How to Make 3% More Rent Automatically (Takes 5 Minutes) (Rookie Reply)

Ashley:
One of the best parts of this show is that we get to answer real questions from rookies who are in the trenches right now.

Tony:
Yeah. And today’s questions are all over the map from where to stash your rental income. So it’s actually earning you something to how to find deals in a tough market like Chicago to running numbers on a $700,000 short-term rental.

Ashley:
And the cool part is these are the same kinds of challenges that rookies everywhere are facing. Cash management, deal flow and running STR numbers the right way. So if you’ve ever wondered how to maximize your rent deposits, how to break into a competitive city or what you might be missing when analyzing an Airbnb, this episode is for you. This is the Real Estate Rookie podcast. And I’m Ashley Kehr.

Tony:
And I’m Tony j Robinson. And with that, let’s jump into our first question, which comes from Kevin in the BiggerPockets forms. Kevin says, where do landlords keep rental income to earn interest before expenses? I’m looking for smart ways to maximize interest on rental income before mortgage and expense payouts. What accounts or platforms do you use? Right now I keep my rental income in a standard checking account that doesn’t earn interest. On average, I bring in about eight k per month in rent and spend around six and a half K on mortgage and expenses. That leaves me with roughly 1500 bucks sitting idle each month not earning anything. I’d love to hear how other landlords manage this. Are you using high yield savings accounts, money market accounts, or landlord specific platform to make your cash work harder between rent collection and payouts? This is actually the cool question. I mean, we’re on episode like, I dunno, 600 and some odd and I don’t know if anyone’s ever asked this question of where do we put our cash to make it work harder? I guess just quick context, when you have money sitting in a bank, if it’s in a traditional account, it’s earning usually pennies if that

Ashley:
0.001%,

Tony:
0.001%, right? And when you think about inflation, it truly means that your money is losing value every single year that it sits there idle. So oftentimes if you have cash that you know is just going to be sitting there, it makes more sense to put that into some sort of account that earns more interest. The bank is going to pay you more for leaving that money in that account. So it is a really great question. Ash, you’re obviously our resident personal finance queen, so what is your initial recommendation to Kevin on where he should stash these funds?

Ashley:
Yeah, I definitely started out with one of those 0.001% interest checking accounts, business checking accounts for my local bank, and we love local banks here, but most of the time it’s for the financing piece and not actually the cash management. So I actually made the switch to Base Lane, which is actually a banking platform built for real estate investors and this is where my tenants automatically pay their rent and it goes into that account. They also have an automated bookkeeping service called Baseline Smart, and that actually automatically puts my transactions in, so it makes my accounting and bookkeeping a lot easier. But yeah, I like and also they have the high yield savings accounts also. So not only do I like to find a bank account that is earning me some money from that high yield interest savings account, but also that makes it easier as a business owner to actually track my income and expenses.
There’s one bank that I had started with is a very small local bank that had five branches and there was no kind of automation. It was literally I got my bank statement in the mail every month. I couldn’t even go online to an online portal and view a check how you can just go and sign into your online banking and view a check as to who was written to and see the actual copy. It was a very long time before they actually got anything like that in place. So I definitely don’t recommend a small local bank for your business. I really definitely like a banking platform instead. That’s all encompassing.

Tony:
Base lane’s a great option. We know a lot of folks that are using Base Lane. I personally use Relay Financial for all of our business banking because if you follow me on Instagram at Tony j Robinson, you probably heard me talk about Relay before. If you’re on our YouTube channel, like my mind and my wife’s YouTube channel, the Real Estate Robinsons, we talk about it a lot there. And the reason that we kind of stumbled into Relay, I’ll talk about the savings part, but the reason that we stumbled into Relay initially is because I’m a big fan of the Profit First methodology for managing your Cashflow. And we’ve actually interviewed Mike Mcal was the author of Profit First on the podcast here, so you can look that episode up. But Relay is actually the only bank that I know of that is the bank built for Managing Profit first or for implementing Profit first, and you can have all of your different checking accounts set up and the money moves automatically.
They’ve since added a lot of other functionality, which makes it really great. But in addition to all those cool things about being an online first bank and the cool technology, they also offer pretty strong interest earn on savings accounts. Now obviously these, and no matter what bank you’re going with, thera that you’ll earn will vary and fluctuate usually based on the Fed funds rate. So we just had that rate come down recently and because of that, a lot of these banks that offer interest on their savings accounts have probably pulled their rates down. I looked at Base Land, they’re at just over 3% relay right now it’s just under 3% in terms of the most that you can earn, but that’s 3% is still better than 0.001% than what you’d be getting. So I think for me just sticking into an account like that, that’s still liquid. I wouldn’t put into something like even a money market account. I think I would be somewhat nervous for because there’s too much fluctuation on a day-to-day and I want to make sure that I can access those funds when I need it. A CD account that’s locked up for too long. So just some of these savings accounts where you can earn a healthy return I think is the best option.

