The $4,000/Month Side Hustle YOU Can Use to Buy Rentals (Rookie Reply)

Ashley:
Welcome to another episode of Ricky Reply, where we’ll be diving into the real challenges of growing your real estate portfolio, starting with the burnout that can come with house hacking to making smart financial decisions about mortgage points, to launching a side hustle that solves a common real estate problem.

Tony:
Today we’re tackling questions that show different stages of the investor journey. We’ve got someone who’s been house hacking for four years and is wondering if it’s time to prioritize their own space. Plus a detailed look at whether buying it down mortgage points makes financial sense on a cash out refinance. And finally, someone who’s worked in real estate for a while and is looking to start a side hustle. So let’s jump in and help our rookie investors navigate these common but super critical challenges.

Ashley:
Welcome to the Real Estate Rookie podcast. I am Ashley Care.

Tony:
And I’m Tony j Robinson.

Ashley:
Okay, so Tony, we got our first question here and it’s from Ryan in the BiggerPockets forums. And the title of this question is, is it fair to be tired of house hacking single family homes? I’ve been house hacking for almost four years in two different single family homes. I’ve essentially been living for free or very cheap now for these years. I have definitely piled up some equity in both houses and currently now rent out my first house hack to a family who are great tenants. So that first two year house hack was a great success. I now live in one and starting to get tired of living with and recruiting random people to rent out rooms, people coming and going using my $700 to $800 per room offering to stay here to live cheaply in either a housing transition, summer internship, job transition, et cetera.
I feel like it doesn’t get talked about much that it’s not easy to recruit people who are clean, quiet, don’t complain much. I’m 27 now and itching to get my own living space. House hacking is a great way to start in investing, but I feel like I want and deserve to reap the benefits of my four year sacrifice and get my own living space. Ideally find a duplex or triplex and still house hack, but just have my own space. I don’t make much at my W2, so honestly would be hard to qualify for good duplex in a nice area. Most of the duplexes I’m seeing are in rough neighborhoods or very old and rundown from tired landlords. I’ve thought about the idea of even buying a single family home and building an A DU on it, but need to find a property with enough land to be approved from a zoning standpoint and then would need to find out how to finance the A DU build regardless.
Has anyone been in a similar circumstance where they felt burnt out with house hacking? When did you decide that you’ve done your time with co-living and eventually just bought your own living space? Well, I actually think this is a great question and I think this is not really an analytical decision, that this is a very personal and emotional decision that the reason you’ve got to go back to the reason you got into real estate because you want a better life. And if that’s financial freedom, if that’s living on your own, if you sacrifice and sacrifice and sacrifice, when do you ever get to enjoy living? And if giving up house hacking is going to make your life that little bit much better, then that is definitely a personal decision for you. There is tons of people who grind and house hack, maybe they don’t mind it, maybe they just want something more and so they’re going to house hack for as long as they can, but I think it is a very, very personal decision with it being your primary residence because there’s other ways to invest in real estate without house hacking. I

Tony:
Think it also, yeah, you said this already, right? I think it goes back to what the initial goals were and maybe instead of making it super emotional about when or how you exit your current house hack, maybe just set some super clear benchmarks. If you can say, Hey, when I get X amount saved, then I’ll feel comfortable moving into a non house hack property. Or if I can achieve X dollars per month in cashflow for my other investments, then I’ll feel comfortable moving into a house hack. I think the question you’ve got to ask yourself is if you do exit this house hack, well what is the next plan for you? He did mention that he doesn’t make a ton from his day job and he’s struggling to find other potential small multifamilies to house hack. So I think just getting some clarity on, okay, if you pivot, what exactly are you pivoting into and does that new pivot still allow you to achieve your long-term goals of whatever it may be? I think in general, we sometimes have to suffer in order to find success, and that sounds so unsexy. It sounds so not what social media makes success out to be, but a lot of times there is a certain level of suffering on the path to success and sometimes being successful with just being able to stick it out long enough, right? Longer than most people are willing to stick it out. So you’ve got to be able to make that decision, I think for yourself.

