How to Maximize Your Rental Income on a Single Property

Ashley:
Let’s get your questions answered. I’m Ashley Kehr and I’m here with Tony j Robinson.

Tony:
And this is the podcast to help you kickstart your real estate investing journey. And today we’re going back into the BiggerPockets forums to get your questions answered. Guys, the forms are the absolute best place to quickly get all of your real estate investing questions answered by experts like me, Ashley, and so many others. But today we’re going to discuss how to determine if you should rent or sell a property. We’re going to talk about a realistic cash on cash return in 2024 and beyond. And finally we’ll talk about what to keep in mind if you’re considering a heloc. Now, before we jump in, we want to give a big, huge thank you to Corporate Direct. This episode is sponsored by Corporate Direct where you can protect your properties with an LLC and let corporate direct take care of all the paperwork. Go to biggerpockets.com/direct for a free 15 minute consultation and get 100 bucks off. If you mention the Real Estate Rookie podcast, let’s jump into the show.

Ashley:
Okay, so our first question today is from the BiggerPockets forums. And here’s the question, I need some advice on whether to sell or hold onto a property that I purchased in 2020. To provide more context, my spouse and I purchased our first property in California in 2020 for 500,000, and that has currently appreciated to 700,000. We did live in the property for a little over two years, but due to family reasons, we had to relocate to Canada in early 2023 and have been renting out the property since then. We did hire a property manager, but even after their $200 fees per month, the property is cashflow positive around $500 if we consider a mortgage plus HOA plus property tax, the time to renew the current lease with our tenants is around the corner. And I must mention that my current tenants are very stable and have never missed any payments so far, and therefore I want to provide them with adequate time since we’ll not be renewing the lease if we are selling the property since, as per our understanding, if we have used the property as our primary residence to out of the last five years, which we have from November, 2020 to January, 2023, then we should be eligible to get capital tax exemption if we sell the property before November 25.

Ashley:
But if we decide to renew the one year lease, the property management company only renews for one year, then we will miss this opportunity forever since we currently have no plans to return back to California, at least not in the immediate timeline, and I have around 30% equity in the property, therefore seeking advice, whether it makes more financial sense to not renew the lease and sell the property, get the capital tax exemption, still need to figure out the implication of selling the home with Canadian taxes or hold onto the property and build our equity, especially since it is cash positive and we have a stable tenant. Well, Tony, I think the first thing is you can talk on the Canadian taxes because you are from Ontario, right? I have to tell a story one time. The first time Tony and I ever met, we were going to Denver and we had to both send in our flights to get reimbursed and I saw Tony’s flight and I was like, he’s coming from Ontario, Canada. That’s so weird. Why is he going to be in Canada coming from there? Ontario, California, I learned

Tony:
Ontario, California, however it is named our founders came from Ontario, Canada, which is why we are Ontario, California. So yeah, the original homesteaders, but a lot to unpack in this question. I think before we get into it, Ash, maybe if we just kind of break down some of the things that she talked about in this question. So the first is the tax exemption. So typically when you sell a piece of real estate, especially like an investment property, your capital gains taxes on the sale. So you get a big profit when you sell, but then you got a big tax bill at the end of the year. So a lot of this question kind of hinges on trying to avoid that capital gains tax, but in order to do that, you have to have lived it as a primary residence or two out of the last five years. So if she reextend this lease, then she won’t have been able to qualify for that two out of the last five because it’ll be one out of the last five, which won’t allow her to qualify for it. So I just want to lead the foundation with that first so listeners can really follow along with what the challenge is here.

Ashley:
So one big piece of this is that you feel like you’re missing an opportunity to tap into the equity of the property, but another option is is that you could always go and refinance to get that 30% equity. The dilemma I do see here is that if you purchased it in 2020, you could have a better interest rate than what you would get now if you went and refinance the property. But I just want to lay that out as a possible scenario to get to tap into equity is by doing that, you also could do the 10 31 exchange on the property too. So I think there’s some different options that I don’t want anyone thinking I have to sell my property in order to get the max value from it. You’re not going to lose out. There’s other ways to tap into the equity. It’s really just figuring out what is the best path for you to do that.

