Rookie Reply: Preparing for a Market Crash, Ending Leases, & Building Teams

Let's get your questions answered. I'm Ashley Care, and I'm here with Tony J. Robinson.

And welcome to the Real Estate Rookie Podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today we're going back into the BiggerPockets forums to get all of your questions answered. Now, guys, if you're listening to this podcast, you should also be in the BiggerPockets forums because that is the place to go to get quick answers to all of your most pressing questions. Now, in today's Rookie reply, we're going to be talking about how to build a real estate team for your investing portfolio. Whether or not there's a real estate crash coming, a tenant who terminates at least after eight days on how to handle that, and what is the absolute best exit strategy to pay partners on a deal.

Yeah. So, Tony, I'm in the general real estate discussions in the Bigger Pockets forum, so I wanted to start here and just pick one of these questions to start with.

Yeah. So I've actually got one from Carlo here, and he asks, I'm curious how people here built their teams. Was it just through the biggerpockets resources like agent find referrals? What were some of the questions you asked to be able to determine if this person was someone you'd actually want to work with? Thank you in advance. And, well, I guess maybe first let's define who should be on someone's team as they're just getting started. So for our rookies that are out there, Ashley, what are some of the the folks that should be adding to their team as they look to get started?

Well, first of all, there's tremendous resources on BiggerPockets. So if you go to BiggerPockets.com teams, you can find all the different team members that you need and how to find them in your market. So it's definite shortcut. So highly recommend connecting there. But for the team members that you do need, let's start with a real estate agent or a wholesaler, somebody who's going to help you find a deal. Okay. Then the next you're going to need your lender. If you're using financing, maybe you're using hard money, whatever it may be. If you're using some kind of financing, you need that lender to be able to close on the deal. The next is, what is your strategy? Are you going to be doing a rehab on the property? Then you're going to need a contractor. If you're going to be managing the property, whether short term, midterm, long term rental, you're going to need a property manager for the property or if you're going to self manage, then you take on that role. Or if you know you are handy, maybe you're going to take on the role of the contractor too. But you should still understand the key components of people that you do need on your team. And then also in some states to close, you do need an attorney to actually do the closing for you. So you can add an attorney then maybe even a title company onto there too. If you're in a non attorney estate.

There's a lot of different ways you can go about finding all of these people. But honestly I think Carlo hit on an amazing place to start for all of these. Right, so biggerpockets like you said, or was it biggerpockets.com team?

Yeah, teams, teams.

Right. And that'll get you in touch with agents, lenders. I think BP just launched their property manager finder as well. So there's a lot of different folks you can reach out to just through BP directly. But say, say that you've maybe tapped out those resources and for whatever reason you can't find someone. I do believe the second best option would be going after referrals. So if there are investors that you know either in your own backyard or in whatever market it is that you're focused on, I would lean into those folks to say, hey, who should I be working with? Right. And usually investors, they know agents, they know lenders, they know folks. Like if you ask me for folks in the markets that I invest in, I can give you a good list of people to go talk to. And I'm sure if I wanted to go into Buffalo and you know, find a good agent or a lender, Ashley could point me to someone in that direction as well. So I think there's an incredible amount of value in going after referrals from existing real estate investors.

Yeah, or even like I started out with just a referral from my parents. My first real estate agent was my parents friend and a family friend and she, you know, has never invested, never had a property, but I still use her to this day for, you know, as my real estate agent. So there are definitely resources right. Within your network that maybe you don't even realize. Like I'm pretty sure I probably didn't even know she was a real estate agent until I started looking for a property to buy. So once again that goes back to telling everyone and anyone what you are trying to do.

I think one other place to go for referrals as well. Because say maybe you don't, maybe you don't know anyone yet who's investing in real estate in your market because you're super brand new, which is totally fine. I would say going to local Facebook group is a great place. Right? There's most markets have some sort of Facebook group for investors. And if you go on there and just search for the word lender agent, people may have posted there or just go in there and post and say, hey, you know, my name's Tony. I'm, I'm looking for my first deal and I'm looking for a good referral on an agent or a lender or contract, whoever it may be, and so reaches out to you. But I think local Facebook groups are a really great place to go.

