Money Rehab with Nicole Lapin - How To Master Real Estate Investing with Whitney Elkins-Hutten

Episode Date: May 28, 2024

There’s a financial fairy tale you’ve probably been told: you find a fixer-upper, flip it, make six or seven figures, and live happily ever after. Real estate expert Whitney Elkins-Hutten is here to tell you… it doesn’t always happen like that. Today, she shares strategies to turn this financial fairytale into a reality. To read Whitney's new book, Money for Tomorrow: How to Build and Protect Generational Wealth, click here: https://store.biggerpockets.com/products/money-for-tomorrow 

I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start, or even too complicated, if, say, you want to put your summer home in Maine on Airbnb, but you live full-time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you.

I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at airbnb.com slash host. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no

maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits

apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. There is this financial fairy tale you've probably heard. You find a fixer-upper, you kiss a frog, so to speak, you flip the house, make six or seven figures, and happily ever after. Whitney Elkins Hutton is here to tell you it doesn't always happen like that, and she knows this personally. She lived the ugly stepsister version of this until she learned how to do it for real. Now Whitney is a successful real estate investor. She's partnered in over

$800 million of real estate deals. She's experienced in flipping residential real estate, and today she shares what she learned to turn this financial fairy tale into a reality. and today she shares what she learned to turn this financial fairy tale into a reality. I want to go back and talk about your early real estate investing days. I know you hit a home run with your first rental property, which is really rare. We should underscore that for people who are just getting in the game. Can you tell us about it? Yeah. So I actually bought a house with a significant other. And mind you, this actually wasn't in my mind an investment. It was and it wasn't. It was like the typical American dream. You go to school. We weren't married. We hadn't gotten married, but get a good job, buy a house, that sort of thing. So that was kind of the path that we were

heading down and bought the house, did things out of order. And about a month later, the relationship fell apart. And then I had a house and it had green shack carpet, psychedelic daisies painted on the walls, dire need of a rehab. And so I was like, oh, what do I do with this thing? So I stuffed it full of roommates to help pay the bills. I honestly thought I was going to go broke owning this house. Got 103% lending on the property, which is kind of unheard of these days. And then over the next 11 months, you know, taught myself how to do tile and drywall and electrical and plumbing. And, you know, the whole entire time I'm thinking from a scarcity mindset, I'm going to lose

money. When I sell the property, I walked away with a $52,000 check. I'm like, huh. And then I'm putting together all my financials for the IRS for tax purposes. And I'm like, wait a second. I was making money every month on this property. I wasn't losing. I was like, oh, oh, hold on. There's something to this real estate thing. I should do more of these types of things, make the investment over my head, like, or the roof over my head, one of those investments that everybody keeps talking about, especially because about this time, rich dad, poor dad is like hitting the scenes. And so I kind of backed into real estate investing. And then from there, I was like, okay, how do I figure this out? And if I could double click really quickly on the 103% lending, what does that mean?

So I had the primary loan on the property. So if I remember right, I think I had an 80 or 85% loan. Actually, it might have been more. It might have been 90. I would use the first time home buyers lending. Guys, this is 2002. So pardon me. I've slept a few nights over the past 22 years. That means like a 10% down payment. So you're doing- 10% down payment. Yeah. And then I took out a second loan on the property, a HELOC, but at this point in time in 2002, they actually would refinance or like allow you to pull out 103% of the home's value.

We had not gone through 2008 or 2009 in this standpoint in time. So in the bank's mind, real estate always goes up and to the right. It always climbs. It doesn't take, right? Or I hadn't done so in over 25 years at that point in time. And so, you know, yeah, I was like 103%, you know, finance, like more money in my pocket. I was a little naive. I didn't know what that meant. I didn't know how risky that was. But you know, they believed me and I'm like, oh, great. They believe in me. I should believe in myself. Let's go do it.

So if you borrow more than 100%, you're underwater. Exactly. Not only did I owe the money to the bank for the loan, but say I took out 100, it's like buying $100,000 B, and 103% means the bank gave me $103,000. If I lose the property or sell the property for anything less than one hundred and three thousand dollars, I now owe money back to the bank for that additional value that was not created on the deal. So even though you made money, you made fifty seven thousand dollars at the end and it sounds like you were cashflow positive as you were chugging along. What would you have done differently? On that particular deal, I probably would have sold it. That's what I would have done differently. I probably would have kept it in my portfolio.

You know, and if we're thinking about afterwards, I wouldn't have gone into the next deal. I would have probably sat there and evaluated a little bit more of like, why did this deal actually work? And that's really what I violated going into my second deal was the location piece. I just thought like, hey, like you buy a piece of property, you get a loan on it, you get as much financing and much debt as you possibly can on it. But going into the next deal, I bought in a mountain town. I didn't understand who my end customer was. So I bought a small cabin with 19 steps to the front porch. And my person who I'm going to sell it to is actually somebody who is a retiree. So when I went to sell that property two years later, I would say 75% of the people that came to look at the property thinking they were going to buy it, couldn't even walk the steps up to the deck.

