The One Thing You Need to Pay $0 in Income Tax

Ashley Kehr:
This is Real Estate Rookie episode 292.

Tony Robinson:
I think that spending money on tax strategy or tax planning is one of the few things in your real estate business where if you put a dollar in, you get multiple dollars back. And yeah, definitely we spend a decent amount on tax strategy this year, but I can also say that I’m probably going to pay zero on taxes for 2022, and that’s because I had the right person in my corner to guide me along to help me understand the tax code to leverage it in my benefit.

Ashley Kehr:
My name is Ashley Kehr and I am here with my co-host Tony Robinson.

Tony Robinson:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I love getting back to our Rookie Reply episode so we can get down to the nitty-gritty with all of our Rookie audience members.

Ashley Kehr:
Tony, before we get into our replies, I do have something I want to share with everyone today. I received a voicemail today and it was to my Google Voice number, which is my work number. And really this phone number is mostly used for direct mail. So when we send out mailers, this is the number they would call. We don’t have it for any property management at all. So I got this voicemail today. It’s “Hi, my name is Angela so and so, I am the director of human services for a town of Wyndham. I’m calling regarding a property at…” And she gives the address, “So if you’re in Willimantic, Connecticut, maybe this is your property.” First of all, right there I’m like, “This doesn’t apply to me because I don’t have any property in Connecticut.”
“There is an issue with sewage backing up into one of the apartments and code enforcement has been on the property and we need to hear from the landlord or property management company to determine what we’re going to do, if we are going to relocate the tenant at your expense, put a lien on the property, or if the property management will relocate the tenants, you can reach me at XXXX.” So right there is very interesting. So this tenant could not get a hold of their landlord or their property management company and called code enforcement and Director of Human Services or one of them called each other and their sewage backing up into their apartment and nobody can get ahold of the property management company. Obviously, there’s not a correct number here since they called me, but yeah, that they’re going to relocate the tenants at their expense and then put a lien on the property for that expense if it is not paid.

Tony Robinson:
You see, those are the stories that upset me as a real estate investor because that’s why there’s so many random people on the internet who are angry at us for being real estate investors because stories like this are the ones that they hear about, right? The landlord that’s negligence, the landlord that is just taking money and not taking care of their tenants, and it gives all of us a bad name. So shame on that landlord. I do hope they put a lien on his or her property. And I do hope that they move that tenant at that landlord’s expense because they’ve obviously completely dropped the ball on making their property safe and usable for their tenants.

Ashley Kehr:
Yeah. And you know what? I’m actually so surprised that I did not do, and maybe because I actually am busy during the day, but I did not PropStream or Google this property since she gave me the address. I probably could find the owner for them.

Tony Robinson:
Imagine it is yours and you didn’t even know.

Ashley Kehr:
Yeah, somebody put it in my name.

Tony Robinson:
Somebody just like deeded a property to you and then never even told you.

Ashley Kehr:
So I pulled it up on Google Maps real quick here. Actually, it looks like a nice duplex here, I see two mailboxes on it. But there’s two people sitting on the front porch and they’re actually waving at the-

Tony Robinson:
At Google Street Map?

Ashley Kehr:
… Google Map camera that’s going by, yeah. So I did try to call that person back, but it just was a busy signal, so I never got through it back to them. Maybe it’s some kind of scam.

Tony Robinson:
Maybe. That’s also true, trying to get you to wire money for something that’s not even yours, that’s true.

Ashley Kehr:
Yeah. Yeah. Yeah.

