Should I Use My Home Equity to Buy My Next Rental Property? (Rookie Reply)

Ashley:
What if the hardest part of real estate isn’t finding that first deal, but knowing what to do after you get it.

Tony:
Today we’re answering three real questions from the BiggerPockets forms that hit the exact pain points that Ricks like you are running into scaling the right way, pricing rentals correctly, and setting up a short-term rental without all of those costly mistakes.

Ashley:
This is the Real Estate Rookie podcast. I’m Ashley Kehr,

Tony:
And I am Tony j Robinson. And with that, let’s get into today’s first question. So our first question again comes from the BiggerPockets forms and it says, I currently own a property that has around $110,000 in equity. While I do not have a renter in this property yet, my plan is to have one by the end of the year, currently still renovating parts of the house with the amount of equity that I have. I’ve been thinking a lot about investing in a second property. I’ve always had the dream of owning vacation rentals. However, I don’t have that much capital and I worry about the feast or famine aspect of short-term rentals. I guess my main questions are what’s the best next investment for someone who is relatively new to real estate investing? Is the Burr method smart for me and should I do a cash out refi to help fund the next investment?
Alright, so basically this person’s just asking a, they’ve got some equity built up. What’s the best way for them to deploy that? I think first let’s just define for other rookies that are out there like equity and what does that actually mean, right? So when we talk about equity, we’re talking about the value of the home. What is the home currently worth, and what is the loan balance on that house? And the difference between those two numbers is your equity. So I think my first question back to the person who asked this question is how did you come up with that $110,000 of equity? Was that based on the Zillow estimate where it said that your house is worth X amount and you know what your loan balance is? Or did your neighbor’s house sell for a certain amount? But I think get some clarity first on how you came to that equity figure would be important because that’ll give you a better gauge on how accurate and how much equity you actually have to work with. So that’s the first part is just defining that. But for you, Ash, I think before we even get into what strategy or maybe what move makes the most sense, this person also asks what’s the best way to tap into that equity? Is it a cash out refinance or is it a heloc? What’s your recommendation?

Ashley:
Yeah, so I would say for this one, they own the property, but it’s going to be a rental. So you would have to do, you couldn’t do refinance or you couldn’t get a home equity line of credit or do a residential refinance. You would have to go and get a commercial line of credit on the property. So look for a local lender that will do these commercial lines of credit. You want to talk to the commercial lender at the small local bank and see what options they have available for you. The two lines of credits that I have are commercial are first liens. So that means that there’s no mortgage and no other debt on the property. So that is something you’d want to clarify and verify with the commercial department that the line of credit will actually be a second lien, which is traditional for most home equity lines of credit.
So you have your mortgage is your first lien, and then the line of credit is the second lien on the property, meaning if you don’t pay your bills goes into foreclosure, the mortgage getting paid first, then the line of credit. So it’s that positioning. And some banks don’t offer a second position for a rental property. So that’s where I would ask and get that clarification on that before you go ahead and start the whole process to get a line of credit. If you do a refinance on the property and it’s going to be a rental, you have a couple options there. You can go to the commercial side of lending for a small local lender, usually you’re going to have to do different amortization and fixed rate periods. Then you would see on the residential side. So for example, you’re maybe looking at a 15 year amortization or a 20 year amortization instead of the 30 year amortization.
Then you’re going to see a fixed rate, not for 30 years, but maybe for five 10, I’ve seen it for seven years, and then it goes into variable. Or you can refinance again to get another fixed rate. You can do A-D-S-C-R loan where this is looking at the debt you are going to put on the property and can the income, so when you rent it out actually support the property and you don’t have to rely on your own income to support the property. And so if you have a high debt to income on the personal side, this is always a great option where they’re looking at the value of the property and the income potential of the property instead of you to making sure it can support itself. And A-D-S-E-R loan, they do have that nice stur year option amortization and 30 year fixed to look at.
So something to take into consideration when you’re looking at two of these options is what is the current interest rate on the mortgage that you have right now on the property? If it’s like a 2.9%, then we’re probably not going to want to refinance. The only reason I would refinance out of this property, if you have a really low rate and you’re going to refinance into a higher rate, is if there is extreme value in that equity where you can put that money into something else and make such a large return, that interest rate and that increase in interest rate means nothing to you because it is very, very minimal compared to the amount of money that you’re making in the new deal that you’re putting that equity into. So look at that upside potential and evaluate that and it goes back to running the numbers in each scenario. So that’s where I would start is looking at those options that you have available for just doing a line of credit or for doing the refinance on the property.