Ashley:
Yeah, and I don’t know if I’m assuming these properties are cash flowing, but you can move out and use some of that cashflow to offset your living expense. If you do go and just get a single family home, that’s just for you too. You’re obviously not going to be making as much money if you’re not house hacking and offsetting that house, but I think you’re in a good position where you have some options because you already have the two properties. And one thing that I am actually shocked at myself for recommending this, but does it actually make sense for you to move out of house hack and maybe you fill it with another family, but you go and rent somewhere. What does that look like? You just go and rent somewhere for a little bit. Would your cashflow from these two properties cover renting? And would renting be significantly cheaper than going out and purchasing a new property? And if it is, there is a big difference in that, then maybe you rent for a little while and you’re paying less for a living. If that’s the case and the rental is cheaper than purchasing a property, then you save up money for that bigger down payment for the duplex that you actually do want. But this could kind of be your transition phase of getting out of your house hack fully renting your last two primary residences and using that cashflow to offset some of your living expense for the next property.

Tony:
I think some other ideas too, it sounds like the pain point or one of the pain points is the tenants. And Ryan says people don’t talk about how hard it is to find people who are clinging quiet and don’t complain too much. So I think maybe revisit also, where are you sourcing your tenants? What is your screening process look like? What marketing channels are you using? Are you leveraging all of the tools at your disposal to find tenants? Could you potentially maybe sign longer leases so you’re not as frequently having to replace these people? Could you maybe add some additional amenities? We interviewed Miller McSwain recently and he talks about hosting things like socials for your tenants or having a cleaning service that comes through, but are there additional things you could add that maybe help with retention that also reduces how frequently you have to go out and source new tenants?
So I think maybe before blowing up the plan that seems to be working well for you, is there a way that maybe you can reduce some of that strain or increase your enjoyment by keeping better tenants longer? And I think the final thing that I’ll share with you too, Ryan, is you said that finding duplexes, a lot of ’em are just like rundown. That’s exactly, I think what a lot of real estate investors are looking for is the rundown duplex because oftentimes it means you can potentially buy those below market value. We just interviewed Kelsey Porter and her strategy, at least a big part of it was finding duplexes in her neighborhood and she and her husband would just drive around town looking for duplexes that fit their buy box and then send mailers to those owners, and she’s able to pick up several deals by doing that exact same strategy.
So I think for you, Ryan, if there are properties that you’re finding that are in maybe the neighborhoods you want but that are rundown, that’s an opportunity for you to go in, live there, fix it up while you’re living in this property, and then either refinance, sell it, or turn it into a traditional rental when you move out and just repeat that same process. But at least now you’ve got the duplex you’re looking for, you can have that one side to yourself and you’ve got the other side that’s going to produce the revenue for you. But I say don’t overlook those rundown duplexes.

Ashley:
Yeah, that’s a great point. So you’re still making a sacrifice in a sense. You’re not living in a completely finished nice unit. You’re going to have to live in a fixer upper, but if you don’t mind that as much as you mind living with other people, that actually might be a great trade off for you. Okay, we’re going to take our first odd break and we’ll be right back after this. Okay, welcome back. So Tony, we got a question from Tony in the real estate rookie Facebook group. What is this question?

Tony:
Alright, so Tony’s question says, any best practices around buying down points? I’m considering a cash out refinance at 70% LTV on a property that will likely appraise around 450,000. I can buy down the interest rate, it would cost me $13,800 to get down to a 6% interest rate, which would give me the best value over the course of the loan. Why wouldn’t I buy all the way down to a 6% interest rate, if not down to 6%? Where would you buy down to? And then Tony goes on to share kind of a table of the different options and payment amounts given the different interest rates. So if you’re watching this on the podcast, you can go check it on the YouTube channel and we’ll post this graphic there, but it’s a table that kind shows all the different points. So that’s Tony’s question, why shouldn’t I just buy down this rate to the lowest number possible?
I think, and even the graphic that he shares, we can kind of see here that there’s a break even point depending on the interest rate that he buys down to. And it looks like at 6%, that breakeven point is five years. So if you plan to hold this property for something significantly beyond five years, then yeah, potentially buying down the interest does make a ton of sense. But I think what it really comes down to is you have to ask yourself, what’s more important to me? Is it saving the interest in the long run? Is it maximizing my monthly cashflow? Is it maximizing my cash on cash return? Because maybe you don’t buy down the points and your cashflow is a little less, but your actual return on your investment is higher because you’re saving that $13,000 which you can then go use for a second property for a different property. So I think the true answer to this comes down to what’s most important to you. Is it reducing the interest expense or is it maximizing your cash on cash return?