Tony Robinson:
All right. Well, we’ve got a few really good questions lined up for you all today. We’re going to talk about taxes and why taxes are so important and how you build your team around your tax strategy. We’ll also share how I plan to pay $0 in taxes for last year. We talked a little bit about credit cards and how and when you should potentially use them to fund your real estate business, what are some of the advantages, what are some of the disadvantages. And then we also talk about debt. And I really enjoyed this conversation around, is there an opportunity for you to maybe have too much debt in your portfolio and how can you protect yourself against that? So lots of really good questions today.
But before we keep rolling, I just want to give a quick shout out to someone by the username of AnthonyF352. Anthony left us a five-star review on Apple Podcasts and says, “This podcast changed my life. I’m 25 years old and recently closed in my first home, it will be a live-in value add through sweat equity. I started listening to this podcast about a year ago and it has changed my view on real estate in general. The information in these podcasts is so simply explained, helpful and organized. Tony and Ashley have the best energy and tailor the contents to all audiences. Thank you so much.”
Anthony, thank you for leaving that review. And kudos to you, congratulations to you for getting that first deal done. And for all of our rookies that are listening, if you haven’t yet left us a rating review on Apple Podcasts or Spotify or wherever it is you’re listening, please take a few minutes to do so because the more reviews we get, the more folks we reach. The more folks we reach, the more folks we can help.
All right, so today’s first question comes from Britney Dave. And Britney’s question is, “Do y’all use a real estate specific CPA for your taxes or do you just have a regular CPA that is capable of handling real estate investment businesses? I’m just starting out and I would like to meet with a CPA to discuss matters and services that I will need from them for next year, but I’m not quite certain where to start. I’m in a rural area so I don’t have that many great options.”
Man, a lot to unpack from this first question. So the first thing that I’ll say, and this is for Britney, this is for every single rookie that’s listening, if your plan is to build a relatively big real estate portfolio where you have more than maybe one or two deals, I think every single person should invest early and invest often into good tax strategy advice and into good tax preparation because if you’re able to set a strong foundation for yourself when you have your first property or even as you’re gearing up for that first property, it makes the tax strategy in planning so much easier when you’ve got four, five, 10, 20, 30 proper properties.
So that’s my first piece of advice, is that I think us, me and my partners and our business, we waited it too long to get that good tax advice and it kind of came back to bite us in the butt. I guess, Ash, before we even answer any parts of Britney’s question, at what point in your business, how many deals had you done when you hired a CPA to kind of help you out?

Ashley Kehr:
Well, I didn’t hire a specific CPA that was just real estate investing. That I didn’t do until last year. So quite a while into my investing journey. But the CPA that I did have prior to that, she does have general knowledge of investment properties. The thing I think to look at too is what kind of knowledge do you have? It’s the same with selecting a real estate agent. What do you need the agent for?
So I actually went to school for accounting. I worked at a CPA firm. So I have a lot of knowledge. I definitely am not up-to-date on taxes and laws and everything like that, but I do know how to create my own financial statements. I do know how to read financial statements. I know how to read tax returns where if there was a mistake on the return, I could point it out most likely as long as it wasn’t something like new or whatever.
So I think for me it worked well because I knew a lot about taxes and accounting, so I didn’t need as much from her. But anytime I did, I would just ask her the question or whatever it was. So I think how much guidance do you actually need, and then look at it more when first starting out. Is it actually a real estate CPA you need or is it a real estate bookkeeper? What do you need starting out? Because real estate specific CPAs can be expensive. And I see here that Britney had put that she lives in a rural area, same as me, where there’s not a ton of options locally. But thankfully a lot of CPAs can do their work remotely where you’re able to find a CPA across the country as long as they have a knowledge of filing a tax return in the state that you are actually in.
So there’s also the difference between having a CPA that is filing your taxes. And that was basically what my first CPA did, was just filed the taxes. And then having a CPA that is actually doing tax planning because there is a big difference between the two. When you are hiring a CPA, you want to understand what is involved in that. Are you actually going to get that kind of tax planning from them or are they there just to fill in the blanks of the tax return to complete that for you?

Tony Robinson:
Yeah, it’s a great call out, Ashley, about tax planning versus tax preparation. But yeah, I mean think I’ll just reiterate that I think that spending money on tax strategy or tax planning is one of the few things in your real estate business where if you put a dollar in, you get multiple dollars back. And yeah, definitely we spent a decent amount on tax strategy this year, but I can also say that I’m probably going to pay zero on taxes for 2022 and that’s because I had the right person in my corner to guide me along to help me understand the tax code to leverage it in my benefit so that I’m able to basically reduce my taxable liability down to zero. And again, that comes from having the right CPA.
So I think for me, Britney, my answer would be I would encourage you to find a CPA that specializes in real estate investing. Ashley and I talked about this on a previous episode, but I think a mistake that a lot of people make when they’re looking for CPAs or attorneys or agents or whoever is they ask the question, “Do you work with real estate investors?” And of course their answer is always going to be yes. But I think a better, more pointed question to ask is, “What percentage of your current clientele are active real estate investors?” And if the CPA a says, “Hey, 60 70% of who I work with are real estate investors,” okay, cool, then you know that this person probably knows the ins and outs and all the intricacies that come along with investing in real estate. But if they’re like, “Hey, I’ve got one or two clients out of 100 that are real estate investors,” well that’s a pretty big difference. So I’d say definitely go with someone whose expertise is specifically in real estate investing.

