If a Rental Doesn’t Pass This “Test,” Don’t Buy It

If you’re about to buy your first rental property, or are buying another, hear this. In today’s market, investors are growing more nervous before making a down payment on a property. That could be tens, or even hundreds of thousands of dollars you’ve worked for, and putting it in the wrong rental could set you back years to financial freedom. But if it’s the right property, you could fast-track your independence. So, how do you know which one is which? In this episode, Henry and I are sharing the “stress-tests” to perform before you buy a rental—if it doesn’t pass, we won’t buy the property, no matter how good the deal “looks”. But that’s not all, we’re answering other questions from the BiggerPockets Forums about how much money you should have in the bank before you BRRRR (buy, rehab, rent, refinance, repeat), how to get around the hardest part of managing rental properties, and whether lowering rent is worth it for a great tenant (not so straightforward). In This Episode We Cover The “stress tests” we perform before we buy any rental property (you should, too) Feeling nervous before buying your first rental? Here’s why you’re not alone Lowering rent for a long-term tenant: Is sacrificing cash flow worth it for peace of mind? How much money should you have before you BRRRR (buy, rehab, rent, refinance, repeat) an investment property? And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠h⁠⁠t⁠t⁠ps://www⁠.biggerpockets.com/blog/real-estate-1283. Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[email protected]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Dave Meyer?

  If you are about to buy your first rental property or about to pick up another, I need you to stop and watch this. In today's market, investors are rightfully more nervous before dropping a down payment. Down payments can be tens or even hundreds of thousands of dollars that you've worked hard for. And if you put it into the wrong property, it could set you back years. But of course, if you put it into the right property, you could fast track your financial independence. So how do you know which one is which? In this episode, Henry and I are sharing these stress tests we run before buying any rental. If a property doesn't pass, we walk away, no matter how good the deal looks on paper.

• 0:42Dave Meyer?

  So if you are nervous to put up that next down payment, this episode is going to help. Whether we give you the green light to relax and go out and buy that property, or give you the red light to stop you from buying a very bad deal. Imagine just how much that peace of mind is worth.

• 1:03Dave Meyer?

  What's up, everyone? I'm Dave Meyer, here with my co-host, Henry Washington. Today, we're dipping into the BiggerPockets forums to answer a few of your questions about real estate investing. Let's jump right in to the first question. All right, Henry, this is a good question. Very curious your opinion on this one. It comes from Kate Thomas, who says, "We're looking at spending 100 grand out of pocket to buy a 3-2 single-family home as a long-term rental in Woodstock." She also says nerves are setting in because that's a lot of money. It is.

• 1:38Henry Washington?

  Yeah, it is.

• 1:39Dave Meyer?

  But she wants to know, is this how everyone feels? Or is this my intuition saying, "Play it safe. Leave the money in the stock market. We've wanted this for years." What do you think?

• 1:50Henry Washington?

  I mean, to give a true opinion on this, I would definitely need some more information. But on its surface, to answer her question, is this the way you always feel? Yeah.

• 2:02Dave Meyer?

  Yes.

• 2:05Henry Washington?

  I've done hundreds of deals and I still get nervous when I buy them, when I either use them. Even when I don't use money of my own to buy them, I still get nervous. I still think, oh, should I do this? I don't know. Like to this day. So yeah, that's pretty normal.

• 2:20Dave Meyer?

  Do you think there are people who don't? I get that way every single time.

• 2:24Henry Washington?

  There's probably people who don't. I don't know. I'm just not that guy. I still get nervous.

• 2:28Dave Meyer?

  You're writing a check for six figures. That's a lot of money. Like you're right about this, Kate. Like it is a lot of money. The one part of this, though, I would challenge is saying that playing it safe in the stock market is necessarily safer than real estate investing. Like, I don't know if that's true.

• 2:46Henry Washington?

  Yeah.

• 2:46Dave Meyer?

