The W2 Employee’s Roadmap to Financial Freedom (Buy Rentals While Working 8-6)

Ashley:
If you’re busy, if you work 50 hours a week and you have a lot going on, that doesn’t mean you cannot invest in real estate. And today’s guest is going to show us how he works 50 hours a week plus and still has made time to get three deals under contract.

Tony:
So today’s guest, Rashad George, is going to walk through his journey again of being a busy professional who started off buying super easy, almost turnkey properties, graduating all the way up to almost full tear down gut jobs. And you’ll hear his journey along the way and why he decided to strategically partner to help continue to build his portfolio.

Ashley:
And at the end, him and Tony let us in on a little secret of the short-term rental tax loophole and it explains why Rashad is going with a certain strategy. Welcome to the Real Estate Rookie Podcast. I’m Ashley Kerr.

Tony:
And I’m Tony J. Robinson. And with that, let’s give a big warm welcome to Rashad.

Rashad:
Yeah, it’s wonderful to be here. I’m happy to be here and I love listening to you guys.

Ashley:
Well, Rashad, before real estate, you went from debt collection to the Air Force to defense contracting. How did these career shifts shape the way that you think about money, risk, and long-term freedom?

Rashad:
Yeah, absolutely. So starting with debt collecting, it really opened my eyes to people making not necessarily the greatest financial decisions. I got to see everything from people who got down on their luck to people who just thought they needed everything and couldn’t afford it. So it really helped ground my expectations of how I should be managing my money. As far as the Air Force goes, that really helped me understand what it means to truly take control of my path in life. I learned a lot of good stuff from the Air Force. It really helped me learn, more importantly, how to manage myself and how to think of everything in terms of moving forward. As far as defense contracting, it’s pretty much the same thing I did in the Air Force and I love it so much, which is why I’m still doing it, but that’s really helped me gain the income that I need to invest and more importantly, stay connected with the military community.

Tony:
So Rashad, I’m just curious because the debt collection, there’s definitely maybe a stigma around that career path, but I also think that maybe there are some skills that translate into being a real estate investor as well. And I guess just what, aside from just the mindset around the money piece, being in that field, I would assume deals with a lot of rejection, a lot of angry people, a lot of walking the line and kind of building relationships. So I guess was there anything else aside from just the mindset around money that you built from a skillset perspective that you feel has helped you as a real estate investor?

Rashad:
Absolutely. I would say sympathy, and if I’m being honest, a little bit of empathy as well. I came across a lot of people who were just down on their luck and being able to sympathize with them while being necessarily, I don’t know, being firm, but being fair is something else that I learned from that job. And also taking a beat to just go, “Hey, I understand what you’re going through. Maybe not be so harsh.” And I think that’s been very helpful with some of the self-managing that I’ve done.

Tony:
We talk a lot or you hear a lot about debt collectors, but from the other side, the people who are having the debt collected, but we don’t necessarily hear it from the folks who were doing the debt collecting. But hey, there’s still, I think, a benefit on being on the other side as well.

Ashley:
Actually, in one of the towns near me, there was a huge debt collection agency, and that was one of the jobs a lot of people went to fresh out of high school if they didn’t go to college or they did it part-time while they were going to college, was working for this debt collection agency. So it was very interesting to hear their side of things as to how it’s different, but a lot of them made a lot of money doing that. But really, you have described yourself now as a high income tech borough, but your real estate journey started earlier than that. So take us back to that first house and you had a $100,000 gain post- COVID. So what did that moment really unlock for you mentally?

Rashad:
Yeah. Seeing that $100,000 check, just anything over six figures, it just helped me immediately understand there is something to this. Friends of mine had been telling me you should be investing in real estate, but that’s when it hit me. I know it’s an anomaly and I’m okay with that, but still, it unlocked the fact that I can move forward, maybe not with the expectation of making $100,000 each time I sell, but with the expectation of getting some sort of gain and understanding it clearly. I

Tony:
Feel like that first financial transaction as a real estate investor was always a bit of an unlock. I remember the first time I got money deposited from my first rental and because there was a lease up fee with that and I think there was some maintenance involved. It wasn’t even enough to cover the first mortgage payment because the property management company had a lease up fee. And so I was in the negative that first month, but it was still like $684. And I was like, oh my goodness. I actually made money from real estate. And it is, I think, a bit of a mindset shifting moment when you realize, hey, this actually works. But 100K is a lot. So I guess I’m just curious quickly, Rashad, if you can walk us through, how did you net 100K on your first deal?

