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How to Make an IRRESISTIBLE Offer Through Creative Financing

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Creative financing can be a powerful tool to help you get YOUR first property in the bag. In this episode, Ashley and Tony explain the biggest differences between hard money, private money, and traditional lending, as well as which options will make your offer irresistible to a seller!

Welcome back to another Rookie Reply! If you need capital for a new deal, you might consider partnering with a parent. Of course, like any investing partnership, it’s critical that you structure it properly and include all important terms in your agreement. Our hosts will show you how! They also cover cash-out refinancing in detail, including how it works and how much money you can pull from a property. Finally, they talk about using wasted space in your investment property to make more cash flow! Do you need to pull permits? Will you get caught if you don’t? Stick around ‘till the end to find out!

Ashley:
This is Real Estate Rookie Episode 324.

Tony:
Typically, when we’re using our private moneylenders on a flip, we’ll say like, “No financing contingency” and we’ll say like, “A 21-day close.” So, we don’t necessarily say like, “Hey, it’s an all-cash offer.” But those are the things we tell them, “Hey, we’re going to close quickly and we don’t have a financing contingency.” Those typically make our offers a little bit more competitive.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kick start your investing journey. Today, we’re coming back with another Rookie Reply and we’ve got some really good conversations going on today. We’re going to talk a little bit about financing options, hard money versus private money, and what the differences are and which one works for each situation.
We’re going to talk about real estate inspections and the timing of those. Should you be doing it before you close on a property, during the closing process, before you even submit an offer? We’ll give you an answer to that. We’re also going to talk a little bit about fire burning toilets and why you should or should not buy properties with that type of plumbing situation.

Ashley:
Then, we talk about partnering with your parents, different ways to actually structure that partnership, and then what happens if you come into a property that has some wasted space like two living rooms that can be an additional bedroom. And Tony and I break down the process as to which we have both encountered and our recommendations as to how you can make more money off of that second living room by turning it into a bedroom.

Tony:
All right. Now, before we get into today’s questions, I want to give a shout-out to someone by the username of Dr. Goldstein who we left us a five-star review on Apple Podcasts. Dr. Goldstein says, “Informative and motivational. The show is great. They cover a wide range of real estate investing topics in an accessible way. Episode 273 inspired me to try something new. Two months later, I’ve closed on a deal and I’m excited to get it going. Thank you Ashley and Tony.”
And guys, that is why we create the Rookie podcast to inspire people just like Dr. Goldstein to hear these stories, to hear these tactics, to hear these strategies and take action. And the only way we can find more people to inspire is if we’re getting more reviews of the podcast, it helps push it out to more folks. So, if you’re part of the Rookie audience, please do leave us with an honest rating review on whatever platform that’s you’re listening to so we can impact more people just like Dr. Goldstein.

Ashley:
Okay. And this week’s social media shout-out goes to Rental Property Couple, Patrick McGrath and his wife. They’re husband and wife team on their way to FIRE, which is Financial Independence, Retire Early. They have 35 rentals that they’ve acquired in the last three years and five-plus million in assets. But they do a great job of sharing their journey on their Instagram page.
So, go ahead and give them a follow and check out their page for some motivation, inspiration, and also to probably ask some questions. So, that’s @RentalPropertyCouple. And if you want to be featured on Instagram or any social media threads, TikTok, make sure to tag Tony and I in your stories in a picture. Use the hashtag Real Estate Rookie and that’s how we’ve been finding these awesome Instagram accounts that we can share with you guys. Clear your feed of funny memes and start adding in other real estate investors to connect and network with.
Our first question today is from Mike Joseph. “Hi all. I’ve been financing my own deals so far, but plan to use other short-term financing methods like hard money to scout faster. This is a very basic question, but when funding a deal using hard money, is that viewed as favorable as cash from a seller perspective?”
“When you make an offer, do you waive the financing contingency to make it more appealing to the seller?” So, Tony, let’s get your thoughts on that for using hard money.