Ashley Kehr:
And the same for a bookkeeper too, as someone who’s going… if you need a bookkeeper, is asking that they have experience in real estate because there are so many different industries and companies that require different ways of accounting, I guess or say, where you have depreciation, you’re doing the amortization of principle and interest for a loan, you’re accounting for fees differently. So where as if you are doing maybe a retail store, that bookkeeper has knowledge of how to handle inventory, how to do payroll, things like that. So I think that’s definitely something that’s a huge advantage is getting a bookkeeper that is knowledgeable in real estate for sure. And they may be able to even help you with some of the allocations of how things should actually be reported too.

Tony Robinson:
Yeah. And I guess just last thing, and you kind of touched on this a little bit, but Britney says that she’s in a rural area so she doesn’t have that many great options. But again, just to reiterate, your your CPA does not need to be local to you. Like Ashley said, as long as they have an understanding of the state that you live in and the tax implications and rules, et cetera of that state, your CPA a can be anywhere. My first CPA lived in a completely different state for me. My new CPA, she lives in California, but she helps clients across the entire country. So you can go the virtual route as you’re looking for a potential CPA. Britney, that should hopefully open up your options a little bit more as opposed to looking someone in your hometown.
All right, so our next question comes from Sam Dang, and Sam’s question is, “What are the typical expectations as the ‘money partner’ within a joint venture deal?” And this is something Ashley that you and I know a lot about, is partnerships within the world of real estate investing. We’ve had situations where we’ve brought some capital, we’ve had situations where we’ve brought no capital and someone else has funded at that. So when you think about a real estate partnership where one person is bringing the majority, if not all of the capital, what do roles and responsibilities and potential expectations look like between the money partner and the non-money partner?

Ashley Kehr:
So this really is up to the partners as to what the role of the money partner is. But as far as basic expectations is if they are the money, then when you are ready to close, they need to have that money ready to go. So that I would say is the first expectation that they know that they need however X amount of money and they need to have it ready to wire to, bring up money, order a cashier’s check, whatever that may be to the closing table to close on your deal.
The second expectation is they should not need their money back until the agreed upon time. So you don’t want to get into the situation where you are two months into rehabbing a property with still another month to go and another month to sell it. Say it’s a flip house and your partner says, “I need my money. I need my money back, I need to pull it out now,” well that wasn’t what your agreement was. So it should be the expectation that they can hold the money with you and won’t need it back for the duration of the joint venture agreement for however long the deal is. I think those are the two major things, is having that kind of understanding.
Then as far as expectations for roles and responsibilities, that is up to you guys as partners. So my first ever partner was just the money partner and that is it. He has no say in operations. I don’t even honestly think he has access to the bank accounts, but he stays out of everything. He trusts me. He lets me go with it, and he just expects his check to get deposited every single month. And so I think with that, making those roles and responsibilities clear in the beginning as you’re forming the joint venture agreement.
So when I was a money partner in a joint venture agreement, I was entitled to ask for the bookkeeping at any time to see the financials of the property, I could request that. Another thing may be that you’re sending the money partner a monthly statement just automatically, “The 15th of the month, here’s what we spent so far. Here’s maybe where we are at the project,” things like that. But that’s up for you guys to decide or it can just be somebody who’s just given the money and just saying, “You know what? Just let me know when my check’s ready to pick up when we’ve sold the deal.”

Tony Robinson:
Yeah, I think another important thing to clarify when there’s a money partner and a non-money partner is what are the terms of repayment. So you talked about timeline a little bit, like how long is that money going to be tied up in the deal, but also how is that person going to be paid back? Are they going to be paid back through maybe a fixed dollar amount throughout the life of the loan? So it’s like, “Hey, for as long as we have this deal, I’m going to pay myself back X dollars per month until I recapture whatever money I put into this deal”? Are they going to be paid back maybe a percentage of the profits on a monthly, quarterly, or annual basis to say, “Hey, there was X amount of profit at the end of the year, I’m going to take 50% of that and pay myself back and then we split the rest.” Are they going to be paid back maybe if you refinance after two or three years to pay back their initial capital or do they wait until the sale?
Or maybe they don’t get paid back at all, right? And their capital that they’ve put into the deal is just their… Since they’re not putting any sweat equity, that’s their contribution. So even when you go to sale or refinance, there’s no repayments back to that partner, but you guys still split that money evenly. So I think that’s an important thing to make sure there are clear expectations on are how, if at all, will this partner be paid back the capital that they put in.
All right. Let’s jump down to our next question. This one comes from Bo Redfern, and Bo’s question is, “Can you use credit cards for a down payment?” Dave Ramsey is punching the air right now. What are your thoughts, Ash? Have you ever seen anyone use a credit card for a down payment on a rental property?