Rashad:
Yeah. So it all started back in 2017 when I just could not find myself living in an apartment for more than three months. I was in town for maybe 11 days or so. And during that time period, I found myself an agent. I left for two and a half months. Every day I was texting back and forth with that agent looking for a home. I found something, took me a while to really pounce on it, but I found something that I really wanted, bought that home, lived in it, did pretty much nothing to it, then got that $100,000. Of course, I should have been a little bit smarter at what I did with the money. I did kind of recycle it, but I wish I had have invested it. And ultimately, I wish I had kept the house too.

Ashley:
So was this house the brand new build or the brand new build comes next after this?

Rashad:
Yeah, the house that I first purchased was built in, I think 2011. I purchased it in 2017. Then the following property, actually the next property I bought was my next primary residence. But after that, I bought my first investment property and that one was a brand new build.

Ashley:
Let’s go through that experience of why you decided to do a brand new build compared to buying an older property like the first one that you had purchased.

Rashad:
Sure. Yeah. I made the decision to buy a brand new bill simply because I didn’t know as much about real estate investing as I do now. So I wanted something that was a little bit easier from a time perspective. And what I mean by that is I didn’t want to always have to be worrying about fixing something or having a new problem that I did not really have any experience with. So I called up my agent and she put together quite a few different options for me, but the majority of what she put together were brand new bills for that very reason. I made the decision that maybe she’s right, there’s something to this, got the new build. Haven’t really had any trouble out of it. And all the trouble that I have had has been warranted anyways.

Ashley:
So basically you put together your buy box, your criteria, what you were looking for, and then your agent came back to you with these deals. And I think that’s such a great lesson for rookies as to like, that is one thing you should be doing right now. If you haven’t reached out to an agent or you haven’t even got your first deal is really defining the criteria of what you’re looking for and building out that buy box and building out your criteria of what you want in a house. So the people who are searching for deals for you and even you when you’re looking for deals scrolling MLS, you know exactly what you are looking for.

Tony:
Ash, do you remember the guest we interviewed and his entire strategy was buying new builds and he would buy … So for those who aren’t familiar with like the new builds, if you’re buying in like a larger subdivision, they’ll typically release homes and phases. So they don’t release everything all at once. They’ll build out a small phase and then they’ll set the prices there. Then they’ll do their next phase and they’ll increase the prices. The next phase they increase the prices. And there was a guest who we had interviewed where his entire strategy was buying these properties in phase one as a primary residence, living there for one to two years. Sometimes he’d keep it. I think sometimes he’d flip them. By the time he got to phase five or 10 or six or whatever it may be, the value had increased so much that he could sell it for a big gain or do a cash out refinance to get some cash back.
And that’s how he built his entire portfolio. So I actually do really love the idea of the new build as a strategy, but sometimes it is a little trickier to get cashflow positive. So were you making actual cashflow on this deal?

Rashad:
I would love to say that I was making cash flow on this deal. I’m going to go ahead and say no. It pretty much breaks even. And I kind of got a little lucky here because I purchased the property after it had been appraised. So when it was originally appraised for tax purposes, it was appraised as just the land value only. So that’s what I paid for year one. Year two rolls around, I’m paying the taxes on the dwelling as well. That being said, technically you could say I cash flowed, but I didn’t actually pull the money out. I just left it in escrow. So all in all, I’m counting that as pretty much neutral. And I’m okay with that, especially as someone new with no expectations of hitting it right out of the park from the get- go, just give me something new, give me something easy, let me learn from it, and then try again on the next one.

Ashley:
So for rookie listening, what are some of the things that maybe made you feel more comfortable that you were going to break even on this property? And what should a rookie look for or think about before they actually decide, “You know what? I’m okay with doing breakeven.”

Rashad:
So one of the things that made me comfortable breaking even is because I had the cash reserves. Just in case something were to go incredibly wrong, who knows, hailstorm, house gets robbed, any number of things that happen, maybe they all happen at once. I’ve got the cash reserves to sort of mitigate against the risk. If you don’t have the cash reserves, I would say maybe not go the route of going completely negative cashflow or neutral, but if you can partner with someone who can help you on the cash side, that might be a route to go as well. So long as the understanding is this is not a forever thing, and of course you have to do better next time. So

Tony:
Would you do a new build again, Rashad? I guess you talked about some of the pros and cons, but given what you now know, do you feel that’s a good firs step for a rookie investor?

