Can You Use Retirement Funds to Grow Your Portfolio Faster? (Rookie Reply)

Ashley:
Welcome to another episode of Rookie Reply. If you’ve ever wondered about tapping into your retirement funds for a deal or wondered how to scale your portfolio faster, this is the episode for you. We’re going to help you weigh the pros and cons of using a Roth IRA to accelerate a deal and to walk you through other options you may be able to take advantage of if you feel backed into a corner financially.

Tony:
And not only that, but in today’s episode we’ll also get into how to handle a messy tenant situation where they just signed a lease but they want to back out before they even move in. And then we will break down the best apps to manage your short-term rentals so you can maximize your cashflow.

Ashley:
This is the Real Estate Rookie podcast. And I’m Ashley Kehr.

Tony:
And I am Tony j Robinson.

Ashley:
Okay, so today our first question is pulled from the real estate rookie Facebook group. You’re not already, make sure you’re following our page. BiggerPockets Real Estate Rookie or our Facebook group real estate Rookie. So this question is from Elizabeth Galloway and it says, tenant signed a year lease yesterday and paid a security deposit and remainings month of rent. Today he has a family emergency and doesn’t want the house. Now he has asked for a full refund, but our lease states a 60 day cancellation notice. I feel like he shouldn’t get a refund. It was a lot of time and effort to get him into the house. So this is a good question because I always have this fear of like, okay, I’ve taken my listing down, I’ve got someone, but their moving day is 30 days plus away. What if they decide to back out? So Tony, in your little bit of experience with long-term rentals, did this happen at all when you were leasing it?

Tony:
No, we’ve never had this issue. When I was working as a leasing agent, again, I did this very, very briefly.

Ashley:
I always forget about that.

Tony:
Yeah, it was like two months that I did it. But during that time we had someone who very similar situation, they paid their deposit and they actually, I think it was three days later, came back and said like, Hey, we changed our mind. And my manager, I was the one who leased the apartments, they were talking to me and I was like, God, sorry guys, we signed it. I don’t know what to do here. And went to my manager and she stood by what the lease stated that they signed. They threatened to take us to small claims to get it back. I don’t really know what happened, but in that situation they said by what the signed the contract said. So Ash, I would assume that maybe this varies state to state on what the legalities of it are, or does it just fall back on the lease better than I do?

Ashley:
Yeah, and if you want to find out what your state rules are, laws are, go to biggerpockets.com/resources and there’s a section that says property management and landlord. And there is a resource you can click on that says state laws and you can actually click on your state and it’ll bring up all of your state laws and it’s kind of like a summarized version of what each of the laws are and see if there is a specific law around this. One thing like New York State does have that would kind of go through with this is you need to give so much notice depending on how much time you’ve lived in the property, especially on the landlord side of things. So just take a couple minutes, go and look at what your state law is before you take any action on this. But I would agree I would go along with what the lease says.

Ashley:
So even though they haven’t moved into the property, if they have signed the lease, so when I used to work as a property manager before I even had my own rentals, we actually had a document that was, they had to give a $200 deposit and they would sign a document saying this is non-refundable and if you end up moving into the property, this $200 was applied to your security deposit because most people didn’t pay their security deposit until the day that they got their keys. They were paying the security deposit and they were paying the first month’s rent. So it also depends on how you’re collecting that. Are you collecting at the lease signing? Are you collecting at the move-in Now I collect the security deposit at the lease signing and then they can pay their first month’s rent before they get the keys. So either they’re bringing a money order cashier’s check to the actual move-in and handing that in or they’re paying online ahead of time and just letting them know you have to pay a couple days ahead to make sure it clears your bank account before we’ll actually hand over the keys to the property.

Ashley:
But I would go along with the lease and if the lease states a 60 day cancellation notice, then that’s 60 days. So that also means they are on the hook and liable for two full months of rent. And then you might actually be the one that has to take them to small claims court. Some states do require that you proactively lease the property or list the property for rent and try to get someone in there sooner. And I’ve seen this language in a lot of lease agreements where it says that if you do move out you are liable. But if somebody else does move into the property during that, so say within these 60 days you get someone into the property, they no longer have to pay. They can stop paying once you get someone else into the property. So in my opinion, I would, if your lease agreement says 60 day cancellation notice, I would stick to that and I would actively start looking for somebody else to get them into the property.