Ashley Kehr:
No, because I don’t know if the bank would actually accept a credit card payment. So I think the only way that you could do it is to take a cash advance on the credit card, which I’ve never done that either, so I’m not sure. But there’s very high fees for actually doing that.

Tony Robinson:
And the bank itself, depending on what kind of loan you’re using, if they see that you just got a cash advance on a credit card right before closing, that might even get you in trouble with underwriting and that could kind of throw your ability to close that deal in jeopardy as well.

Ashley Kehr:
Are they able to see that though, do you think?

Tony Robinson:
They should be able to see your balances on your credit cards, right? If you ran up your balance.

Ashley Kehr:
Well, when I think of cash advance, I think of like, you go to the ATM and you’re pulling out actual cash, so it doesn’t actually go into your bank account. But I see where you’re saying as they want to see the proof of funds.

Tony Robinson:
Right. Because typically if there’s a large deposit while you’re in escrow, they’ll want to know. And this depends on the kind of loan that you’re using, but let’s say you’re using a traditional personal loan and you have a big deposit during your escrow period, most underwriters are going to ask, “Hey, help us understand where this money came from in order to really clear your file.” You could be in a situation where like, “Hey, I pulled this from our credit card.” They’re like, “Okay, well you don’t actually have the money to close on this thing.”

Ashley Kehr:
Yeah. So I’m doing a refinance right now and it’s going to be in my personal name. The only time they asked for bank statements was when I first applied for the loan and they have not asked again and I’m closing in four days. So I think that also depends too. Are they going to actually ask for bank statements again to actually see that deposit? Because my banking, I don’t do with the same business or same bank that’s doing the mortgage. My bank accounts are at a different bank, so it’s not like they can automatically go and look. I think if you did do the advance on the credit card, it probably wouldn’t show up on your credit yet that your minimum payment has increased on that credit card. But also minimum payments are so minuscule because it’s just that little bit of interest, not even the whole interest sometimes. So that may not even affect your debt to income if it were to show up on your credit report before closing.

Tony Robinson:
Yeah, I think I would just also, Bo, really think through your repayment plan for that if you say you were able to find a way to do that, because like Ashley said, interest rates and credit cards are pretty high. If you’re funding an entire down payment, that could be a pretty significant amount of money every single month. We don’t know the amount that you’re looking for both, so that could play a factor here as well. But I would hope that if you’re using it in that capacity, that you’ve got a really clear path to repaying that quickly either because you plan to rehab this property and then maybe refinance a few months down the road to pay off that credit card. But I would just caution against trying to maybe have that open balance too long on that credit card because you never know what could happen.

Ashley Kehr:
I was just trying to Google real quick 0% interest credit cards for cash advances. But just quickly looking, it looks like the cash advances don’t apply to the 0%, which makes sense because credit card companies make money off of every time you swipe the card because that vendor is paying those transaction fees for you to use your credit card and that’s how they make their money. If you take that cash advance, they’re not making that money on you swiping the card.

Tony Robinson:
That’s actually true as well. What you see a lot of folks do, Bo, is they’ll use credit cards not for the down payments. But if you’re rehabbing a property, they’ll use a 0% interest credit card to fund all of the material purchase because now you’ve got 18 months to pay that bat boy off and hopefully you can kind of rehab and flip the property in that timeframe and you don’t have to worry about the limitations of the cash advance. So I don’t think I’ve met anyone that’s used a credit card to fund the down payments on a rental property, so maybe not the best path forward.