Tony:
Yeah, you read my mind, Ashley, on the 10 31 exchange, a lot of her dilemma is trying to avoid this big taxable event, but if you use what’s called a 10 31 exchange, and for our viewers and listeners who aren’t familiar with that, basically there’s a section of the IRS tax code section 10 31, which allows for kind exchanges where you can defer the capital gains tax if you exchange this asset for another kind asset. So basically the person who posted this question can sell this property in California, whether it be five years from now or 20 years from now. And instead of paying taxes on the gain, they can take that entire profit and roll it into another property so they can defer those taxes until they actually sell and just liquidate for the full profit. So there’s a lot of people who quote, swap to you drop where you just keep swapping your properties for bigger properties and you never actually have to pay tax on it while you’re alive because you just keep deferring it into the next building. So we’ve done 1 10 31 exchange and it was an easy way for us to take the equity that we had in a property and we were actually able to turn that into two different properties from the equity that we had built up. So I personally, if I’m in the situation, you got a cashflowing asset in a vastly or aggressively appreciating market like California. So you’re getting cashflow and appreciation and a super easy tenant. It sounds like you’d like the property manager if it’s me probably not selling this property.

Ashley:
So I think your two things to consider is how important is it that you get this cash now, do you need this cash now to tap into the equity or can you keep the cash that equity invested into this property still? And then the next thing to look at is do you want to be done with rental properties? Because if you do the 10 31 exchange, you’re going to have to buy a kind property, which is most likely going to be some kind of rental property. So that would be, I see the big things to think about right there as to what are your lifestyle goals, your immediate goals that you need right now, and what are your goals down the road? So say a year from now, this resident, this tenant doesn’t decide to renew and you want to sell the property a year from now because you don’t have another great tenant in place like this one was for you, do you want to go and buy another property that you would have as an investment as a rental property again too?

Ashley:
So I think those are two big things about when do you actually need the cash? What are the other opportunities that you can do with that cash and is it going to be a better return than you’re making right now? But I think Tony said it perfectly, you have a cash flowing property that’s appreciating it’s most likely going to continue to appreciate. You’re most likely going to get more cashflow because you’re probably on a 30 year fixed rate mortgage and you’re going to have property and property taxes and insurance increase, but you’re most likely probably going to be able to increase rent above and beyond that where your cashflow will actually increase. That is one big lesson that I’ve learned as a real estate investor is to watching my cashflow increase because my mortgage payment has stayed the same, but I am continuously raising rents to keep up with market rents and on a property I bought 5, 6, 7 years ago, my cashflow was so much more now because of just time and being able to raise rents in different areas too. And that definitely has become such a benefit of being a landlord and investing in rentals.

Tony:
Yeah, I couldn’t agree more actually. I feel like this person’s in a really good spot and again, I feel like cashflow, appreciation, good management, that’s what everyone hopes for. It sounds like you hit the holy trinity there. So I’m probably holding onto the property.

Ashley:
Before we jump into our second question, rookies, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as original content like my new series rookie resource. We want to hit 100,000 subscribers and we need your help. If you aren’t already, make sure you are subscribed to our YouTube channel by going to youtube.com/at realestate rookie. Okay everyone, welcome back Tony. What’s our next question today?

Tony:
Alright, so our next question says, I’m trying to approximate how much real estate I need to achieve my annual cashflow goals. And it boils down really to cash on cash returns. Frankly, I’m trying to buy as little real estate as possible to meet my cashflow goals due to low liquidity plus current market conditions and I’ll put the rest of my portfolio in the stock market on the BiggerPockets YouTube channel. There is a nice friendly debate of stocks versus real estate and real estate wins in terms of return on investment when well leveraged per the podcast, I believe it was suggested that a first year cash on cash return of 15% to 20% is achievable when well leveraged might be tough to achieve positive leverage with today’s interest rates in a possible housing bubble. Well debatable, the highest first year cash on cash return I’ve ever heard of is 39% at a self storage facility where there was $68,000 in that operating income, $29,000 in interest in principle, and then a $39,000 in cashflow with a hundred thousand dollars down payment on a $470,000 property.

