Which Rent Numbers Can You Trust When Analyzing a Deal?

Tony Robinson:
Hey, before we get into the show, I wanted to mention Bigger Pockets is hiring a full-time supervising producer for our podcast network. This is a remote position and a chance to work with an amazing team, if we do say so ourselves. We’re looking for someone with at least a couple of years experience managing production teams and someone who will feel confident taking the lead when launching new podcasts. So, would you or someone you know be a great fit? You can find the full job description at biggerpockets.com/jobs. Again, that’s biggerpockets.com/jobs to apply for our open podcast producer job. Now enjoy the show.

Ashley Kehr:
This is Real Estate Rookie episode 150. My name is Ashley Kehr, and I am here with my co-host Tony Robinson. Tony, can you believe it’s episode 150?

Tony Robinson:
I cannot believe it. We’re halfway through the 100s, making our way toward 200. And if this is your first time joining us here at the Real Estate Rookie podcast, every week, twice a week we bring you the inspiration, the motivation, the education, everything you need, the stories to get started as a real estate investor to build that portfolio and eventually find financial freedom. So, what do we got going on today, Ashley? What’s new in your world?

Ashley Kehr:
Not much. I feel like I’m always just waiting to close on properties, but I’m pretty sure I’m closing on one little cabin tomorrow, little A-frame… Or not tomorrow, next week, a little A-frame cabin. And then, yeah, just trying to stay caught up with things. I actually feel pretty overwhelmed right now, just getting 1099s out and getting caught up on all sorts of different things.

Tony Robinson:
All that stuff that comes with it. So, I know we’ve got a topic for it today, but I feel like it also might be cool, Ash, if you talk a little bit about your big 700-acre property and what’s going on with that, because that was the first time I’d heard anything like that. So, it might be cool if some of the listeners can get some insights into what’s going on with it.

Ashley Kehr:
Sure. Yeah. So, this campground that I’m working on, it was a foreclosure property. It was actually bought by the bank that had the mortgage on it at a tax foreclosure auction. And they did not put title insurance on the property, so as of right now, you cannot get title insurance on the property.
So, I am in the process of figuring out why exactly that is. Is there a redemption period? Can I pay an extra premium on this property? So, I did get an email yesterday from the paralegal at my attorney’s office saying that we’re good to go again. We can get title insurance, so I’ve followed up with her as to, “Okay, how can we get it? With does that mean?”

Tony Robinson:
Right. What’s different?

Ashley Kehr:
And I haven’t heard back yet. But, yeah, this is something very new. In New York state, attorneys handle closings, and they actually handle getting the title insurance policy for you. It’s pretty hands-off for people purchasing, and it’s done directly with the attorney. So, going to find out some more information about that, but it was like a little panic mode like, “Oh, my gosh. We’re not going to be able to get this property without title insurance, because we won’t be able to get any investors.”
So, definitely it was a kind of a little shock and a speed bump, hopefully a little obstacle that we are overcoming. But, yeah, it’s just one of those things with purchasing a large commercial property for the first time. Definitely the most expensive property I’ve ever purchased.

Tony Robinson:
Yeah. And I just, it’s like every time that you venture outside of your comfort zone, you learn something new. And I’m learning vicariously through you because I never knew that that could even potentially be an issue, that because the previous buyer didn’t get title insurance that it can impact your ability as a new buyer to get title insurance. And again, that could potentially vary state to state or district to district, locality to locality, but it’s just always cool to know what your options are when you get into another situations.
Our friend Derrick Acuff flipping a house on Instagram, he’s having an issue with another house as well where he has title insurance, but the title company missed that there was a lien against the property when he purchased it. So, now he’s not even sure if he owns the property. So, yeah. We got to get someone from a title company or something on here to talk through what all that stuff is so we can give people some inside scoop.

Ashley Kehr:
Yeah. That’s a great idea, because even my attorney was like, “This is where we’re at right now.” And he just ordered the title search to be done, so once we get the title search back, we still have a 25 day due diligence period. So, there’s definitely still more time to figure things out, but he made it seem like our hands were tied at the moment.
So, what did I do? The first thing I do is I call some of my investor friends who have done large commercial deals and I say, “What do you think about this? What can we do?” So, the recommendations were look at the redemption period, look at if you can pay a premium, and then ask for a reduction off of the purchase price to cover that insurance premium that you’re paying up front. So, yeah. Lean on your investor friends, but also make sure that you can add some value to them, too.