  Let's presume for the moment, Kate, that you're buying the deal right, that it's cash flowing, that you have cash reserves, that you're buying at a good price in a good location. If that's the case, then I think you can make an argument that real estate is safer than the stock market. Depending on who you are. I mean, I think the stock market is very highly valued and I think that real estate risk of going to zero, pretty darn low. You know, like if you really think about how much money you can lose in a situation like this, buying a single family home, let's presume you're using fixed rate debt.

• 3:24Dave Meyer?

  Like, I wouldn't say that's more risky than the stock market, but I do understand feeling a little anxious about it.

• 3:32Henry Washington?

  The only way to really lose buying a property like this is if you sell it before it becomes profitable, right? So as long as you can hold on to this for 10 years at a minimum, like you, you'll look like a genius at some point, I'm sure. Even with modest appreciation each year. Plus, you're putting a hundred thousand dollars down, which should, I assume, help with increasing the cash flow and hopefully putting money into your pocket. And you're buying yourself equity and, you know, hopefully you're buying with some sort of a discount and walking into a little bit of equity as well. So, I mean, it's a safe-ish place to put your money, given a lot of the assumptions you and I are deciding to make about this deal.

• 4:14Dave Meyer?

  Yeah, we're assuming that you listen to this podcast, Kate, and are going to buy this right. I do think, though, like, one of the reasons why this happens so much. Where you get really nervous is because it's the normal thing is just to stick it in the stock market. Like if you go talk to your friends or whomever, you're probably your financial advisor. They're like, just stick it in the stock market. That's safer. It's less common to interact with other investors who write these kinds of checks and can tell you that this is actually normal. It's normal to feel anxious and that it's relatively safe. So my advice, Kate, is if you are nervous about this, go talk to other investors.

• 4:56Dave Meyer?

  Like you're clearly doing that on the forums. That's a great place to do it in BiggerPockets. But also come to BPCon, right? Like go to the BiggerPockets conference and interact with people who are in the same shoes as you. Go to a local REA event and talk to other people about this. I think that's where you gain confidence in this industry where your average friend, your average cousin is not doing this. And so it can feel riskier than it actually is because it's less common.

• 5:24Henry Washington?

  All you're doing is you're taking that $100,000 out of one account and you're putting it into another account. And that account in this case is, you know, equity in this property. And if you look back over history, home values typically go up in price. You know, there's been some times where they go down in value, but for the most part, they go up in value. And so the expectation that this $100,000 is going to disappear and turn into nothing is pretty unlikely.

• 5:53Dave Meyer?

  Yes.

• 5:54Henry Washington?

  It's gonna be a little illiquid now. You won't just be able to get access to it when you want to. And with you putting so much down, it helps you to be able to get access to some of that or all of that money back when you need to via a home equity line of credit, or a sale, or a refinance, cash out refi. It gives you some options. So I don't think it's as scary as it may feel, taking the $100,000 and putting it into this property, but it's still gonna be there. It'll just be a little less liquid.

• 6:23Dave Meyer?

  Yep. That's a really good point. I doubt you're putting 3% down if you're putting 100 grand down, right? You're probably putting 25% down. That really insulates you. It protects you a lot in that kind of deal. Makes it a lot less risky. Before we move on to our other questions though, just wanted to shout out, I did mention BPCon because it is on my mind and we were sending out speaker invites. Henry, have you accepted?

• 6:45Henry Washington?

  Hey, I got mine and I signed my contract. So come see me speaking at BPCon.

• 6:52Dave Meyer?

  Yeah, it's gonna be a lot of fun. If you guys have never been, BPCon is the best time. I look forward to it every year. This year, October 2nd through 4th, you can get your tickets at biggerpockets.com/conference. It's in Orlando, Florida, so it's gonna be a lot of fun. Bring the whole family. Are you bringing your family?

• 7:09Henry Washington?

  Yeah, we're planning on bringing the family this time. Look, Orlando, last time we did it there, it was, I mean, that's arguably probably the most fun BPCon I've been to.

• 7:17Dave Meyer?

  It was literally the best party I've ever been to my whole life.

• 7:19Henry Washington?

  That was super fun. So excited to do that again. Last time in Orlando, you got to play golf though, and I didn't, so.

• 7:27Dave Meyer?

