my motivation behind doing that is I want more control on the valuation of the properties that I purchase. I can give you an example of when this worked against me in the single family space. So we recently had a flip that you know, we spent a bunch of money getting this property rehabbed and we had it under contract for like I don't know, 575 I think is what we had it in contract for. And the property ended up appraising for less than $500,000. The income and the returns at 575 were still good, right, because it was a high income producing short term rental that we were selling. But because the value of a single family residence is based on comparable sales, there have been a few kind of lowball offers that sellers accepted while we were kind of negotiating this deal. So we went from a property that was worth and a great return at 575 to 1 that a bank wouldn't lend more than $500,000 on the commercial side gives you a benefit because your, your value of your property is not just necessarily tied to what other properties are selling for but your, your net operating income plays a big role as well. And I was doing some quick back of the napkin mat. So if I'm off here, someone please send me a DM and let me know, don't beat me up in the reviews or anything, but let's say that you buy a property for $100,000 at a 10, a 10 cap, right? So your cap rate is 10%. That means you're going to be generating $10,000 a year in net operating income. Okay? You buy for a hundred thousand dollars 10 cap, that means $10,000 a year in net operating income. Let's say that you've got five units and you're able to increase rents by maybe 50 bucks per unit. Now you're, that's an additional $3,000 that goes to your NOI. So your NOI goes from $10,000 to $13,000 at a 10 cap. Even though you just increase the rents by 3,000 per year, the value of your property increases by $30,000. So you go from $100,000 is what you bought it at. You increase the rents by $50 per per door. Now your property's worth $130,000 at a cap rate. So even if nothing else happened, right? Who cares what the other people are selling for? If that 10 cap holds true, you and you just do a $50 increase per unit over the course of a year, you just add an additional $30,000 in value to your property. And to me that's the power of commercial real estate where you're able to drive the value up by actions that you take. And as long as you're able to manage the property and increase revenues, you have a very strong ability to increase the value of that property as well. So that's, that's one of the reasons I'm super excited to transition to, into the commercial side of things.

That's such a great point, Tony, as you brought up as to the commercial lending versus residential lending. And another thing too is that with the, as you get into commercial lending, banks may require you to hold reserves with them. So if you're buying large enough, they will require you to keep in their bank. That and you can't touch this, this is reserves that you are to keep on hand with them. And I was just talking to an investor over the weekend at a conference and he said that he negotiated with his bank that instead of the money just be kept in a general savings account, that he actually had them put it into a one year CD with no penalty if they had to tap into the reserves. And he said now I'm making, I think it was like 5% interest instead of, you know, one and a half percent interest in the savings account on that money for those reserves. So I think there's so many different as far as just the residential versus commercial lending side of things. There's a lot of differences that can be beneficial but also can make it harder for you or you know, it definitely depends on your circumstance but just different things to watch out for as far as the banking side of things. One nice thing though is with commercial they don't ask you for your all your grandmother's information or Tony, what was that 27 charge on your bank saving.

Okay, this week I want to give a shout out to Serena Norris. She is at Serena S E R e N A dot Claire C L A I R e on Instagram and Serena is does a ton of real estate. She's flipped houses, she's done buy and hold. But she is a master integrator and so if you need help with your systems and processes, give her a follow. She's, you know, does amazing things with telling somebody this is your vision, this is what you want to do. Here's the exact steps to to kind of implement that. So give her a follow on Instagram. Feel free to send her a dm. Ask her your questions about systems and processes. I've gotten a ton of value from being her friend, but also when we're at conferences picking her brain. So make sure you give@serena.claire a follow. Okay you guys, thank you so much for listening to this week's Rookie Reply. Don't forget to leave us an honest rating and review on your favorite podcast platform. Make sure you are subscribed to the real estate rookie YouTube channel. Along with Tony and I. There's a bunch of amazing other collaborators on there that post videos. It's not just the podcast on there so make sure you hit subscribe so you do not miss them. And lastly, we have the Real Estate Rookie Facebook group that is continuously growing every single day. It's filled with experienced investors and rookie investors. If you have a question, it will get answered almost immediately. You'll get tons of opinions and advice from all kinds of different investors. So make sure you join the group. That's Real Estate Rookie on Facebook. Well thank you guys so much for listening to this week's Rookie reply. I'm Ashley at Wealth from Rentals and he's Tony at Tony J. Robinson and we will be back on Wednesday with a guest.

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