Yeah, and kind of the last part of this question was what are the questions you can ask to be able to determine if this person is a good fit for you to work with? And I think a great idea is to kind of give the person a task, but very subtly as to can you send me more information on that? And I think the follow up and the communication that happens after that initial phone call or that initial conversation will tell a lot about the person. So maybe you met the person face to face and you're, maybe you're at a showing and you say, could you actually send me the comparables for that property? How quickly and timely are they getting that over to you? Do they even send it to you or just, you know, brush you aside and you're not that important to them as a client, you know, or even a lender. Could you send me like an example of what interest rates are at today if I purchase a house for 500,000, you know, like if I close today, what would they be? Could you email that over to me? I just would like to look at it or your different types of loan products. So I think that is definitely a telltale sign as to how you know, quick they are to respond to you and to communicate with you that they take the time to actually do that. Because if someone doesn't really care that much about you as a client, then it's not going to be a priority for them to send you that information or to get it to you.

Yeah, I love that as giving, giving them some, some micro commitments to try and keep before you jump into the, jump into the big one. I think one question that I do usually like to ask as well is just trying to get a sense of how often they work with real estate investors. And again the question isn't do you work with real estate investors? Because everyone's answer to that will be yes. But it's like if you're talking to an agent, say well how many transactions did you close on last year? And they'll say X. And I say okay, well of those, how many were real estate investors? And that's how you'll really get a sense of what percentage of their business is coming from folks like you who are looking to do this as an investment as opposed to first time home buyers because that buy box and that strategy is very different.

The last thing I'll kind of add to this piece as to kind of finding, you know, team members is also not only how quickly they communicate to you and you know, but how long you get a well with them too. But also think about what is important to you. Why do you need this team member? Okay, I've refused to get my real estate license. I just don't want to sell houses. I don't want to have to show the houses I'm selling. I don't want to have to do the paperwork. I don't want to fill in a contract that is important to me. That and the real estate agent will do that for me. But the biggest thing is how timely they can get me into a property.

Awesome guys. Well like, stay tuned because in a moment here we're going to discuss a tenant who terminated their lease after eight days of moving in and whether or not a crash is coming for the real estate market. So stay tuned. But first we're going to take a quick break to hear a word from our show sponsors.

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All right guys, welcome back. So Ash, how about you? What question sticks out to you from the forums?

So I'm looking in the general landlording discussion ones and Brendan writes, hello all, I had my first tenant sign a 12 month lease agreement on my property in Alabama on July 1st. So congratulations. She has already paid rent and the security deposit, but is requesting to terminate the lease after eight days because her mother passed away. She works for her mother's business and needs to move back home. I have read that my tenant is responsible for paying the rent until a new tenant is found. What should I do with the security deposit? Are there any other charges or legalities I should know of? Okay, so the first thing you have to do is go back to your lease agreement. What does the lease say? So I'm thinking he said, I have read that my tenant is responsible for paying the rent until a new tenant is found. Which is very common in lease agreements to have that clause in there, which is a great one, but you have to be proactive. So usually there is law in your state stating that you have to proactively list and solicit new applicants into your property. You can just let it sit for the remainder of the lease and say, oh sorry, you don't have a new tenant yet. So in this question too, I had seen you asked about the security deposit. So we do refund the security deposit because we don't want to say and this used to be in the lease agreements where we would say you forfeit your security deposit because then that gives them no reason to care about the state of the unit when they leave. If they already know they're forfeiting their security deposit. Really depends on what your lease, lease agreement says. So if it doesn't say anything in your lease agreement that you will retain the security deposit, then yes, you are obligated to return the security deposit. Unless there are damages, of course, but then you can continue, continue to charge them. But here's one thing I wouldn't do is I wouldn't. If, you know, say the apartment becomes vacant for, you know, it's vacant one month and they owe you one extra month's rent until you got a new tenant in place. I would not refund their security deposit until they paid for that one month rent too, because or else you may never see them again and they'll never pay that, that extra month.

I guess, let me, let me ask, well, I guess two questions, right? And I don't know the answer to this. Maybe you can educate me, actually, but say Brendan doesn't have any language in his lease about early termination. What then takes precedence? Is it just, hey, we're going to make something up on the fly or, or what. What happens in that situation? And I, I know you don't know for Alabama, but say that that was the case in, in New York. Like what, what would happen?

Yeah, Honestly, I don't know if there's like an exact specific law, but I would believe that you are in a contract, you were in a lease agreement and you could take them to civil court and give that, put a judgment in for, you know, the time that they haven't paid. So, but also think about it too, as to like, if they move out and they stop paying and they still have, you know, nine months left on their lease, you would, you know, they've vacated whatever. You can go and place a judgment against them for the money owed, but you would have to wait until the 12 months is up. The judge would probably ask to show that the apartment was vacant during that time and then you could get a judgment against them because they broke their contract. Whatever.

I have done a judgment against people before. I've never, I think twice. I've never seen a dime.