Tony:
Yeah, all great points, Ashley. And the next part of that question is what is the next investment for someone in their position? And I really think that depends on you as an individual investor first. I think if you have $110,000 in equity, let’s just assume that aside from selling, you won’t be able to access all of that. So maybe somewhere in the 80 ish thousand, 70, $80,000 range, which you’ll actually be able to access through a line of credit or potentially refinance. And with that amount of capital, you’ve got to ask yourself, okay, what is the best way for me to actually go deploy that? I think just generally speaking, I’m a fan of the Burr strategy because it allows you to recycle a portion of that capital. But obviously that does require you finding a deal significantly below market value, which is a skillset in and of itself.
It requires you to manage a rehab, which is another skillset in and of itself, right? So there’s some more complexity there, but I think if you have the desire to learn those skills or the ability to do that already, a bur could be a great way to build your portfolio. And I’ve met so many investors who have taken one heloc, combine that with the Burr strategy and built a decently sized portfolio by just recycling that same capital deal after deal after deal. So it is a good way to build that momentum. So I think if you have the ability or the desire, a burr would be a great way to move forward.

Ashley:
And also too, the burr doesn’t just mean a long-term buy and hold rental. It could be your dream of doing a short-term rental too. So that can give you an extra layer of protection by doing a bur for a short-term rental property. You can really have increase the value of the property so you have more equity in the property when you go ahead and finish the rehab on it and pull your money back out. And you have this equity sitting in there to give you a little bit of cushion and security that okay, that feast and famine and mindset that you had. One little tip on that, if you are worried about that, what are going to be your other strategies that you can pivot to with this property. So for example, could you easily pivot to a midterm rental? Can you easily pivot to a long-term rental with this property?
So if that does happen, I had a property listed before as a short-term rental and a midterm rental, and I would leave the midterm rental booking open and I would just change it and I would keep my short-term rental window very minimal, I think only 30 to 60 days to keep it open. So that way someone booked 60 plus days out for a midterm rental, I could go ahead and close off the short-term rental bookings for that period because I would’ve rather have had the midterm rental bookings than the short-term rental. So think about different ways that you can incorporate other strategies if just doing the short-term rental route doesn’t make sense, maybe it’s seasonality or you just have periods of time where there’s a lull that you’re able to pivot when necessary coming up, even the best strategy falls apart if your rent numbers are wrong, we’re going to break down which rent tools you can trust and which ones get investors in after a quick word from our sponsors,

Tony:
Vacancy isn’t just lost rent. It’s a silent profit killer. Every empty day compounds the damage mortgage strain, rising insurance, wasted marketing spend. Most landlords wait way too long to respond. But savvy investors, they use avail avails rent analysis report helps you price your unit competitively with realtime local comps, market trends, and predictive pricing insights. And once you’ve priced it right, avail also offers promoted listings. So your rental gets priority placement on realtor.com and zumper, so you’ll fill your unit faster and stop the cash from bleeding. Plus get access to full tools for tenant screening, automated rent collection, lease management and maintenance tracking all in one place. Take the guesswork out, cut your vacancy gap and start landlording like a pro. Go to a avail.co/biggerpockets to sign up for free today.