Tony:
Yeah, I mean, you definitely do see some folks that’ll say that they’ve got “cash” when they’re buying with hard money. I think it depends also on the way that you’re using that hard money. If it’s traditional hard money, you might have to jump through a few more hoops, especially depending on your experience level. But say you’ve got a true private moneylender where you’re just cutting them a check of interest every quarter, every month or whatever it is.
And you really do have the cash in your bank even though it’s technically a loan that way, it’s a little bit easier, a little less friction that way. So, I think it depends, Mike, on how you set up that private money or that hard money transaction on, if you feel super comfortable or confident calling it cash. Like for example, we buy a lot of our flips and we will say that we’re paying cash even though we’re using debt, but it’s because we have private moneylenders that we have a relationship with and we’ve kind of already got the financing lined up.
So, the benefits of going with hard money versus private money is that, typically, your lenders are going to make it a little bit easier than a traditional and especially like an FHA loan or something like that, right? If you can come in with a loan that has a higher likelihood of closing, I think that’s what’s more important to the seller than even what debt you have per se.

Ashley:
Yeah, so in New York State, when you close on a property, you have to use attorneys, and then there’s a lot more title work that goes into it and it’s a lot harder process to actually get the hard moneylenders lien on the actual property when you’re closing. So, I have put that it was cash before, and then it’s been questioned by the sellers as to why are the attorneys having to do all of this stuff that looks like you’re getting financing now.
So, I’ve learned not to put it as cash. It’s just makes it way more clear to the sellers that yes, there is going to be a more work from the attorneys, which may take a little bit more time as far as closing. So, I am definitely on the side of saying that you are getting financing. But I know a ton of other investors who say that it is cash because they can get the money so quickly from their hard moneylender and it’s not as much of a lengthy process to go through New York State to actually do that.

Tony:
Yeah, typically, when we’re using our private moneylenders on a flip, we’ll say like, “No financing contingency,” and we’ll say like, “A 21-day close.” So, we don’t necessarily say like, “Hey, it’s an all-cash offer,” but those are the things we tell them, “Hey, we’re going to close quickly and we don’t have a financing contingency.” And those typically kind of make our offers a little bit more competitive.

Ashley:
Yeah, for private money, I’ve always done, it’s a cash offer and then, yeah, no financing contingency in this. But with hard money, I’ve started saying that it is financing on there.

Tony:
Yeah. And let’s just break that down too, Ash, for our rookies that maybe aren’t familiar with the differences. So, there’s traditional lending where you’re going Bank of America or your local credit union, or et cetera, to go out and get debt to buy a property. But then, there’s kind of more the creative side where you’re using hard money or private money.
Private money is probably the simpler option. So, let’s say that Ash and I are friends, I mean we are friends. But let’s say that Ashley’s got $500,000 just sitting in the bank right now and I find a deal where the purchase price and the rehab comes out to $500,000. So, I can go to Ashley and say, “Ashley, look, I found this deal. The total project cost is $500,000. I think the property will be worth $750 by the time we’re done.”
So, we have some baked in equity there, maybe $800. And I say, “Ashley, can you loan me that $500,000. I’ll pay you a fixed interest payment every month, every quarter, maybe at the end of the project of, whatever, 10%.” So, that means Ashley’s getting $50,000 per year on her $500,000 if we’re paying her 10%. So, Ashley says, “Yes, Tony, of course.”
So, Ashley then either wires me the money for the deal, that’s one way to do it, or she can wire it into title and escrow. But basically, Ashley is funding that deal for me. It’s a one-to-one person transaction and it’s based on our relationship with each other. That’s a private money transaction. A hard moneylender, typically, that’s a person that’s running a business of some sort.
So, it’s not someone maybe that you have a super close personal relationship with. This is someone that’s got a website and they’re funding tons of deals on a monthly basis. And they’re going to have super strict underwriting guidelines. They’re going to want to see your property. They’re going to want to see your deal. They’re going to want to make sure that you’ve got a good scope of work.
They’re going to want to know if you’ve got a good contractor. They want to make sure they’re really protecting the asset and their money because they don’t know you personally. And typically, with a hard moneylender, you’re going to see higher fees. So, you’re going to maybe pay a little bit more money upfront and fees. They call those points. Your interest rate might be a little bit higher than a private moneylender, again, because this is a business for them.
So, if you’re paying, whatever, 6% or 7% on a traditional investment, maybe you’re paying 12% or something for hard money, right? I’ve never used hard money. So, I know the rates are higher, but typically, they’re going to charge a little bit more. But hard money is a business, whereas private money is a relationship focus piece.

Ashley:
Private money, if you have access to private money, is usually so much easier and better than hard money, my opinion.