  All right, I'm gonna tell you a secret, that I contacted the golf course closest to the hotel to see if we could buy it out and do like a scramble with BiggerPockets members.

• 7:38Henry Washington?

  I'm so down.

• 7:38Dave Meyer?

  And it's not that expensive. Like, it is a reasonable thing that we could do. So, I guess it's up to our audience. Like, if you want to do this, if you want to go golf with me and Henry, and we'll find, I'll find other speakers to come to this too. If you want to do that, message me or Henry on Instagram. I'm at thedatadella, you're at thehenrywashington.

• 7:57Henry Washington?

  That's right.

• 7:58Dave Meyer?

  Message us and tell us that you want us to do this. If we can get like 50 people, we can definitely do this. It would be a great time.

• 8:04Henry Washington?

  Yes.

• 8:04Dave Meyer?

  Anyway, I digress. BPCon is a lot of fun. Let's move on to our next question. But if you want to golf, also tell us. We would love to golf with you.

• 8:12Henry Washington?

  I'm so down.

• 8:13Dave Meyer?

  Moving on, next question.

• 8:15Henry Washington?

  Our next question comes from Todd in Santa Barbara. Man, I love Santa Barbara. What an underrated city. We don't talk about Santa Barbara enough. I love that place. Todd says he started running every rental analysis through a "what if I'm wrong by 15%" filter. Oh, I like this.

• 8:30Dave Meyer?

  I like that.

• 8:31Henry Washington?

  If the deal still works with rents 15% below my estimate, it's worth pursuing. If it doesn't, I move on. It's a simple rule, but it's killed about 60% of the deals I was previously excited about. Painful, but probably safe. Me from a few disasters. What's your go to stress test before making an offer?

• 8:51Dave Meyer?

  I love it, Todd. Good for you.

• 8:53Henry Washington?

  Absolutely. But Dave and I have talked about this many times where basically in underwriting, we're trying to talk ourselves out of buying a property by underwriting so uber conservatively. It's funny because I have an acquisitions manager who helps me field my leads and, and talk to sellers and she'll call me sometimes and be like, hey, look at this deal. If you do this and you do that and you get this just right, you can make, you know, 30 grand. And I'm like, nah.

• 9:21Dave Meyer?

  Yeah, exactly.

• 9:22Henry Washington?

  Right? Like I'm leaving money on the table in deals because I just want them to pay me so much better than what maybe somebody else is willing to work for a deal. And I think it surprises her sometimes because she's like, you sure you don't want this one? Yeah, I'm pretty sure. We're going to leave that one on the table. I want doubles and triples right now. I'm kind of, I'm kind of leaving singles alone unless, unless there's some criteria that just make a lot of sense, unless the location is super amazing. And I'm okay pivoting my exit strategy to keep it if I need to. Other than that, like I just underwrite so conservatively that if the deal still makes sense, I'm like, I guess I gotta buy it.

• 10:03Dave Meyer?

  Yeah, exactly. That's the approach to have. And I think, I like what you said about wanting triples and doubles because then if you miss, if you miss on a triple, you're still getting a double, right? If you miss on a double, you're still getting a single. If you miss on a single, you're out. That's not good, right? Like you don't want to do that. So that's, that's a hundred percent why you just have to have high standards, especially right now because the, the market is not going to save you.

• 10:28Henry Washington?

  Yep.

• 10:29Dave Meyer?

  I think the rents stress test makes a lot of sense. I mostly stress sense vacancy. Like what if you made 20% less income? That's really what it comes down to, whether it comes from lower rent or higher vacancy. I don't really care, but like, what if your income goes down 20%? Very unlikely, right? Super unlikely. But what if? How bad of a situation would that be? I also pretty much always assume no appreciation. I'd bet 2% appreciation long-term, which is lower than the long-term average. So I'm very conservative about that. And then, you know, if I'm doing a BRRRR, just big contingencies in the, in the renovation process, both in timeline and budget. So I think those are the main things.

• 11:08Henry Washington?

  I think the other thing to consider on a BRRRR, to be conservative, is don't assume the lender will give you 75%.

