Rookie Reply: Why Real Estate Debt Isn’t So Scary

Ashley Kehr:
This is Real Estate Rookie episode 178. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast. And if this is your first time joining us, we are the podcast that’s focused on those investors at the beginning part of their journey. So if you haven’t done a deal, you’re still starting, this is a podcast for you because you’re bringing you the inspiration and the information you need to get started. So Ashley Kehr what’s going on, what’s new?

Ashley Kehr:
Well, once again, I feel like I’ve been saying this for like 20 episodes. I’m recording from my couch, [inaudible 00:00:39]. But I also have my little youngest here. So if you see a hand or a leg or something fly into the side of the camera if you’re watching on YouTube. He is my producer today. So we had him on another episode where I think he made it maybe halfway through before he asked if he could leave. So let’s see how long he lasts today.

Tony Robinson:
Are we going to see the famous Ashley death stare?

Ashley Kehr:
Oh my gosh, I forgot about this. Yeah, this was probably almost a year ago. I was on vacation with my kids and we were in a hotel room, just one room and I had to record. And the three kids, I put the TV on for them on mute and they were too, sit on the bed. And all of a sudden one starts jumping from bed to bed and I had to give the death stare, and I had to message to Tony and say, just so you know I’m not glaring at you. My kids are behind the camera. And that was the same day that as soon as we ended recording, one of them said, “Mom, we lost a hermit crab.” Because we had bought hermit crabs on vacation and one had got lost while we were out there. Luckily we found it and put it back in his cage.

Tony Robinson:
That’s a fond memory.

Ashley Kehr:
Always lots of things happening behind the scenes.

Tony Robinson:
Fond memory. Well, yeah, no, that’s cool. I’m glad you’re covering well, Ash. What’s new with me. I mentioned this last time we recorded, but we’re actually in the process of putting together a fund for short-term rentals. Actually two funds I’m working on. One’s going to be focused on new development and we’re pretty close to that one actually launching. And then the second one’s going to be more so focused on acquiring existing single family residences and converting those into short term rentals.
So just as we think about our growth plans, I realize that’s probably the best way for us to kind of continue to scale. And there’s some other benefits that come along with running a fund. So yeah, you guys that are listening, if you want to learn more, it’s still super early, but just follow me on Instagram, @TonyJRobinson and I’ll be sure to post some information about that there when we get to that point.

Ashley Kehr:
Yeah. That’s a great opportunity for anybody to get into. So congratulations Tony on starting that.

Tony Robinson:
Yeah. Thanks Ash. I appreciate it. Well, we got some good questions today. The Rookie reply. That’s what we do when we get these Saturday episodes. So if you guys want your questions featured, you guys can get active in the BiggerPockets forums, the Real Estate Rookie Facebook group, or you can slide into the DMs for me and Ashley. So today’s question actually comes from my DMs. Let me see if I can pull this person’s name, hold on. Because I want to be able to give them a proper shout out. Hold on you [crosstalk 00:03:24]

Ashley Kehr:
In the meantime. If you guys love the Real Estate Rookie podcast, we would appreciate it if you would go to Apple Podcast and leave us a five star review and tell us why the podcast has helped you, motivated or influenced you to become a real estate investor, we love reading through those. And don’t forget to subscribe to our YouTube channel. And that’s the end of our commercial break. Back to Tony.