Tony Robinson:
Yeah. And if you don’t have many investor friends, that’s what we’re here for. Right? The Bigger Pockets forums, Real Estate Rookie Facebook group, there is a sea of other eager, willing investors who want to get to know you and share notes back and forth. Well, I’m glad Ashley that you found another option, another path forward. I know you were stressed a little bit when you first got that news, but it just proves that there’s always a different way or there’s always a creative solution when it comes to investing in real estate.

Ashley Kehr:
Yeah. And I still have not completely overcome this obstacle, and I have to admit there are days where I’m like, “Should I just back out now and get my very large deposit back?” And I’m really struggling with staying motivated and keep going, and so it’s always awesome to be able to come onto a podcast where we have guests that are inspiring me. I hear their story. I’m like, “Okay, if they can do this, I can get through this deal. I can make this happen, and I can make it work.” So ,yeah. Real estate is definitely a rollercoaster, ups and downs and staying motivated all the time because every day there’s something good or bad that can come up.

Tony Robinson:
Yeah. Well I’m sure it’ll turn out well for you. And if not, if it turns out terribly, at least it’ll make for a good podcasts episode someday. So, either way, there’s a benefit to it.

Ashley Kehr:
Yeah, really. Yeah.

Tony Robinson:
But we’re actually working on a commercial deal right now, too. I actually just got off the phone with one of my business partners right before this call, and there’s another motel. This is an actual motel that’s not too far from my house right now, another lake town, but it’s been very poorly managed it seems. We requested financials. The last financials were from 2016. If you listen to this podcast, it is right now 2022, so the financials are just a little bit outdated. And to make matters worse, the financials only included a one page of what the expenses were for the year.
So, just when you think of like mom and pop bad bookkeeping, super outdated, it literally checks all those boxes. But we’re excited about this property because of the location. It’s in a really prime part of town, and I think there’s a really good opportunity to come in and renovate this property, make it cool and hip like our short-term rental listings, reduce the overhead by not having staff on site, and make it a self check in, self checkout. So, probably going to go out there at some point this week, and I’m hoping we can finally take down my first commercial property. It’ll be 33 units, I think, if we can actually make it happen.

Ashley Kehr:
Tony, that’s awesome. I have a couple questions about that property. So, what are you going to do to fund that property? Are you going to do bank financing, because with financials not being up-to-date current, would you be able to get an SBA loan. Or maybe that’s an opportunity to go for seller financing even, say, “Hey, look, you’re going to have a really hard time selling this property.”

Tony Robinson:
Yeah. So, the seller actually was in escrow with a different buyer before. Buyer wasn’t able to perform. So, I guess he’s had a couple of false starts with this property, and he actually already understands that it’s not something that most banks will touch. So, he’s willing to offer seller financing.
He wants a 40% down payment, which is pretty hefty. But he’s offering, I think, a three year interest-only at 6% or something like that. So, not terrible, gives us more than enough time to go in, make the renovations we need to make, and stabilize the property. And I think once we get it stabilized, we’ll look for some kind of SBA lending to get out of that owner finance deal.

Ashley Kehr:
Well, that’s really exciting, Tony.

Tony Robinson:
Yeah.

Ashley Kehr:
Good luck.

Tony Robinson:
So, it’s early. I don’t want to get my hopes up.

Ashley Kehr:
Right. But still, yeah.

Tony Robinson:
I try not to get too excited until the ink is dry. Right? Once the contract is signed and everything’s closed, then I can get excited. But right now, it’s-

Ashley Kehr:
But that’s when it gets scary, too.

Tony Robinson:
That’s true. That’s true. We’ve never done a deal 33 units all in one shot. But I’ve shared a few times that my goal is to get to 1,000 short-term rental units by the end of 2023, so I’ve got almost exactly 24 months to make that happen. And if the only thing I’m doing is buying one single-family house a month, I’m going to fall miserably short of that goal. So, I need to break out of my own comfort zone, conquer some of my own fears and start chasing some of these bigger deals.

Ashley Kehr:
Well, I know you can do it, Tony.

Tony Robinson:
Ah, thank you, Ash.

Ashley Kehr:
Okay. So, do we have a question for today? I think you had one from your DMs, right?

Tony Robinson:
We do. We actually have a question. So, today’s episode was not about commercial real estate. We actually have a question pulled from the audience. So, today’s question actually comes from my Instagram. Someone hit me up and sent a question that I thought would make a good topic for today and actually falls in line actually with what we’re just talking about with the commercial properties.
But this question from Colettes_REI7. So, Colette reached out to me on Instagram and said, “Do you make offers based on the pro forma that’s provided or on the current actuals of a property?” So, Ash, what are your thoughts on pro formas versus actuals and how you use those to analyze?