• 11:16Dave Meyer?

  Oh, that's a good one. Yeah.

• 11:18Henry Washington?

  Assume a lower loan to value.

• 11:20Dave Meyer?

  Or won't appraise.

• 11:21Henry Washington?

  Or won't appraise.

• 11:21Dave Meyer?

  For what you think it's going to, yes, that's a very good one.

• 11:24Henry Washington?

  And then I'll talk about in terms of flips, how do I protect myself? So on the flip side, the things that I'm adjusting in my underwriting or being conservative about are the not fixed costs, right? Holding costs. Most people like to budget three months to renovate, a month or two to sell. I am adding an additional two to three months on top of my normal holding costs every deal I'm underwriting. So if I would typically underwrite it for six months, I'm doing it for eight to nine, just because some deals we list and they get three offers in two days. Some deals we list and they get three offers in six months. And sometimes there's no rhyme or reason, like I can't figure out why one versus the other. I'm stopped trying

• 12:07Henry Washington?

  to figure it out and I'm just underwriting it into the deal conservatively.

• 12:10Dave Meyer?

  Average it. Yeah, exactly.

• 12:12Henry Washington?

  The other thing that we are doing to protect ourselves in the underwriting is we are not underwriting to sell at max ARV.

• 12:23Dave Meyer?

  Yep.

• 12:23Henry Washington?

  We are underwriting to sell at mid ARV. And then we're still reevaluating when it's time to list the property and we're doing it very, very comp-specific. So that if I have comps and those comps are priced a certain way, I always want to be under what they're priced at. So that I force everyone who's looking in that market to come see my property because more eyeballs equals more offers. And so that's, those are the things.

• 12:55Henry Washington?

  That are protecting us in the underwriting.

• 12:56Dave Meyer?

  This is just a good philosophy with just like management in general. I think if you're working with on a flip or a burr or whatever, like the numbers you should be telling your team, your contractor, your agent, your property manager are the best case scenarios. Like that's what you want people to be shooting for. Internally, you have to know that there's a different number that still works, right? Like I think that's, you're not even being dishonest. Like you should say like, this is what I expect. I want to get 3,800 bucks a month. I want to sell this for $400,000. But you need to know, okay, if it sells for 370, we're going to be fine. Right? Like that, that cushion is super important.

• 13:33Henry Washington?

  Yep. And I believe we said this on a previous episode. It's not that underwriting conservatively is the hard part. The hard part is seeing when you underwrite conservatively, that the deal just barely doesn't meet your criteria and still walking away. That's the hard part. That's what you gotta be able to do. And that means sometimes you're leaving money on the table. Like I was, I was talking with the seller and I, those of you who know me know I make very honest offers. I don't, I'm, sellers know what I plan on making. That's part of how I make my offer. And so when I told the seller, she had a, a, a higher end house in a more expensive neighborhood, very desirable neighborhood.

• 14:14Henry Washington?

  But those properties take longer to sell. Buyers expect more to be done at a higher quality. And I just want to be paid for the rest that I take on. And so I told her, I was like, I just can't do this deal. There's not enough meat on the bone. And she was like, yeah, but you're still going to make 50 grand. And I was like, yeah, I can't do it.

• 14:33Dave Meyer?

  Yeah.

• 14:33Henry Washington?

  It just doesn't fit.

• 14:34Dave Meyer?

  Well, good question, Todd. And please let us know if you need more advice on your portfolio. Henry and I are willing to fly to Santa Barbara at your, at your expense and play golf with you.

• 14:45Henry Washington?

  And play golf with you and talk it over. Yeah.

• 14:50Dave Meyer?

  No, actually, good question, Todd. I do respect this idea. This makes a lot of sense.

• 14:55Henry Washington?

  All right. I'm curious your thoughts on the next question, but I'm gonna have to wait to hear those until after the break.

• 15:01Dave Meyer?

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• 15:35Henry Washington?