Rashad:
I think it is a good first step for a rookie investor, specifically folks who are looking to invest not necessarily in their local area. If they get something new, it’s a little bit easier to deal with. And I do want to kind of quantify this in a time perspective as well. You are going to spend time managing your assets. There’s no way around that, but for something that’s new, it is a lot less time. For someone like myself who has a weekday or 40 hour a week job, I also get stuck in traffic at least two hours a day. That leaves me 10 hours that I’m already just dedicating to work. So I have to sort of use my time in a wiser manner to make sure it makes sense. So if anyone else is in that predicament, then sure. But if you have more time than you have money, I would say maybe the new build might not be the way to go.

Ashley:
We have to take a short break, but we’ll be right back. While we are gone, make sure to subscribe to us on YouTube @realestaterookie. We’ll be right back. Okay. Welcome back. We went over Rashad’s first deal, the new build, but for your second deal, you actually decided to partner with your sister and form an LLC. So money and family, what conversations did you have upfront to make sure that this partnership was going to work out?

Rashad:
Yeah. So first off, we have an incredibly good relationship. There’s no way I would try this with anyone, whether they’re family or not, if I didn’t have a good relationship with that person. The conversations that we had were, what questions do we need to answer and put in front of an attorney to form our articles of organization? While we both trust each other, trust only goes so far in business relationships and we’ve got the paper to back it up. So pretty much we were asking, what happens if either one of us dies? What if we come into a disagreement? What if I want to sell the property and she doesn’t? Those sorts of things. All of those questions, I think an attorney goes a long way in helping people to get.

Tony:
Now shameless plug here. Ash and I wrote a book, Real Estate Partnerships. You guys can pick it up at biggerpockets.com/partnerships. But in that book, we talk about a lot of those questions like what Rashad just mentioned that you should ask before you get into a business partnership with someone. And another book that I usually like to recommend as well is called The Partnership Charter by David Gage. It’s not specific to real estate investing, it’s more so a general business partnership book, but another one that kind of prompts a lot of those questions to ask to make sure that the partnership stays smooth if things do get rocky. So you guys asked a lot of those tough questions upfront, but I think even before that, Rashad, what made you feel that getting into a partnership was a necessary next step for you?

Rashad:
Ah, I love this question. I got into a partnership for the reason that most people don’t necessarily consider, at least not the investors that I know. It’s for the time and skillset. We both have different time, different amounts of time, and our free time lines up differently. Also, our skillsets are differently. I like to focus on the operations type stuff, and she likes to do what I call the nerd stuff in the back end. Running all the numbers, making sure I don’t go too crazy with operations. From that perspective, I think it works out incredibly well. So really what I look for is skills that compliment each other. Time is another big one, and of course they have to have a great personality if they’re a partner. That’s just something I look for because I don’t want someone who’s customer facing potentially to just have a terrible personality.
And I personally think the last reason to ever form a partnership should be lack of money, especially if someone doesn’t have skill.

Ashley:
So after you formed this partnership, you guys decided to analyze over 200 deals before you actually found the right one. So was this a grueling process and what was your process for actually sourcing these deals? Was it just MLS deals or did you have other tactics to bring deals in?

Rashad:
Yeah, the process itself was, I would say, a learning process. It was not quick and I don’t want anyone to take away that it was quick or that we shortcut because we only did 200 or that 200 is a lot. You never know what the exact number is until you run the numbers enough and you’re comfortable with it. But our process is very lengthy. It essentially boiled down to looking at different zip codes in town for San Antonio and what HUD paid for those zip codes. We were specifically targeting Section eight, so that’s why we were doing that. Once we found what HUD was paying, actually once we found zip codes that paid pretty high, we looked at the price to rent ratio. That was also important. Then we started narrowing down to what fits inside of the amount of cash that we have. And that’s how we pretty much landed on the first property that we found, which would have been perfect for us had the deal not fallen through.

Tony:
So Rashad, first, I appreciate you breaking down your process in such a systematic way. And when you say HUD, you mentioned that that’s what Section eight pays, right? So you’re looking at who by the zip code is commanding the highest rent for section eight rentals, and then who has the best price to rent ratio? I mean, we’re just comparing the rent to the actual purchase prices in those zip codes and whoever has the best ratios where you kind of focus your time. So I love that approach, but were you just sourcing all of these deals right off the MLS? Were you working with wholesalers? What was your process for actually finding these different properties to look at?