Ashley Kehr:
So, when I analyze a property, I’m looking at what I think the numbers are going to be, so the pro forma. Then I also analyze it at worst case scenario, like what maybe what the numbers are now or what’s the worst case scenario of that property? What’s the lowest rent it could get? What are the highest my expenses could be? Then I also at best case scenario, so what’s the best case scenario for this property? And then I look at those and see, can this property survive at all of those different options?
And I think looking at commercial real estate is a lot different than looking at a duplex and running the numbers, too. With a duplex or a smaller property, it’s a lot easier to turn that property over per se, because you’re maybe just doing one or two units, where if you’re going after a large commercial property, it may take you a full year to actually get to that pro forma. So, you have to have a plan in place to cover those expenses, whether you have a large amount of working capital.
So, working capital is when you take a sum of money, say if you’re buying a large commercial property, you’re taking a $100,000, and you’re putting it into a bank account to cover maybe payroll, to cover snowplowing for the year, to cover insurance, to cover property taxes, because you know the income for the first year won’t cover that. And that is not to be confused with your capital improvement money.
So, if you’re going in and you’re making improvements, you’re putting in new flooring, you’re putting on a new roof to really appreciate that value so you can charge more rent, that is going to be a separate amount of money you need. So, I think looking at both of those, the actuals and the pro formas, definitely buying a property that has value-add for that pro forma is where you’re going to get the most bang for your buck.
If you’re buying a property for the actuals, it’s probably not going to be that great of a return for you as if you’re adding value. So, I think it’s important to look at both, and if the pro forma works but the actuals don’t, how are you going to cover that until you get to the pro forma?

Tony Robinson:
Yeah. Ash, what a phenomenal response. There’s not much that I can add to that. The process you outline is essentially the same exact thing that I do as well. So, I think the only thing that I’ll add is that in order to find out what those pro forma numbers are, the thing that you do not want to do is take the pro forma that the sellers listed or that the brokers listed because they have an incentive to make sure that the property is shown in the most favorable light. So, they’re probably going to be a little bit more optimistic about how that property will actually perform.
So, anytime that the seller or the agent or the broker is giving you pro forma data, thank them kindly for sending it to you, but you always want to double check and make sure that you validate that information on your own. Luckily, Bigger Pockets has resources to help you do that. If you go onto the Bigger Pockets websites, under tools there’s the services area and there’s the rent estimator.
I’ve used this in the past, and it actually works pretty well. I looked at my very first rental property on the rental estimator on Bigger Pockets. I was renting that property out for 1,350 a month, and the rental estimator on BP has it at $1,300 per month. So it’s like almost spot on with what I was actually charging for that property, so it does a relatively good job of pulling that data.
And if you’re not a Bigger Pocket’s pro member, you don’t have access to that, you can do that same search manually on your own. Just open up Zillow, open up Craigslist, Facebook Marketplace, whatever is the dominance listing source in your market and just see what other properties are renting for in that area. And you can come to that same determination on your own, but the big takeaway is do your own homework when it comes to the projected income. Don’t rely on what the seller’s telling you.

Ashley Kehr:
Yeah. It’s that trust but verify. You may trust somebody, an agent you’ve worked with or somebody that’s selling you the property, but always verify those numbers. That’s great advice, Tony. Just on top of the using the rent estimator on Bigger Pockets, there’s also the calculator reports too, where if you’re a pro member you can run unlimited reports. So, run a report as the actual numbers, run a report as the best case scenario, as the worst case scenario, and then compare them. You can print them out, save them, lots of things you can do with those calculator reports.

Tony Robinson:
Yeah. So, I hope that answers your question, Colette. Ash and I both sunk our teeth into it. I know that’s a question that comes up a lot on how do you use those two figures, so hopefully that gives you the right direction that you need moving forward.

Ashley Kehr:
Well, thank you guys so much for joining us for episode 150. I can’t believe of it still. We appreciate you guys so much and love that you listen to the show. And if you want to be a guest on the Bigger Pockets Real Estate Rookie podcast, you can submit a form at biggerpockets.com/guest. And we will be back on Wednesday with a guest. My name is Ashley Kehr at Wealth From Rentals, and he’s Tony Robinson at Tony J. Robinson on Instagram. But before you guys go, let’s check out something you can use at biggerpockets.com.