Tony:
And that’s why I’ve never used hard because we do have access to private money. So, it’s like why would I jump through the hoops of a hard moneylender when I can just go the private money route? Now, there are some people that I know that combine the two of them. And some hard moneylenders are okay with this, others are not. But say you have a hard moneylender that is okay with this.
Say that you have a deal and you need to put up $100,000 and your hard moneylender is going to cover the other $400. Some hard moneylenders will allow you to basically get a private moneylender to cover that $100,000. So, when you go take down this property, it’s zero cash out-of-pocket for you. You have your hard moneylender who’s putting up the $400.
You have your private moneylender who’s putting up the $100. Together, that combines to cover your total project costs and you just pay interest back to both of those people. That’s one option as well. Again, I’ve just never gone that route because I prefer just to keep it all with the private money, but it is more leverage, right?
And that’s the only reason I thought about it because, say, that I go out and at one point, we might have $2, $3 million in private money loans out to different people and it’s like that’s all tied up in maybe three or four properties. Now, imagine if I took that $2 million and I use those as down payments on a bunch of hard money loans.
I could have 10 deals that I’m doing at one time if I spread it out that way, but there’s more risks, there’s more costs. So, we just keep it simple. All private money.

Ashley:
Yeah, I have a friend who did his first hard money loan. So, this was one of his first rental properties actually. When he got a hard moneylender and they would do 80% and then he had to bring the other 20%, but he was allowed to get private financing for 10% of that. So, 10%, he had to show proof that it was coming from his bank account, the other 10%, he could borrow from someone else.
And then, the other 80% was covered by the hard moneylender. Okay. So, our next question is by Jesse Andhra. And the question is, is it possible to have an inspection done on a property before submitting an offer? And yes, it is. So, especially if the property is off market and you’re talking to the seller directly, you can go ahead and ask to have an inspection done.
The problem that I see with doing this is that if you guys are not even in the same range in ballpark and you go ahead and spend $500 on an inspection, then you give them their offer and they say, “No, we actually want a 100,000 bucks more for the property.” So, that’s one reason I like to get the property under contract first before I go and pay that expense of paying a home inspector. If the property is on the MLS, one thing that… inspections can take a long time.
The last property inspection I did, it took them three and a half hours to do the property. It was I think 1,600 square foot, single family house. Three and a half hours. So, typically, when you schedule a showing, the agent time blocks your 15-minute, 30-minute window of when you’re going to be there to see the house. So, it would have to be made clear that you would like to view the property for the amount of time that the property was having the inspection so that you’re not having other people have showings.
And in today’s hot market, there could be back to back to back to back to back showings when the property is listed. So, those are the couple of concerns I can think about, but I would just be very open and honest with everybody, the sellers, your agent, their agent, whoever’s involved, that that’s what you want to do is do an inspection before actually putting an offer in and then make sure you are prepared to pay that money before making an offer.

Tony:
There were some pieces of a real estate transaction or, I guess, some players in a real estate transaction, they get paid no matter what. A lender only gets paid if the deal closes. A real estate agent only gets paid if the deal closes. But your appraiser and your inspector, they don’t care if the deal closes. They get paid upfront when they render their services.
So, to Ashley’s point, it can get super expensive if you are out doing inspections on every single property that you’re thinking about submitting an offer on. The reason you don’t have to do that, Jesse, is because when you submit your offer, typically, you’re given a certain number of days for due diligence. Okay? So, you should walk the property or have your agent walk the property or at least get photos or a video walkthrough so you get a good sense of the general condition of the property.
And based on that, you can make some assumptions around, “Hey, what are some things that I feel based on this initial walkthrough that might need to be repaired or fixed or replaced?” The due diligence period is your opportunity. Now that you’ve got it under contract, now that you and that seller have agreed to at least an initial starting point for purchase price, now you can go through and do that super deep dive to get behind the walls and do whatever else you need to do to make sure that everything’s good under the hood.
But the reason you don’t have to do a property inspection before is because you have that due diligence period during your escrow time to pull out if some big expense comes up or to ask for an additional credit from the seller if additional things pop on that inspection report. I typically write 14 days for due diligence into most of my offers. Ashley, what do you typically put?