So that's how bad I violated that number one law of real estate, mutable law of real estate is location, location, location. I violated that. I didn't know. On top of that, I used really bad debt on the property. I had an adjustable rate mortgage and kind of tell me if this sounds familiar. When I bought it, it was like 3%. By the time I went to sell it two months later, the rate I was paying was 9% on that mortgage. So that debt was just taking off on me. I was upside down again on the property. So after that second try, did you think about calling it quits on this real estate stuff? Well, so by this time I've met my husband and, you know, barely get out from under that second deal alive. And there's a whole other, you know, a school bus fell into the roof of the property.

What? After closing. Yes. Wait, I have a thousand questions. Right. Most people do. But, you know, there was a lot of things that went wrong on this property. When I finally got it closed, my husband goes, oh, you're ready to give up on this real estate thing? And I'm like, no, actually, I think I got to figure it out. Okay. But seriously, how do you get a school bus to fall into the roof? So the cabin was on a hillside and behind the house was a retaining wall that helped keep the person who's up the hill from me, their property sliding into the back of the house. So they, I mean, this is mountain town USA.

I mean, a lot of things go that don't go in the city. So she was renting to a tenant who parked his school bus on the retaining wall. In the inspection, when I was selling that property, the retaining wall was flagged as being deficient, you know, breaking down. And anyways, we had to go and repair the wall. And the school bus gets moved during this whole time. And the neighbor's tenant, they moved the school bus to my neighbor's property, who has the same type of retaining wall.

And nobody wanted to admit that it was the weight of the school bus on the retaining wall that was causing the breakdown. Until we all saw it happen to my neighbor. They're like, if you just tell the person to move their school bus someplace else, this won't happen. So we go through this whole rigmarole. This retaining wall gets put in place. I mean, it's signed off by every inspector under the sun and engineer in the county, I feel like. It's completely bomb-proof. And I had a stipulation that the school bus may

not be moved back on the retaining wall. No way. They cannot move that back in. I'm the owner. It cannot go back there. That retaining wall is my property. You're violating my easement. The next person didn't care, allows the tenant to move their school bus back. The hours after closing back onto that wall, within 24 hours, the school bus falls into the roof of the property. Oh my God. Well, thank you for taking that little detour with us. I do think it's worth it because it does highlight the fact that some weird shit can happen in real estate that you do not expect. I mean, when your realtor calls you- Not on your bingo card. Yeah. When your realtor calls you post-closing and you can hear people screaming in the background, the police

sirens and a shotgun being pumped, you're like, what just happened? And am I involved in any way? So what did you learn from the second deal aside from, you know, not having school buses next to retaining walls and being strict about that? It sounds like you are not a fan of arms. What I learned from that deal is arms adjustable rate mortgages. I'm not a fan. I like fixed rate debt. So what did I learn? To back it up, first of all, the location extremely matters. Location, location, location. Don't violate that. And depending on the type of real estate you're doing, say like even adding a cash flowing business to a piece of real estate, you got to add another location on top of that. So, you know, you really have to

pay attention to those, your underwriting in these particular things and flex that skill. And then, you know, match the debt up with the business plan of the asset. So the business plan on this asset, you know, in both the first and the second deal, typically I should have had fixed rate debt on both of those deals because, you know, my intent was to hold, not to necessarily flip. I didn't know that that's what I was doing in either one of those cases. But I mean, if my intent was to flip in a certain timeframe, then maybe having that adjustable rate mortgage or some sort of construction loan actually would make sense. But understanding what your plan is and matching it up

your various, either the location, the business plan profile, or the debt profile appropriately with that asset is super important. Real estate right now is so super expensive. Are you seeing any good deals out there? Yeah, I mean, you have to kind of make a good deal right now. So asset prices are in, and here's the thing, you know, real estate is hyper local. And so somebody can be on the West Coast or on the East Coast, and they're saying, I can't find a deal. You might go to Midwest Town, America, and find a great deal in a tertiary market. So I think gone are the days for our large metropolitan service areas, even our primary metropolitan service areas. Those are really hard

to make a good cash-flowing deal. And again, we have to be very specific. What is a good deal? What are you looking for? Are you just looking to preserve capital? Are you looking to create cash flow? Are you looking to create equity? Are you looking for a blend of all that? So we have to get extremely specific. But for me, I'm a cash flow investor. And so I like the equity component, but I want to have cashflow. I have to go make the deal in this market, meaning I need to find a distressed seller. I need to maybe buy below value. I need to be able to get my hands dirty, roll up my sleeves, maybe assume, you know, try to negotiate to where I can assume the debt on the particular property,