Ashley Kehr:
I think one thing that you could do is, okay, so you could take the cash advance from it. I mean I don’t think you can get that much of a cash advance compared to what the limit is. So maybe you have to open several of them to take the cash advances on all of them to have enough for a down payment. But one thing you could do is look at your everyday expenses and put those on a 0% interest credit card and then save what you would normally be spending in cash and then use that for your down payment. So you’re still in this situation where you’re going to owe money because you’re going to have to pay off that credit card, but this way at least you’re not paying interest on doing that cash advance.
So if there’s a way that if you look at your monthly expenses and you can dump them all onto the credit card and then take that cash that you would normally spend on your bank account and use that towards your down payment. But only do this if you know that you are diligent and you can pay off your credit cards. I don’t want anyone to get into credit card debt. Dave Ramsey would have our heads.

Tony Robinson:
All right, let’s jump to our next question here. This one comes from Julie Glasser, and Julie’s question is, “For those of you who list your flips for sale by owner, how do you deal with realtors who contact you upfront asking if you’d be willing to pay them a commission if they bring you a buyer?”
So before we even answer Julie’s question here, I just want to define what she means when she says list your flips for a sale by owner. So oftentimes when you sell a home or you go to list a home for sale, you contact a real estate agent or realtor and then they turn around and list your property on the MLS, and then they are in charge of doing the showings, basically finding you a buyer, then facilitating that transaction from the time you open escrow until you actually close on the sale. And that’s how realtors make a living, right? They find buyers, they find sellers, match them up and they take a split of the commission.
Going for sale by owner means you bypass the real estate agent and instead of using the agents to list and find buyers and facilitate that transaction, you do all of that work yourself. Now, I don’t know the numbers off the top of my head, but I feel like I’ve heard it and seen in so many different places that the majority of people who list their properties for sale by owner tend to make less money. And the folks who use agents tend to be able to draw a slightly higher purchase price. And it’s because that’s what they do for a living. That’s what they’re good at.
So first I would just really have you question yourself, Julie, what is your motivation for going for sale by owner. Do you have the experience to market your property correctly, to find a buyer to really facilitate that transaction, to negotiate effectively? Because every purchase of a home has some level of negotiation in terms of credits from the seller and things of that nature, especially right now given that it’s more of a buyer’s market than a seller’s market. If you don’t have that experience, you could find yourself in kind of a tough situation.

Ashley Kehr:
I actually got a phone call today, so I’m selling a building for sale by owner, and I got a call today from a real estate agent that said… And so her office is actually right next door to this building and she said she had somebody walk into her office and ask about it. And so she’s like, “I just thought I would call and get some information.” And so I told her about the building, what the price was, things like that. And she said, “If I end up having a buyer, I’ll let you know and I can usually work out terms with the buyer where they’re paying my fee.” And so I thought that was actually interesting that her first question wasn’t, “Would you be willing to pay me a commission if I’m able to find a buyer?” She was already saying I probably can have a buyer pay my fee for negotiating this deal for them and getting it done.
But I ended up saying to her, I was like, “And if that doesn’t work out, I would be open to negotiating something with you too if you did bring a buyer to the deal.” Because I think it is worth it. In that situation, you’re not signing a listing agreement where you’re locked in with one real estate agent. So everyone that calls you, you can say, “Sure, go ahead. Whoever brings you the buyer first gets that commission.” And I’m not sure how that would work as far as fees and stuff, but it’s probably going to be a situation where you’re paying maybe less than you would if you were to get a listing agent, but I don’t know that offhand.
Typical fees around here are 6% to sell a property where 3% goes to the buyer’s broker’s office and then the other 3% goes to the seller’s broker’s office where this would almost kind of be a dual agent scenario, but they wouldn’t be working on your behalf. One reason this works so well in New York state is because you have to use attorneys to close anyway. So basically your attorney can just work directly with their attorney and you can bypass the agent in some aspects where a dual agent can be fine. It’s that negotiating part. So if you feel comfortable negotiating directly with an agent and not having an agent represent you, then I think this would be a fair scenario. Especially if the property is sitting and it’s not selling, calculate how much you’d actually be giving up in commission and maybe it’s worth it.

Tony Robinson:
Yeah, you mentioned about 6% for where you’re at. I want to say for the properties that we bought and sold recently, we’re around 5%, the markets that we’re at in California. So 2.5 to the listing agent, 2.5 to the buyer’s agent, which seems pretty reasonable.