Ashley:
Okay, today’s second question is between BiggerPockets estimator and Prop Stream, which Rent Estimator do you find most accurate or are they pulling from the same data source? I saw a 2-year-old post on this and almost read that as I saw a 2-year-old post about this, but no, he said, I saw a post that was two years old on this, but wondering what’s the most accurate today? Okay, this is a great question as to where are these rent estimators getting their data from? And I’m going to be honest, I do not like Rent estimators every time I tried to use them. Not enough data, not enough data in my small, little tiny rural towns that I invest in. So I have to say I do like I use Turbo Tenant, and when you go ahead and list it, they have a rent estimator for you that you can go ahead and plug it in.
So I always just do it and check, and sometimes it will work for me and there’ll be enough data in some of the areas I invest in, but I think looking at where their data is coming from and when it was last updated. So if this data is from two years ago that they’re pulling, how are they getting their most recent data? This is a very old school way of doing it, but I really do believe it is accurate. And this is how I estimated rents for a very, very long time, was I had a spreadsheet. I would go in and look at the listings every single day for that market. I would put them into the spreadsheet and then I would update them every day. So if a listing was gone, I would assume that that property was rented, that property was rented, and if it was rented within a 30 day period, I would assume that it was rented for the price that they were asking for.
Very rarely have I in my over 10 years of investing in the markets, I choose seen price drops or decreases on rent. So usually you’re getting what those people are asking for, or if it’s continuously sitting and sitting and sitting, I know that’s not a good comp and I’m not going to use that property. And then I would just track it. I would track it and see what was going on. Then I would call property management companies. I would call, if I saw a four rent sign in someone’s yard, I would call that number and I would ask, what are you charging in rent? Most of the time I would just say, Hey, I’m just interested in that apartment, what are charging in rent for? And okay, thanks, have a great day. Or maybe ask a little bit more like how many bedrooms, things like that.
And I could use that as a comp. So you can always do that, but I think especially if you really want to niche down on an area, you can go ahead and do this heavy lifting or have a VA do it for you too. But BiggerPockets, rent estimator, prop Stream, I’ve never used Prop Stream. I love Prop Stream for a lot of things. I’ve never used their Rent estimator though. Turbo Tenant has a rent estimator. I think there’s a website called Rentometer that is out there too. And honestly, I would just use them all. I think they all are free to use.