Tony:
And this was purchased in late 2020. I’m curious how fellow real estate investors have fared in terms of one year cash on cash returns and any opinions of the current market conditions. So a lot to impact here as well. It sounds like there’s really a couple questions here. So his first question is, how can I really maximize my return with the fewest number of properties possible? So that’s one question. And then the second part of his question is what is an actual good cash on cash return for this market? So maybe let’s focus on the first part of that question of, hey, how can he really accelerate the cashflow with the least number of properties? And there’s a few different ways to skin that cat. I think what comes to mind for me first, Ashley, is a lot of it I think depends on how aggressive this person wants to get.

Tony:
I always go back to when we interviewed Craig op on the Ricky podcast because I think he was a phenomenal example of someone who literally went all in to try and maximize their return per property. So if you guys go back and listen to the episode with Craig, he bought a big, I think it was like a five bedroom house as a recently graduated young professional from college, didn’t need five bedrooms, but he got a big old five bedroom house. He slept on the couch in the living room and then he rented out all five bedrooms to other people. So he got this super low down payment debt, the super attractive debt. He’s really maximizing the cashflow by renting out all five rooms and he just repeated that process and within just a few properties he was able to get to a point where he had a good chunk of cashflow coming in. So I think a lot of it depends on how aggressive this person’s willing to get. So aside from house hacking, Ashley, I guess what other strategies might this person employ to really juice the cashflow from the fewest number of rental properties?

Ashley:
Yeah, actually I was just listening to James Danor on a BiggerPockets on the market podcast and he was talking about flipping and how he requires he won’t do a flip unless he is getting a 35% cash on cash return over six months. So that is his base metric for when he’s analyzing a flip. If he is not getting whatever capital he’s investing in, and I believe it was he’s getting hard money of 85% of the total cost of the flip. So that’s purchase price and that’s the rehab cost too. He’s getting funding for 85%, so he’s putting 15% capital upfront from him or his partners, whatever, but with that 15%, he is requiring that he’s getting 35% cash on cash return when he sells that flip, what he’s making on the profit of it. So I think that is a super great metric. He’s also flipping in a higher end area of Seattle.

Ashley:
And so I think understanding your market and what’s achievable in your market, Jimmy has also been doing this for a very long time and has done thousands of flips and really, really knows how to get that little extra percentage by analyzing and estimating his rehab down to the nitty gritty. But I thought that was really interesting that he shared that. So I think definitely flipping could be another metric. I actually invested capital into a flip and we got over a hundred percent cash on cash return from the money I invested into that flip. But that’s not going to happen every single time. Of course not. But I definitely think flipping could be an avenue of getting a high cash on cash return. The thing with calculating cash on cash return for rental properties is that you’re not taking into account the equity and the mortgage pay down that’s being built up in the appreciation in this property too. You’re just looking at cashflow and the capital you left in the property.

Tony:
Yeah, I think flipping another great strategy, and we probably don’t talk about flipping enough in terms of cash, on cash return, I think most people look at flipping just in terms of how much, what profit did I have at the end of the deal. But yeah, I love Jimmy’s approach. Look at it from a cash on cash return perspective. I think another unique strategy, and we’ve interviewed some folks recently on the podcast that have done this as well, the nassos we interviewed recently where they would buy kind of similar to the house hack, but they were buying somewhat larger properties and then rehabbing and converting them into even larger properties where they could rent by the room. And that did phenomenally well for them and they were able to get four or five x what the usual long-term rents are by doing this super massive rent by the room strategy.