Rashad:
Yeah. Initially we were pretty much searching right on the MLS, which worked out pretty good through, I don’t know, a confluence of conundrums. We ended up not purchasing when we wanted to purchase. So we had to wait a little bit longer and that’s when the market was then swinging more towards a buyer’s market. Then we were pretty much solely looking on MLS. We also used our agent who’s been very helpful. She found some off-market deals and she also had some pocket listings. They didn’t quite fit exactly what we were looking for, but they were really good. But yeah, MLS was, it was great. Even now, the MLS is still great.

Ashley:
Rashad, can you explain what a pocket listing is?

Rashad:
Sure. Yeah. A pocket listing is just a listing that an agent has that necessarily … Excuse me. A pocket listing is just a listing that an agent has that hasn’t necessarily hit the market yet. So it’s something that they’re keeping in- house that they can then set you up with before it ever hits the market.

Tony:
And now Rashad, you mentioned that the deal that you found that you were like, “Man, this one really actually does seem pretty strong that that deal actually fell through.” What was the backstory there?

Rashad:
Yeah, I think we got some really bad vibes from the seller and also some bad vibes from the tenant. So we found this property. It was tenant occupied and HUD was already paying the housing choice voucher of Section eight and it was actually paying pretty good compared to what the monthly mortgage would’ve been. We found it, thought it was perfect. The seller did tell us that there was one thing wrong with the property prior to us going under contract. The one thing that he said was wrong was that there was a broken sewer line, which wasn’t the only thing wrong, and I’m pretty sure he knew that. So we then go under contract and that’s when we find out, well, that broken sewer line then translated into a terribly cracked foundation, just awful. That didn’t turn us away upfront. The thing that really turned us away was we sent our inspector over to do an inspection.
He couldn’t even do an inspection because the home was so … It was very occupied with belongings. I guess that’s a nice way to say it.

Ashley:
I’ve had a couple of those houses.

Rashad:
Yeah. We fell out of contract because we couldn’t even get a really good inspection and there’s just no way we’re going to make an offer and follow through with it if we don’t know everything that’s wrong with the property or at least most of the things that the inspector could find. It just didn’t make sense from a business perspective.

Tony:
Just one thing I want to say, Rashad, is kudos to you and your sister for walking away because I think we’ve seen a lot of newer investors who get so emotionally attached when they’ve … Like you said, you underwrote 200 plus deals. You finally found one that checks all the boxes, you’re excited, you’re like, “Okay, this is the one, we’re here, we did it. ” And then you get to your due diligence period and things start to pop up that don’t make sense. And oftentimes we can rationalize those things that are major red flags simply for the fact that we’ve got this emotional attachment to trying to get a deal done, but I think there’s so much more discipline and the better investors. It’s not about how often we say yes, but about how often we say no in our discipline in saying no. And I also appreciate that you said the foundation itself wasn’t even necessarily what made you say no, because maybe that’s something that we can get fixed, but the fact is you couldn’t do an inspection at all could be tough.
Now, I’ve actually never purchased a property that was tenant occupied.That’s just always been part of my buy box. “Hey, I don’t want to deal with the tenants. I want it empty.” But Ash, have you ever had a property where you were maybe in a similar situation where you couldn’t even get the inspection done that you did move forward with? And if so, how did you build that confidence in yourself?

Ashley:
Yeah, I think I went into it knowing that it was going to need a full gut rehab on the property that this was a property that the actually welfare family services had come in and taken this woman out of the home. She was 101 or 103 years old. I can’t remember exactly living there alone and the property was dilapidated. There was so much stuff in there you could barely move. There was no heat except for one little fireplace. So she ended up being removed from the home and then I’m assuming a court appointed attorney or somebody took care of the sale of the house and actually went on the MLS. And so we just bought the property knowing that this was going to be a full project. And we actually got pretty lucky in the fact that it was the first time I use a guy that has dumpsters and then he has a crew for doing garbage removal.
So they’ve done a lot of rehabs for us. And this was kind of the first hoarder house where they were coming in to take us stuff out and they low balled it. And I feel bad because they really, really underestimated the amount of stuff that was in that house and how long it would take them. And looking at what they charge now just for a regular clean out, they definitely undercharged for that property for sure. But I would say to make yourself feel okay, you already have to have the mindset going in knowing everything needs to be ripped out and redone without being able to see what’s happening behind or underneath all of this stuff.