Ashley:
Yeah, I think one other thing to add on to here too is how long do you intend to hold the property? So is this a property that you want to keep longer than five years? Because that was the break even point around five years. So if you’re going to sell before the five year mark, then this doesn’t make sense at all to pay down the rate, especially if you’re doing a live and flip on a property, which in this circumstance it isn’t because he is doing, he did say it was an investment property, but if it’s your primary residence and you’re going to do a live and flip and only hold it for two years, you don’t have to pay taxes on it. There’s no point in paying, usually buying down any points if you’re going to sell it in two years. So if you have an idea of how long you want to hold this property, that can really help too.
So maybe it’s a short-term rental where you’re only going to keep it for three years and then you want to do a 10 31 exchange into something else. So they really think about that too. When you’re looking at buying down these points as to what you can do, I also would urge you to look at comparables from other banks. So reach out to other lenders. You can literally just send an email and say, I have this property exactly what you told us. Basically it’s going to appraise around four 50. Give a little information about yourself. What are today’s current rates if you close today? And they can actually give you an idea of what their rate is. And of course it’s going to depend on what your credit score is, things like that, lots of other variables, but it’ll at least give you an idea of how one bank compares to another bank or broker compares to another broker as to like, okay, this bank is consistently lower than this other bank.
So they’re probably going to have better options. And I would sometimes they’ll even have them, like the small local banks will even have ’em listed directly right on their website where you don’t even have to email anyone and it will you ask, answer a couple questions, and then it will tell you what the estimated interest rate would actually be on your property from that bank. So make sure you’re also shopping out your loans too when looking at this. And I would be curious too, when you’re looking at this buy down rate, what are the fees on top of this that the lender is charging? So are you already paying like $8,000 in a loan commitment fee to the bank? I’ve seen this a lot of times with DSER loans where they try and sneak in this fee that they’re charging you for whatever, and I fight it every single time.
And then if you’re doing more conventional lending, a lot of banks will charge you different fees too. Like I’m doing a loan right now and it’s a $450 commitment fee, but the interest rate was way lower than the bank that didn’t charge any closing costs at all. So make sure you’re also comparing that to what are those other fees that are associated, because even though you may be able to buy down the rate at this bank for this amount, there may be other fees on the backend too. So make sure you’re getting that closing estimate disclosure upfront too, to look through all those fees and see what they are because that can also help you decide like, wow, I’m already paying this much in closing costs. I actually don’t have another $13,000 to spend to buy down the rate too.

Tony:
You make a really good point, Ashley, of shopping around. And I feel that’s a mistake that we oftentimes see with rookie investors is that they don’t shop round enough and they treat the loan process like it’s some sort of, I don’t know, some sort of monogamous relationship where you can’t actually go out and talk to other people, but you have to do yourself as the investor working your own best interest. And that oftentimes means getting quotes from multiple different lenders. I guess the last thing I’ll add to this is that depending on how the property appraises, you might be able to get a seller credit to help offset those costs. That was very popular at one point to have a seller credits kind of covered buying down your rates. There are some loan limits depending on what type of loan you get, how much seller credit you can actually get. And I was trying to look it up.

Ashley:
I’ve seen 13,000 is one I’ve seen recently is that it was the max for this lender was 13,000.

Tony:
Okay. And yeah, I know it also varies I think by the type of property. I think for primary residences it’s higher than investment properties. So talk to your lender so you can know those exact percentages or numbers, but maybe your 13,000 could be covered by a credit from the seller. So now you’re not out of pocket any additional capital, but you’re still getting that buy down and there’s no harm. I think in asking that from the seller, the worst they’re going to say is no. Best they’re going to say is yes. And maybe somewhere that you guys land in the middle like, Hey, I can’t give you the whole 13, but I’ll give you six and a half and you guys can split it down the middle. So having those conversations might be beneficial for you as well.

