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Tony Robinson:
Hey, before we get into the show, I wanted to mention Bigger Pockets is hiring a full-time supervising producer for our podcast network. This is a remote position and a chance to work with an amazing team, if we do say so ourselves. We\u2019re looking for someone with at least a couple of years experience managing production teams and someone who will feel confident taking the lead when launching new podcasts. So, would you or someone you know be a great fit? You can find the full job description at biggerpockets.com\/jobs. Again, that\u2019s biggerpockets.com\/jobs to apply for our open podcast producer job. Now enjoy the show.<\/p>\n
Ashley Kehr:
This is Real Estate Rookie episode 150. My name is Ashley Kehr, and I am here with my co-host Tony Robinson. Tony, can you believe it\u2019s episode 150?<\/p>\n
Tony Robinson:
I cannot believe it. We\u2019re halfway through the 100s, making our way toward 200. And if this is your first time joining us here at the Real Estate Rookie podcast, every week, twice a week we bring you the inspiration, the motivation, the education, everything you need, the stories to get started as a real estate investor to build that portfolio and eventually find financial freedom. So, what do we got going on today, Ashley? What\u2019s new in your world?<\/p>\n
Ashley Kehr:
Not much. I feel like I\u2019m always just waiting to close on properties, but I\u2019m pretty sure I\u2019m closing on one little cabin tomorrow, little A-frame\u2026 Or not tomorrow, next week, a little A-frame cabin. And then, yeah, just trying to stay caught up with things. I actually feel pretty overwhelmed right now, just getting 1099s out and getting caught up on all sorts of different things.<\/p>\n
Tony Robinson:
All that stuff that comes with it. So, I know we\u2019ve got a topic for it today, but I feel like it also might be cool, Ash, if you talk a little bit about your big 700-acre property and what\u2019s going on with that, because that was the first time I\u2019d heard anything like that. So, it might be cool if some of the listeners can get some insights into what\u2019s going on with it.<\/p>\n
Ashley Kehr:
Sure. Yeah. So, this campground that I\u2019m working on, it was a foreclosure property. It was actually bought by the bank that had the mortgage on it at a tax foreclosure auction. And they did not put title insurance on the property, so as of right now, you cannot get title insurance on the property.
So, I am in the process of figuring out why exactly that is. Is there a redemption period? Can I pay an extra premium on this property? So, I did get an email yesterday from the paralegal at my attorney\u2019s office saying that we\u2019re good to go again. We can get title insurance, so I\u2019ve followed up with her as to, \u201cOkay, how can we get it? With does that mean?\u201d<\/p>\n
Tony Robinson:
Right. What\u2019s different?<\/p>\n
Ashley Kehr:
And I haven\u2019t heard back yet. But, yeah, this is something very new. In New York state, attorneys handle closings, and they actually handle getting the title insurance policy for you. It\u2019s pretty hands-off for people purchasing, and it\u2019s done directly with the attorney. So, going to find out some more information about that, but it was like a little panic mode like, \u201cOh, my gosh. We\u2019re not going to be able to get this property without title insurance, because we won\u2019t be able to get any investors.\u201d
So, definitely it was a kind of a little shock and a speed bump, hopefully a little obstacle that we are overcoming. But, yeah, it\u2019s just one of those things with purchasing a large commercial property for the first time. Definitely the most expensive property I\u2019ve ever purchased.<\/p>\n
Tony Robinson:
Yeah. And I just, it\u2019s like every time that you venture outside of your comfort zone, you learn something new. And I\u2019m learning vicariously through you because I never knew that that could even potentially be an issue, that because the previous buyer didn\u2019t get title insurance that it can impact your ability as a new buyer to get title insurance. And again, that could potentially vary state to state or district to district, locality to locality, but it\u2019s just always cool to know what your options are when you get into another situations.
Our friend Derrick Acuff flipping a house on Instagram, he\u2019s having an issue with another house as well where he has title insurance, but the title company missed that there was a lien against the property when he purchased it. So, now he\u2019s not even sure if he owns the property. So, yeah. We got to get someone from a title company or something on here to talk through what all that stuff is so we can give people some inside scoop.<\/p>\n
Ashley Kehr:
Yeah. That\u2019s a great idea, because even my attorney was like, \u201cThis is where we\u2019re at right now.\u201d And he just ordered the title search to be done, so once we get the title search back, we still have a 25 day due diligence period. So, there\u2019s definitely still more time to figure things out, but he made it seem like our hands were tied at the moment.