Tony:
So Rashad, what deal did you end up landing on and what issues did you overcome as you went through that deal?

Rashad:
Oh man, where to start with the issues? We’ll start with the deal first. The deal, it was actually one that the agent had proposed to us a while back and we kind of thought, oh, maybe this isn’t the one. We did a little bit more research and the pictures were terrible. There were only four pictures of the exterior of the home and the listing agent wasn’t even really willing to show us the inside of the home because it was tenant occupied until we went under contract. So automatically that just ruled out pretty much everybody that’s not an investor. So we thought, “Ooh, this might be one of those unicorn things that we’ve been hearing so much about. ” So we went under contract. We looked in the house after that. It wasn’t in great shape, but it wasn’t in terrible shape. We ended up closing on it.
I think we offered 94 and they came back at 93. Hold on. It was 93 and they came back at 94. Yeah, that’s more right. So we ended up purchasing it for $94,000 and the home, it has a valuation of 170. That’s one person’s valuation, but still that’s pretty good. So we thought, okay, this actually seems like we need to follow through with it. As far as the issues goes, oh, there’s a mound of roaches in that house. Just however many you’re thinking, go ahead and triple that. There’s that many in there. There is a couple mice in the property. There’s a little bit of mold. On top of that, the tenant was a little troublesome, but she ended up leaving pretty much a month later anyways. The property’s empty now, which is another issue is getting it renovated. So yeah, it’s got some things wrong with it.
It’s also not in the best neighborhood, which is fine.

Ashley:
This property bought it for 94,000. And this was without you doing anything. It was already appraised at 170,000?

Rashad:
Yeah, we did absolutely nothing to it. It’s at 170 as it stands.

Ashley:
And what is your plan for this property going forward?

Rashad:
I am glad you asked. We originally started with a plan that has scoped a little bit further now. It’s a three bed, one bath. We were just going to do some minor renovations, fix the mold, fix everything that could break down, basically mitigate the expenses moving forward. But then we thought to ourselves, no, that might not be the right plan. If we’re already getting it renovated, it has a single car garage, we’re going to convert that to a primary suite since there’s only one bathroom in the house. Then once we do that, the goal is to still get a Section eight renter in place. The rent in that particular zip code for four bedrooms, like 1950 a month, that’s the top, doesn’t mean we’re going to get that, but still that’s a dramatic improvement from the 1,025 rent that the tenant was paying.

Tony:
And what would the cost to be, Rashad, on converting that from a 3.1 into a 4.2? And how do you guys plan to finance that?

Rashad:
Yeah, I’m actually really glad you asked that question. The original plan, making the 3.1 a little bit better, it came in at right at $50,000, which is pretty decent. And I have my contractor coming back over today to finalize the bid, but he thinks it should be around 80,000 to get the conversion and get it completely made over. But I think we can cut it back to 70,000. As far as financing goes, we’re more than likely going to look into a hard money loan. And I also have a community bank here in town that I’m going to approach as well and see what they have to offer, hoping that pans out. But if not, the hard money route’s probably the way to go.

Tony:
I mean, with that much equity baked into the deal, I would imagine that there’d be some local lender, bank, credit union, whoever it may be that would be interested in taking that deal on. And this is me just like if I’m you, that’s probably going to be my first though before I go to hard money because generally speaking, the local banks and credit unions will give you better rates than the hard money folks. So the property right now is vacant as you guys kind of go through this process of getting renovated. And how much time do you guys think the renovations will take?

Rashad:
My contractor can usually get things done pretty quickly. I think it’ll probably be 12 to 16 weeks, but we’ll budget for 16 weeks just to be on the safe side. So another four months of vacancy while it’s getting repaired.

Ashley:
So you had mentioned that you wanted to put a Section eight tenant in this unit when it’s completely renovated. What are some misconceptions that other investors may have about Section eight that maybe you want to debunk for us as to why you’ve decided you want to go that route?

Rashad:
Sure. I grew up in a small town at Shreveport, Louisiana, and I knew some folks who were on Section eight. And just like any renter, regardless of where the funds come from, there’s going to be good tenants and then there’s going to be bad tenants. Just because you have someone on Section eight doesn’t mean they’re terrible for you or your property. All that means is you have to do your due diligence just as good as you would as if they were not on Section eight. The other thing about Section eight that I don’t know if I’d call it debunking, but I want to touch on is typically those folks stay in place a little bit longer because of their situation, which is unfortunate, but sometimes you have people staying in place 20, 30 years versus just your regular turnover. And so I think I want to help people understand that Section eight could be a good option simply because the amount of time that tenants stay in place mitigating the turnover expenses.