  Here's a strategy that most W2 employees have never heard of. Normally, if you want to write off a rental property against your regular income, you need real estate professional status. That means tracking hundreds of hours a year. Rent to Retirement just launched a program that skips all of that. It's called the STR loophole tenant placement program. Here's how it works. You buy one of Rent to Retirement's Class A new construction investment properties. You set up an Airbnb listing and self-manage it for the remainder of the year. Rent to Retirement then rents the home as a short-term rental to establish it as an STR for the year, no furnishing required, making this the easy button to save five or six figures in taxes this year. And because you're the sole manager, there's no hourly

• 16:20Henry Washington?

  minimum to meet. That lets you use a cost segregation study to accelerate the depreciation and potentially write off over $100,000 against your income, even on your first rental. Add in cash back up to 13% of the home price, which exceeds $60,000 on some properties. With this massive cash back incentives, investors are seeing total returns up to 126%. New construction, A-class properties, and inventory is limited. Learn more at biggerpockets.com/retirement or text REI to 33777. Again, text REI to 33777.

• 16:59Dave Meyer?

  I just booked a backpacking trip through Olympic National Park. Two nights out on the trail, no cell service, nothing to do but eat trail mix and stare at mountains I'll never get tired of. That's the whole appeal. But while I'm off grid, my place doesn't need to sit empty. I can list my space on Airbnb and make a little extra income while I'm away. And with Airbnb's co-host network, I could partner with a vetted local co-host to help take care of the details, from guest communications to onsite support, so I can fully unplug and enjoy my time out in the backcountry. If you've got upcoming travel plans, you can find a co-host at Airbnb.com/host.

• 17:42Speaker 02

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• 18:10Henry Washington?

  All right, we're back on the BiggerPockets Podcast, and Dave and I are going through forum questions. These are questions that you guys have asked in the BiggerPockets forums, and we are here to answer them. Dave, what you got for us?

• 18:23Dave Meyer?

  All right, next we have a question from a BiggerPockets community member named Eli, who asks, "I just turned 20 years old." Wow, forgotten what that feels like.

• 18:34Henry Washington?

  Right.

• 18:34Dave Meyer?

  "And I'm finished a half-gut remodel of my first home, which I recently moved into. I really fell in love with the whole process, and I'm very confident that this is what I want to do for my career. Anyway, I'm going to buy a distressed property around the 60 to 80K range, and most likely going with the BRRRR, and I'm just wondering how much cash reserves I should have? Any advice is greatly appreciated for someone just starting out." And by the way, Henry, we did some research. He is in Montpelier. I can't pronounce that. I took French for six years, I can't even say it. Anyway, Montpelier, Ohio, is where Eli is. That explains the 60 to 80K range for the BRRRR property. What's your advice for Eli?

• 19:19Henry Washington?

  If the property is already stabilized, I typically want to have between 10 to 15, maybe $20,000 on hand because if a roof needs replaced for some reason, right? That's typically the price point that that's going to fall in. That may be probably the most expensive repair, right? But that's for a property that's stabilized. Seeing as that this property is not stabilized, I think you need to have that on hand, right? What's it going to cost you for the most expensive repair? And then you need to have some cushion above and beyond your repair budget. So again, I'm making assumptions. I'm going to assume that your repair budget for this property is going to come in financed in with part of your loan because that's what most people do.

• 20:03Henry Washington?

  So I'm assuming you're not paying for the renovation out of your pocket. So what I would do is I would make sure that you've got enough to cover maybe 15 to 20%, 25% over your repair budget. Because if you've never done a repair on a property before, you've probably under budgeted it. It's probably going to take you a little longer than you expect. You want to be able to cover those overages. Typically, you're going to have to cover those overages out of your pocket. That's my pretty generic answer is 20 to 25% over your rehab budget and then another 10 grand ish to cover a very expensive repair if it comes up after you've got it as a rental property.

• 20:41Dave Meyer?

  I like the way that you frame that because there, you know, when we talk about cash reserves on the show, most of the time we're talking about the hold period when you're, when you're just owning and operating the rental property long-term. I usually, honestly, I just like estimate it to like 10 grand, something like that. Five to 10 grand, that usually covers most expenses. As you get larger, you can just, I sort of keep like a 30 grand buffer for like all of my rental property.