Well, it sounds like Brendan, like what Ashley said, go back to your lease first, see what you stipulated in that lease. And then if there is no language, I guess maybe now you've got the ability to, you know, make a decision on what you want to do from there. But I do like your, your idea, Ash, of just saying, hey, it's a flat two Months. And I'm assuming, did you go with that number because you. You feel confident that most of your units, you can re rent within that time frame.

It was more because the standard had always been one extra month's rent. That was the time for us. And then the security deposit retained, like you just forfeited it. So it. It was really just because that was how it's always been. So they just. Instead of doing the scare deposit, it's two months.

So you said this last unit that was like nine days or something like that. I mean, is that typical for you? Like, if someone does need to vacate earlier, are you usually renting it, like, pretty quickly?

Yes, we're renting so fast that people are getting pissed because they'll schedule showing and then we cancel their showing because it's already rented. But usually move in. Dates are. Most people are moving in the first of the month or around that they're. So like, it really depends on the unit. If the unit. If we can show the unit before the person is moving out because it's in great condition, then we can line them up pretty back to back. But if we need some time to do, you know, patch of pain or do some things to it, then we don't show it until it's done. So that's where, you know, like, maybe we'll take a week to kind of do those things, then we start showings right away, and then, you know, we'll get someone in. So I would say like 30 days max is what our vacancy is. What if we have to do some renovations to it? Yeah, yeah.

So too much of more than cover, whatever that. That missed time is.

Yeah, yeah. If you guys love talking real estate like we do, head over to the Bigger Pockets forums. This is where I was able to triple my real estate portfolio because I found the Bigger Pockets forums and I was able to connect and network with other investors, ask questions and answer questions. It also made me realize, like, wow, I actually know some things about real estate. So head on over to the forums, ask your questions, and we may pick yours to be on the show. If you're loving this episode, please hit the follow button on your favorite podcast platform so you're notified of new shows. And it gives us a higher ranking so we can reach more people in the real estate world. Okay, Tony, back to the BiggerPockets forums. You want to go into the markets and trends discussion?

Yeah, I do. I actually see a good question here from Nate, and he says, is a massive real estate crash on the horizon? Experts are divided. But what do you think? Are there warning signs suggesting caution for potential buyers and investors? Nate, I think you, you, you hit on a really important point in your question is that there are a lot of divided folks on this topic. But I think what's, what's maybe more important is defining. What do you mean when you say massive real estate crash? So different assets are being affected in different ways and different assets in different locations across the country are being impacted in different ways. Like there, there are some markets where maybe multifamily is seeing rents come down. Office obviously is being hit pretty hard in a lot of places right now, but things like light industrial, you know, small warehouses and distribution centers, those are doing incredibly well. So it really varies on, on the ass class and the location. But I, I think what Nate is alluding to here with this question is are we going to see something like what we saw in 2008 where, you know, there's a bunch of people underwater, massive sell off and this big correction in the actual value of the homes. And this is my take, and I'm curious to hear what you think, Ash. But, but my take is that we will not see anything similar to what we saw in 2008. And the biggest reason why is because a, you know, the lending practices have changed tremendously. Like we're not seeing these no DOC loans or people can go in and like, you know, fog up a mirror and get approved for $1 million mortgage. Like that's not happening anymore. And folks just have way more equity today than what they had in 2008 as well. So even if people were forced to sell for whatever reason, if you bought, you know, pre Covid, which a lot of people did, or pre 2021 even, you've got a lot of equity right now built up in your home so you can still sell and, and be profitable. So I think the things that drove the market crash for real estate in 2008, those same things are happening today in 2024.

So on the real estate rookie boot camp, we had Dave Meyer on yesterday and such a wealth of information. He's one of the hosts of on the Market podcast with bigger pockets. And just I'm so enlightened by him every time I learn so much. But he was talking, talking about, you know, a lot of people have this misconception that when there's a recession that it will affect the housing market and cause a crash. And he said that's not the scenario. Like there's, they're not correlated actually. And so he said that you know, understanding the difference that if there is a recession, that that doesn't mean that the housing market will crash. And so there seems to be more of a recession than actual. He didn't say this, but from what I've seen and what I've heard is that more of a recession trend than actually having a real estate crash on the horizon. But a big impact of this if what will happen is based on the election as to who will be elected president because different tax policies and different laws that will be enacted will impact everything else. So for example, if, you know, interest rates are brought down, then inflation will increase and vice versa. So there's all these economic factors that will come into play based on the policy. So I think the political play will make a big impact on what actually happens with the market. But I agree with you, Tony. I don't see a massive real estate crash. I think different, like you said, different asset classes will be affected. I see all the time headlines about multifamily syndicator, you know, getting their property foreclosed on or they're not making payments to their investors and they're not being honest. There's, if you go on the biggerpockets forums, you'll find all this juicy gossip of, of what's happening in these syndications that people invested in. So I, I definitely agree it will depend on the, the asset class for sure.