Tony:
And Rochado, just got to give you … Go ahead.

Ashley:
I got to say, anyone listening that’s been an OG rookie listener from the beginning, did your eyes just get as big as mine when he said he was from Shreveport, Louisiana because that was Tony’s first deal that he had was from that town and we talked about it forever and forever, I thought it was Freeport, Treeport, like everything but Shreveport.

Tony:
So Rashad, you’re from Shreveport, shout out to the 318, right? But did you ever think of actually investing in Shreveport?

Rashad:
The more I learn about it, the more I consider it. Things that do scare me a little bit there is the property taxes because they’re roughly the same as they are here in Texas, but the average income is lower. So that does scare me. Also, the income of the area is just not the same as it is in other places. Would I invest there short of it is yes, it’s not on my shortlist, but absolutely. There’s some good spots in town.

Tony:
There are. And I had a really good first deal there, a really not great second deal there, but if it wasn’t for the flood insurance, I think that second deal would’ve been great as well, but it’s a market that’s relatively low cost to get into. And even though it’s a smaller market, there’s military there, which has been a pretty constant presence that brings in a lot of military folks as well. There’s surprisingly been investment from people like 50 Cent, trying to turn that into a bit of an entertainment hub as of late as well. So anyway, for anyone that’s thinking, Shreveport might be a place to check out, but I think you might be the first guest that we’ve had that’s from Shreveport, so small world. I love it.

Rashad:
Yeah, hardly anybody’s from Shreveport.

Tony:
It’s a fair point. So we heard about Rashad’s first and a second deal, but when we come back, let’s find out about his latest REO deal. All right, welcome back. We’re here with Rashad and we talked about the first couple of deals, but I want to talk about a deal that you bought solo, which was an REO deal. First, can you explain for folks that aren’t maybe familiar with the term, what is REO? What does that mean?

Rashad:
Yeah. REO is real estate owned, which basically translates to the property was more than likely foreclosed on and is now owned by the bank and probably going to go up for auction.

Tony:
And REO, I think a lot of people, especially coming out of this 2008 crisis, that was a big term. Everyone’s buying these REOs because there were so many of them. I feel like the volume of that has definitely dried up a little bit and you don’t hear about it as much, but the benefit of these REO deals is that oftentimes you can get them at significantly below market value. So how did you come across this REO deal? Was it just, again, listed on the MLS? Was it a pocket listing? Was it somewhere else? How did you find the deal?

Rashad:
Yeah, I actually found this deal in the process of analyzing homes to purchase with my business partner. I found this one on the side and go, oh, I might keep that one for myself. No, I presented it to her and she passed up on it. But yeah, it was just on the MLS and I saw it and I told my agent about it and she told me that, yeah, this one’s going to come up for auction soon. So we pretty much had to go over there on one of my lunch breaks. I didn’t even eat that day, just went over, checked out the house, didn’t even necessarily know 100% what I was looking for. But from my knowledge, it seemed like a solid deal. Of course, I didn’t know what the price was going to be. That was up to me. But yes, that was an MLS deal.

Ashley:
I’ve bought one REO property and it was on the MLS also. And I think it was originally listed at $90,000 and they just kept dropping the price. And this was right before COVID. And then I actually bought it right in the height of COVID, like March and April. I got it under contract. I think I closed in June and I bought it for like $29,000. But it was a very interesting process, kind of like having my agent deal with the bank and their attorney, because in New York State you have to use attorneys, but a very different process, but a very, very good deal that we were able to get the property for.

Tony:
Ash, what was that process? I’ve never purchased REO before, so how does it differ from buying from a traditional seller?

Ashley:
Yeah, honestly, it wasn’t much different. It was more of just the communication aspect of my attorney trying to get ahold of them, the back and forth. My earnest money deposit check got lost, I had to send out a new one. So it was just having to deal with the back and forth between And the attorneys, but they would threaten that there was timelines and these need to be done and stuff, and then no follow through. So it wasn’t more that the process was different. It was just that it was more difficult to actually move forward with the flow of the deal, I guess.