Tony:
I couldn’t agree more. I think a lot of these estimating tools are good for a general baseline, but when it comes to actually sharpening the pencil on your underwriting, I do think that that level of manual work that you just talked through is beneficial. But I think the one point that I will disagree with you on is that I think your lack of trust, or maybe the lack of usefulness that you get from the estimator tools is probably because the market that you’re in. But I pulled up the BiggerPockets rental estimator tool for Shreveport, Louisiana where I started my investing career back in 2018, and I typed in the address for the very first property that I bought, and at the time in 2018, it was renting for about 1500 bucks per month. And I typed in that same address, and right now it’s showing that it would rent for about 1600 bucks per month, which feels about right.
That was 2018, right? So what is that? I can’t do that math fast enough eight years ago, give or take that we did that, right? So it kind of makes sense now that the rents have gone up a little bit. And I remember doing this when I first bought that property as well, and it was almost spot on to what I was actually charging in rent. So I think depending on how big of a market you are, the BiggerPockets rental estimator could be a good starting point. But still to Ashley’s point, go back, do a lot of that manual underwriting yourself to validate what you’re seeing in these estimating tools. Alright, we’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the realestate Rookie YouTube channel. You can find us at realestate Rookie and we’ll be back with more right after this.
Alright guys, we are back. And here is our final question for today’s rookie reply. Are we just closed on our first short-term rental property in the DFW North Texas area? And I’m excited to start setting this property up. A few questions here are regarding cleaning crews for short-term rentals. Could you walk me through an example of your interview and hiring process for short-term rental specific crews in your area? For example, what questions are you asking when interviewing? What qualifications slash traits or must haves do you pay by the job or each visit or by the hour? Do you issue w nines? What accounting software do you use? And do you use your cleaning crews to do laundry or is that a separate service that you all have? Thanks so much. Alright, lots of really good questions here. And this is a pretty tactical question and I don’t think one that we’ve hit before out of all the Ricky reply questions that we’ve had.
But it is a super important question because your cleaners for your short-term rental business are probably the most important people that you hire because they are the last eyes to see the property before a guest checks in. And they’re usually the first ones to see the property once a guest checks out. So they’re the only people that have access to your property in between a guest checking in and checking out. So it’s on them to really be your eyes and ears and boots on the ground to make sure that everything’s flowing smoothly. And if they aren’t doing a good job, it usually has a pretty big impact on you as the host. You’ll see that show up in your cleaning fees or if they’re not telling you about deferred maintenance issues, you’ll see that show up in your reviews. So there’s a lot that your cleaner does that’s really, really important.
So I appreciate this question. So let’s break it down first he about the hiring process. What questions do we ask? What are some of the must haves? How do you pay? And then what services should you expect? So on the interviewing side, I’ll walk through my process and national pur George looks like. But for me, I’ll usually want to get a sense of how big their operation is. I strongly, strongly advise against hiring a person who is a one woman or one man show because if you do that, you are now subject to all of the ebbs and flows of that person’s life. If they get sick, if they get a flat tire, if they have a kid who gets sick, if they need to go on vacation, if they have a death in the family and they need to take some time, whatever it may be, all the things that happen in their life that would prevent them from getting to your property now becomes a fire that you have to put out.
So my strong recommendation is to hire cleaners who have at least a few people that work together. That way if one person’s out, there’s someone else who can step in and fill in the gaps here. So that’s the first piece for me is we got to have someone that’s got a team. Second, I do strongly prefer someone with cleaning experience already. Someone who’s already cleaned short-term rentals, they know the process, they have everything kind of dialed in. That will be a little trickier depending on what market you go into. If you’re in a super small market, that might be tough to find someone who has that experience already. But if you’re in a market that’s decently sized, I would prioritize someone who has that experience. And the other big one for us is being able to integrate into our systems and processes. We have specific software that we use for all of our cleaners where we can track what time they arrive to the property, what time they leave, we get a checklist they have to submit, there are photos they have to submit.
So we have a very specific system that cleaners have to plug into. And if a cleaner’s not willing to do that, then right off the bat we don’t hire them. So making sure that they integrate with our systems and processes. And then the fourth piece is just making sure that they’ll do same day turns again. In some markets or some cleaners who are maybe stretched beyond their capacity, they’ll tell you, Hey, I don’t have the ability to do a same day turn. So if someone’s checking out at 11 and the next check-in is at 4:00 PM I don’t have enough bandwidth to clean that in that timeframe, so I would need you to block the day of checkout so that they can check in the following day at 4:00 PM And that just decimate your ability to really generate revenue. So anyone who can’t do same day turns is a hard no for me as well. So those are kind of the four big buckets that I focus on when I’m talking to cleaners as I’m curious what your processes look like.

Ashley:
Honestly, I haven’t had to hire a cleaner yet because I had someone who was co-hosting for me and they took care of all that, and I kind of just inherited my cleaner from them. So I haven’t gone through that process yet, but I kind of answered some of these other questions about how I manage it now and how I pay them and the bookkeeping and things like that. So right now we use hospitable where we manage our bookings. Then we also pay them per an hour. So my last cleaner that I had for a very long time, it was by the job, and we paid her no matter if it was a super easy clean or was a disaster, it was she charged the same rate every single time. And this cleaner charges by the hour. So it’s from the time they walk in the door until the time that they leave, they’re charged.
They charge us that. And then for accounting software, we use, well, it’s not really accounting software, but to actually pay them, we use Turo. And then for our full bookkeeping of the property, we use a base lane where we’re actually putting in the income that’s coming in from Airbnb. And then the expenses that are going out that include the expenses for the cleaner. And then that last part there of the cleaning crews, if they do laundry or if that’s a separate service, laundry is included. We always have extra sets for each property in each bed, and then they actually take the laundry with them. Our one property, our A-Frame doesn’t have a laundry there at all. So they take it with them to do it, and then they put on the fresh linens that are there, and then when they come back the next time they bring the dirty that’s turned new and then leave it there as the extra step.

