Show notes
Homes with many small bedrooms are hotly desired today. Why? In an economic rough patch, people need roommates. Secondly, home offices are more popular than ever. Residents increasingly want yards today too. Gardening is popular as a hedge against disruptions in the food supply chain. This all makes single-family homes more popular than apartments. *The entire episode transcript is below.* The debt-to-income ratio requirement is positioned to be removed from qualified mortgages. Three listener questions are answered: 1) What about CapEx expenses? 2) What about all these property notices I get in the mail? 3) What happened to the coffee and cacao providers? I give you four reasons about why money is a taboo topic. Learn the least likely money topic that people are willing to discuss. The most I ever made at my day job was $108,000. People must stop equating net worth with self-worth. Resources mentioned: April Home Prices Grew 5.5%: https://www.housingwire.com/articles/u-s-home-prices-grew-5-5-in-april-despite-pandemic/ Why Money Is A Taboo Topic - Ally Bank survey: https://media.ally.com/2015-11-24-Holiday-Tip-Most-Americans-Say-Social-Conversations-About-Money-are-Taboo-According-to-Ally-Banks-Money-Talks-Study The Atlantic: Why Americans Don't Talk About Money Mortgage Loans: RidgeLendingGroup.com QRPs: text "QRP" in ALL CAPS to 72000 or: eQRP.co By texting "QRP" to 72000 and opting in, you will receive periodic marketing messages from eQRP Co. Message & data rates may apply. Reply "STOP" to cancel. New Construction Turnkey Property: NewConstructionTurnkey.com Best Financial Education: GetRichEducation.com Top Properties & Providers: GREturnkey.com Follow us on Instagram: @getricheducation Keith's personal Instagram: @keithweinhold Welcome to Get Rich Education. I'm your host, Keith Weinhold. Talking about today's hottest rental type, then my favorite guest is here on milestone Episode 300 - because that guest is you - as I help with your listener questions about your rental property operations, then "Why Money Is A Taboo Topic" (why DO people hide their salary?), and finally a little Episode 300 bonus. All today, on Get Rich Education. _____________________ Hey, you're inside GRE. From Phoenix, AZ to Phoenixville, PA and across 188 nations worldwide. I'm Keith Weinhold. This IS that show that's created more financial freedom than nearly any show in the world. You're listening to milestone Episode 300 of Get Rich Education. More on that later. The hottest INCOME PROPERTY housing type today could very well be single-family rental (SFR) homes that have many small bedrooms. Four bedrooms is often better than three. Three is better than two. Yeah, today, a high number of small bedrooms is being favored over fewer large bedrooms. For one thing, this is because as the economy is in a rough patch, more people seek roommates to share housing costs. Also, with more people working from home now, they want the extra bedroom for quiet office privacy. You probably already understand that more residents prefer SFRs over apartments to avoid common areas like laundry rooms and hallways and even elevators. Another reason boosting SFR demand today is something that you might be overlooking when it comes to rental property … because often, you're thinking about things INSIDE the property like amenities, and square footage, and layout. But another reason renters increasingly want single-family rentals are yards. Now sometimes, duplexes might have a fenced yard for each side too, of course. But … why are yards more desired today? Well, there are a few reasons. In the pandemic, people have discovered gardening like the hunter-gatherers did. Yeah, gardening as a hedge against these disruptions in the food supply chain. In fact, Burpee Seed Company recently had the highest sales in its 144-year history. People are gardening. In fact, the homeowner's association in my own neighborhood recently put it to a vote among residents about "OK'ing" having a second detached building in your backyard (only 1 maximum is allowed now) and that's because more people want to have a greenhouse today. Gardens and greenhouses - these are most conducive to single-family rentals. People are even buying egg-laying chickens like never before. It's kind of a back-to-basics subculture that's emerging. Yes, humans are mammals and mammals need sustenance! Haha. You need food and you need real estate. In the midst of The Great Shutdown, people want to do more with their lawns. Lowe's & Home Depot are doing really well - and they're selling home-dwellers a lot of things like Inflatable pools, patio furniture, and trampolines. Then back indoors, yeah, you may very well want to tilt your new property buys into SFRs with more small bedrooms. Sometimes, older SFHs can have four or even five bedrooms. One reason for that is that families had more children generations ago. Family sizes are smaller now. So if you still have a 4-5 bedroom place, it can work well for either roommates or home offices. If you're the "hands-on" type, building a wall to divide a large bedroom has rarely been more lucrative than it's been lately. Now, one 300 sf bedroom