Tony:
So I think finding ways to really maximize every square inch of space. So sometimes maybe even adding more space is a great strategy to jury more additional revenue for your properties. I think the one last thing that I would say from a strategy perspective, obviously short-term rental I think are great because you’re going to get better cashflow than traditional long-term rentals. But I do think some of the small commercial probably doesn’t get enough love either in this question. He talked about self storage facilities. We just bought our first small boutique hotel, the returns and that are phenomenal comparison to what we could have got, how we deploy that into a single family home. So I think there’s a lot of newer investors who kind of are gun shy for the small commercial, but I do think there’s really a sweet spot right now in that asset class specifically to get really good deals that are undervalued where you can do some value add and really juicy returns as well.

Ashley:
Yeah. And Tony, what was the price point of your Motel two that you bought? It was like 800,000.

Tony:
It was just under a million. It was nine 50.

Ashley:
Okay. And then what, what’s some of the price points of the single family homes you bought in the Smoky Mountains?

Tony:
I’ll give you a perfect example. The first cabin that we bought, we bought it for five 90. Today, it’s probably worth close to a million bucks, maybe a little less, but that cabin, that one single family home is valued the same as what we bought a 13 room hotel for. And the revenue potential on the hotel is at least four x what that single family home is. So you can see how when you find the right commercial, same exact price, but so much more upside when you go commercial.

Ashley:
That’s the point I wanted to drive in that sometimes thinking of a motel or a commercial property, you’re thinking higher price point, but that’s not always the case. Right? Where I am right now at the lake, there’s this motel for sale and it’s completely run, but it’s listed at 249,000 or something like that. And it’s just like there’s lake houses that are 2 million around here, but yet there is this, I don’t know how many rooms are there, like 12 maybe or something like that. You would have to obviously bring in capital to fix it up and things like that. But don’t get into that mindset that commercial or motels or campgrounds or anything like that are less affordable than going and buying a single family home or a small multifamily.

Tony:
Did you say that there is a motel in your town that’s listed for 240,000 bucks on the lake?

Ashley:
It’s not on the lake, it’s on the other side of the street of the lake.

Tony:
Why have you not told me about this deal yet? What’s the name of this lake? What’s the name of the lake? It’s probably some crazy lake name.

Ashley:
It’s Ch Taco Lake. We had a guest on Adam who did buy a motel on the lake and turned it into a boutique motel. So I’ll have to find Adam’s show number, what show he was on, but he bought a motel, fixed it all up. He did seller financing. There was a single family home with it. There was a whole bunch of docks too with slips. And then, yeah, so I actually went, before I bought my lake house, I went and stayed at his motel at this little boutique motel that he was put together there and it was super nice and I met him and his wife in person and yeah, it was really cool. And last I heard, I think he had said they were trying to buy a marina too on the lake, but yeah, I’ll have to find his episode number because it was a really good one.

Tony:
Now Ashley, I’ll have to find the name of that hotel that’s for sale right now and send that to me so I can go get an offer.

Ashley:
There was another one that actually just sold, it was a pretty well known more a two story motel and it had a put putt course and stuff like that. And when I saw how much it sold for, I couldn’t believe it was that cheap that it sold for. And we actually went there a month or two ago to actually do the put putt course and there was nobody around. It was a ghost town. It was so weird. The door to the shed where you check in to play put putt was unlocked, but nobody was there. Is this selfer, do we just help ourselves do a ball and a thing and we’re like, I don’t know, let’s just leave. And we ended up leaving and going somewhere else. But yeah,

Tony:
I think we covered maybe a few different opportunities in terms of juice and the cash on cash return. But the second part of that question is what is a good cash on cash return to shoot for in year one? What are your thoughts on that Ash?

Ashley:
For a rental property, I’m looking at between 15 to 18% cash on cash return for a rental In my market. I’m happy with that. I’ve also, it used to always have to be over 20%. A couple of years ago it was very different for me, but now I care more about appreciation and mortgage pay down and equity that I have in my property. So I’d rather leave some money into the deal and be not as leveraged on a property too to have that equity baked in. So I may be a little bit different, but that’s where I’m looking at right now is between 15 to 18% cash on cash return for a rental property. That’s also going to give me appreciation.