Ashley:
Yeah. Then I think the last thing to look at is not only the savings over time and what your payment’s going to be and compare that difference. So right here it looks like there’s $200 difference if you bought down to the from 7.1 to 5% to 6%. Okay, so that $200, what else could you do with that $200 every month over five years? Could you actually funnel that into a different investment where it’s actually going to make you more money than this 1% difference on your mortgage too? So I would think about that too as to what’s the actual benefit if you pay down to that lower rate, that saving of $200 a month, could you do anything better with that or is that not enough that it would make a difference for you to invest it into something else that $200 and maybe it’s not worth it to buy down the rate to. We’re going to take a quick break, but before our last question while we are gone, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us at realestate Rookie. We’ll be right back with more after this.
Alright, let’s jump back in. So our last question today is from Christie Miller, and this is from the BiggerPockets forums. Has anyone started a short-term rental cleaning company or property management company? My short-term rentals are in a small destination mountain town and finding good cleaners is the number one struggle. Many owners are also absentee and rely on property management companies to book their properties and cleaners. Does anyone have a good podcast or direct experience with starting a cleaning company and paying the cleaners on W2, possibly even benefits to ensure quality work? Most cleaning companies where I am, don’t pay that well. Don’t use scheduling technology, don’t offer enough hours for full-time and aren’t run by someone who has their act together. Seems like an opportunity, but looking for firsthand advice. So luckily, I do actually know a podcast that you can listen to and it is real estate rookie, and I do know someone who has started their own cleaning company and his name is Tony j Robinson. So just for this question, we’ve brought Tony on to the podcast today. Tony, welcome to the show.

Tony:
Ashley, thank you so much. I’ve been a long time listener on the podcast. Happy to finally be here.

Ashley:
So Tony, let’s hear from your experience. First of all, why did you decide to start your own cleaning company?

Tony:
Yeah, similar issue in Joshua Tree specifically, we were having a very difficult time finding cleaners that could live up to our standards just for everyone to understand that there’s this divide in the short-term rental industry of the legacy folks who were pre covid and the new hosts that were post covid. And along with that, there’s legacy cleaners who were pre covid and then the new cleaners who were post covid and the pre covid cleaners, many of them, their level of work was kind of like C level. And as Airbnb has evolved as a platform, the expectations from guests from Airbnb, they’ve increased, they’ve become more strict, and a lot of cleaners don’t want to adapt to these new standards and they kind of scoffed when we asked for things like, Hey, we want you to submit photos at every single turn. Hey, we want to have meetings.
Hey, we’re going to penalize you if we don’t get the right kind of cleaning scores that we’re supposed to be getting. So as we were dealing with all these challenges, we said, well look, what if we just do it ourselves? So we went to someone who had no experience cleaning Airbnbs, it was actually our contractor’s daughter. She had just had a baby. She didn’t want to go back to her previous job and think she was working like a retail job, didn’t want to go back to it. And we said, Hey, we think we can offer you something that’s a little bit more flexible that gives you the kind of lifestyle you’re looking for. And we just kind of trained her up on everything that we knew about clinging Airbnbs, and that was four years ago now, and now she cleans her and our team clean all of our properties. We’ve got a small roster of other clients that aren’t our own properties as well. And it was probably one of the better decisions we made to really control kind of from start to finish that product that we’re able to put into the market.

Ashley:
So you are benefiting as the investor because you now are getting your properties cleaned exactly how you want, and you’re also sharing the overhead of hiring your own cleaners by taking on other clients.

Tony:
We get our cleans at cost as well. So before there’s usually margin that you’re paying to a cleaning company to have them do your properties, but basically whatever the hourly rate is that we pay the cleaners, that’s what we charge the property. So we get to really reduce our cleaning costs on the property side as well.

Ashley:
Now you have a manager for this company, but say I wanted to go out and I was going to oversee all the cleaners and this was going to be my side hustle business that I’m creating. As I’ve got these rentals, I’m going to start up cleaners. Instead of hiring a manager, I guess, what do you pay your manager? So what a profit look like for me as I’m going in and I’m taking ownership of this business and I’m actually going to run it.

Tony:
Right now, we run that company about breakeven, but if we were to run it ourselves and not have a manager there, we’d probably net somewhere around four grand a month, give or take, which isn’t insignificant for the level of work that goes into it. But yeah, you get a strong enough roster of clients and making several thousand dollars a month and profits would be very doable,

Ashley:
And to bring in four grand a month for something that is helping your real estate properties, that’s not actually a bad gig at all.

Tony:
Not a bad deal.

