The “Boring” Rental Strategy That Could Retire You by Your 40s (Rookie Reply)

Ashley Kehr:What if the biggest mistakes in real estate don’t happen at the closing table? They happen in the three decisions you make before you even write up an offer.

Tony Robinson:Today we’re answering three questions straight from the BiggerPockets forums that every rookie has to work through before deal one. How to pick a market when your own backyard does a pencil, whether to buy a rental or a primary residence first when you’re just starting out, and what you actually need to know about short-term rental regulations before you bet your strategy on Airbnb.

Ashley Kehr:This says the Real Estate Rookie Podcast. I’m Ashley Kerr.

Tony Robinson:And I am at Tony J. Robinson. And with that, let’s get into our first question, which comes from the BiggerPockets Forums. Now, this is a longer question, so I’m going to paraphrase a bit here, but the question that basically says, “I’m an aspiring investor living in Los Angeles and investing locally is basically out of the question. Even a house hack in this city is tough right now. Anything with an ADU or multiple units in a decent area is well above the $1 million mark. So I’m stuck at the stage of choosing a market. I’m looking for out- of-state opportunities where I can actually cash flow. What criteria should I be using and how do I narrow down from the entire country to one place that I can actually commit to? ” It’s a great question, and it’s one that a lot of rookies honestly get stuck on initially is where do I invest?Now, I’m just going to talk strategically here for a moment because I think it’s an important foundation to lay. There are over 20,000 cities in the United States, 20,000. So the chances of you finding the Goldilocks city that is the absolute perfect match for you, or like the Cinderella slipper, where it is the absolute perfect city for you. It’s going to be tough. With 20,000 cities, there are probably hundreds, if not thousands of cities that you can invest in that would make sense to help you achieve your goals. So the thing that you should be focused on is not what is the absolute best city for me to invest into. The thing you should do first is ask yourself, what do I want out of a city? What are my investment goals? What boxes does a city need to check to give me confidence to invest into it?Because when we then start with ourselves and we have a clear set of criteria, all we then have to do is compare our criteria to the cities that we’ve come across. And if they match, well, then we simply add them to our list of places to invest. And if it doesn’t match, we set them to the side and we can do so confidently, and then we move on to the next. So just from a strategic standpoint, I want you to rewire how you think about market selection. Once you’ve got that set aside and you’re okay with the fact that we’re not looking for the Cinderella city, we’re just looking for the cities that match, then there are some basic data points that we can look at. Now, you didn’t mention what strategy you’re focused on, but let’s just assume you’re focused on things like traditional long-term rentals.And if that’s the case, some of the basic things we’re looking at are population and job growth. Is that happening in the cities that you’re considering? Is it a city where there’s a lot of people leaving or is it a city where there’s a lot of people coming in? Landlord friendliness, right? How easy is it be to actually be a landlord in that specific city? Are you in a place like where me and Ashley live, California, New York, which are some of the toughest states to do that? Or are you somewhere like Texas where maybe there’s a little bit more flexibility or favor towards the landlords? Price to rent ratio, right? The price of the home compared to the rent, is it a healthy ratio? Is it 0.25%, which would be pretty low? Or is it a market where maybe you can still hit the 2% rule, which maybe doesn’t happen as much these days.But those are the big things we want to look at. What are the data points within that market that suggests if it actually supports the strategy that I’m looking to go after?