Tony:
And I think we already touched on the flipping and what that looks like. Short-term rentals. I mean, 20% is a good floor and I think we’re still seeing deals maybe north of 30%. Much like Ashley a few years ago, we would only look at deals that they were doing at least 30%. Obviously as interest rates have changed, we’ve had to pull that number down just a tad bit. But yeah, I think that’s a fair number in the short term rental space. But honestly, I think a lot of it’s going to come down to you as an individual investor and what your risk tolerance is because maybe you could go out and get a 50% cash on cash return, but is that going to force you into a war zone maybe where your tenants maybe aren’t taking the best care of your property and there’s other issues that come along.

Tony:
So I think a lot of it does come down to your risk tolerance or how risky of a project is it? Are you going to do new construction for the first time? You’ve never done it before where maybe the returns are phenomenal, but you’re going to sit waiting for permits for 12 months before you even get the green light to build anything. So there’s a lot of nuance that I think that goes into cash on cash returns. But general rule of thumb, yeah, somewhere in the double digits to start with is probably a good starting point.

Ashley:
I just looked up Adam’s episode where he talks about the motel and the leak that he purchased in its episode 375.

Tony:
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Ashley:
Okay, welcome back. Our last question is from the BiggerPockets forums. And the question is context is that we have a couple other single family rentals and we’re currently considering getting a HELOC from one of them to fund the down payment to a commercial multifamily listing that’s above four units. Would this be a bad idea? Depending on our other financial standings, we currently have amazing income coming in from multiple rentals and our businesses, but the HELOC is within consideration because capital is dry. Coincidentally during this time due to other investment pursuits going on for us, we can absolutely make the interest payments and would be fine if they shot up from say 10% to 15%, what am I missing? Is there any reason why I shouldn’t do this? Or is this a normal day occurrence for people to utilize HELOCs for investment properties when they have the means to cover any worst case scenarios related to the loan? Oh, a good, he lack a home equity line of credit. So it looks like they’re trying to get a key lock on their other investment properties. Is that how you’re reading this too?

Tony:
Yeah, it sounds like they got some equity in their single family homes that they want to use to buy this small commercial property.

Ashley:
And I’ve done this before. You can definitely do this. Check small local banks where they will give you a line of credit on an investment property. It doesn’t have to be your primary residence, and then you can, so they want to take this money, pull the money off of the line of credit and use it as the down payment. So I don’t do this. I usually use a line of credit to fund the purchase price of a deal that I’m going to go and refinance all of it and pay the HELOC back, or I fund it for the rehab and then when I go and refinance, I pay it back. So in this situation, they’re using it as a down payment, so they’re most likely not going to go and refinance and pull the money back out of the property to pay the line of credit.

Ashley:
So they go on to say that they are fine with making the payments on the line of credit. They’re going to maybe take money from their other investments, whatever it is to pay that off. So what the first thing I would look at is analyze the deal and make sure you are including those payments to the line of credit, and what is your cashflow after that? Does the deal still make sense based on that? Because you do want to run the numbers to see what the deal actually does for you. So understand that you need to add in the mortgage on the property, plus also the HELOC payments that you’re going to be making to pay that back.

Tony:
Ashley, one thing I want to drill down on. You said that you usually use it in kind of like a short term instance. Why is that? Why has that kind of been your preferred approach?

Ashley:
Because the interest rate is usually higher than if I was going to go and get long-term debt, like a 15, 20, 30 year fixed rate mortgage on it, plus variable as they indicated that they’re okay with the interest rates swinging from 10% to 15%. They still can cover that, which is great that they are already understanding that could happen and considering that. So that’s one thing I don’t like about it is that it’s variable. Also, some line of credits are only for a certain amount of time where at the end of a term, say five years, the bank can go ahead and either call the note and say, okay, you have $50,000 that you’ve taken out, we are now going to end your line of credit and we’re going to amortize that 50,000 that’s left over the next 15 years and you’re going to make payments back to us based on that amortization schedule. So there’s a couple, and that definitely depends on what type of line of credit you get, things like that. But I like just using it for short-term purposes and then getting a better interest rate for something that’s more long-term.