Ashley:
But sometimes even some of the money market account or the CDs, the rate is not even that much better than a high yield savings account. I remember looking, this was probably four years ago, five years ago, I had a chunk of money that I was looking to do something with and to put it into something and it was actually better for me to put it in the high yield savings account than lock it up for six months a year into a cd. So I think look around, but also especially if you are, what is the purpose of that money? So basically I keep all my security deposits in there where I am not using that money, that money is sitting there, but also if someone moves out, I have to be ready to be able to take that money out to refund their security deposit as long as there’s no damage or anything.
But if it’s your rental income, do you need to pay bills conveniently? Do you want to have to write a check every month? Do you want some kind of bill pay system? Things like that you should be thinking of, do you want your rent collection to actually be deposited into that account or is this just your leftover cashflow that’s actually just going to be sitting there and maybe you’re saving for a CapEx or saving for the next deal? Things like that. So I also think you should be looking at what kind of bank account you want depending on what that money is actually going to be used for or maybe all of those things you need.

Tony:
Ashton, you bring up a really good point about comparing the rates on a certificate of deposit, which typically have to lock that money up for some predetermined period of time and the traditional high yield savings accounts, and we use Ally for our personal bank and they’ve got I think 3% on their savings accounts right now, just over 3%. So pretty much in line with what both Relay and Baseline are offering, but they’re, their savings account offers a 3.4% rate. Their three month CD offers a flat 3%. So you would truly be better off in that timeframe just leaving your money in a savings account and even at 12 months is at 3.85%. It doesn’t even get above four ever. The highest that they’ll offer is the 3.65% and that’s on 18 months or it looks like 3.85% on 12 months. But my point is we’re talking 85 basis points, but that money is locked up for 12 months. So is it worth it? Probably not for this scenario. I think the only time, Ash, I’m curious that you think, I think the only time a CD would make sense is if you are really trying to force yourself to save money

Ashley:
So you don’t access

Tony:
It, so you don’t access it at all. Maybe you got a big tax refund or maybe you came into some money, you sold something and you want to make sure I really don’t want to spend this money and you don’t trust yourself to kind of be disciplined without that, then I think the CD is a great approach because it forces you to forget that that money exists while also earning interest on it. But for day-to-day operational things in the portfolio, I don’t think it makes a ton of sense,

Ashley:
But I also wouldn’t do that if you are doing a risky project or rehab where maybe all of a sudden you might be going out of budget just because you don’t want to go over budget and you don’t want to use that money, I’d make sure you still have access to your reserves, but if this is additional cash, additional savings, then you don’t want to touch that. Maybe saving for a down payment or something like that. You could put that in knowing it’s going to be a year out or whatever until you’re ready to purchase that property. But I just looked for my personal savings. I don’t use Ally, but I use Wealthfront and that actually is at 3.75% and if you refer someone, they’ll give you a half a point boost for three months and you’ll get it too. So Tony, you need me to refer you. Anybody DM me at Wealth from Rentals, I will give this to you as you get that point boost that I could get that half a point boost too.

Tony:
You mentioned that, right? So we also use, yeah, I’ve got a really complicated banking setup. So we use Ally for most of our bill pays and all those things, but our discretionary spending, we always have a different account, and right now we’re using this new bank that I found called Crew and Crew kind of operates with the digital envelope system. I actually used to use this other company called Q, but they’re going through this weird restructuring things. We had to pull all of our money out. But part of the reason that I like Crew was because they offer a based a PY interest rate of 3.45% for any money you have in there. But then if you refer someone, you get again, a half percent boost for up to three months and you can have up to four boosts active at one time. So that could be, that’s like an additional 2% if you were able to refer that many people in such a short timeframe.

Ashley:
So four of you messaged Tony and then one other person messaged me as you avoid. One thing too that I’ve seen a lot of personal finance people that I follow on Instagram do is they change their checking account often for cash bonuses. So they’ll look for a lot of nationwide banks like Chase, Wells Fargo, I’ll see them do this where it’s like if you have X amount of a CH payments, so your paycheck being automatically deposited in, if you have six of them over three months or something like that, they’ll deposit. I’ve seen ’em ’em up as like $900 they’ll deposit into your account by just fulfilling certain requirements or whatever. And there are people that I will see that will frequently change their banking based on it. Now it makes me exhausted thinking about changing all of my auto pays. But if you could do it where you’re just having your check deposited and then money transferred to another account maybe, and you don’t have to change all of those, but to get 900 bucks over three months, it might be worth it to take the time to actually change your bank every three months or whatever the time period is to actually get that.
I mean, you could potentially get a couple thousand dollars a year just from doing that. Yeah. Okay. Well, we have to take a short break, but we will be right back with our next question after this. Mess up your bookkeeping and you mess up your profits. That’s why real estate investors need accounting. They can trust Turbo Tenant Accounting is built for landlords automatically helping you maximize deductions, keep clean books and reduce tax season and headaches. Turbo tenant accounting lives right where you already manage your rentals. One login, one platform, everything in sync, say goodbye to manual spreadsheets or expensive software that’s not built for real estate. Don’t gamble with your numbers, run your rentals like a real [email protected] slash get accounting. The second question comes from Eric. He says, I’m currently looking for my next deal in Chicago and my search has been all MLS deals. I’m searching for a two to four unit, but I haven’t found anything that works for me. By the way, I’m talking about C ish class and above class, no D class. I tend to be cautious and conservative with my deal analysis, but am I the only one finding it a bit difficult in Chicago? If someone could point me in the right direction, let me know. Overall, I think deal finding in general across the country has been hard given the current market conditions. Tony, do you know anything about the Chicago market specifically?