Tony Robinson:
All right. So I found her name. So today’s question comes from Jessica and hopefully I get this last name, right [Veristegway 00:03:58]. So Jessica Veristegway. Hopefully I’m saying that right, Jessica. But Jessica’s question is, I’ve been watching the content, you and Sarah, my wife, I have been posting on YouTube and you guys are in inspiration. I’m looking into following in your footsteps, but I had a question about debt. You seem to be doing really well with all those properties, but how much debt have you accumulated? I’ve watched the videos with your revenue and it’s impressive, but carrying a lot of debt scares me. Any advice? So Jessica, I think my first question would be why does debt scare you?
And the way that I look at it is that debt is one of the big advantages of investing in real estate in comparison to other potential asset classes. Most people can’t go out and get a loan to say, hey, I want to buy 10,000 shares of Tesla. Most banks, aren’t going to lend you money to go out and buy Tesla stock. Or if you say, hey, I’ve got this really cool idea for this hot and new startup, you can’t necessarily walk into the local credit union and then they’re going to give you a loan of half a million dollars for your new hot startup idea. Real estate is one of the few asset classes where if the numbers make sense, you are able to leverage debt in a smart way to buy a property that you otherwise wouldn’t have been able to.
So I’ve always looked at debt as a tool. Especially good debt right now. I’m not talking about racking up credit card debt, but when we talk about the debt that I’m using to purchase these properties, it’s debt that gives me a good return. So that’s my first thought. I don’t know, Ash, what are your thoughts on that piece?

Ashley Kehr:
Yeah, I agree that debt is definitely a tool and I have struggled with the same thing. So I paid off all of my personal debt using the Dave Ramsey method. And so I think that for me, it’s that other people is paying that debt. So my rental properties, other people are paying those mortgage payments for me. That’s not something that’s coming out of my income and that I’m not responsible for. So I like to keep my payments very minimal. I mean, I can’t even tell you the last time I actually had a car payment. I’ve paid off our farm equipment. All of those payments that were put on myself personally, I got rid of those. So I like to not have that personal debt. But as far as rental properties, like Tony said, it’s such a huge advantage to be able to go out and get a mortgage on these properties.
And then look at what’s the worst case scenario if you actually can’t pay the mortgage. You get foreclosed on. The bank takes the property back and you’re back to where you started. You’re back to where you started. And plus in New York, at least it takes forever for a foreclosure to go through. So you have some time to kind of figure out a plan B. So think do more research on exactly what debt is and how it works. What are the exit strategies? If you do get into trouble with having lots of debt, I definitely don’t think over leverage yourself. So maybe you set a minimum requirement, like, okay, every property I’m never going to leverage myself 75% or 80% more of what the property’s value is. So set those limitations for yourself so that if you do have to do a quick sale to get out of some debt on the property, that you have some wiggle room, oh there’s the first foot for anyone who’s watching on YouTube. You have some wiggle room to sell that property, even if you break even on it.

Tony Robinson:
Yeah. And if you think about like the big players in real estate, they all… sorry, I’m laughing right now because I’m seeing that foot creeping into the video.

Ashley Kehr:
He’s smiling, smirking over here, he knows exactly what he’s doing.

Tony Robinson:
But if you think about the big players in real estate, they’re all using debt as well. Like Sam Zell, who’s a multi-billion dollar guy. I can’t remember his name, but the guy that owns the Irvine company, right? Like all these people that have amassed these huge fortunes in real estate, they’re all doing it with debt as well. So, Jessica, I understand that there’s a certain fear associated with taking on debt. But I think if you’re underwriting the properties, you’re analyzing them conservatively and you’re able to get a good return on that investment, then there’s no reason not to move forward.

Ashley Kehr:
Yeah. I agree. Okay. I think we answered that one. Anything else to add?

Tony Robinson:
Nah, I don’t think so. I think that’s everything Jessica. Sorry, if I butcher your last name, just shoot me a DM afterwards and give me the phonetic spelling. So maybe that’s like just rule of thumb, if you guys are going to DM us and you’ve got maybe a harder to pronounce last name, give us the phonetic spelling that when we get in front of the rookie audience, we’re not butchering what your name is.

Ashley Kehr:
Honestly, it doesn’t matter to me because if I don’t know how to say it, I just make Tony say it. Well you guys thank you so much for joining us for this week’s Rookie Reply. Remington. Do you want to say goodbye?

Remington:
Bye.

Ashley Kehr:
Thank you guys so much for watching on YouTube. Make sure you subscribe to our YouTube channel and comment below with what you think leveraging debt has to do with you personally. Are you against it? Are you for it? Do you feel comfortable with it? And what are your tips for overcoming that fear of taking on debt? I’m Ashley @wealthfromrentals. He’s Tony @TonyJRobinson. And we’ll be back on Wednesday with a guest.