Ashley Kehr:You can also go to biggerpockets.com/markets, and this will actually take you to a market finder that will help you analyze a market based upon your goals and what you’re trying to achieve and basically everything Tony just said. So you can find that at biggerpockets.com/markets. Okay. Coming up, you’ve identified a market. Now the question is, what you actually buy first? Is it a rental or maybe your primary residence? For investors in their 20s with limited capital, this one decision could shape the next decade. We’ll be right back after a word from a show sponsor. Okay, welcome back. So let’s say you’ve done the work, you’ve got a market in mind, you’ve been saving up and you’re ready to make a move. But now comes to a question that trips almost every early 20s investor up. Do you buy rental first and keep renting yourself or do you buy a primary and start building equity in the place that you live?So this question comes from the BiggerPockets Forums and it says, “My husband and I are in our early 20s and we want to buy a house, but we’re trying to decide if it would be better to buy a rental property instead.” We’re okay with house hacking if there’s a separate kitchen and living space. We want to be financially independent by our early 40s. Should we use a 3% down payment on a rental or buy a house to live in for our first property? For reference, we make about 85K combined pre-tax. Okay. So everyone’s sick of house hacking, I know, but they did ask about it, okay? They’re okay with it. That would be my number one choice, house hacking definitely would be. But it also depends on what markets you’re in. So first, what I want you to do is to look at the purchase price, okay?What type of property would you be able to buy? So maybe go and get pre-approved and see what your actual spending limit is. Can you even get a duplex for the amount that you want to buy? Could you get a single family home that doesn’t need tons of rehab, it’s completely dilapidated for your price point. So I think right there is a great starting point. Compare your two options. If you took the money that you had and you did a 3% down payment on your primary residence, what would that get you for a single family home? Then I would also take and look and most likely, unless you found some lender I don’t know about, you’re not going to be able to do a 3% down payment on an investment property. It’s probably going to be more like 20 at 25%. And that property, if you’re just renting it out and you’re going to keep renting yourself, what would that money get you and would you be able to save up that type of capital?So really that’s why I love house hacking is because you’re allowed to use that low primary residence loan with a low down payment to get into a property and to have it as an investment as a rental. So I think that’s a really good starting point. And I want you to think about how much money you’re saving that you would be paying in rent. If you were to live somewhere else, then I also want you to look at appreciation. When you’re comparing doing these different strategies, what house will also give you a lot of appreciation? When I started buying investment properties, they were small, little rinky dang, duplexes that had cosmetic updates, but still were like troublesome properties and they have no appreciation. I sold them for two, three times what I bought them for because I bought them so below market value and because I sold them in 2021 at the height of the real estate market since I’ve been alive probably.And so that is literally the only reason I made money on them. So look at that too. You don’t want to give yourself a headache. You don’t want to problem property either and get into too much then you can actually take on.

Tony Robinson:I think they’re in an incredible position, right? To be in their early 20s and they say that they want to retire, be financially independent in their early 40s. Talking two decades of time to work this plan toward financial independence. Actually, I couldn’t agree with you more on leveraging a house hack as their kind of primary vehicle here because it allows them to A, to your point, get into a property with low money out of pocket, but then B, gives them the ability to reduce their living expenses. So I’m just going to give you maybe a sample roadmap of what the next 20 years could look like. Without even being too overly aggressive, let’s say that you buy a property today, small multifamily where you live in one unit and you rent out the other units and through that, you’re able to live not even necessarily making cash flow in this deal, but you’re able to live rent free.You have no living expenses because the other units are fully covering the mortgages, principal interest, taxes, and insurance, which is pretty reasonable today in a lot of different markets. You do that for two years. So you get to save up, let’s say that maybe you would be paying 2,000 bucks in rent, but instead you get to pocket that $2,000 every month for two years. $2,000 a month over 12 months is $24,000. That over two years is $48,000. So every two years, you get to save up $48,000. If you’re buying a primary residence, and let’s just assume for simple numbers sake that maybe you can put 5% down. You’re not even doing an FHG at 3.5%, but I’ll round up to 50 grand. Let’s say that’s a 5% down payment. At 5%, that’s a massive down payment. Let me even go a little bit smaller. Let’s say 50,000 over maybe like a, let’s go like 20%.That’s 250,000. I don’t know what market you’re in, but let’s say every year you’re able to buy a house that’s maybe like 400,000 bucks, right? 50 grand, depending on what kind of down payment you can use, that’s pretty reasonable. So every year for two years, you’re buying a property, putting down 50 grand in another primary residence, and then you look up in 10 years and you’ve got five properties that you’ve done that with. Now you’ve had to house hack over that timeframe, but you’ve accumulated five properties. Now maybe you’re at the point where instead of house hacking, you’re just buying single family homes where you go in, you live there yourself, but now you’ve got all this cashflow coming from your first five properties that still every two years you can buy another single family home. So you have five or 10 years of buying multifamily properties, you were house hacking.Then you had another 10 years of buying single family homes, you lived there for two years, you move out, turn it into a rental, buy another property. At the end of that timeframe, you now have the portfolios of single family homes plus a portfolio of small multifamily homes. And for a lot of people, that could get them to the point of being financially independent. So simple roadmap, but that’s my challenge to you is to work that plan. All right guys, we’re going to take a quick break. While we’re going, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us @realestaterookie and we’ll be back with more right after this. All right guys, welcome back to our last and final question. This one also comes from the BiggerPockets Forms. And it says, “I’m just starting out and I’m looking at short-term rentals through Airbnb and Vrbo, but I read that Airbnb places a maximum of 90 days that you can rent out your property as a short-term rental and will disable your listing once you hit that cap.Is this true? I understand each city or county may have their own permitting requirements, but how are people making any return on their investment if it maxes out at 90 days?” This wouldn’t even cover expenses. Do people have to keep switching between short-term and mid-term and long-term rentals to make this work? It’s a great question. And I think that’s why it’s so important for us to do these reply episodes because we can maybe put aside some of the misinformation that’s out there about real estate investing. Airbnb as a platform does not have any cap on usage. There’s nothing on the Airbnb platform that says that there’s any sort of cap on how many nights you can rent out your property. Now, there are certain cities, counties, municipalities that do put limits on usage. For example, I was just looking at a city in Wisconsin, I think it was Wisconsin Dells, that says you can only rent your property out for 50% of the year.So your maximum occupancy on your short-term rental in the city of Wisconsin Dells is 50%, but that is a city-based ordinance. Airbnb is a platform, does not have any sort of restriction on usage. Now, my strong recommendation to you is to, for whatever city it is that you’re thinking about, instead of guessing or taking kind of secondhand knowledge on what that ordinance says, do the research yourself. If you just type in whatever city you’re thinking about and then you follow that with the word short-term rental ordinance, typically that’ll pull up whatever information you need about that city, that county, and how they regulate short-term rentals. And even better is if you can pick up the phone and call, even better is if you can walk into the office and talk to them in person. And the things you’re trying to understand is, are there any restrictions on usage and occupancy?Are there any restrictions on zoning? Are there any restrictions on maybe proximity to other short-term rentals? Are there any restrictions on the actual number of people that I can put into my short-term rental? Ask all the questions you have about what do I need to know to legally operate a short-term rental in this market? Some cities have a long laundry list of things you need to do. Some cities say you don’t even need anything. It’s your property, do what you want. So all that to say, there’s no cap on the platform. It’s a city by city, county by county difference.