Tony:
And Rashad, what about for you? How was the experience in yourself? Were you able to do an inspection? Could you negotiate in the same way that you can with the traditional seller? How did that process look like for you?

Rashad:
I did get the opportunity to do an inspection, but unfortunately the inspector couldn’t come out in time. So we rolled forward anyways. For me, I found it the day, it was two days before the auction actually. So we just kind of had just rolled through it, just said, “Hey, we’re going to do this thing.” It was just a lot of me talking with the agent, understanding what I wanted to offer, even though it was listed for sale at a certain price on the market. It was just basically doing that communications and letting her know this is my top dollar.

Tony:
So Rashada, I want to compare this deal to the deal with the foundation issues that we talked about earlier. Both of those deals seem like on paper, really good opportunities, but some question marks around, okay, what’s the condition of the property? And neither one could you get in and do a full inspection. But with the first one, you decided to not move forward with the deal, but with this REO opportunity, you decided to move forward with the deal. What was the difference there? Why did you have the confidence the second go around, but not the first time?

Rashad:
Honestly, that confidence comes from listening to a podcast like this one and the OG BiggerPockets podcast, as well as having investor friends out in the community that said, “Hey, this is how you can get in and improve the situation.” And also learning about hard money. That was my first hard money loan, and it actually worked out pretty good. It gave me the confidence to walk in, do a little bit of inspection myself. I could see obviously the foundation needed some work. I could see the roof needed some work. And pretty much 70% of the things that I identified were the same thing that the inspector said, which gave me even more confidence because I did get an inspection, but it wasn’t until after I put the home under contract with no option to back out.

Tony:
So I think the lesson there for our rookie audience, and this is a point that Ashley and I try and drive home all the time. And Rashad, you actually said this earlier, is that the purpose of your first deal and even your second deal is not necessarily to retire you from your day job. The goal of those first few deals is to build your confidence so that your third deal and your fifth deal and your 10th deal become a little bit easier. And it is such a common occurrence where we see the complexity of deals start to increase as you go from deal one to deal two to deal three to deal five, because every deal builds a little bit more confidence than the last one. And even though we’re only talking one or two deal difference, you walked away from the first one because it just didn’t feel right, yet you confidently move forward the second time around because you had built up that confidence.
So I think that’s a really important point for our Rickis to understand. Now, do you feel that you bought it at the right price, Rashad? Given everything that you couldn’t get into it before and was actually the right deal to move forward with?

Rashad:
I think for multiple reasons it was the right deal to move forward with, with price being probably the least important one. I think I might’ve overpaid by about $10,000. Even my agent was signaling to me that maybe this is overpaying a little bit. And she even coached me through the decision I had to come forward with was, am I willing to overpay a little bit to stop the search? And for me, I think it made sense to end my search, even though I did overpay. We talked about it a little bit earlier. I have at least 50 hours a week dedicated towards work and commute. That doesn’t include anything else I do. So that’s time that I’m losing and time itself is in fact money. So moving forward with it did make sense. But for me, the main reason I wanted to move forward with it, and maybe Tony, you’ll appreciate this, is because of the area that it’s in, it is great for short-term rentals and there’s only so many rental permits that the city’s giving out.
And that one actually does qualify for the permit.

Ashley:
Oh, wow. Interesting. So you’re paying the 10 grand to buy the permit. Basically, that’s how liquor license work in New York. They only issue so many liquor license and my liquor store doesn’t make a ton of money, but it’s the fact that I had the liquor license in that area for the only store that can come in, in that area. So that’s the true value of it. So you can also frame it that way as you paid that extra $10,000 to actually be one of the few that has that short-term rental permit. So now with this property, what is the status of it today?

Rashad:
Ooh, yeah. The status of it today, it is week number 17 of the renovations and they are putting the finishing touches on it. I’m actually going to drive by there in probably an hour or so, make sure everything looks good and get ready to refinance it next week. That was hard money, so I’m going to go into a debt service coverage ratio loan with my entity, but yeah, it’s looking good. Did overpay a little bit, but the numbers support it.

Ashley:
So what did you end up buying it for? Again, what was the price for that? And then what do you think it’s going to end up appraising at?

Rashad:
Yeah. So I ended up purchasing at 160, which is slightly higher than what the average was for homes in that zip code in that condition. And the ARV was estimated to be 265. I just had a recent valuation done at 269. The home wasn’t completed. They’re going to do another one at the end of the week. Hopefully it comes in at at least 275, but even if it comes in slightly over the original projections, I’m okay with that.