I guess the question isn't should I be investing today? But it's how do I adapt my strategy so that it makes sense to invest today.

So I think that's a great point to bring up, I think, about what strategy you're doing. So not only what asset class, but what strategy. If you're doing a flip and there is a market crash, that's where you're in big trouble. Or if you're doing a burr and you're planning on refinancing and there's a big crash and now, you know, all the comps are not what you thought they were going to be and you can't refinance for as much as you thought you're going to be able to. So that's definitely where it can affect you more is. But if you're going to sell the property, that's where you can get into trouble. But if you're planning on holding this property for 10, 20, 30 years, you're going to have mortgage pay down. You're probably going to have, you know, at least a little appreciation. And yes, there will be capital improvements, repairs and expenses that come up for the property along the way. But if you don't need this to sell the property, what do you care about what the comps are doing and what other properties around you are doing? So you know, if you buy a property three years later there's a market crash and your property isn't worth what it was then if you don't need to sell it, it doesn't matter. Ride the market out and keep holding your property for the next 10 years. And if you look at the historical, you know, history of, you know, property value, they tend to increase even, you know, if there are ups and downs. Like even, you know, you look at the historical chart, you'll see like, yeah, there's dips, you know, 2008 or whatever. But if you bought that property 30 years before 2008, like that is still going to be worth more than what you bought it for the 30 year priors, even when there was that, that market crash. So looking at the data can kind of give you that sense of security. But I think that's the great thing about buying hold but also understanding that if there is a market crash, there's an affordability problem where if you do have the nicest, the luxury town homes that you're renting out, that you're going to have a really slim tenant pool because people won't have the discretionary income they did. And that's where you can get into trouble is if you're not in that affordability bubble. I would say.

And that's why honestly, even for me I should like have, you know, I've been thinking about like if we, if we ever did dip our toes back into the world and I think at one point we will of like traditional long term rentals. I would really want to focus on affordable housing of some sort because I feel like that's where the, the biggest need is. And I don't know if it's necessarily doing Section 8 or something like that, but even if it's like, you know, I'm only going to do room like rent by the room type, long term rentals because folks can get into the places that you know, are typically more expensive but at a fraction of the cost. Right. So what does that look like and how can you kind of build that into your business model to, to be a little bit more, you know, I don't, I don't think there's any asset classes recession proof. But how do you, how do you kind of build that up to be maybe more recession resistant?

Right.

Okay, so we're going to take a short ad break, but when we get back, our next question is going to be what is the best exit strateg strategy to pay back partners on the deal?

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So Ash, I'm looking at the BRRRR discussions and here's a question from Kieran. Kieran says, so my parents are buying my first fixer upper for me. All cash in their name. Now we've created a contract that states I have to pay them back within two years via a refi to get it out of their name and into mine. What would be the best way to go about this HELOC cash out or any other strategies? What is a good exit strategy?

I would ask your parents if they want to be the bank and they want to make interest on you and do some kind of seller financing. It would technically be seller financing but if they want to be your private money lender and ask if they want to actually make payments because I don't think he's making payments right now. Right? He has two years.

It doesn't say so he has to refi.

So I would first throw out that option and say mom, dad, what if instead of just paying you back the cash, what if I paid you this lump sum now of maybe the next few years you save up 20 grand or whatever and you say I'll pay this 20 grand and and then I will pay you monthly payments at 5% interest over the next 15 years or something like that, you might as well throw it out there and see what they say. If they say no, then. Okay, moving on. But the best way I think to go about this would be to do a refinance. So cash out refinance because you'll get the best interest rate and you'll get the lowest payment by doing that. If you go and get a HELOC on the property, you're going to maybe have a fixed rate for like sometimes they'll do an introductory rate for, for the first six months your interest rate's only 3% or whatever but then it's variable so you don't know exactly what it's going to be. You're going to be paying interest only on the loan and then you can pay whatever you want for extra principal. But your interest, your monthly payment will be lower if you're just paying the interest, but then you won't have any principal pay down. So I would say cash out refinance. The downside to that is that you're actually going to have to pay closing costs where on a HELOC you usually don't have to pay any closing costs. Those are covered with the heloc. Tony, what's your experience with both of those?