Ashley:
So, for an inspection, we’ve actually really shortened that timeframe and we’ve been doing within… seven days is pretty much the max we’re able to do right now. But we will tell them that we will do it as soon as we can get the home inspector out of there. My agent will communicate that to the seller, and that’s actually worked in our favor for a couple of our offers.
So, the last two properties that I offered on the MLS where I wanted to do an inspection on them, we were able to complete this inspection within the first 48 hours of submitting our offer to them and them accepting it. So, that has been a super key thing is that we’re able to go ahead right away. And a lot of times, before I put the offer in, a lot of the due diligence is done that I can do on the computer already because that’s helping the basis of my offer.
The second piece is just really the inspection of the property and what kind of rehab’s going to be done, anything that has come up, what’s the cost going to be to repair that. So, we have to get the inspector in, which can take two days mostly. Usually, that’s when we can get them in, two days from when we actually ask, so when our offer is accepted, and then so within two days.
And then, we usually need about 12 to 24 hours after we get the results to actually decide on the offer. And during that time period, we’re collecting costs of what it would cost to make these repairs, finding out other information on the property that has come up during the inspection that we need to do some more research on. We had one, this was a lake house and it had an incinerator toilet in it. So, this is where it burns it up, baby.

Tony:
Is that real?

Ashley:
Yes. So, there was no septic and no sewer at this property and there were at surrounding properties. So, one thing that we had to find out was how much it would cost to install a septic system there. But this incinerator toilet, it’s just the toilet and then there’s a vent that comes out of it. And you put a piece of paper in the toilet and there’s very strict instructions of how to do it.
So, during our inspection, our agent, we actually were there with the seller’s agent. She’s like, “Okay, the seller showed me how to do this. I’m going to show you guys how to use this toilet.” And we went through the whole process. So, you take the sheet of paper out and you put the sheet of paper in the toilet, okay? And it’s closed off so you just see the bowl.
And then, you go to the bathroom and then you have to push a button to flush it first. So, it opens up the bottom of the toilet, your paper falls down with your stuff in it. And then, it closes back up when you release the button and then you light the fire and it makes like a, and you hear it burning in there. And then, every so often, I think the seller said every week before they would leave the lake house, they would empty the ashes out.
But when you were outside and the toilet flush, you could smell burning in the air out of the vent out the one side of the house if you were on that side of the house. So, we had to do a lot of research on these toilets and be like, “Okay, first of all, if we want to use this as our own residents, enjoy the lake house ourselves, we can deal with this for the price we’re getting it. But to do it as a short-term rental to try to explain to guests how to operate this thing and-”

Tony:
They’d burn the house down. The house will be burned down the first year.

Ashley:
So, yeah, that was a big thing. And we ended up losing the property because we did the inspection and then we hadn’t had attorney approval yet because it’d been over the weekend and somebody else submitted a sight unseen offer and actually offered $70,000 more than we did. So, they took that, but they reimbursed us for our inspection as a courtesy.

Tony:
That’s cool.

Ashley:
So, that was nice, but it would’ve been way nicer at the price we were going to get this property.

Tony:
I wonder if that person that bought it, that kind of beat you to it, knew about this fire burning toilet situation because I’ve never heard of that before.

Ashley:
Yeah, and the property did close. We have gone by on our boat and we see the new owners out on their dock and so-

Tony:
Yeah, that is wild. Craziest thing I think I’ve heard from a property inspection.

Ashley:
So, we’ve been trying to do them, to answer your question, in as short of time as possible so that way if we don’t come to an agreement on something, we say to the sellers, this way you have not lost time. And both of those offers, we were the first people to see the property, so we got it under contract right away. So, what happened was in those circumstances, the one was actually a pocket listing.
They never even listed it yet. And then, the second one, they never let it go pending. They just said they were delaying showings. So, we got to see it first. We put our offer in right away and they stopped showings. And that’s why we agreed to rush the inspection and everything, so they didn’t have to put it pending and then we don’t agree on the inspection and then it goes back to being listed again, which can leave a dent into the property.
So, that’s also a negotiation technique is when you submit your offer, if you know you’re one of the first and say, “You don’t have to put it pending until after our offer is submitted, we’re going to do it so quickly that you just have to delay showings for a couple of days or whatever. But make sure you get that contract and attorney approval for signed off on though, because that was definitely a big lesson for us that we learned.”

Tony:
Crazy. Did you get a video? You got to send me the video of that fire breathing toilet if you got one?