maybe go a little bit further outside of my primary market into a secondary or tertiary market. So those are the things right now, the trends I'm seeing right now, and the things that I would suggest anybody who's looking to get into real estate or expand their empire right now should consider. What are some of the things or like what's a little checklist that you look for when you're evaluating a residential property and whether or not that could be a good investment for a rental? You know, so I bring this back to what is that investor's goals first? What do you need? Do you need capital preservation? Do you need cash flow? Do you need equity growth? Do you need tax benefits? Because that, you know, if we're talking buy and hold real estate,

you can get all four of those. If you're talking fix and flipping real estate, we got a different checklist altogether. And we knock out a couple of those wealth pillars right from the start. But for me, I'm also looking to layer on lifestyle. So my checklist varies a little bit different from somebody who's starting off in real estate, because for me right now in my phase of investing, I'm looking for strong markets, probably secondary, tertiary markets. But I'm also looking for places that I want to travel to, because I want to be able to do like a midterm rental on that property and take advantage of using that property. What is a midterm rental? Running, you know, for like 30 days to under one year, that would constitute, you know, a midterm rental. So it's going to be somebody who needs a

property longer than what you would rent a short-term rental for, but doesn't need to sign a full year lease agreement. I have two rentals in a mountain town close by, and we keep those on six month midterm rentals for those units. And you get service workers that come to the area, you know, seasonally, maybe a travel nurse. In some markets, that's kind of like the hybrid between, you know, what you can get for a long termterm lease versus a short-term rental. So you can kind of get best of both worlds by using a midterm rental at least. You say there's a simple math equation to unlock your assets true potential. What is that? One of the equations that I help people understand is to understand, are you using the right debt on a property? Because this is one

of the ways that people can actually lose a lot of money and anybody can use this. And that's understanding what is your total debt, you know, say like on a credit card or a auto loan or a personal loan divided by the minimum monthly payment. And that's going to give you what we call is an index. And that now allows you to kind of compare apples to apples on which that should be paid off first. So if that number yields 50 or below, that is a debt you probably want to get rid of ASAP. You're probably going to make, you know, if you can think of it in this terms, you're going to probably make, you know, 30%

or more on your money by paying off that debt. If it's between 50 and 100, that's debt you're going to probably make, you know, 30% or more on your money by paying off that debt. If it's between 50 and 100, that's debt you're going to want to renegotiate, you know, see if you can get a lower interest rate or extend the payment terms, lower your monthly payments somehow. And then for debt, like that has an index of 100 or over, now that's probably debt that's pretty efficient. Those are going to be largely your home equity lines of credit, your primary loan on your house, maybe even a primary loan on a rental property. And then that's where it gets really fun because if you have that type of debt and now you can cash flow it,

you've got a huge advantage there at building wealth. So you mean for each individual type of loan you have, do that equation, not lump it together. Exactly. So list out all your credit cards. What do you have? All your credit cards, all your loans, all your, you know, your car loan, your student debt, your every loan that you have on a house, rental property, whatever it is, every single debt that lists that out. Because this also, you know, when people do have extra cash flow, and they're trying to figure out what do I pay off first in order to get ahead, lower my debt to income, you know, maybe even just like lower my overall monthly payment. So it's less of a burden. We want to

be very cognizant on like, which debt is going to get us there the fastest. I mean, some would think that it's just all about paying down your largest debt first or your highest interest rate debt first. There's actually a more nuanced way to do it that actually will create more value with your money. I assume though that all credit card debt is going to be under 50. Generally, yes. Unless it's a 0% interest rate. So like if you have like an introductory interest rate for like 18 to 24 months, you know, while you might want to get rid of that credit card debt, you might have a higher and better use of your cash flow, extra cash flow, putting that to a car loan for the next 18 to 24 months and holding off and allowing that 0% interest rate to kind of

like hold, you know, carry you through. Now, you got to be really savvy with credit, though, because if you are even late one day on that 0% interest rate, you could lose it. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high

quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. One of the most stressful periods of my life was when

I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime.

Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Orp Bank NA or Stride Bank NA. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. And now for some more money rehab. All right.