• 21:06Henry Washington?

  Exactly the same.

• 21:07Dave Meyer?

  You don't need 10 for every single property. You know, the 80 grand repair I just ate, I had to figure that one out. But most of the time, 30 covers it. So I think that's, that's totally fine. But I think what Henry's right about is in your situation, Eli, for this, like you're new, you're young, I'm going to make again the presumption, you don't have a lot of cash on hand. And you're looking at a distressed property. So I think 20% makes a lot of sense and maybe even higher.

• 21:39Henry Washington?

  The bigger the renovation, the more you should definitely have aside.

• 21:41Dave Meyer?

  Do you think percentage wise or like?

• 21:43Henry Washington?

  I mean, percentage, percentage wise is fine. Yeah. That's why I say 20% because if it's, I'm assuming this rehab is going to cost about as much as the home, maybe more.

• 21:51Dave Meyer?

  I agree. Right. Yeah. So I think if you're going to renovate it and think it's 60 grand renovation cost, I think you need, you said 20%, 12 grand.

• 22:00Henry Washington?

  Yeah.

• 22:00Dave Meyer?

  Yeah, that might not even be enough.

• 22:02Henry Washington?

  That might not be enough. You're right.

• 22:03Dave Meyer?

  15, 20 grand like.

• 22:05Henry Washington?

  You're probably right.

• 22:05Dave Meyer?

  Because then you also need a little bit of a contingency if it takes longer, right? Like not just your renovation costs, but like holding costs, especially when you're new to this. Like if an extra couple of months, holding the, eating the debt can be expensive. I'm looking at Montpellier, Ohio, not a lot for sale there. So I'm wondering what rent demand will be like. You might have vacancies there. So I would say 15, 20 grand on this one would be my estimate, but it really is art. Always, always err on the side of caution on these things. Always assume things are going to take longer. They're going to cost more. And then if they don't, that cash reserve, you get to use it for your next deal instead. Like that's the better situation.

• 22:49Henry Washington?

  Yep.

• 22:50Dave Meyer?

  All right, Henry, I got a question that I think every real estate investor is wondering about right now. It comes from Junice, a property manager in Fort Lauderdale, Florida. And the question, the title is, new here, what's the hardest part of managing your rentals recently?

• 23:11Dave Meyer?

  We might need a whole episode for this one, but Junice says, I currently manage 250 plus multifamily units. Wow. Handling leasing, maintenance, coordination and resident relations. From the management side, it's been interesting to see how differently things can play out depending on the systems in place or lack of them. Most of the time it's small inconsistencies that build up over time and turn into bigger issues. I'm really interested in learning how investors who self-manage are navigating things right now. What's been the most challenging part? Of managing your properties lately, tenant related, systems and processes, or something else, maybe all of the above. That's my own commentary, but what's your take on this, Henry?

• 23:52Henry Washington?

  Well, I haven't self managed in close to four years.

• 23:56Dave Meyer?

  Congratulations.

• 23:58Henry Washington?

  Thank you very much. Yes. Here is what I was struggling with. Again, it was several years ago, but this is the thing that was that I was struggling with. It was tenant turns in a timely fashion. And mind you, I had gotten to a point where at this time, I think I had about 65 ish. And a lot of the reason the turns were challenging is because I don't have in-house maintenance. And so I was using contractors to handle maintenance and turns. Plus I was also flipping houses. And so flipping houses took priority a lot of the time because so much more expensive for me to hustle and get those things done versus a lot of the times,

• 24:40Henry Washington?

  what the rent was going to be if I, you know, took an extra week to get a turn done. But what started to happen was this compounding effect, right? If you've got one tenant turn you're managing, that's easy. If you've got six or seven tenant turns that are all coming up within, you know, a week or so of each other, it just became too time consuming and tedious to manage all of the intricacies that go on with that. And so I had to a choice to make, right? It was either I find a company who can take on all of this for me and handle it more efficiently, or I have to hire somebody in-house who can focus solely on that thing.

• 25:18Dave Meyer?