Tony:
I mean I personally haven’t looked in Chicago, but to your point, Ashley, I think that what Eric is describing is something that we’re seeing nationwide, but I think the questions that I would pose back to him are the questions I would pose back to anyone no matter what market you’re in first, he says, I haven’t found anything that works for me. And I think that is the piece that we really need to drill down on. How are you defining works for me? Are we saying that there just aren’t enough two to four units that are on the market? So there’s just simply not enough volume of deals for you to look at? Is it an issue of, Hey, I’ve only analyzed three properties because I’m just looking at the MLS and I’m just naturally excluding a lot of these because I think they’re not going to work.
So it’s the volume of deals analyzed or underwritten. Are you maybe analyzing a lot of deals but none of them are penciling at the listed offer prices and then you’re stopping there? Or are you going to the next step in submitting offers at whatever price makes the most sense for you? Or are you submitting all those offers and then everyone’s just saying no? Right. So there’s so many different layers that we can focus on, but I think what I see most Ricks struggle with Ashley, and I’m sure you see the same, is they never get to the point of getting a bunch of rejections. They usually get stuck at some point before that where either their buy box is so tight that they just can’t analyze enough deals. B, they’re not analyzing enough deals or C, they’ve analyzed those deals, but they’re not actually making the offers. And if we can just focus on pulling those three levers, I think typically we start to see more good things happen. So that’s my take, and again, I’m making some assumptions here, but I feel one of those is probably the issue that Eric is facing.

Ashley:
The first thing that I thought of actually was earlier today we interviewed a rookie investor, Esther, and she talked about how there was this property that set on market, set on market and they kept decreasing the price and they ended up buying it. And the reason they bought it not was because the price kept on decreasing and because it all of a sudden was affordable, it was because it had 900 extra square feet that wasn’t in the listing. So I think this is another lesson for all of us, is that just because a deal isn’t working for you, what are you going based off of and how can you get more creative? I think it was like 900 square feet and it was just a rec room and they DIYed, YouTube University turns it into a studio apartment to rent out, or I don’t know if it was a studio apartment, but an apartment to rent out so they could house hack.
And I think that getting creative and looking outside of the box as to what else can you do with the property, what other additional income streams, what is the available in this property that’s not in the listing? So scan the photos, does it look like maybe this property is actually bigger than they’re stating? I’m renting a property right now that it’s two bedrooms in one path, but it has two large living rooms. So I’m making that abundantly clear that if you wanted to, you could use another living room as an office den, another bedroom if you wanted to put a curtain up, I guess, I don’t know, but there’s more possibilities. Just because it’s a two bed, one bath doesn’t mean there’s extra space to do something with. And yeah, probably eventually we’ll turn one of those living rooms into a third bedroom to really maximize the value, but it’s going to rent out great now as is. So I think just looking outside the box and what other opportunities, what additional income streams can you get out of a property that’s maybe not just stated there right in front of you on the listing.

Tony:
Alright, we’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us at realestate Rookie and we’ll be back with more right after this. Alright guys, welcome back. We are here with our final question for today. And this question also from the BiggerPockets forms comes from Chris and Chris says, should I buy the short-term rental? The purchase price is $700,000. The down payment would be $300,000. The monthly payment, including taxes and insurance would be $2,225. The rabu and Rabu is like a data estimator estimates the monthly revenue at $6,800 per month. He plans to self-manage and he says, when I estimate supply and CapEx, I see a monthly net of about $3,800. I’m an experienced property manager, but newbie investor. So I appreciate any advice. What am I missing? Couple of things here, Tony,

Ashley:
Get out your handy dandy calculator. What is our cash on cash return with a $300,000 down payment?