is pretty big. Dividing it into two bedrooms of 150sf each is paying off more than it has in the past. They are some housing trends in the pandemic - demand for SFR with more small bedrooms and a yard for a garden. In the pandemic, the broader economy is getting "bailed out" more often than a bank behaving badly. It's not just quantitative easing, dropping interest rates on every loan type, or loosening bank reserve requirements or putting free checks into unemployed people's hands. Many real estate investors are getting support … almost like they had opened their own GoFundMe account. Low supply keeps housing prices buoyant. Low mortgage rates keep demand high. Forbearance keeps borrowers from defaulting - so that further supports prices. Now, the debt-to-income ratio (DTI) requirement is positioned to be removed from qualified mortgages. This means borrowers that have higher existing monthly debt payments on everyday things like their car or their credit cards could now qualify for new mortgage loans - when they couldn't previously. Well, what this does is that it creates a larger buyer pool. More people have the capacity to qualify and buy property. This larger buyer pool serves to further push up real estate prices - and that's both investment property and primary residences. Well, eliminating the DTI is great news if you want to lock up more property at these historically low interest rates. But there can be too much of a good thing. It's a call-to-vigilance to be sure we don't return to those loosey-goosey days of, say, 2005. That's when virtually anyone with a name and a signature could get a loan. Borrowers lied about their income on loan applications and the income wasn't checked - it wasn't even confirmed in underwriting. So then, people with historically low-paying jobs like movie theater ushers & dishwashers & pedicurists could sometimes own a fairly lavish home back then. When appreciation stopped in 2007, liar-borrowers had no equity to remove for servicing the payments … and that whole thing didn't end well. We're nowhere near that point. But watch that pendulum swing. If you're buying for resilient cash flow, you're not so price sensitive anyway. ----- The first one of your listener questions today comes from Chad in Saline, Michigan. Keith, I like your easy-to-remember VIMTUM explanation of expenses but why are you excluding CapEx expenses from the cash flow calculation? OK, thanks, Chad. Let me translate if you, the listener, are uninitiated on this. The easy way to remember how to calculate your monthly cash flow is to take your rental income and subtract out your mortgage (that's principal & interest) and your operating expenses, which I call your VIMTUM. V-I-M-T-U-M. That's just an acronym I use for your regularly, recurring operating expenses and VIMTUM stands for Vacancy, Insurance, Maint., Taxes, Utilities, and Mgmt. V-I-M-T-U-M What Chad is asking about are CapEx - which a shorthand way of saying Capital Expenditures. CapEx means large, IRregular expenses that an investor or even a homeowner - often incurs with their property over longer periods of time. An example is, what happens when your roof needs to be replaced? A lot of roofs have a 25-year life expectancy. Now, your property's water heater has more like a 10-year life expectancy. Chad is basically asking me how I'm accounting for that when figuring cash flow. I think I addressed this on a prior episode, but it's been a long time so I'll bring a fresh angle to the answer. First of all, I've mentioned previously that it's prudent to keep 3-5% of the TOTAL value of your property portfolio in a liquid side fund. So if all your properties are worth $1M, you'd have $30K - $50K in cash or cash equivalents. If you've just got your, say first turnkey at $100K - have $3 to $5K set aside. Note that when you qualify for a mortgage in the first place, mortgage loan underwriting typically requires that you have reserves already. And, by the way, this liquid side fund should be in addition to any overall liquid emergency fund that you have in your life. But, Chad, on your CapEx question, you might still be thinking ... Yes, I want to take some of those dollars that you've felt compelled to put in a liquid side fund account monthly and factor THAT in to your property ROI. I get that. Here's the thing. If you follow … really … the entire wealth formula espoused here on the show, your CapEx expense should be limited. You're going to pay less in CapEx expenses than other investors. Why is that? It's because at the 8-to-10 year mark, which is before a lot of major CapEx items need attention, you're going to sell your property and 1031 Exchange it into the next one - or hopefully into two at that point. That is all driven by the fact that, after most any 10-year slice in the housing market, you're going to have appreciation, hence accumulated equity. As you know, home equity is unsafe, illiquid, and its rate of return is always zero. So it's really due to math and the loss of leverage that makes you move your property along before CapEx expenses kick in. And with SFRs, you can sell to an owner-occupant buyer that typically get emotions