  Yeah, tenant turns suck. No one likes doing that. It's not fun. You know, if the tenants did something wrong that you're compensate, you know, getting compensated to that.

• 25:27Henry Washington?

  Who's responsible for parts of the tenant turn, right?

• 25:29Dave Meyer?

  Exactly. Yeah, it's annoying. I agree. Yeah, it is. So I agree with that. I'll say like, I also stopped self managing six years ago, did it for 10 years though. So remember it actually fondly. I don't mind. I didn't mind doing it at the time. But I will say that right now, I think the hardest part of managing rentals is controlling expenses. And it's not that it can't be done. It's just so much shopping around. Like you just like, you can't trust anything anymore. I just feel like that's kind of where I'm at. Every quote just feels like you're getting kicked in the ribs. Like you're just like, what? I've never seen this in my life where I am literally seeing quotes now,

• 26:14Dave Meyer?

  two or three X times what the lowest quote will be. And I'm not talking like small things. Like I am sure you deal with this with flipping all the time. But like even in rental properties, this is getting crazy. Like redoing a bathroom now. It spans from $7,000 to $35,000. It's unbelievable. And it's like, I'm willing to do it. I obviously do it, but like,

• 26:38Henry Washington?

  It's so true.

• 26:39Dave Meyer?

  It just takes so much time and it's so annoying. And it's not even my time. It's like, I want to do it for the tenant. Like maybe there's something wrong. And then I have to spend three weeks getting quotes, before I can even start the work. Because I'm not paying $25,000 for you to go to Home Depot and get a Kohler toilet and replace it. Like, I'm sorry, I'm just not. Not Kohler, American Standard toilet and replace it.

• 27:04Henry Washington?

  There we go, baby. That's what I'm talking about.

• 27:06Dave Meyer?

  Yeah, exactly. You gotta go American Standard.

• 27:09Henry Washington?

  The difficult part about property management, even after you outsource it, is because

• 27:15Dave Meyer?

  Yes, exactly.

• 27:16Henry Washington?

  If you don't train your property managers and force them to get multiple bids, they're just gonna get one and it may be the most expensive one. And they're gonna go with it because they're trying to be efficient. But right now, I'm really pushing back. If it's over my not to exceed amount, then I need you to get three bids because some of these biz discrepancies are crazy.

• 27:38Dave Meyer?

  A hundred percent. I've been dealing that this is the managing the managers that I feel like I need to just kind of be a pain in the ass about. I'm like, you know, these are big projects. Like some of these are like full renovations of a unit. I got a quote for $35,000 for one of them. Called around, I found another one. It was like 26. I mean, nine grand for the same thing. These are cheap homes. Like those aren't expensive. Of units I'm talking about nine grand is a big difference like so I think that's the big thing and it's not just trades like insurance costs right now are the same way like you need to shop around on that lending obviously is a little bit you know if you're going conventional it's a little tighter band but even in the private money or the DSCR space things are really different so I think that's one of the most difficult but

• 28:23Dave Meyer?

  it's also the best use of time because you can save so much money when you actually think about it it's a couple of hours to save tens of thousands of dollars so that is well worth it I'm just being grumpy and I'm annoyed that I have to do it because you didn't have to do it like five years ago you didn't have to do this

• 28:42Henry Washington?

  Totally agree

• 28:43Dave Meyer?

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• 33:26Dave Meyer?

  Welcome back. Henry and I are answering the BiggerPockets community questions. Henry, what's our next question?

• 33:32Henry Washington?

  This question comes from David P. He says, "I have an excellent tenant that has lived in my property for the last four years. She called me earlier this week and said she and her husband are separated and she needs to start looking elsewhere. They were paying $4,500 a month for a large house here in Los Angeles, and she told me that her budget is now $3,800. I told her, "We can do $4,000 a month for a new one-year lease and then reevaluate later, and I was essentially breaking even on the property at $4,500 a month. So now I'll be slightly negative each month. Would you guys do the same to keep an excellent tenant?

• 34:14Henry Washington?

  A one-month vacancy will be almost the same as a one-year price reduction, so I figure it's better to keep someone who's been great this whole time."

• 34:22Dave Meyer?