Tony:
And that was one of the things that jumped out at me, right? I mean that’s obviously a big down payment, right? That’s 300 over 700, like 40%, 42%. So it’s a massive down payment. And if you’re netting $3,800 a month over 12 months, it’s about $45,000 a year. But over a $300,000 down payment, we’re looking at about a 15% cash on cash return, which honestly isn’t bad. It’s a strong return given the amount of down payment that you’re putting. But I have a few very serious questions, I think to make sure that this is actually a deal worth pursuing. The first thing is the monthly revenue estimate. Chris says that Rabu estimates $6,800 per month in income. That is a great starting point to know if this deal is worth doing a deeper dive on, but I would not make a purchase decision on any short-term rental property based on an revenue estimate from rabu, from your DNA or from any other data provider because they’re not accurate.

Ashley:
Tony, I have a question about that. When you’re looking at Revu or these other data providers, that revenue estimate, is that including cleaning fees? Is that before or after Airbnb fees are paid out? Is that gross or is that net revenue that you actually get all said and done?

Tony:
So different data providers handle this differently. Honestly, rabu I think is, and no disrespect to them, but just in terms of what I see from other short-term rental operators, rabu is probably on the third tier of data providers. Everyone really focuses on Price Labs and Air DNA and Rabbit is kind of like a tier below just in terms of usage from what I see from folks who are actually doing this on a daily basis, but even between Price Labs and aird NA, they handle those two points of cleaning fees differently. When you see a revenue estimate from Price Labs, it does not include cleaning fee income. When you see revenue estimates from aird NA, it does include cleaning fee income. So even just those nuances between those two different platforms, if you don’t understand that, you could either grossly overestimate or underestimate what the revenue potential is, which is why first I like to use both the data sources.
So I can go into both of those, both EDA and price labs and do my analysis in both of those. But second, instead of just relying on whatever estimate these tools spit out, I want to go through and build out my own custom set of properties that are similar to my property in terms of size, location, design and amenities, construction quality, and see what kind of revenue do these tools think that those properties are doing. And the more I can find that are similar to my property, the more confidence I get in how my property might do. But the revenue estimators, they can’t use that same nuance of deciding which comps we should include and which ones we should exclude. And that’s why oftentimes those numbers are off. So I would not go based on the revenue estimates that BU gave you.

Ashley:
So I guess Tony, looking at this and knowing that the revenue could be off, what about any of the expenses on this? Because not just as a rookie, a CR host myself, I see there’s the supplies, the CapEx, and depending on what the revenue shows, if it’s including the cleaning fees, then they need to show the cleaning expenses as to what they would pay out in fees for that. And then also any software they would be including. Are there any other expenses, maybe like utilities, things like that, that they’re missing?

Tony:
So there’s two big things still that I think are missing from this. Number one, I see no mention of setup, design and amenities. The only thing they mention is down payment. And I think that’s where a lot of new short-term mental hosts make the mistake is that they only budget for acquisition and they forget to budget for a setup. So Chris is going to drop,

Ashley:
Maybe it’s the turnkey one. We could, even if its turnkey, okay,

Tony:
Even if it’s turnkey, there’s usually some level of money that we need to reinvest to make sure the property is ready for your standards. It could be something as small as, Hey, some of these mattresses need to be replaced, or they’ve got the TVs from 2005 that are super outdated and we’ve got eight different remotes and there’s no smart TVs

Ashley:
Connect. The TV has a backend to it,

Tony:
Right? The TV’s got a backend, even forks and knives and cutlery and all those things. Even if you’re buying turnkey, there’s still usually some level of investment that we need to do to get this property ready. We’ve purchased properties that are new construction, turnkey that we still have had to go back and add our own elements to make sure that we can compete. So I think that is a big portion. The design, the amenities, the household essentials. We typically recommend at least 30 bucks per square foot to get a short-term rental ready. So I don’t know the purchase or the square footage on this, but I mean 700,000 square feet. Let’s assume it’s maybe like a four or five bedroom, I’ll call it 2,500 square feet, 30 bucks a square foot, that’s another 75 grand that is not accounted for here that we would need to invest back into this deal to make it Airbnb ready.
So that’s a big one. And then the second piece is what you alluded to, Ashley, are the other kind of operational expenses, cleaning fee. We’re not sure if that’s included in their supplies and CapEx number. You set supply costs, just setting money aside, and this is something that I’ve done more recently that we weren’t doing initially, but aside from just like your reserves, having money set aside specifically to reinvest back into your property, short-term rentals are different from traditional long-term rentals in the sense that with the long-term rental, you just have to worry about the roof, the water heater, the major things that keep that property running. But with the short-term rental, we’ve got to worry about competition and continually improving the experience that we can give to our guests. And I think siphoning off some percentage of your revenue on a regular basis is an important thing to do as well. So it does feel like maybe there are some of the operational expenses that are being left out here as well.

Ashley:
Well, thank you guys so much for joining us today. I’m Ashley. He’s Tony, and we’ll see you guys next time for another episode of Real Estate Rookie.