Ashley:
Circumstances will probably play out that most likely they’re going to refuse to pay you that first month’s rent and then it’s up to you if you want to take them to small claims court for that. But I would just at that point, I would apply their security deposit if that’s allowed to the monthly rent that they owe you and issue a full disposition letter that states what their security deposit was and why you’re retaining some of it. And in this case, because they didn’t pay the first month’s rent, that’s kind of the plan of action I would go towards I guess.

Tony:
I think the other thing to call out here too, I see this a lot on the short-term rental side on the Airbnb side where someone books a reservation day before they want to cancel because of a quote family emergency and we say, Hey, we’re so sorry to hear that you’re experiencing some family emergency. We hope all works out. Unfortunately we have to stick to our cancellation policy and with your check-in date being so close, we’re not able to offer a refund and then magically the quote, family emergency disappears, right? So I think maybe a little bit of pushback, maybe the quote emergency isn’t as big of an emergency as they kind of made it out to be initially. So Ashley’s approach is great and I think just sometimes pushing back they might just fall in line,

Ashley:
Which also I think leads to already friction at the beginning of your lease of like, okay, now this person feels like they’re forced to live there. And I guess too looking at it is, okay, this person’s like fine, I have to live there for 60 days, I’ll live there for 60 days. Is it worth turning over the apartment twice too? So now putting them into the apartment, they’re going to live there for 60 days, then you have to turn it over again. How much destruction, damage, where and tear can they do in 60 days? Do they have a bunch of dogs? So I think that’s also another factor to consider is knowing you’re only going to have that person for those 60 days that they do decide to comply with the lease and move in and then move out after 60 days too.

Tony:
Alright guys, we’re going to talk a little bit about Roth IRAs and whether they’re good tools to help fund your real estate deal, but we’re going to take a quick break before that. Alright guys, welcome back. So our question today, our second question today is also from the real estate rookie Facebook group. And this question is from an anonymous user, but it says, do I pull from my Roth IRA and pay a penalty but be able to finish my multifamily property sooner and use that equity to keep burying? We purchased an abandoned flip in our neighborhood in California. It’s a multifamily with three separate homes on one property and the ability to make a fourth if we decide to, we purchased it for $500,000, which is actually the average cost of one small house. My husband is a contractor and the first home was almost done at purchase and has been renting for two years covering three fourths of the mortgage.

Tony:
Second home is partially done, but we’re running short on funds to get it done faster. I’m thinking of withdrawing about $50,000 from my Roth IRA. I’m 44, so there will be a penalty to complete the other two homes just to get them done and then hopefully recoup some of that loss later. Our mortgage right now is about 4K per month with the other two homes done. The property will bring in about $7,500 a month in rental fees and more if we add another studio. Yes, we are spending money to eventually make money. This is not a quick straightforward deal, we’re aware of that. It was a unique opportunity in a highly desirable area. We then are thinking we would do a cash out refinance to continue with another property and so on. Can experience folks offer some pointers? This is our first investment property and we are learning as we go. I know the penalty will suck, but we want to get this rolling faster than this. I’m still working and contributing to my retirement accounts. Thanks so much. Maybe the first thing we should do, Ashley, is just define a Roth IRA and you are our resident personal finance expert, the index fund queen. So what’s a Roth IRA?

Ashley:
I did go to FinCon two years, so I do feel like I am entitled to that title, but so a Roth IRA is a retirement account. I think right now the don’t hold me to this, I think it’s at $7,000 per year is the max you can contribute. And this is an after tax contribution. So after you get paid from your W2 job or if you’re self-employed, you pay taxes on your income, you are then contributing to your Roth IRA. But then when it’s time to retire, you do not pay taxes on the money that you withdraw from the Roth IRA. So this is where Roth IRAs are really beneficial to people who think they will have a higher income level when they are older and in retirement that they won’t want to pay taxes because they’re on a higher income bracket anyways, my answer to this is no, I don’t think you should do this and not because I love Roth IRAs or I love index funds or retirement accounts.