  That's a tough question. This is a tough

• 34:24Henry Washington?

  This is a hard one.

• 34:25Dave Meyer?

  I would say philosophically, I would lower rent for a good tenant. On principle, this makes sense to me, the way that you're thinking this through. The thing that's holding me up about this particular situation is you're only breaking even and now you're taking a loss?

• 34:42Henry Washington?

  Yeah.

• 34:42Dave Meyer?

  Like that, that's a tough situation. Because David's also saying a one month vacancy would be almost the exact same as a one year price reduction. I don't know, it's more like a two month vacancy, right? You're taking 700 bucks a month off rent. That times 12 is $8,400 a year. That's basically two months of rent. So could you find a good tenant in less than two months? I would hope so. And I do really respect the idea that you're like, this is a good tenant, is a good person. I want to do that. It's the thing we always talk about on this show. You put yourself at a lot of risk if you're not cash flowing. And if you make this your default, like, how does it get better?

• 35:24Dave Meyer?

  Because you're basically investing into this tenant and saying, I'm going to keep this tenant indefinitely. And so you're just going to lose money indefinitely? Like, I, I don't really like that idea. If this was temporary, I would personally be able to live with that. Or if it was in a multifamily unit where it's like, okay, I might make a little less overall, but I could still cash flow the overall financial position of the portfolio is still good. Then I would be okay with it. But it's like, now I'm just going to have a drain on my own assets. Like, I don't, I don't like that.

• 35:57Henry Washington?

  I think it's fine to lower your rent a little bit to accommodate an excellent tenant for the right property. In this particular situation, I wouldn't do this. The things that concern me are putting yourself in the negative every month as a default. So what you're saying is if everything goes great and she pays her rent on time, you're still going to lose money. That's scary. The other part that scares me about this is this financial situation is new to her. And so we're hoping that she can afford the $3,800 a month rent. But it sounds like she just got into this situation herself. And so you don't really know. So if I was going to do this situation, I would definitely put her on a month to month

• 36:38Henry Washington?

  lease for a little while to see if she can continue to pay even that $3,800 a month. Do that consistently and then I might look to put her on something more long term, but I don't know that I would lock her in long term off the bat, just in case you need to end that lease so that you can really find somebody who can pay more closer to market if you need to. But in my opinion, it's just, it's just a little too risky if you're going to be losing money and you're not quite certain if her new financial situation is truly what she says it is.

• 37:10Dave Meyer?

  One of the things missing in the information here is like, what is market rent?

• 37:13Henry Washington?

  Yeah.

• 37:14Dave Meyer?

  Because David said 4,500 bucks for the last four years, like market rent might be 4,800 at this point, you know, like rents might be higher than that. And I am not one to say like you should be maximizing rent all the time, but if market rents are 48 and you're allowing it to go out for 38, that's $12,000 a year. You're just giving up and coming out of pocket to pay your mortgage on. Like I am sensitive to that, but I personally would not do it. I'd figured out a way to be flexible with this person and help them, you know, don't say you have to get out by this day, but figure out a way to help them transition to a place that they can afford. And in exchange for

• 37:54Dave Meyer?

  that, work with this person so that you can show the property while she's still living there and you don't have that one month of vacancy. Like I feel like this is one of those things you clearly, David, have your heart in it in the right place where you want to do the right thing. But like, I think you can do that in a way where you can put this person in a situation where she can comfortably pay because it's not right to put her in a situation she can't and where you can avoid vacancy and get market rents at the same time.

• 38:21Henry Washington?

  Yep.

• 38:22Dave Meyer?

  All right. Well, this was a lot of fun. Great questions today. I think we got some unique and interesting ones. So thanks for weighing in here. Before we go though, reminder, we found these questions on the BiggerPockets forum. So if you have real estate questions of your own, which you definitely do, go to biggerpockets.com/forums and get advice from more than 3 million members. It's totally free and we might even pick your question for a future community question episode of the BiggerPockets podcast. Thank you all so much for listening to this episode. I'm Dave Meyer. He's Henry Washington. We'll see y'all next time.

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