Ashley:
Yeah. I’m sure we have one in all the pictures we took. Yeah. Okay. The next question is from Will Kilby. “I’m looking to find a home to flip and my parents have offered to be cash partners. And I would like to manage the deal and then split the profits. How would I structure this type of deal? Just find a loan and have them fund the renovations.”
“They could buy it with cash, but I feel like that would be more trouble when I don’t want to risk that much of my parents’ money. Any tips would really be appreciated.” Well, Will.

Tony:
First, he said the magic word. Anytime someone says this word in the podcast, we got to throw up a copy of the book. But Will, you should check out Real Estate Partnerships written by Ashley Kehr and Tony J. Robinson. So, for those that haven’t heard us yet, we’ve been talking about nonstop, but Ash and I wrote a book together called Real Estate Partnerships. It launched August 10th.
So, as you’re listening to this episode, it should be out anywhere to purchase, but head over to biggerpockets.com/partnerships. We talk a ton about partnership structures. But Ash, I guess, what’s your initial advice to Will based on this question of how to structure this specific type of partnership?

Ashley:
Yeah, so I think the first thing you need to decide is, are you going to go and get a loan and then just to fund the renovations from them, or it’s just going to be a cash purchase and they’re going to fund the renovations. That’s the first thing you need to decide. And yes, there is a lot of risk of them putting up their cash for the property, but there’s also a lot of risk getting a loan too that they could lose out on the renovations.
So, I think if you know that you have access to a loan that you could get, whether it’s a hard moneylender or maybe another private moneylender, but either way, you should feel comfortable and confident going into the deal that you’re not going to lose the cash and your parents aren’t going to lose out. The biggest thing I think of here is making sure that whatever structure you do that it’s in writing and everything is clear.
If it is clear to your parents that this is a risk, this is an investment and they are not guaranteed the cash, and that you’re going to split the profits off of it. So, there’s two ways I could see here that you could structure it. So, this could just simply be a debt partnership where they are going to lend you the money and you pay them a monthly percentage of interest, and they are guaranteed that money back, where if you don’t sell it for what you thought, you are still going to eventually owe them that money.
The second thing is you’re going to be equity partners where your parents and you, say, you’re going to split it 50-50, they’re putting the money in. When the house sells, maybe they just get their money back and then you guys split whatever’s left between the two of you. As far as the percentage of the profits, I would look at as to how much time and energy are you going to have to actually do managing the deal.
Are you going to be acquiring the deal, you’re going to find it? Are you going to be managing contractors? Are you going to be actually doing any of the work yourself? So, I think that plays a big role into how much percentage you should actually take. If you end up getting the loan and the debt is going to be in your name, that also plays a lot more onto the weight of what you are bringing to the table and that should definitely increase your percentage.
If you’re going to get the loan in your parents’ name, then that definitely increases what they’re bringing to the table. So, those are kind of the things that I would look at. And also, you need to know what your parents want out of this too before you can decide which way to go, is that they want to get the profits or they just want to get a set amount, maybe a monthly payment, or at the end when the project is done, they just want to have a percentage that they get from you borrowing their money.

Tony:
I think me personally, I’ve prefer on a flip to just make it a debt-based partnership. It gives a fixed, almost guaranteed return to the money partner and then it allows you as a person that’s really managing the deal to get all of the upside. And funny enough, Will, my mom is actually a private moneylender on one of my flips. I think we had two private moneylenders lined up and we were short just a little bit.
So, I reached out to my mom, she had a little bit of cash at the time and she came in as a private moneylender. And we paid her, we had her fill out all the same docs that our other private moneylenders filled out. She recorded them and she had a promissory note, she had a deed of trust and everything got recorded with the county. And we paid her, I think at the time we were given a 10% interest.
So, we treated her the same way we did all of our other private moneylenders. So, everything Ashley said is spot on. But me personally, I always liked the idea of a debt partnership for flip and then equity partnerships more so for the long-term whole type situations.

Ashley:
And then, I would also look at as to what your parents’ involvement will be. Will it just be cash partners or is it going to be your mom coming in and saying, “No, no, not that tile. Return it. This tile will look better too.” So-

Tony:
That’s also part of the reason maybe to do it as a debt partnership so your parents can’t… because every parent wants to parent their kid in some way, shape, or form. So, I think, Will, you got to ask yourself, do you want your parents trying to tell you, yeah, tile selection and flooring and all that stuff?