Tony:
Yeah, we’ve never used the HELOC before. Usually if we’re doing rehabs, it’s private money that we’ve typically used. So we haven’t pulled the HELOC specifically. So maybe you can even educate me a bit here, Ash, but I guess what are some of the questions if this person did want to move forward with the heloc, like you talked about, hey, what happens at the end of the term that’s something that maybe people don’t take into account? What are some other maybe gotchas that this person may not be thinking about as it relates to pulling a HELOC and using it as a down payment?

Ashley:
If there’s any requirements? So sometimes I run into the circumstance where the bank will want me to keep my checking account for the business at that bank. They want my deposits. So that could be a requirement. They could ask to have your financials every single year. So at this one bank, every year I’m submitting my personal financial statement, my tax return, any of my partner’s tax returns, my business tax returns to this bank. Another thing to look out for is to how do you get the money off of the line of credit? So in one circumstance, one bank, I’m filling out a form and I email them the form and they deposit it into whatever account I want another bank, there is no form I have to call or email one of the loan officers and request for them to do it. So in other circumstances, I’ve seen people just have a checkbook where they can just write a check and the money comes off the line of credit.

Ashley:
So I think understanding what that process is. So for example, if you have the checkbook, we could be at, and I’ve literally seen this before where a guy had his checkbook from his line of credit, and I’ve seen another guy with his self-directed IRA checkbook be at meetups and be like, I’m ready to write checks. Who wants to invest with them? Like super cocky, don’t do that guys. But I’ve seen. But if you get a checkbook, you can write the check whenever where if I want to pull money off my line of credit and I have to submit this form to the bank or I have to email the loan officer, I’m limited to banking hours to be able to do that too. So I think understanding how you can get your money off the requirements for maintaining and establishing the line of credit, understanding that too, and if there are requirements to renew your line of credit, what that looks like.

Tony:
And they touched on a little bit in the question too, but I think just the variability of the actual interest rate. Let me ask Ashley, for the line of credit that you have, is there a cap on the rate or can it move without any limit?

Ashley:
I honestly have no idea. It’s never gone higher than 10%, but one of them started, I’m trying to think of what year I took it out, maybe 2017 or 18, and it was at 4.75% and it’s worked it’s way up to 10%. And I think right now I just got a notice that it’s down to 9.25 or something like that right now. But that’s a big swing. I mean, that has made, yeah, it made a huge difference. And if I had pulled out money, then verse now as to what the interest payment would be every single month. And that’s one thing nice to know too is if you’re just making interest payments or how, I gave the example that if they call your loan, they could amortize it. We now you’re paying principal and interest. And that actually happened to one of my business partners. He took out a line of credit and they actually converted it, I think it was after two years, converted it and said, you can’t pull any more money off. We’re converting it to a 15 year term loan. Now he makes those payments on it, but I don’t know, I can’t remember what his interest rate is. But that would be something to think about too, is okay if they do convert it to a long-term loan, how do they establish what my interest rate is at that time too?

Tony:
Yeah, and I think with most things, talking to a few different people as you shop for this HELOC will probably be important as well. I’ve given the example before that the mortgage industry is kind of like the ice cream industry. They’re all selling the same thing, but the flavors vary so much depending on who you go to and who you talk with. And while everyone may offer a heloc, the way in which they actually deliver that, the nuance of how you interact with that HELOC could be very, very different. So talk to the local banks, talk to brokers, talk to whoever you can and try and get at least a few options before you sign on the dotted line for that first heloc.

Ashley:
And keep asking until you’re told yes, because there are a lot of banks who will say no to doing a line of credit on your investment property, but I have two banks just in my small rural area that I live that have done it. So keep asking around until you find someone that will do it. Okay. Well, that is all of our questions today on rookie reply. Thank you so much for joining us. If you want to be part of the BiggerPockets community, you can go to biggerpockets.com/forums. You can also sign up for a free membership or you can become a pro member. I’m Ashley and Hughes. Tony, thank you so much for listening or watching on YouTube real estate Rookie.