Ashley Kehr:
And also that is sometimes negotiable. So the investor that I’ve done work for… And just like, he used to make me ask for discounts all the time and I would get so embarrassed, I’m like, “No, please don’t make me.” But one thing he always did was, “Ah, tell him we’ll do 5% instead of 6. Just tell him. Tell him.” I’m like, “Ah, but this is his job. He’s just trying to make money.” I’d get all heartfelt embarrassed that I was trying to make somebody. Every single time the person would be like, “Yeah, okay, sure” and I was just amazed. And now I’ve overcome that fear completely as to asking for a discount because every single time he proved me wrong, that they wouldn’t say no. So it worked out well. And if they say no, okay, they say no, that’s it. And then you agree to what originally was asked and move on.

Tony Robinson:
And for all of our rookies, I think that’s a benefit as well, is that you can position yourself as a real estate investor. You’re not just a one-time client that’s going to buy a house every two decades. Like you say, “Hey, I’m going to buy two houses a year for the next five years. I’m going to be a volume client for you.” And that’s leverage that you can have because now they don’t have to house flip for that next client. They know that they’re going to be able to work with you at least a couple times this year.
So Julie, I would just say for yourself, really think about what your motivation is for going for sale by owner. And like Ashley said, I don’t think I would necessarily turn down a buyer’s agent if they came to me with a buyer because it means that that’s a little bit less work on your end, but you have to ask yourself if you feel that it’s worth the cost associated with this. Now, the last thing to keep in mind too is that you also want to think about how much time is it going to take for you to find a buyer and facilitate that transaction on your own own. And if bringing in a buyer’s agent can maybe cut that time in half, now there’s less holding costs, right? There’s less maybe headache around you managing this property yourself if that’s what you’re doing. So there’s other factors to consider as opposed to just like, “Hey, I don’t want to pay any agents any fees whatsoever.”
All right, so our next question here comes from Chiloe Carter Davis. Chiloe’s question is, “When buying property that you will owe on for 20 to 30 years, are you concerned with having so much debt as you continue to add to your portfolio? For example, having five $200,000 homes definitely in times now when being evicted for not paying rent is being somewhat protected.” So it sounds like Chiloe’s question here is around should you continue to use leverage to purchase real estate investments as your portfolio scales? Or maybe should you think about paying off some of your rentals so you don’t exceed a certain level of debt? So sounds like Chiloe might be drinking the Dave Ramsey Kool-Aid a little bit here as well. What are your thoughts on that, Ashley? Should you put a cap on the amount of debt that you have in your rental portfolio?

Ashley Kehr:
Well, I think that the fear she states out is that evictions are taking a lot longer because of COVID where there was the eviction moratorium. I have somebody that has lived in a unit for 12 months without paying rent because they keep applying for county funding, and it’s about four months behind. So by the time it’s processed, they’re another four months behind on rent. But you can’t evict them while they have submitted an application for this funding. Then once the funding is approved or denied, you can go ahead and start the eviction. But if the funding has been approved and they get funded, they can go ahead and apply again. So then it’ll stop the eviction again.
I actually just got a huge payout for this tenant, but now I think it’s three months behind right now, so we’ll see what their next move is. So I think that that is such a fair fear is, “What if all of my tenants stop paying rent? I can’t get them evicted because of whatever the state laws are.” Things like that. So I think what I like to make me feel better is that I have different properties in different areas. So I may only invest in New York right now, but all of those properties are in different areas in different townships. So in some of the rural areas, the court just goes so much faster and smoother in some of them where it’s super easy to evict because it’s such a small town. And other ones, it takes forever because they only go to court once a month and there’s not a ton of court states available. You have to line up with your attorney, things like that.
So I think a big thing would be to really, if that is a big fear of yours, is to kind of diversify in different markets to have that protection of, “Okay, if you can no longer evict in this county or this town or whatever it may be, then you have your other properties to lean on.” And that’s an advantage of growing your portfolio. So if you have a lot of doors, it’s a lot more cost-effective to have a couple that are vacant or non rent paying. If you have two doors and they both stop paying rent, that is detrimental. If you have 20 doors and two of them stop paying rent, that may be some of your cashflow is now covering those payments until they’re evicted or until they start paying, where it’s not like you’re taking money out of your W2 or finding money somewhere else and drowning trying to make these payments.
So as far as over-leveraging yourself, I always keep a couple properties that are debt free, that have no mortgage on them. I mean, they’re not high end properties where it’s hundreds of thousands of dollars that I’m letting sit in these properties, but that’s something that kind of gives me a peace of mind so that if I needed to, if I feel myself getting into a situation, I could sell that property, get a big lump sum and use that to carry me on, or I could go ahead and refinance that property and put a mortgage on it.