Ashley:
And maybe that would be advantage for having them an equity partner, or maybe your dad is super handy where he would come in and be able to help with some of it too. So, a lot of variables to look at there. But like Tony said, doing it… the debt structure is definitely a lot cleaner.
And then, doing it the other way to make a list of the roles and responsibilities that everyone is doing and put a dollar amount to that, and then how much cash they’re bringing, put a percentage to that, who’s getting the loan and put a percentage to that too. Okay. The next question is from RJ Elbers. Let’s say a house has two living rooms and I wanted to turn one of them into an extra bedroom by just adding a wall.
What’s usually the process of getting this accomplished? Do I have to pull permits or can I just hire a contractor to add the wall? Also, if anyone has done this, what does this typically cost? So, Tony, have you ever done this for short-term rental?

Tony:
Yeah. I mean, we’ve never done just this, but we have done it as part of a larger renovation on a property. And actually, the only time we’ve added bedrooms, this is a funny story, is that the previous owner… it was a three-bedroom house and the previous owner knocked down all of the walls between all three bedrooms. They were kind of set up in an L configuration.
So, there was a hallway and there’s two doors here and one door here. So, it was a big L and she just knocked down all the walls and had just one big massive master bedroom. So, we just went back and we put the walls back where they were. So, that’s the only time that we’ve done it. We have added additional bathrooms to a couple of our properties.
And the very first time that we added a bathroom, we didn’t pull a permit and the city ended up, just so happened to be driving by this property out of all of our properties and saw the work going on. We got to stop work order. Had to actually pull permits for that property.
So, I think, RJ, the safest and easiest kind of bet is that once you identify that you want to add additional square footage, bedrooms, bathrooms, whatever it is, go to your city, go to your county, say, “Hey, here’s what I’m looking to do.” They’re going to say, “Hey, we need this document, this document, this document.” Submit those things to them.
And if you want to avoid the risk of getting shut down by the city and getting on their naughty list, just get those permits pulled upfront. It’ll make the process a little bit easier for you.

Ashley:
Yeah, and it can definitely depend on your city that you’re into as to-

Tony:
That’s true.

Ashley:
… what the actual permits you need. So, in Tony’s situation, adding a bathroom, a plumbing permit, you’re adding new plumbing to the property. But in this situation, as far as properties that I have done, the code enforcement officers have not required a permit to add a wall that’s just making a bedroom because there’s no, especially if there’s no electric-

Tony:
No electrical. Yeah.

Ashley:
… being done or no plumbing-

Tony:
Plumbing.

Ashley:
… and you’re just literally putting up the wall. One thing that you may have to consider is adding a closet to make it a legal bedroom in the property. So, I would just call your code enforcement officer, ask, but typically in this situation, I would not see a need for you having to get a permit because it is just a wall going up. And if you’re not putting any new electric, like an outlet in it or anything like that, then you wouldn’t need to get a permit.

Tony:
Yeah. And like you said, I think it does depend also on what city or county that you’re in. We were in a part of northwest Arkansas last summer and we were looking at some properties out there. And the agent that was driving us around, we asked something about the permitting process. He was like, “Oh, in this county, there is no permitting process.” And we’re like, “What do you mean?”
He was like, “Yeah, if you own the land, you can build whatever you want.” And we were like, “What?” So, that almost made me nervous to even buy out there because you have no idea what you’re going to do-

Ashley:
You don’t know what you’re going to get, yeah. The new development out there, possibilities are endless. Once you get really rural, where I live too, the towns even around me will say like, “Building permit required,” because a lot of the other towns don’t have… you don’t have to have building permits or anything like that. So, the town said too, I’m there, “Welcome to this town.” And then, it’ll say building permit.

Tony:
Building permit. Yeah.

Ashley:
Yeah. And then, the last part of this question, what does this typically cost? So, when you’re doing this project, it’s framing, so you’ll have to pay for the lumber depending on how well it is, you have to put your studs in and frame it out. And then, you’ll have to, I’m assuming this is not an exterior wall. So, you wouldn’t need any insulation on it. And then, you’ll need drywall on both sides of the wall.
The biggest expense is actually hiring a contractor to come back to finish the drywall. So, even though they could frame it, they can hang up the drywall, the taping and mudding and finishing the drywall, that’s actually going to be the biggest time waster or time consumption of the contractor because they’ll have to let the mud dry and then they’ll have to come back and sand it.
And then, they might have to come back and mud it again and then sand it. But luckily, since it should probably be… you could probably do two boards, maybe a little extra in a wall depending how big it is. I am just looking at the wall behind me and that’d be like two pieces of drywall. But that would be the biggest time consumption is having a contractor that would have to come back multiple times.
It’s not like something they could finish in a day. And then, the painting, I mean you could probably do the painting yourself, or just when it’s dried, the contractor would just paint it in a day, unless it needed new coats. But being brand new drywall, you most likely wouldn’t need two coats on it.