Ashley:
So we actually have a second question here that relates to cleaners and Airbnbs, and this question is from Ashley in Buffalo, New York. Ashley’s question is, this is Tony. We’ve had therapy on here for me before confessionals. I just need to release some of the real estate things that have happened to me and this thing that happened to me this past week. My jaw dropped when I saw this. I look at my phone and I see messages from Airbnb. It’s in the Airbnb app, it’s my guest and it’s my property manager. We had guests arrive and everyone’s worst nightmare. The property was not cleaned, it was not turned over. I’m still shaking right now just thinking about it. This is literally my nightmare ever happening. Luckily, I will say this upfront, the person was so nice about this. I looked at Daryl and I was like, she’s being so nice. I was like, I would be furious if we rented an Airbnb. And we walked in and there she sent us pictures and there was bags of garbage. And she literally asked and said, it seems there’s some garbage left behind us. There’s somewhere we can put it. And then she sends the bed and it was just like the sheets all crumpled up on the bed. She’s like, I think actually it wasn’t clean. Here’s a picture at the bed.
I would’ve been freaking out at this point if I was a guest at an Airbnb. So I’m so thankful for this lady. So as I’m seeing the messages, my manager has already messaged some things and said, oh my gosh, I am so embarrassed. Let me find out what happened. I will get someone up there right away. She sends her $50 and says, here’s my dinner recommendations. Please go out to dinner. We’re sending our cleaner up right now. So me, I just throw money at problems. I’m like, please refund her. At least one night. We got to do more. This is awful. So we refunder the one night stay or whatever if they’re there. And she was just like, wow, that was so nice. You’re so thoughtful and giving. And I’m like, are you kidding me? I would be so upset. So our cleaner just forgot she had cleaned one of our other properties that day. She had cleaned some of our commercial property common areas that day, and she forgot to clean this unit. Tony, has this happened to you before? And how should I handle this? Is this a big deal? Should I sweep it under the rug? She’s made one mistake, let me know.

Tony:
It has happened to us before, not in a while. And the reason why is because after it happened more times than it should have, we instituted some changes in how we manage our cleans on a daily basis. So right now we use software to schedule all of the turns for the day. And with that software, our cleaners have a calendar that they can log into. They also get texts and email reminders of the turns. So that’s the first kind of layer to make sure that there’s no forgetting of any turns that are happening. The second thing that we do that’s more manual is that our VA team is reviewing the scheduling software. And when a cleaner shows up at the property, they have to start the task inside of the software. And if the task doesn’t start at least three hours before check-in, then the VAs are manually reaching out to that cleaner saying, Hey, we’re three hours before check-in.
You haven’t started your task yet. So there’s multiple layers that we’ve instituted to make sure that no one should be forgetting about any sort of turn that’s happening. And since we’ve done that, it hasn’t happened. And then to answer the other part of your question of what should you do with the cleaner, sometimes you have to ask the question of is it the person or is it the process? And it feels like here maybe it was more so a process thing. And if she’s been phenomenal for you, I probably wouldn’t sweat it too much. If it becomes a recurring thing, then maybe, but it sounds like you’ve had her for a while and she’s been great. So I would probably chalk this more up to broken process as opposed to wrong person.

Ashley:
Yeah, I think that right now the only thing we have is that she gets a notification when someone books, I believe it is. So then I think it’s up to her to actually put it in her calendar. Like, oh, I know that there’s somebody coming in and out this day that I need to. I think that is how it’s set up. But that’s a really great point. I need to clarify that with my manager as to what is that actual process, because obviously I have no idea. I think that’s how it is. And implement something that’s more secure, as in it’s very hard to forget because there’s so many follow-ups and reminders.

Tony:
Absolutely. And given the max access to the calendar, that way it’s always in front of them. Because what happens if someone adjusts their check-in date? We have that happen, or their checkout date. Maybe a guest extends, maybe they want to come a little bit early. What happens if someone cancels? Right? So you don’t want to have to rely on manual workarounds to keep your cleaners updated of those things. It should all be automatically synced with whatever platform they’re using to track all their cleans.

Ashley:
So you’re saying it’s not my cleaner’s fault, it’s my property manager’s fault. No, I’m just kidding.

Tony:
I was going to say, you’re putting me on the spot, but I would say it is the process’s fault, right? They just got to dial in the process a little bit more,

Ashley:
Which me as the owner of the short-term rental, that is my job to make sure that the processes are in order and are working well. Okay. Well, I’m going to report back to you guys, Tony. Maybe we can even create a little SOP or something and we can link it into biggerpockets.com and everyone can head over and use the same process that I am going to implement now for my short-term rentals and the cleanings.

Tony:
Yeah, I love that. It’d be super easy for.

Ashley:
Well, thank you guys so much for joining us for this episode of Real Estate Rookie. I am Ashley. And he’s Tony. And we’ll see you guys on the next episode.