Yeah, I would agree with you, Ash, that I think doing a refinance would probably be the best exit strategy. But Karen, you just want to make sure that you have enough room between what your all in cost is for this property and you didn't. You said pay. So I guess one piece of data that we're missing here is that you, you said, Karen, that you have to pay them back within two years. But are you paying them back with interest or is it, are you literally just repaying them back the, the principal amount? But, but either way, whatever amount it is, you're borrowing from your parents.

Actually Tony, we have to stop there because I reread the question and his parents are buying it in their name. So it's not even in his name yet. So wouldn't be a cash out refinance, it would be a purchase of the property.

So then that, that changes things, Karen, and here's, here's what I would instruct you to do. I would instead have you purchase the property in your name. Let your parents be the, the lenders on records. That way there's a note between you and your parents for the amount of the purchase because like Ashley said, if they own the property, you can't do a cash out refinance with their property. Right. Like you, you would just have to buy that property from them. At which point you're gonna have to put up a down payment of some sort for a lender to approve that purchase. But if you own the property originally and your parents are just listed as the lender now you can do a cash out refinance to pay them off. That's a great catch actually. I think just logistically from a paperwork perspective, it's important how you put this deal together.

Yeah, I mean the other thing is, is like you could have your parents quit, claim, deed it into your name and then you know, they sell it to you for a dollar or whatever it is. Or you know, they say that you are selling it to them for like you said, putting that they sold it and they're holding the note on it.

But you could, and then you can go to the bank and do the cash out refinance. But you have to make sure you have your lender lined up because a lot of lenders have a seasoning period where after you purchase the property in order to do a refinance you will need a seasoning period. So that could be six months, that could be a year. So make sure you understand those little details before you have the property transferred into your name. So if you are going to transfer it and not do a, a purchase from them, then I would, you know, make sure that you know what the seasoning period is with the bank that you want to use and that you're going to be able to go ahead and refinance right away too.

Yeah. So two, two super important things. I personally would have your parent parents act as the lender, as your private money lender on that initial purchase. So your name is on the title but they're listed as lien holders against that property with the loan that they gave you. And then second, I would just make sure that your all in cost or your purchase price, any rehab is less than about 75%, maybe even 70% of whatever you project that property to be worth afterwards. So two super important things to really nail nail that exit strategy.

Unless you're planning on like house hacking this property, you're going to live in it. Then I would go and look for like an FHA loan product or something like that. Where you're going, you're going to only have to pay 5% down and you're going to be able to finance 95% or even 3 1/2% put down and finance more of it, the property that way and probably get a really good interest rate too. That's if you're house hacking going to live in it for a year. Yeah.

If he did go that route, he could also maybe get a credit if his parents do buy it, then he could get a credit from his parents at closing to cover whatever his down payment and closing costs is. So then he could technically still get into it for zero. Right.

And you know what, that's true. Like his parents could sell it to him for whatever they wanted to, but then they would also pay the capital gains on whatever that amount is on that property too, because it's not their primary residence. So honestly, your parents should go and talk to their CPA as to how they should handle that sale or that transfer to you of that property. And hopefully their CPA would say that the best tax strategy is for them to seller finance it to you and then you can just make payments to.

Them and that's the easiest way.

Yeah, but it's all serious. That is a huge tax advantage when you are selling a property and don't wanna pay this capital gains. Okay, well if you guys have a question you'd like to ask, make sure you head over to the BiggerPockets forums. You can find that at biggerpockets.com forums and submit your question and we may pick it to be on the show. I'm Ashley and he's Tony. Thank you so much for listening and we'll see you on the next episode.

This BiggerPockets podcast is produced by Daniel Zarate, edited by Exodus Media, copywriting by Calico Content.

I'm Ashley, he's Tony and you have been listening to Real Estate Rookie.

And if you want your questions answered on the show, go to biggerpockets.com refy.

Okay, we're going to shift gears for a minute to cover something important, especially for new landlords. The shows often talk about getting stuck doing everything ourselves and the cost of sweat equity. The key question is simple. Is my time better spent elsewhere? I use a tool that cuts down on a lot of landlord hassles. And the wild part is it's just $12 a month. It handles rental screenings, rent collection, maintenance requests and accounting all in one platform via a mobile app or desktop. It saves me time in tenant communication and keeps me organized for tax season. It's called Rent Ready and you can sign up for a six month plan for just $1 with promo code BP2025. Pro users get it for free because we believe in it. Just sign in through your pro account to get started. Rentready helps ensure on time rent with auto reminders, keeps communication professional and lets you post listings to multiple sites. Check it out at rentready.com biggerpockets that's rent R-E-DI.com biggerpockets.