Tony:
Yeah, I’ve actually never just done it as a project by itself. It’s always been inclusive of a full gut rehab. So, we’re spending a $100,000 on renovating the super old home. So, I couldn’t even ballpark what it would cost to just do one wall for one bedroom.

Ashley:
Yeah, we actually had… I was going to make this into an Instagram reel today. We had a tenant submit a maintenance request last night saying, “I am so sorry, I fell and tripped over my vacuum and put a hole in the wall. Can you please come fix it?” And then, put a picture up and it’s literally a big hole in the wall and the drywall. And so, the maintenance guy let her know he would stop by to look at it on Monday or whatever day it was to give her an estimate on the cost to repair it.
And she was appalled, “What do you mean I have to pay for it? This was an accident.” And he was like, “Yes, unfortunately, since you caused the damage to the property that you have to pay to have it fixed. You’re more than welcome to use another contractor that’s approved by us to go ahead and make the repair for you or I can come in and do it.”
And so, then, we got this long email from the resident to the property manager just saying like, “She has no idea how to fix this. She can’t fix it herself. She should have to pay.” And we’re just laughing. And so, some people will get confused sometimes that living in apartment means that they are in a full care facility in this. And even still, I bet, if you were at a full care facility, you put a hole in the wall, that would show up on your monthly bill too.

Tony:
Totally.

Ashley:
But yeah, so that was something that came up today. But when we were thinking about, okay, how much do we charge for that because it is so time-consuming to do that patch because you’re having to go back to it multiple times to actually finish the mudding on the drywall and then to paint it and actually paint match too. This is someone that’s lived there, I think, 10 years.
So, as far as I know, the paint has changed over the 10 years. But we’ll have to take a sample and go get it matched at Sherwin-Williams and everything like that. But probably be cost just as much to repair it without just the labor itself. We’ve had contractors that won’t do such a small job like that because they would have to come back four or five times, but it’s still such a small thing to do. Yeah.

Tony:
Funny story, I actually put two holes in my drywall as a kid. I was in… over my junior high years, it was the same apartment me and my mom were living in and the first hole was in my bedroom. Me and my friends were all wrestling in my room and one of us threw each other into the wall and one of our knees went through the drywall.
And the same thing happened downstairs. We’re wrestling downstairs and bumped into the drywall and broke it there too. So, anyway, I sympathized with your tenant.

Ashley:
Do you remember what happened? Did your mom have to pay the property management company to fix it or did she have somebody fix it?

Tony:
I don’t remember. I don’t remember. Yeah, as a kid, things just massively happen.

Ashley:
Yeah, you don’t.

Tony:
Yeah. So, I got to ask her though. I got to like, “Hey, did you have to pay for it?”

Ashley:
Yeah, yeah. Because part of the reason I want to do the reel too is to see, am I in the wrong? Is this actually something that should be included? But I don’t think so.

Tony:
No. Yeah, drywall’s one of those things that should be in the same condition after a tenant moves out.

Ashley:
Exactly.

Tony:
Drywall doesn’t just magically disintegrate by itself. Yeah.

Ashley:
And also, I think about, okay, if you owned your own home, what would you do? You would call someone and pay for it. I understand, you live in an apartment because more things are taken care of, included for you, but-

Tony:
Now, you got to update the lease. Drywall damages are not included in any repairs that were there, they understand-

Ashley:
Which we do have it as the move-out checklist in there as to this is what you’ll be charged to have a hole fixed upon when you do move out. That’s a good idea. Maybe I’ll just go off of that prices if they were moving out and there was a hole in it and that’s what we would charge. Yeah, that’s a good idea.

Tony:
There you go. Problem solved.