Tony Robinson:
There’s a social media profile that I follow and I think it’d be cool to shout him out right now, but it’s Mark Ferguson. He goes by InvestFourMore on Instagram, so invest, F-O-U-R, more. The reason I bring him up is because he always talks about every quarter and annually his goals. And almost every time he talks about his goals, one of his things that he lists as a goal is to increase his debt. And he always says, “I want X millions more in debt this year.” And the reason Mark says that is because he understands that the more debt he has, the more property he owns, the more cashflow he gets in return.
So I do think that there’s a smart way to leverage debt, Chiloe, and I think it’s natural, like Ashley said, to have some fear around that. The tactics that Ashley gave to make it less fearful, I think, are solid. So I’ll just try and add some more flavor to that. I think first is your reserves, like Ashley talked about having properties paid off, which is a great approach. But for me, we have properties that are 500,000, 600,000, $700,000. It’s unrealistic for us to have those properties fully paid off.
But what does make sense is to potentially have a reserves target. So maybe you want three months of principal interest and taxes and insurance. Maybe you want six months, maybe you want nine months. Maybe you want a year of payments just sitting in an account for each property and maybe your commitment to yourself is, “I’m not going to buy another property until I have a year’s worth of principal interest, taxes and insurances for the current portfolio.” And now that gives you a year for every single property to really be able to decide on what to do if things kind of hit the fan.
The next thing you can kind of look at is your overall loan to value, like your debt to equity level across your entire portfolio. So a lot of times you look at one property and say, “Hey, this property is worth 100,000. We owe 80,000. So we’re at an 80% LTV.” But it’s also sometimes good to look at that across your entire portfolio. And maybe you want to say, “Hey, across my portfolio, I want to be at a 60% loan to value.” So maybe I have some properties that are at 90 or 80 because I just bought them, but then my other ones need to be at 30 or 40% to kind of off offset that. So across my entire portfolio at 40% equity if I add everything up. So I think looking at both your reserves target and your equity across your portfolio are two ways to maybe make you feel a little bit more comfortable adding on that additional debt.

Ashley Kehr:
Yeah, that’s great advice especially the reserves, like having those reserves in place when you’re first starting out. I would even add onto that and say for your first couple, lean towards that six months range. And then as you continue to grow and scale, you may not need six months of reserves for every single property because that’s a lot of cash that can be sitting and the chances of all of them needing your reserves at once are low. And then if that did happen, that’s where you tap into your lines of credit and things like that. But yeah, I think that’s great advice.

Tony Robinson:
Yeah, but it also depends on the partnership, right? Because was it this episode where we were talking about partners? Maybe the last episode? But for us, we actually have to keep our reserves separate because for so many of our properties, we have a different partner on each one of those. So for me, I can’t say, “Hey, if things hit the fan on property A with partner A, I’m going to take money from there and put it to part to property C.” So we’ve had to build out kind of a separate reserves for each one.
And it’s so crazy with the way that reserves work. A lot of our properties in Joshua Tree, they were all built between late 2020, 2021, 2022. So all relatively new properties, but some of them have just had more issues than others. And some of those properties, we’ve literally never touched the reserves once. And other ones, it feels like every couple of months we’re almost emptying the reserves out because some big maintenance thing happens that we have to go back and replace. So yeah, I do think reserves gives you peace of mind. And honestly, the way that we stated it in our partnership agreements is that the majority of our cashflow is supposed to go towards building the reserves until we hit, I think, a certain threshold. I think it’s like three months or something like that of principal interest, taxes and insurance to make sure we have that buffer there.

Ashley Kehr:
I can just hear Daryl, and I’m sure a lot of other people are thinking of someone that’s going, “Ah, things just aren’t made the way they used to be.”

Tony Robinson:
Yeah, which is true, which is true.

Ashley Kehr:
Thank you guys so much for joining us for this week’s Rookie Reply. If you would like to submit a question, you can go to biggerpockets.com/reply, or you can visit us on Instagram and go to our link tree to click on the link to submit your Rookie Reply question. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson. We’ll be back on Wednesday with a guest. We’ll see you guys next time.