Ashley:
It is because of the math. So when you pull out of your Roth IRA early, you are paying a 10% penalty, plus you are paying income taxes on that amount. So let’s just say you’re even in a 20% income tax bracket or 22% whatever it’s at now, plus the 10, that is a good chunk of money. So above and beyond that $50,000 you’re going to have to pull out more to pay that 10% and to pay your income tax on that. I think there are a lot of other ways to get cheaper money. So your primary residence, can you put a line of credit? I got an email from my small local bank the other day saying get a personal loan for eight and a half percent. You may not be able to get up to $50,000 on a personal loan, but maybe between you and your wife each getting one, maybe you could get 20,000 and you’re only paying eight and a half percent on that. So I think there’s other ways to find cheaper money than to go and tap into your Roth. IRA

Tony:
Totally agree. I think the HELOC on a primary is a great example. Sounds like they live in California, which is a market that tends to appreciate pretty well. So depending on when they bought, maybe they’ve got a good chunk of equity there. I think another path forward is private money is are there any, because if the plan is to refinance anyway, if you only need 50,000 bucks, could you go out and get a private money note for that 50,000 and then when you’re done with everything you refinance, pay off the original debt and you pay off your private money lender. That way you don’t have to worry about tapping into your retirement accounts as well. Actually, I don’t have a Roth, but do you know Ashley, can you take a loan out against a Roth IRA the same way that you can with a standard brokerage account?

Ashley:
I don’t think so. No. The only retirement accounts I know is you can take a loan against your 401k. I do not think unless your Roth IRA is maybe through your employer. Maybe you can because they’d pull it out of your paycheck each month. But I am not aware of that. Did I just lose my title now is

Tony:
The personal finance queen? I think so. I’m very, very disappointed you don’t have the answer to that question, but no, I think you’re right. I know the 401k loans are pretty common, but I haven’t heard it on the Roth side,

Ashley:
But I think that’s something important to touch on as to what those terms kind of look like and the advantages for that.

Tony:
I think this person also has a unique skillset or maybe a unique advantage because the husband’s a contractor and it’s like that’s a really strong resume as you approach potential private money lenders to say, Hey look, we’ve already got this property, here are the numbers on it, here’s our experience level. That breeds a lot of confidence for someone to say, yeah, cool, here’s 50,000 bucks to finish this thing off. So I think like you, Ashley, probably not doing this, lots of other options around ways to tap into that equity.

Ashley:
Yeah, I really like the private money idea as to we’ll pay you 10%, 12%, which is still less than paying income tax and the 10% on taking it out of your Roth IRA, but to a private money lender and say, Hey, I’ve got this property. Show them the numbers on it and what you’re doing and what the timeline is and borrow from them directly instead of, and then you can either do payments to them or you could do it like my private money lender right now for my live and flip. I don’t make any payments once I refinance into my new loan. I pay all the interest when I pay off the balance of the loan. So that I feel like would be a great strategy to use if you can find someone who would be willing to do that and look at it that way. 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 and make sure you’re following us on your favorite podcast platform. We’ll be right back with more after this.

Ashley:
Okay, let’s jump back in. Today is third question is from Christine Brown in the BiggerPockets forums. What’s the best way to manage listing my property on multiple short-term rental sites such as Airbnb and VRBO? Is there an overarching management platform I can use to ensure I am not double booked and such? Also, what are your recommendations for the best platform or site to list my property as a short-term rental? Are there other sites than Airbnb and VRBO? I am so glad Christine asked this question because Tony, I have a follow-up to this for my own personal Airbnb listings to ask you. So let’s do Christine’s question first. Tony, what are some of the best management software to use for your short-term rental?

Tony:
Yeah, I guess let me answer the second part of her question first. Cause I feel like that ties into the first part, but she says, what are the recommendations for the best platform? Ideally you want to be on as many as you can, but at a baseline, at the very minimum you should be on both Airbnb and vrbo. I get questions from folks sometimes where it’s like, Hey, should I listen on Airbnb or Stellas on vrbo? And the answer is always both. Those are the two biggest players in the single family short-term rental space, and there’s no downside to being on both of those platforms. booking.com I think is probably like a close third to consider on the single family short-term rental side, but Airbnb and VRBO are definitely non-negotiables there. But going back to the first part of the question in terms of how do you manage your listing on multiple sites, it’s a pretty simple solution.