So, what did I do? The first thing I do is I call some of my investor friends who have done large commercial deals and I say, \u201cWhat do you think about this? What can we do?\u201d So, the recommendations were look at the redemption period, look at if you can pay a premium, and then ask for a reduction off of the purchase price to cover that insurance premium that you\u2019re paying up front. So, yeah. Lean on your investor friends, but also make sure that you can add some value to them, too.<\/p>\n
Tony Robinson:
Yeah. And if you don\u2019t have many investor friends, that\u2019s what we\u2019re here for. Right? The Bigger Pockets forums, Real Estate Rookie Facebook group, there is a sea of other eager, willing investors who want to get to know you and share notes back and forth. Well, I\u2019m glad Ashley that you found another option, another path forward. I know you were stressed a little bit when you first got that news, but it just proves that there\u2019s always a different way or there\u2019s always a creative solution when it comes to investing in real estate.<\/p>\n
Ashley Kehr:
Yeah. And I still have not completely overcome this obstacle, and I have to admit there are days where I\u2019m like, \u201cShould I just back out now and get my very large deposit back?\u201d And I\u2019m really struggling with staying motivated and keep going, and so it\u2019s always awesome to be able to come onto a podcast where we have guests that are inspiring me. I hear their story. I\u2019m like, \u201cOkay, if they can do this, I can get through this deal. I can make this happen, and I can make it work.\u201d So ,yeah. Real estate is definitely a rollercoaster, ups and downs and staying motivated all the time because every day there\u2019s something good or bad that can come up.<\/p>\n
Tony Robinson:
Yeah. Well I\u2019m sure it\u2019ll turn out well for you. And if not, if it turns out terribly, at least it\u2019ll make for a good podcasts episode someday. So, either way, there\u2019s a benefit to it.<\/p>\n
Ashley Kehr:
Yeah, really. Yeah.<\/p>\n
Tony Robinson:
But we\u2019re actually working on a commercial deal right now, too. I actually just got off the phone with one of my business partners right before this call, and there\u2019s another motel. This is an actual motel that\u2019s not too far from my house right now, another lake town, but it\u2019s been very poorly managed it seems. We requested financials. The last financials were from 2016. If you listen to this podcast, it is right now 2022, so the financials are just a little bit outdated. And to make matters worse, the financials only included a one page of what the expenses were for the year.
So, just when you think of like mom and pop bad bookkeeping, super outdated, it literally checks all those boxes. But we\u2019re excited about this property because of the location. It\u2019s in a really prime part of town, and I think there\u2019s a really good opportunity to come in and renovate this property, make it cool and hip like our short-term rental listings, reduce the overhead by not having staff on site, and make it a self check in, self checkout. So, probably going to go out there at some point this week, and I\u2019m hoping we can finally take down my first commercial property. It\u2019ll be 33 units, I think, if we can actually make it happen.<\/p>\n
Ashley Kehr:
Tony, that\u2019s awesome. I have a couple questions about that property. So, what are you going to do to fund that property? Are you going to do bank financing, because with financials not being up-to-date current, would you be able to get an SBA loan. Or maybe that\u2019s an opportunity to go for seller financing even, say, \u201cHey, look, you\u2019re going to have a really hard time selling this property.\u201d<\/p>\n
Tony Robinson:
Yeah. So, the seller actually was in escrow with a different buyer before. Buyer wasn\u2019t able to perform. So, I guess he\u2019s had a couple of false starts with this property, and he actually already understands that it\u2019s not something that most banks will touch. So, he\u2019s willing to offer seller financing.
He wants a 40% down payment, which is pretty hefty. But he\u2019s offering, I think, a three year interest-only at 6% or something like that. So, not terrible, gives us more than enough time to go in, make the renovations we need to make, and stabilize the property. And I think once we get it stabilized, we\u2019ll look for some kind of SBA lending to get out of that owner finance deal.<\/p>\n
Ashley Kehr:
Well, that\u2019s really exciting, Tony.<\/p>\n
Tony Robinson:
Yeah.<\/p>\n
Ashley Kehr:
Good luck.<\/p>\n
Tony Robinson:
So, it\u2019s early. I don\u2019t want to get my hopes up.<\/p>\n
Ashley Kehr:
Right. But still, yeah.<\/p>\n
Tony Robinson:
I try not to get too excited until the ink is dry. Right? Once the contract is signed and everything\u2019s closed, then I can get excited. But right now, it\u2019s-<\/p>\n
Ashley Kehr:
But that\u2019s when it gets scary, too.<\/p>\n
Tony Robinson:
That\u2019s true. That\u2019s true. We\u2019ve never done a deal 33 units all in one shot. But I\u2019ve shared a few times that my goal is to get to 1,000 short-term rental units by the end of 2023, so I\u2019ve got almost exactly 24 months to make that happen. And if the only thing I\u2019m doing is buying one single-family house a month, I\u2019m going to fall miserably short of that goal. So, I need to break out of my own comfort zone, conquer some of my own fears and start chasing some of these bigger deals.<\/p>\n
Ashley Kehr:
Well, I know you can do it, Tony.<\/p>\n
Tony Robinson:
Ah, thank you, Ash.<\/p>\n
Ashley Kehr:
Okay. So, do we have a question for today? I think you had one from your DMs, right?<\/p>\n
Tony Robinson:
We do. We actually have a question. So, today\u2019s episode was not about commercial real estate. We actually have a question pulled from the audience. So, today\u2019s question actually comes from my Instagram. Someone hit me up and sent a question that I thought would make a good topic for today and actually falls in line actually with what we\u2019re just talking about with the commercial properties.