You have already mentioned some of the alphabet soup of real estate and it's wild. I mean, it just never ends. Whitney, can you help define some of these real estate acronyms? Ready? Yes. ADU. Accessory dwelling unit or attached dwelling unit. Now I'll give an example. The mountain property that I spoke about, we actually have an accessory dwelling unit. Now I'll give an example. The mountain property that I spoke about, we actually have an accessory dwelling unit. There's a main house with a garage. And then in the back of the property, there's a park garage with another 800 square foot unit above it. So that's an accessory dwelling unit. Now it can also be attached to the main house as well. And so this essentially kind of allows it to operate as a multi-unit type

property where you could live in one unit, rent out to the other unit, or you could rent both, rent out both units. SFR. Single family rental. So that's no ADU. No ADU. Yeah, that's going to be like your primary house, like your three bedroom, two bath house. All right. STR. Short term rental. So this is where your intention to rent is less than 30 days. And so these are going to be more of your Airbnbs, your VRBOs. RAL. Residential assisted living. So you have to be the right type of operator. If you want a passive investor, this is not for you. This is for my active investors. You can buy a, say a four or five, six bedroom house and change those rooms. You're going to have to jump through a lot of understanding what your county and city provisions are, but essentially retrofit it for, you know,

assisted living clients. You know, somebody's mother just lost their husband and doesn't want to live alone or, you know, something like that. Somebody who needs a little bit more extra care, wants to live in community, but it's still pretty self-sufficient. You can rent by the room or even put two tenants into a room depending on your coves in your county and in your city. And so, you know, those type of living situations, you would bring in probably a cook, probably a nurse, maybe some nurse's aides, you need to make sure that everybody is safe and sound and to run the location. But you could probably charge, you know, $4,000, $5,000 a month per tenant. MHP.

Mobile home park. So this is where you're going to have, you know, a piece of land and essentially you're providing the infrastructure for the land, like the water, the sewer, the electricity, and then people are moving their mobile homes, double wides, single wides, manufactured homes onto those pads, as they call it, kind of like the driveway. You'd have a driveway and you're essentially placed in the house at the end of the driveway and you're charging rent for the pad and for the utilities. Yeah. So BRRR, I think I got all the R's. So it's buy, rent, rehab, repeat, but essentially you're going to buy the property below value.

Try to get as good a deal as you possibly can. And it usually means that it can mean, you know, buying a property that just needs like some paint and carpet, or it can mean buying a property where you got to tear it down to the studs, right? There's, you know, all flavors of rehab, but you're buying a property below value. You're going to complete the rehab on that project. And in this case, you're probably going to get some sort of combined lending that allows you to purchase the property and pay for the rehab at the same time. You're going to make the improvements on the property through the rehab. You're going to put a tenant in there. So maybe before the rehab, it rented at $800 a month, but you rehab the property and now

you can get $1,300 a month. So you're capturing the extra value and then you're going to refinance. So maybe you took the house from $100,000 purchase, the other R, and now the house is worth $170,000 and you're going to refinance out as much of your money as you possibly can. Yeah. So I've heard it as buy, renovate, rent, refinance, repeat, which I guess you don't have to refinance. It depends on what your strategy is.

But I'd love to double click a little bit more on this one. You've used the BRRRR strategy successfully. I had Barbara Corcoran on the podcast and she said that she feels like this strategy is trendy, but it's not super effective. Why do you think it's worked so well for you? You know, I think it's the type of strategy. It actually works in every market, but it works better in markets where there's a nice spread between the entry purchase price for the initial asset and the appreciative value. purchase price for the initial asset and the appreciative value and where rents are closer to aligning with that appreciative value that are closer to like 1% or 2%. So what does that mean? So when I was scaling 36 units in single family rentals, I essentially would buy a house for say $60,000. I would put 10 or 15K in a rehab into that property. And now that value of the property

would say $110,000 and I could rent it for $1,100 a month. Okay. I'm getting all my money, maybe even extra out of that property when I refinanced. And so essentially I had zero in the property. I might've actually put five or 10 K into my pocket to carry into the next deal. I might have actually put five or 10K into my pocket to carry into the next deal. And I was renting at 1%. Okay. I was getting, you know, $1,100 and the appreciative price of my property was $110,000. Today, that strategy actually is harder to take all of your money back out of a property, but it can still work effectively well for you to get property that other people won't touch. And so you can still get a little bit below value, but you might not get 100% of your money back out. You might only get 80% of your money back out. But now you're in at a lower cost basis and you're actually picking up property that other

people won't touch. So your competition pool is much less. So yes, I agree with Barbara on the fact that it was trendy for a while because everybody was like, look at me, I got 100% of my money back out of my property. Woohoo. Now you've got to really have your financial metrics dialed in and understand that you are essentially getting in for a lower cost basis. And you got to wait to get that additional appreciative value on the property. We end our episodes, Whitney, by asking our guests for one money tip listeners can take straight to the bank. I know you have so many, but what is one that you can leave us with? You know, I would say go back to basics,

especially in this market. Make sure that you have a fortified financial portfolio. And if there's one move, make sure that you're tracking your income and expenses and your assets in your portfolio. I know so many high profile investors that are kind of wondering, portfolio. I know so many high profile investors that are kind of wondering, how can I optimize? And whenever I coach them, they just have no idea what money they're bringing in. They're going out for their personal banking, for their asset banking, for their business banking. So go back to basics. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes.

Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me and follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.