behind the home and isn't at all concerned that you were the one that enjoyed the new roof in its first ten years of use or whatever. Now, if you have substantial enquiry accumulation after 10 years on a property that performs really well and you want to hold onto it, then you might do a cash-out refi and have CapEx expenses like a new water heater. So, thanks for your excellent question, Chad. One other thing I'd like to mention that a lot of real estate people don't like to talk about are to, in general, run your cash flow projections fairly conservatively. That is because, in real estate, unexpected expenses are more common than unexpected income. Thanks, Chad. The next question comes from Lori in Pasadena, CA. Lori says, "Keith, love listening to you. You've got the most relevant real estate show out there. Wow, thanks for that. Things are going fairly well with the properties that I buy through GRETurnkey.com but with each buy, I get more & more of these various letters in the mai that I have to deal with. The latest one is an annual property rental fee statement from Florida. Things like this continue to cut into my time … umm … and then Lori goes on to give another example. OK, Lori. Yeah, what she's talking about here … is that the Florida municipality - the town - where her rental SFH is located has this annoying little administrative charge. They charge a whole $50 per year to Lori for this property because she's an out-of-area investor that has the "privilege" of owning Florida rental property in their town. This is basically like a tax excised by the town where she owns her property. What something like this really is Lori is … a nuisance. Just reading the form, and figuring it out what it is, and seeing how that Florida town accepts the payment. It IS annoying. It cuts into your time. In fact, I got a piece of nuisance mail for one of my apartment buildings just yesterday. This is from a utility provider - the natural gas provider to the building. Basically, the natural gas company is working on a high-pressure gas transmission pipeline, and the R-O-W for the pipeline is apparently within ⅛ of a mile of this apartment building of mine. The letter said that the property residents should be informed. Well, Lori, with the piece of nuisance mail that you received and the one that I got, here's what you do. Get it out of your life. Get that nuisance mail out of your life. Now, I don't mean "throw it away". This all comes down to one word - and that word is "manager". What I did was get out my phone, I took a photo of this letter, sent the letter image to my Property Manager right away. I asked them to handle it - and also asked the manager to make sure to tell the letter sender that any future correspondence like this be sent to the manager, not me. You know what we just did, Lori. We both just increased our ROTI. Yes, we just increased that all-important investor metric that's even more important than ROI. ROTI is your Return on Time Invested. I'm a big proponent after having a professional Property Manager. Remember, it's their job to handle communications with your residents like this - and it doesn't cost you anything extra. Remember to outsource these little nuisances to your PM. Lori, I don't know how many properties you have, but just say you have a total of ten rental doors. With a portfolio that size, some months, you might have what investors call "a perfect month" - that is, a month with zero repairs or maintenance in your portfolio. But whenever you do, sometimes you might wonder - well, what did I pay the manager for? Well, you still paid your manager to collect the rent and pay your bills and itemize your statements, and just have the peace of mind that your tenants can't get ahold of your DIRECTLY at an inconvenient time. But ensuring that your manager handles all your nuisance notices such that you don't even know that you got one … that increases your Return on Time Invested. Be that responsible owner. Do good in the world. You want a nuisance tax notice to get paid, you want your tenants to be informed about nearby utility work - but be sure to outsource it and keep your quality of life. Like I'm fond of saying, "Be sure your quality of life exceeds your cost of living". Bottom line is - Use your manager. Thanks for the question, Lori! The next question is from Brian in Austin, TX. Brian says: Hi Keith, I am an investor with $7 million in value across 32 properties. (Nice job there, Brian). I noticed you are not promoting coffee and cocoa any longer and was curious if there was concern or a reason behind it? Thanks, Brian. Alright, Brian. What he's referring to is that at GREturnkey.com - where our list of cash-flowing property providers is, there used to be a page for coffee investing there and a page for cacao investing there - and they're both currently gone. Brian, what happened is that, with the provider there - and its the same provider for both types of agricultural investment - that is, where you, the investor, get cash flow from the ANNUAL harvest of coffee and cacao is that that provider is having troubl…
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