Ashley:
Okay, another Rookie Reply. Last week, I got to do a takeover of asking a question and then today too, Tony’s answering all my questions. Well, we got time for about one more question. So, let’s take Austin’s question. “What’s up, everyone? As of now, I’m a real newbie with getting into real estate investing.” Welcome, Austin. We’re excited to have you in this community.
“I do think I know a lot about real estate now, at least how some processes and numbers work. Love numbers. I’m an engineer. However, I’m curious about how a cash-out refinance works. When you take the cash-out refinance, are you paying a mortgage on the amount you took out or the entire ARV of the house? I appreciate this cool group.” Great question, Austin.

Tony:
There’s a couple different ways, right? So, let’s say, Austin, that, and I’ll try and use round numbers here so that that way it’s a little bit easier for folks to understand. Let’s say that Austin buys a home and say that the total cost for him to purchase and rehab that home comes out to $60,000. So, $60,000 is every dollar that Austin put into that property. And let’s say that he paid cash.
He paid $60,000 cash to both buy and rehab that property. Austin then goes out and he gets an appraisal on the property. So, he has someone give their opinion of the market value of that property. And they say, “Austin, your home is worth $100,000.” So, he put in $60,000, the home is worth $100,000. Okay. So, he currently has $40,000 in equity.

Ashley:
And I just want to point out, he mentioned the ARV, that is the after-repair value. So, that is what it appraised for in his situation. So, the ARV could be your goal of what you want the property to appraise for or it could be what you want the property to sell for if you’re flipping the house.

Tony:
So, the ARV is important when you’re getting a loan because most lenders will not loan you the full appraised value or ARV on a property. So, in Austin’s situation, the home is worth, it’s valued, it’s appraised at $100,000. Most lenders will only give you, depending on what kind of debt you give, but if say you’re getting an investment product, maybe you’re at 20%, right?
So, they want to keep at least 20% equity in the property. So, that means on $100,000, they’ll give you 80% of that as a loan. So, that means you’ll be able to get 80% of $100,000 is $80,000. So, let me reset the table here again in this example. The house is worth $100,000. The bank is willing to lend you 80% of that, or $80,000. And Austin put $60,000 cash into this property. Okay?
So, he has a spread of $20,000. The 60 to 80 is that equity that he can tap into. So, Austin can then go to a bank. He goes to whatever local city credit union or Main Street Bank, and they say, “Austin, here’s a loan for $80,000.” This is a cash-out refinance because he’s getting a full cash check, he’s going to pay back his $60,000 that he put into the deal, and he’s going to walk away with an additional $20,000.
So, that’s the process, I guess, for a cash-out refinance. It means you’re paying back whatever money you initially put into this property and you get to keep whatever money is left over up to whatever amount the bank is willing to lend you.

Ashley:
So, the scenario that Tony gave, great example, and that would work if you got a loan for that initial $60,000. So, maybe you borrowed that money from a friend or a hard moneylender. You would still have the cash-out refinance scenario because you’re paying $60,000 to the hard moneylender back and then you’re taking that $20,000 cash.
So, anytime there’s money that doesn’t have to be repaid back to anyone, it is called a cash-out refinance. So, in this scenario that maybe you borrowed money from your mom to do this and there was no lien, there’s really no record, she just gave you the money, that whole dollar amount is really going to be considered a cash-out refinance because there is no record of actually refinancing a mortgage.
Where if you went and got hard money on the property and you got that $60,000 and you only took out $60,000 and you left that $40,000, that 40% equity back into the property and you didn’t touch that, then that would just be a refinance because you’re just paying off the other mortgage that you had on the property, the hard money.

Tony:
And then, I just want to clarify the last couple piece of his question there. So, he says, “When you take out the cash-out refinance, are you paying the mortgage on the amount you took out or the entire ARV?” And it’s just the amount of the mortgage that you took out. So, again, going back to the example, you took out a loan for $80,000, so your mortgage payments will be based on the $80,000, not the ARV of $100,000.

Ashley:
And that was our last question today too. Thank you guys so much for always submitting awesome questions. We love answering them. You guys always come up with different stuff and we love it. So, you can submit more questions at biggerpockets.com/reply. And as always, please leave us a review or rating on your favorite podcast platform. We’d also love for you to subscribe to our YouTube channel.
And also one last plug, our Real Estate Partnerships book that just launched in August, super excited, it’s on biggerpockets.com. You can use the code Ashley or Tony to get a discount. Thank you guys so much for listening. We will be back on Wednesday with a guest. We’ll see you then.

 

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