Tony:
Yeah, a lot of our process pretty closely with what you said, Ash. I think one of the biggest differences there is that we actually do pay by the job. And the reason that I like that better for the single family space, we pay by the hour for our hotel. Those are like W2 employees that work for us, and there’s a bunch of rooms under one roof, so we can track that a little bit easier. But the reason that we do it by the job for our single family portfolio is because it’s easier to control the cost, and we can make sure that we always have the margin built into the cleaning fee. So for example, unlike our five bedroom cabin, our cleaner charges us 2 25. Well, I know that I need to charge the guest a little bit more than that to account for the fees that Airbnb charges and all those things to make sure that I’m not actually losing money on the cleans.
So we prefer the single family side to pay by the job. And the way that you can gauge what that per job costs should be is to look at the cleaning fees for the other properties in your area, and that’ll give you a good baseline on the max, max, max that a cleaner should be charging you. And again, ideally, you should always be a little bit less to make sure you’re accounting for those fees. So if you get a quote from these cleaners and they say, I’m going to charge you $600 to clean your two bedroom, and you look at all the other two bedrooms and they’re charging 1 75, or there’s a really solid data point for you to take back to that person and say, Hey, 600 seems a little bit unreasonable. So we do like to charge by the job. We also pay our cleaners usually either biweekly or monthly, depending on the cleaner.
We prefer monthly just because it’s easier for us from a bookkeeping perspective. But we have some cleaners who prefer biweekly, so we’ll do the first and the 15th, and then we will just pay them through our business banking platform. We use Relay, and we just issue a CH payments directly into those cleaners bank accounts. So that’s how we pay them. And then we do issue 10 90 nines at the end of the year. All of our cleaners for our single family properties are all contractors. They clean our properties to clean other properties, so we pay them as contractors, and we issue 10 90 nines at the end of the year for them as well. So that’s kind of how we have ours set up.

Ashley:
Yeah, I do 10 90 nines as well. And I think in the Quish question, they got ’em switched up. It’s said, do you issue W nines? And a W nine is actually what you want to give your cleaner, and I highly recommend that you do it upon hiring them and have them fill it out so that you have the correct information. You need to actually issue them a 10 99 at the end of the year, and it could be their company or their personal name, whatever they operate under, unless they’re like a corporation, then you don’t have to issue them a 10 99.

Tony:
And my strong recommendation is to not pay them until you get the W nine, because once you pay someone for a whole year and then you’re chasing them down to get that information, they’re a little less likely to comply. And that’s actually a cool feature inside of Relay is that in this business bank that we use, is that you can issue someone a payment, but it won’t actually send that payment. They’ll see it in queue status, but it won’t actually send until we have a valid W nine on file for them. So that’s a really cool feature that Relay has to kind of automate that process. The last one that I didn’t answer was about the laundry piece. This does vary from market to market, from property to property. For our smaller properties, our cleaners typically do the laundry onsite. We’ve got a 391 square foot tiny house. We can do the laundry while we’re there, but for our larger properties, there’s not enough capacity to turn five beds or six beds or whatever it may be in one sitting. So there are cleaners will take it offsite. So just kind of talk with your cleaner and get a better sense of like, Hey, what do you feel works best for this specific property? But again, making sure that the total cost of the clean and the laundry is still less than what you’re charging to the guest.

Ashley:
Well, thank you guys so much for listening. And this has been Real Estate a Ricky, an episode of Ricky Reply. I’m Ashley, he’s Tony. Thank you guys so much for joining us. And make sure you are subscribed on YouTube at a realestate rookie and follow us on Instagram at BiggerPockets Rookie. We’ll see you guys next time.