But this question from Colettes_REI7. So, Colette reached out to me on Instagram and said, \u201cDo you make offers based on the pro forma that\u2019s provided or on the current actuals of a property?\u201d So, Ash, what are your thoughts on pro formas versus actuals and how you use those to analyze?<\/p>\n
Ashley Kehr:
So, when I analyze a property, I\u2019m looking at what I think the numbers are going to be, so the pro forma. Then I also analyze it at worst case scenario, like what maybe what the numbers are now or what\u2019s the worst case scenario of that property? What\u2019s the lowest rent it could get? What are the highest my expenses could be? Then I also at best case scenario, so what\u2019s the best case scenario for this property? And then I look at those and see, can this property survive at all of those different options?
And I think looking at commercial real estate is a lot different than looking at a duplex and running the numbers, too. With a duplex or a smaller property, it\u2019s a lot easier to turn that property over per se, because you\u2019re maybe just doing one or two units, where if you\u2019re going after a large commercial property, it may take you a full year to actually get to that pro forma. So, you have to have a plan in place to cover those expenses, whether you have a large amount of working capital.
So, working capital is when you take a sum of money, say if you\u2019re buying a large commercial property, you\u2019re taking a $100,000, and you\u2019re putting it into a bank account to cover maybe payroll, to cover snowplowing for the year, to cover insurance, to cover property taxes, because you know the income for the first year won\u2019t cover that. And that is not to be confused with your capital improvement money.
So, if you\u2019re going in and you\u2019re making improvements, you\u2019re putting in new flooring, you\u2019re putting on a new roof to really appreciate that value so you can charge more rent, that is going to be a separate amount of money you need. So, I think looking at both of those, the actuals and the pro formas, definitely buying a property that has value-add for that pro forma is where you\u2019re going to get the most bang for your buck.
If you\u2019re buying a property for the actuals, it\u2019s probably not going to be that great of a return for you as if you\u2019re adding value. So, I think it\u2019s important to look at both, and if the pro forma works but the actuals don\u2019t, how are you going to cover that until you get to the pro forma?<\/p>\n
Tony Robinson:
Yeah. Ash, what a phenomenal response. There\u2019s not much that I can add to that. The process you outline is essentially the same exact thing that I do as well. So, I think the only thing that I\u2019ll add is that in order to find out what those pro forma numbers are, the thing that you do not want to do is take the pro forma that the sellers listed or that the brokers listed because they have an incentive to make sure that the property is shown in the most favorable light. So, they\u2019re probably going to be a little bit more optimistic about how that property will actually perform.
So, anytime that the seller or the agent or the broker is giving you pro forma data, thank them kindly for sending it to you, but you always want to double check and make sure that you validate that information on your own. Luckily, Bigger Pockets has resources to help you do that. If you go onto the Bigger Pockets websites, under tools there\u2019s the services area and there\u2019s the rent estimator.
I\u2019ve used this in the past, and it actually works pretty well. I looked at my very first rental property on the rental estimator on Bigger Pockets. I was renting that property out for 1,350 a month, and the rental estimator on BP has it at $1,300 per month. So it\u2019s like almost spot on with what I was actually charging for that property, so it does a relatively good job of pulling that data.
And if you\u2019re not a Bigger Pocket\u2019s pro member, you don\u2019t have access to that, you can do that same search manually on your own. Just open up Zillow, open up Craigslist, Facebook Marketplace, whatever is the dominance listing source in your market and just see what other properties are renting for in that area. And you can come to that same determination on your own, but the big takeaway is do your own homework when it comes to the projected income. Don\u2019t rely on what the seller\u2019s telling you.<\/p>\n
Ashley Kehr:
Yeah. It\u2019s that trust but verify. You may trust somebody, an agent you\u2019ve worked with or somebody that\u2019s selling you the property, but always verify those numbers. That\u2019s great advice, Tony. Just on top of the using the rent estimator on Bigger Pockets, there\u2019s also the calculator reports too, where if you\u2019re a pro member you can run unlimited reports. So, run a report as the actual numbers, run a report as the best case scenario, as the worst case scenario, and then compare them. You can print them out, save them, lots of things you can do with those calculator reports.<\/p>\n
Tony Robinson:
Yeah. So, I hope that answers your question, Colette. Ash and I both sunk our teeth into it. I know that\u2019s a question that comes up a lot on how do you use those two figures, so hopefully that gives you the right direction that you need moving forward.<\/p>\n
Ashley Kehr:
Well, thank you guys so much for joining us for episode 150. I can\u2019t believe of it still. We appreciate you guys so much and love that you listen to the show. And if you want to be a guest on the Bigger Pockets Real Estate Rookie podcast, you can submit a form at biggerpockets.com\/guest. And we will be back on Wednesday with a guest. My name is Ashley Kehr at Wealth From Rentals, and he\u2019s Tony Robinson at Tony J. Robinson on Instagram. But before you guys go, let\u2019s check out something you can use at biggerpockets.com.<\/p>\n
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