Tony:
And what did you put in for the renovation costs, Rashad?

Rashad:
So this is also a fun topic. I was estimated to put in 88,000, but as I knew it was going to be a short-term rental, I had a few extra things done, rewiring the electrical, putting in an EV charger, things like that. So I ended up total withholding costs, today I’m at 102. So that brings me from pretty much 160 to 262.

Ashley:
So it’s appraising for right around what you bought for it and what you put into it. So when you go ahead and refinance this property, how much are you planning on leaving into the deal? Is it going to be 20%, more? Yeah.

Rashad:
When I refinance a property, I’m not going to pull anything out of the deal. I think it might make more sense to not be overleveraged. I don’t think I need to at this point in my life and where I stand financially to take any money out. It just doesn’t make sense for me. So yeah, leaving it all in.

Tony:
Yeah. And I just did the quick math, right? Assuming you can get 80% LTV on that 275, I get you to about 220 on your loan balance. So you’d leave about 45K in the deal, give or take. And just like ballpark, so are you committed to this being a short-term rental or are you still open to it being a long-term rental as well?

Rashad:
I am mostly committed to the short-term rental prospect because of where it sits as the first reason. Second reason, I think hosting, I don’t know, I’ve always been good at customer service and I kind of miss it. I’m not customer facing anymore, so I kind of want to get back into it. But also for tax purposes, I’m talking with my accountant and yeah, it makes sense for tax reasons to have at least one short-term rental.

Ashley:
We have to talk about this. Tony, let out the secret.

Tony:
So I’ll give the quick rundown. So what Rashad is talking about is what’s known as the short-term rental tax loophole. And it’s not really a loophole, it’s like written into the tax code, but basically if you own a short-term rental where your average length of stay, so the average amount of time that a guest stays at your house is seven days or less, then it qualifies for this tax loophole where basically you can take all of the paper losses from your short-term rental and apply those against other forms of active income, AKA your day job. So there are a lot of folks who go out and they purchase short-term rentals. They get a big paper loss by doing what’s called a cost segregation study and leveraging what’s called bonus depreciation. And those two things combined oftentimes can significantly reduce or sometimes eliminate the tax bill from your day job.
Now, I’m not a CPA, this is not professional tax advice, go talk to an attorney, but that is a strategy that a lot of folks use to really supercharge their tax savings and their tax returns. Now, there are certain requirements you have to hit to be able to do that. It’s called material participation, but just know, talk with an attorney or with a CPA and they can kind of give you all the ins and outs of it.

Ashley:
So Rashad, before we wrap up here, what is the biggest mistake that you think you’ve made across all of your deals and how has it actually changed the way you think about a deal moving forward and how you’re underwriting and how you’re going to operate the deal?

Rashad:
I still think my biggest mistake was that third deal that we talked about, not fully getting an inspection done before going under contract with no contingency. That was a mistake. I would never do that again. That was risk I was willing to accept one time for the purpose of propelling my finances forward. I would not do that again. I would say to everybody out there listening, make sure you get an inspection done. And more importantly, make sure you understand the things that are in that inspection and what it takes to mitigate the risks from the deficiencies.

Ashley:
Well, Rashad, thank you so much for joining us today. We really appreciated you coming onto the show and sharing your experience and the knowledge that you’ve obtained over the years of your real estate investing. Where can people reach out to you and find out more information?

Rashad:
Yes. If you guys are interested in seeing what I’m up to, you can check out my YouTube. It’s youtube.com/@king_crispy with a K. Outside of that, you can reach out to me on BiggerPockets. I’m Rashad George. To my knowledge, I’m the only one.

Ashley:
I don’t know why, but that YouTube name is making me think Burger King, the King and a crispy chicken sandwich. But I did read when you submitted your guest application that you have been documenting your whole journey of this process and it’s specifically one of your properties, right? Showing the whole process start to finish?

Rashad:
Yeah, I’m documenting it. The documentation of it is not as good as it could be. So the beginning is a little rough, but the ending parts are getting a little bit better. But yeah, I decided to document it, not the work that’s happening, but specifically what it looks like from the investor standpoint. So that is documented and it is on YouTube.

Ashley:
Awesome. Cool. I can’t wait to check it out. Well, thank you again so much for joining us. I’m Ashley. He’s Tony, and this has been an episode of Real Estate Rookie, and we’ll see you guys next time.