Ashley Kehr:Tony, didn’t you once fly to Texas to actually walk into the office to discuss short-term rental regulations?

Tony Robinson:I did. Now we were already planning the trip. We wanted to go out there to look at these properties, but while we were there, we went into city hall. And quick backstory, we were opening up our first arbitrage units, and this was in Dallas. And literally, I think two weeks before we were supposed to fly out there, Dallas came in the news for effectively banning short-term rentals. And we’re like, “Man, that’s not great.” So we went into City Hall and come to find out, City Hall did pass this ordinance, but they had no set plans yet for enforcement because they were basically preparing for a legal battle in court. And that was, I think, maybe three years ago at this point. And that legal battle is still going on today. So there’s still tons of Airbnbs in Dallas because they haven’t sorted out what that’s actually going to look like.So yeah, walking in and being able to talk to someone, I’ll never forget, I asked them like, “Hey guys, I saw that you guys, here’s what’s going on. ” And they kind of chuckled because they’re like, “Man, we don’t even know why this is happening and we don’t think this is going to stand.” And that gave me a certain degree of confidence that I could probably sign a one-year lease for the short-term rental and still be okay.

Ashley Kehr:We have this ski resort town near us where they’ve changed the laws and well, they’ve changed the zoning. And so people who bought houses in 2021 by 2023, they couldn’t do short-term rentals anymore. And so it has really actually crushed the market. There are so many houses for sale because a lot of people bought short-term rentals the height of the market in 2021, and then they went and changed all the zoning. And basically it was something along the lines of like, it has to be your primary residence to be in the village. And then they changed the zoning even. So it included more properties than it originally did and things like that. So it’s really hurt a lot of investors that had short-term rentals in the area. Now the market is just saturated with houses for sale and people trying to sell them because they can’t rent them out.And also they have less of a buyer’s market because it’s only people that can afford to have a second home in these areas and nobody that actually lives in these towns can afford these houses. So the buyer pool is very, very slim compared to if they would allow you to have short-term rentals. Well, thank you guys so much for joining us today. I’m Ashley. He’s Tony. And we’ll see you guys on the next episode of Real Estate, Ricky.