Tony:
You just need good property management software and there are a few big players in the PMS space for Airbnbs. You’ve got guesty, you’ve got hospitable host away, hostfully owner as there’s a lot of them out there. I think it’s about finding the one that aligns best with your specific kind of level of tech know-how and savviness and how big your portfolio is and what aligns best. But all of those software give you the ability to connect your Airbnb, your vrbo, your booking.com listings to the PMM S to make sure that if someone books on one website, it automatically blocks it on all the other websites. So it’s a very simple kind of couple of click step process you have to go through to connect all those things.

Ashley:
I guess for my follow-up question, Tony is Hostfully is the platform that we use and my manager just let me know that they made a change with how they’re notifying the cleaners that there is a new booking or when they need to scheduling. So it’s something with the scheduling of the cleaners. I’m very hands off with the use of Hostfully, but she said they made a change and it’s getting really frustrating for our cleaner because it’s not as clear or not as good as it was before to schedule her. And we had talked about this a couple episodes ago or a while ago where she actually didn’t show up to a cleaning for the first time ever and it was my worst nightmare. So I guess the question my manager has for me that I don’t know the answer to is what are there other software we can use to schedule the cleaner? An idea she had was to actually make the cleaner a part of, is it a co-host on Airbnb, which I’m very cautious of actually doing that. So what’s your opinion and advice for me?

Tony:
Yeah, so I’m not as familiar with Hostfully with their property management software. We do use them for our digital guidebooks, but I think what I would look into is instead of adding them as a co-host through Airbnb, can you actually add them as a user within your hostfully account? So for example, my PMSI have different roles that I can assign to people. My role is admin, I can control everything, but we also add our cleaners and their role is specifically cleaner so that way they can actually log into our PMSs app and they can open up the calendar and they can see all of the reservations and all of the bookings, but they can’t see things like the financial information. They can’t message the guests. All they can see is the calendar with the information that they need. And then the other thing that we do that I would check and see if your PMS can do is can you send any sort of notifications when bookings happen?

Ashley:
I think that’s where the changes is that they change that. So that’s where it’s not as clear of a notification. I’m not really sure, but it was something in the notification part of when there’s cleaning that has changed and it’s not as clear or something, but

Tony:
I would just triple check your ability to time those notifications because what we do right now is we do it when they book our cleaners get a text and an email and then 24 hours before checkout they get a reminder text and email saying, Hey Ashley, don’t forget Tony’s checking out tomorrow at 10:00 AM So if you can set it up that way. So there’s multiple, that always works, but if not just defaulting back to just giving them direct access to your actual PMS and restricting their role, then it’ll just be on the cleaner to make sure they’re going in on a daily basis to review the calendar to make sure everything’s aligning with what they were expecting.

Ashley:
Okay. Yeah, I’m definitely going to try to add as a user and I’ll look at those notifications too. The last question I had on that was, I think it’s breezeway when you’ve mentioned to me many, many times, is there anything that can be done inside of that? Because we’ve talked about implementing that and we just never have yet.

Tony:
It’s literally one of my favorite tools.

Ashley:
Don’t look at me that way, Tony. You’ve told me I need to. No,

Tony:
It’s truly one of my favorite tools we have in our business because it just provides so much sense of nothing’s going to slip through the cracks. And we use it for scheduling, we use it for inspections, we use it for cleaning, we use it for maintenance, we use it for checklists, we use it for photo documentation. It solves a lot of the kind of operational constraints that we had when we were trying to manage everything just through the PMS. So isn’t obviously an additional cost because it’s software, but to me it’s very much worth the additional investment to give you that peace of mind.

Ashley:
Well, as always, thank you so much, Tony for your guidance and expertise. I’m sorry I let you down on the personal finance side today, but I’ll be back on another episode and try to be the queen of something else. Thank you guys so much for listening to this episode of Rick Reply. I’m Ashley. And he’s Tony. And we’ll see you guys next time.